Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Non-Accelerated
Filer ☐ Accelerated Filer ☐ Smaller Reporting Company ☒
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2020, the aggregate
market value of our common stock held by non-affiliates was $21,369,743, based on 18,187,016 shares of outstanding common stock
held by non-affiliates, and a price of $1.175 per share, which was the last reported sale price of our common stock on the NYSE
American on that date.
There were a total of 32,000,155 shares
of the registrant’s common stock outstanding as of March 19, 2021.
Portions of the registrant’s
definitive Proxy Statement relating to its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission
within 120 days after the end of the fiscal year to which this report relates.
This report contains
forward-looking statements. Certain of the matters discussed herein concerning, among other items, our operations, cash flows,
financial position and economic performance including, in particular, future sales, product demand, competition and the effect
of economic conditions, include forward-looking statements.
Forward-looking statements
are predictive in nature and can be identified by the fact that they do not relate strictly to historical or current facts and
generally include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”
“estimates” and similar expressions. Although we believe that these statements are based upon reasonable assumptions,
including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital,
capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations, and general economic
conditions, these statements and other projections contained herein expressing opinions about future outcomes and non-historical
information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements
will be achieved.
Investors are cautioned
that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially
from the expectations expressed in forward-looking statements contained herein. Given these uncertainties, you should not
place any reliance on these forward-looking statements which speak only as of the date hereof. See “Risk factors” for
a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.
We undertake no obligation
to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as
may be required under applicable securities laws. You are advised, however, to consult any additional disclosures we make
in our reports filed with the Securities and Exchange Commission (“SEC”).
PART I
ITEM 1. BUSINESS
Introduction
As used in this report,
unless otherwise stated or the context requires otherwise, the “Company” and terms such as “we,” “us”
“our,” and “AIRI” refer to Air Industries Group, a Nevada corporation, and its wholly-owned subsidiaries.
We are an aerospace
and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear,
arresting gear, engine mounts, flight controls, throttle quadrants, components for jet engines and other components. Our products
are currently deployed on a wide range of high-profile military and commercial aircraft including Sikorsky’s UH-60 Black
Hawk, Lockheed Martin’s F-35 Joint Strike Fighter, Northrop Grumman’s E2 Hawkeye, Boeing’s 777, Airbus’
380 commercial airliners, the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine segment makes components for jet
engines that are used on the USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine
applications.
We conduct our operations
through our wholly-owned subsidiaries: Air Industries Machining (“AIM”); Nassau Tool Works (“NTW”); and
The Sterling Engineering Corporation (“Sterling”). AIM and NTW comprise our Complex Machining segment and Sterling
represents our Turbine Engine Components segment. AIM has manufactured components and subassemblies for the defense and commercial
aerospace industry for over 50 years and has established long-term relationships with leading defense and aerospace manufacturers.
We
are currently focused on positioning our business to obtain profitability, achieve positive cash flow and we remain resolute on
meeting customers’ needs. We believe that an unyielding focus on our customers will allow us to execute on our existing backlog
in a timely fashion. As part of our effort to increase our operating efficiencies, we relocated our headquarters to our main campus
in Bay Shore, New York and consolidated the operations of NTW with those of AIM. In
2020, in order to take advantage of the long-term growth opportunities we see in our markets, we made significant capital investments
in new equipment. Additionally, we expanded our operations and manufacturing cells located in our Connecticut facility which houses
the operations of Sterling. We believe these investments will increase the volume and efficiency of production, increase the size
and diversity of products we can make and allow us to offer additional services to our customers. We are pleased with the positive
responses received from our customers to date.
Our Market
We operate primarily
in the military and, to a lesser degree, commercial aviation industries. Defense revenues represent a preponderance of our sales.
Our principal customers include Sikorsky Aircraft, Goodrich Landing Gear Systems, Northrop Grumman, the United States Department
of Defense, GKN Aerospace, Lockheed, Boeing, Raytheon, Piper Aircraft, M7 Aerospace, Vought Aerospace, Ametek/Hughes-Treitler and
Airbus.
Our products are incorporated
into many aircraft platforms, the majority of which remain in production, and of which there are a substantial number of operating
aircraft in fleets maintained by the military and commercial airlines. Many of our products are “flight critical,”
essential to aircraft performance and safety on takeoff, during flight and when landing. These products require advanced certifications
as a condition to being a supplier. For many of our products we are the sole or one of a limited number of sources of supply. Many
of the parts we supply are subject to wear and tear or fatigue and are routinely replaced on aircraft on a time in service or flight
cycle basis. Replacement demand for these products will continue, albeit at perhaps a lower rate, so long as an aircraft remains
in service, which is usually many years after production has stopped.
Sales and Marketing
Our approach to sales
and marketing can be best understood through the concept of customer alignment. The aerospace industry is dominated by a small
number of large prime contractors and equipment manufacturers. These customers rely heavily upon subcontractors to supply quality
parts meeting specifications on a timely and cost effective basis. These customers and other customers we supply routinely rate
their suppliers based on a variety of performance factors. One of our principal goals is to be highly rated and thus relied upon
by all of our customers.
The large prime contractors
are increasingly seeking subcontractors who can supply and are qualified to integrate the fabrication of larger, more complex and
more complete subassemblies. We seek to position ourselves within the supply chain of these contractors and manufacturers to be
selected for subcontracted projects. Successful positioning requires that we qualify to be a preferred supplier by achieving and
maintaining independent third party quality approval certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts.
During our sales and
marketing efforts we let customers know that we have employees with the talent and experience to manage the manufacture of sections
of aircraft structures to be delivered to the final assembly phase of the aircraft manufacturing cycle, and customers have now
engaged us for these services.
Initial contracts are
usually obtained through competitive bidding against other qualified subcontractors, while follow-on contracts are usually retained
by successfully performing initial contracts. Our long term business generally benefits from barriers to entry resulting from investments,
certifications, familiarization with the needs and systems of customers, and manufacturing techniques developed during the initial
manufacturing phase. We endeavor to develop each of our relationships to one of a “partnership” where we participate
in the resolution of pre-production design and build issues, and initial contracts are obtained as single source awards and follow-on
pricing is determined through negotiations. Our ability to interact with our customers was hampered during 2020 as a result of
the cancellation of industry-wide events and the difficulties in scheduling meetings with our customers as many of their personnel
worked from home. In response, we have adapted our business development efforts to increase our use of social media and online
presentations.
Our Backlog
The production cycle
of products we manufacture can extend from several months to a year or longer. This gives rise to significant backlogs as customers
must order product with sufficient lead time to ensure timely delivery.
We have a number of
long-term multi-year purchase agreements or LTA’s with several of our customers. These agreements specify part numbers, specifications
and prices of the covered products for an agreed upon period, but do not authorize immediate production and shipment. Production
is authorized periodically by the customer through Purchase Orders or Releases by customers.
Our “firm backlog”
includes only fully authorized orders received for products to be delivered within the forward 18-month period. As of December
31, 2020, our 18-month “firm backlog” was approximately $81.1 million.
Competition
Winning a new contract
is highly competitive. We manufacture to customer design specifications, and we compete against companies that have similar manufacturing
capabilities in a global marketplace. Consequently, the ability to obtain contracts requires providing quality products at competitive
prices. To accomplish this requires that we strive for continuous improvement in our capabilities to assure our competitiveness
and provide value to our customers. Our marketing strategy involves developing long-term ongoing working relationships with customers.
These relationships enable us to develop entry barriers to would-be competitors by establishing and maintaining advanced quality
approvals, certifications and tooling investments that are difficult and expensive to duplicate. Many of our competitors are larger
enterprises or divisions of significantly larger companies having greater financial, physical and technical resources, and the
capabilities to timelier respond under much larger contracts.
Among our competitors
are: Monitor Aerospace, a division of Stellex Aerospace; Hydromil, a division of Triumph Aerospace Group; Heroux Aerospace and
Ellanef Manufacturing, a division of Magellan Corporation.
Raw Materials and Replacement Parts
The manufacturing process
for certain products, particularly those for which we serve as product integrator, requires significant purchases of raw materials,
hardware and subcontracted details. As a result, much of our success in profitably meeting customer demand for these products requires
efficient and effective subcontract management. Price and availability of many raw materials utilized in the aerospace industry
are subject to volatile global markets and political conditions. Most suppliers of raw materials are unwilling to commit to long-term
contracts at fixed prices. This is a substantial risk as our strategy often involves long term fixed price commitments to our customers.
Employees
As of March 15, 2021,
we employed approximately 151 people. Of these, approximately 52 were in administration, 6 were in sales and procurement, and 93
were in manufacturing.
AIM is a party to a
collective bargaining agreement (the “Agreement”) with the United Service Workers, IUJAT, Local 355 (the “Union”)
with which we believe we maintain good relations. The Agreement was renewed as of December 31, 2018 and expires on December 31,
2021 and covers all of AIM’s production personnel, approximately 93 individuals. AIM is required to make a monthly contribution
to each of the Union’s United Welfare Fund and the United Services Worker’s Security Fund. This is the only pension
benefit required by the Agreement and the Company is not obligated for any future defined benefit to retirees. The Agreement contains
a “no-strike” clause, whereby, during the term of the Agreement, the Union will not strike and AIM will not lockout
its employees.
All of our employees
are covered under a co-employment agreement with Insperity Services, Inc., a professional employer organization (“PEO”)
that provides out-sourced human resource services.
Regulations
Environmental Regulation; Employee Safety
We are subject to regulations
administered by the United States Environmental Protection Agency, the Occupational Safety and Health Administration, various state
agencies and county and local authorities acting in cooperation with federal and state authorities. Among other things, these regulatory
bodies impose restrictions that require us to control air, soil and water pollution, to protect against occupational exposure to
chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain
hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and financial and operating risks
on us. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose
civil and criminal fines in the case of violations.
The Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and several liabilities on the present
and former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation
and Recovery Act of 1976 (“RCRA”) regulates the generation, transportation, treatment, storage and disposal of hazardous
waste. New York and Connecticut, the states where our production facilities are located, also have stringent laws and regulations
governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards
that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence
of hazardous chemicals and to train employees in the use of such substances.
Federal Aviation Administration
We are subject to regulation
by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation Act of 1958, as amended.
The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by
the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations.
Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts,
which could have a material adverse effect on our operations. We have never been subject to such fines or disqualifications.
Government Contract Compliance
Our government contracts
and those of many of our customers are subject to the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations. Many of the contract terms are dictated by these rules and regulations. During and after the
fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed to the
project. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquiries
and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or
limitations on our ability to continue to bid for government contracts and fulfill existing contracts.
We believe that we
are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material
licenses and permits required for the operation of our business.
ITEM 1A. RISK FACTORS
The purchase of our
common stock involves a very high degree of risk.
In evaluating our common
stock and our business, you should carefully consider the risks and uncertainties described below and the other information and
our consolidated financial statements and related notes included herein. If any of the events described in the risks below
actually occurs, our financial condition or operating results may be materially and adversely affected, the price of our common
stock may decline, perhaps significantly, and you could lose all or a part of your investment.
The risks below can
be characterized into four groups:
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Risks related to COVID-19;
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2)
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Risks related to our business, including risks specific to the defense and aerospace industry;
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Risks arising from our indebtedness; and
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Risks related to our common stock.
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The financial statements
contained in this Report, as well as the description of our business contained herein, unless otherwise indicated, principally
reflect the status of our business and the result of operations as of December 31, 2020.
Risks Related to COVID-19
The COVID-19 pandemic and the resulting
macroeconomic disruption have affected how we, our customers and our suppliers are operating our businesses, and the duration and
extent to which this will impact our future results of operations and overall financial performance remains uncertain.
In March 2020, the
World Health Organization announced that infections caused by the coronavirus disease of 2019 (“COVID-19”) had become
pandemic and the U.S. President announced a National Emergency relating to the disease. National, state and local authorities,
including those in which our offices and manufacturing facilities are located, have adopted various regulations and orders, including
“shelter in place” rules, restrictions on travel, mandates on the number of people that may gather in one location
and closing non-essential businesses. The global impact of the outbreak is continually evolving.
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,
had 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 and their willingness to adopt further measures is uncertain.
The likely overall economic impact of the COVID-19 pandemic has been and will continue to be highly negative to the general economy.
While we continue to operate substantially in the normal course of business, 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 resulted in increased operating costs. Our facilities did not operate with full staff or with normal efficiency during
portions of 2020 primarily due to employee absenteeism and supplier disruptions. Although business has substantially returned to
pre-Covid-19 operating levels, an increase in COVID-19 infections or changes in governmental regulations may force us to close
or reduce operations or otherwise adversely impact our operations in future periods.
The future economic
impact of Covid-19 cannot be predicted with certainty. COVID continues to cause significant disruption to the commercial travel
and aerospace industries. Although domestic air travel in the United States has increased, it may take several years for overall
economic conditions to return to normal and, particularly in the aerospace industry, for air travel and the resulting demand for
new and refurbished aircraft to return to normal. If conditions do not improve, or if they worsen, it could make it difficult for
us to access debt and equity capital on attractive terms, or at all, and impact our ability to fund business activities and repay
debt on a timely basis. Although the impact of reduced air travel may be disproportionately felt in the commercial as opposed to
the defense aerospace industry, it should be expected that manufacturers in the commercial sector with excess capacity will increase
their efforts to win projects in the defense aerospace industry.
We cannot forecast
with any certainty whether the disruptions caused by the COVID-19 pandemic will increase, or the extent to which any recovery may
be negatively impacted by an increase in cases as a result of the spread of a new variant and restrictions imposed by various governments
in response to any such increase. Any such disruption may materially impact our business and our consolidated financial position,
results of operations, and cash flows.
In reading the remaining
risk factors set forth below, in each case, consider the additional uncertainties caused by the outbreak of COVID-19.
Risks Related to Our Business
We may need additional financing.
We may need to obtain
additional financing to fund acquisitions of capital items necessary for our growth and to upgrade equipment to remain competitive.
We may also need to obtain the agreement of holders of portions of our debt to extend or otherwise refinance such debt. We may
need to offer these holders increases in the rates of interest they receive or otherwise compensate them through payments of cash
or issuances of our equity securities. Future financings or refinancing may involve the issuance of debt, equity and/or securities
convertible into or exercisable or exchangeable for our equity securities. Additional funding may not be available to us on reasonable
terms, if at all. If we are able to consummate such financings or re-financings, the trading price of our common stock could be
adversely affected and the terms of such financings may adversely affect the interests of our existing stockholders. Any failure
to obtain additional working capital when required would have a material adverse effect on our business and financial condition
and may result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants
or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting
and economic interest of our existing stockholders.
A reduction in government spending on defense could materially
adversely impact our revenues, results of operations and financial condition.
A large percentage
of our revenue is derived from products for US military aviation. There are risks associated with programs that are subject to
appropriation by Congress, which could be potential targets for reductions in funding. Reductions in United States Government spending
on defense or future changes in the mix of defense products required by United States Government agencies could limit demand for
our products, and may have a materially adverse effect on our operating results and financial condition. For the past several years,
our operations have been impacted by volatility in government procurement cycles and spending patterns. There can be no assurance
that our financial condition and results of operations will not be materially adversely impacted by future volatility in defense
spending or a change in the mix of products purchased by defense departments in the United States or other countries, or the perception
on the part of our customers that such changes are about to occur.
We depend on revenues from a few
significant relationships. Any loss, cancellation, reduction, or interruption in these relationships could harm our business.
We derive most of our
revenues from a small number of customers. Three customers represented approximately 74% and 76% of total sales for the years ended
December 31, 2020 and 2019, respectively. The markets in which we sell our products are dominated by a relatively small number
of customers which have contracts with United States governmental agencies, thereby limiting the number of potential customers.
Our success depends on our ability to develop and manage relationships with significant customers. We cannot be sure that we will
be able to retain our largest customers or that we will be able to attract additional customers, or that our customers will continue
to buy our products in the same amounts as in prior years. The loss of one or more of our largest customers, any reduction or interruption
in sales to these customers, our inability to successfully develop relationships with additional customers or future price concessions
that we may have to make, could significantly harm our business.
We depend on revenues from components
for a few aircraft platforms and the cancellation or reduction of either production or use of these aircraft platforms could harm
our business.
We derive a significant
portion of our revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter, the Northrop
Grumman E-2 Hawkeye naval aircraft, the F-16 Falcon and the F-18 Hornet. A reduction in demand for our products as a result of
either a reduction in the production of new aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market
demand) would have a material adverse effect on our operating results and financial condition.
Intense competition in our markets may lead to a reduction
in our revenues and market share.
The defense and aerospace
component manufacturing market is highly competitive and we expect that competition will increase and perhaps intensify. In particular,
we anticipate that manufacturers which have historically operated predominately in the commercial sector may seek to increase the
revenue derived in the defense aerospace market to utilize excess capacity. Many competitors have significantly greater technical,
manufacturing, financial and marketing resources than we do. We may not be able to compete successfully against either current
or future competitors. Increased competition could result in reduced revenue, lower margins or loss of market share, any of which
could significantly harm our business, our operating results and financial condition.
We may lose sales if our suppliers fail to meet our needs
or shipments of raw materials are not timely made.
Although we procure
most of our parts and components from multiple sources and rely upon a number of subcontractors to perform detailed services, or
believe that these components and services are readily available from numerous sources, certain components and services are available
only from a sole or limited number of sources. While we believe that substitute components or assemblies and subcontractors could
be obtained, use of substitutes would require development of new suppliers or would require us to re-engineer our products, or
both, which could delay shipment of our products and could have a materially adverse effect on our operating results and financial
condition. In the past, due to our liquidity problems, we had difficulties in securing timely shipments of raw materials from and
the timely performance of services by certain vendors which had negatively impacted our results of operations. Any delays in the
shipment of raw materials or the performance of subcontracted services could significantly harm our business, our operating results
and our financial condition.
There are risks associated with the bidding processes
in which we compete.
We obtain many contracts
through a competitive bidding process. We must devote substantial time and resources to prepare bids and proposals and may not
have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have bid will be sufficient
to allow us to generate a profit from any particular contract. There are significant costs involved with producing a small number
of initial units of any new product and it may not be possible to recoup such costs on later production runs.
Due to fixed contract pricing, increasing
contract costs expose us to reduced profitability and the potential loss of future business.
The cost estimation
process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor,
the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of
any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover
any claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material
effect on our consolidated financial position or results of operations.
The prices of raw materials we use are volatile.
The prices of raw materials
used in our manufacturing processes are volatile. If the prices of raw materials rise, we may not be able to pass along such increases
to our customers and this could have an adverse impact on our consolidated financial position and results of operations. It is
possible that some of the raw materials we use might become subject to new or increased tariffs. Significant increases in the prices
of raw materials could adversely impact our customers’ demand for certain products which could lead to a reduction in our
revenues and have a material adverse impact on our revenues and on our consolidated financial position and results of operations.
Some of the products we produce have long lead times.
Some of the products
we produce require months to produce and we sometimes produce products in excess of the number ordered intending to sell the excess
as spares when orders arise. As a result, our inventory turns slowly and ties up our working capital. Our inventory represented
approximately 56% of our assets as of December 31, 2020. Any requirement to write down the value of our inventory due to obsolescence
or a drop in the price of materials could have a material adverse effect on our consolidated financial position, results of operations
and could result in a breach of the financial covenants in our Loan Facility.
We do not own the intellectual property rights to products
we produce.
Nearly all the parts
and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any, related
to the product. Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would
be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.
There are risks associated with new programs.
New programs typically
carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or changing specifications,
timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program may experience delays
for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs to the customers’
satisfaction or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays
or other problems, then our business, financial condition and results of operations could be materially adversely affected. This
could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings in excess
of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.
To perform on new programs,
we may be required to incur material up-front costs which may not have been separately negotiated and may not be recoverable. Such
charges and the loss of up-front costs could have a material impact on our liquidity.
The need to control
our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be adversely affected.
Attracting and retaining executive
talent and other key personnel is an essential element of our future success.
Our future success
depends to a significant extent upon our ability to attract executive talent, as well as the continued service of our existing
executive officers and other key management and technical personnel. Experienced management and technical, marketing and support
personnel in the defense and aerospace industries are in demand and competition for their talents is intense. Our failure to attract
executive talent, or retain our existing executive officers and key personnel, could have a material adverse effect on our business,
financial condition and results of operations.
We are subject to strict governmental regulations relating
to the environment, which could result in fines and remediation expense in the event of non-compliance.
We are required to
comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things,
these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure
to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain
hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks
on us. In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances
released on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore,
we are required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause
serious physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees
in the use of such substances. Our operations require the use of chemicals and other materials for painting and cleaning that are
classified under applicable laws as hazardous chemicals and substances. If we are found to be in violation of any of these rules,
regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any
of which could result in substantial costs that would adversely impact our business operations and financial condition.
We may be subject to fines and disqualification for non-compliance
with Federal Aviation Administration regulations.
We are subject to regulation
by the FAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements
for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties
(including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations
could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect
on our operations. We have never been subject to such fines or disqualification.
Cyber security attacks, internal
system or service failures may adversely impact our business and operations.
Any system or service
disruptions, including those caused by projects to improve our information technology systems, if not anticipated and appropriately
mitigated, could disrupt our business and impair our ability to effectively provide products and related services to our customers
and could have a material adverse effect on our business. We could also be subject to systems failures, including network, software
or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters,
power shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software,
unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products,
customers or suppliers, or other acts that could lead to disruptions in our business. Any such failures could cause loss of data
and interruptions or delays in our business, cause us to incur remediation costs or require us to pay ransom to a hacker which
takes over our systems, or subject us to claims and damage our reputation. In addition, the failure or disruption of our communications
or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Although we utilize
various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures
and controls will be sufficient. Our property and business interruption insurance may be inadequate to compensate us for all losses
that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results
of operations and financial condition. Moreover, expenditures incurred in implementing cyber security and other procedures and
controls could adversely affect our results of operations and financial condition.
Terrorist acts and acts of war may seriously harm our
business, results of operations and financial condition.
United States and global
responses to actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats and other global
political crises increase uncertainties with respect to the U.S. and other business and financial markets. Several factors associated,
directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats,
and other global political crises and responses thereto, may adversely affect the mix of products purchased by defense departments
in the United States or other countries to platforms not serviced by us. A shift in defense budgets to product lines we do not
produce could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Indebtedness
Our indebtedness may have a material adverse effect on
our operations.
We have substantial
indebtedness under our Loan Facility. As of December 31, 2020, we had approximately $21,207,000 of indebtedness outstanding under
the Loan Facility. All of our indebtedness under the Loan Facility is secured by substantially all of our assets.
We also have approximately
$ 6,012,000 of indebtedness outstanding in the form of subordinated notes payable on July 1, 2023. These notes are held by related
parties, specifically Michael N. Taglich (our Chairman) and Robert F. Taglich (a Director), and their affiliates.
Notes with a principal
value of approximately $4,412,000 are convertible into approximately 3,791,000 shares of common stock at a weighted average conversion
price of $1.16 per share. These notes carry interest rates from 6% to 15% per annum with a weighted average interest rate of 7.8%
per year.
If we are unable to
pay or refinance the outstanding principal and accrued interest on these notes when due, our operations may be materially and adversely
affected. We may need to offer the holders of this debt increases in the rates of interest they receive or otherwise compensate
them through payments of cash or issuances of our equity securities. Future financings or re-financings may involve the issuance
of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. If we are able to
consummate such financings or re-financings, the terms of such financings may adversely affect the trading price of our common
stock and the interests of our existing stockholders. Any failure to obtain additional working capital when required would have
a material adverse effect on our business and financial condition and may result in a decline in our stock price. Any issuances
of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable
for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.
Our leverage may adversely
affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may
make our results of operations more susceptible to adverse economic conditions.
Our indebtedness may limit our ability to pay dividends
in the future.
We currently do not
pay dividends and the terms of our Loan Facility require that we maintain certain financial covenants. Unless we are in compliance
with our Loan Facility in the future, we would need to seek covenant changes under our Loan Facility to pay dividends in the future.
There can be no assurance our lenders would agree to covenant changes acceptable to us or at all. In addition, we may in the future
incur indebtedness or otherwise become subject to agreements whose terms restrict our ability to pay dividends in the future.
Risks Related to our common stock
The price of our common stock can fluctuate.
The financial markets
have been impacted in various ways by the reactions to the outbreak of the COVID-19 pandemic and government stimulus programs adopted
in response to the pandemic. The price of our common stock has and is expected to continue to be volatile. We cannot forecast with
any certainty whether and to what degree the disruption caused by the COVID-19 pandemic and reactions thereto will continue to
adversely impact financial markets and the impact to our common stock. Likewise, we cannot state with certainty the degree to which
financial markets were supported by government stimulus programs and whether such support will continue as governments elect not
to adopt similar measures in the future.
The ownership of our common stock
is highly concentrated, and your interests may conflict with the interests of our existing stockholders.
Two of our directors,
Michael N. Taglich and Robert F. Taglich, and their affiliates own a significant number of shares of our outstanding common stock
as well as a significant amount of debt convertible into our common stock, which together with their position as directors of our
company, give them significant influence over the outcome of corporate actions requiring stockholder approval and the terms on
which we complete transactions with their affiliates. The interests of these directors may be different from the interests of other
stockholders on these matters. This concentration of ownership could also have the effect of delaying or preventing a change in
our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce
the price of our common stock.
We can provide no assurance that our common stock will
continue to meet NYSE American listing requirements. If we fail to comply with the continuing listing standards of the NYSE American,
our common stock could be delisted.
If we fail to satisfy
the continued listing requirements of the NYSE American, the NYSE American may take steps to delist our common stock. The delisting
of our common stock would likely have a negative effect on the price of our common stock and would impair your ability to sell
or purchase common stock when you wish to do so.
There is only a limited public market for our common stock.
Our common stock is
listed on the NYSE American. However, trading volume has been limited and a more active public market for our common stock may
not develop or be sustained over time. The lack of a robust market may impair a stockholder’s ability to sell shares of our
common stock. In the absence of a more active trading market, any attempt to sell a substantial number of our shares could result
in a decrease in the price of our stock. Specifically, you may not be able to resell your shares of common stock at or above the
price you paid for such shares or at all.
Moreover, sales of
our common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our
common stock. As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly at all,
and the price per share of our common stock may fluctuate significantly.
If we fail to meet the expectations of securities analysts
or investors, our stock price could decline significantly.
Our quarterly and annual
operating results fluctuate significantly due to a variety of factors, some of which are outside our control. Accordingly, we believe
period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future
performance. Some of the factors that could cause quarterly or annual operating results to fluctuate include conditions inherent
in government contracting and our business such as the timing of cost and expense recognition for contracts, the United States
Government contracting and budget cycles, introduction of new government regulations and standards, contract closeouts, variations
in manufacturing efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers, general
economic conditions and economic conditions specific to the defense market. Because we base our operating expenses on anticipated
revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted
revenues could significantly harm our business.
Fluctuations in quarterly
results or announcements of extraordinary events such as an award of a new contract, acquisitions or litigation may cause earnings
to fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could
significantly decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market
price of our common stock, as well as our overall operating results. Consequently, our share price may experience significant volatility
and may not necessarily reflect the value of our expected performance.
Future financings or acquisitions may adversely affect
the market price of our common stock.
Future sales or issuances
of our common stock, including upon conversion of our outstanding convertible notes, upon exercise of our outstanding warrants
or as part of future financings or acquisitions, would be substantially dilutive to the outstanding shares of common stock. Any
dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in
the price of common stock.
We incur significant costs as a result
of operating as a public company, and our management is required to devote substantial time to compliance requirements, including
establishing and maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable
to comply with these requirements.
As a public company,
we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented
by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies,
including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial
amount of time to these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly.
The Sarbanes-Oxley
Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure controls
and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial
reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and
expend significant management efforts. Our testing may reveal deficiencies in our internal controls over financial reporting that
are deemed to be material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal
controls that we cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose
confidence in the reliability of our financial statements and we could be subject to sanctions or investigations by the SEC or
other applicable regulatory authorities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The operation of our
executive offices, NTW and AIM are conducted out of our 5.4-acre corporate campus in Bay Shore, New York. We also maintain a warehouse
lease nearby in Bohemia, New York. That, lease term commenced on April 1, 2020 and expires on May 31, 2025.
The operations of Sterling
are conducted in a 74,923 square foot facility in Barkhamsted, Connecticut which we own.
We remain liable under
a lease for unused office space in Hauppauge, New York. This lease ends January 2022 and we do not expect to renew such lease.
The annual rent is approximately $113,000. It is likely we will not be able to sublease such facility.
ITEM 3. LEGAL PROCEEDINGS
A number of actions
have been commenced against us in the ordinary course of business 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 us. As certain of these claims
represent amounts included in accounts payable they are not specifically discussed herein.
Contract Pharmacal
Corp. (“Contract Pharmacal”) commenced an action on October 2, 2018, relating to a Sublease entered into between us
and Contract Pharmacal in May 2018 with respect to the property that was formerly occupied by Welding Metallurgy, Inc. (“WMI”),
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. We dispute the validity of the claims
asserted by Contract Pharmacal and believe we have meritorious defenses to those claims. The pace of litigation in the civil courts
in New York has been slowed by the impact of Covid-19. The Court has ordered us and Contract Pharmacal to complete discovery, which
is ongoing.
On December 20, 2018,
we completed the sale of all of the outstanding shares of our subsidiary, WMI, to CPI Aerostructures (“CPI”). There
ensued a dispute with CPI regarding amounts it claimed were due based upon the value it ascribed to the inventory as of the closing
date. On December 23, 2020, we reached an agreement with CPI to settle the working capital dispute. Pursuant to the settlement,
the escrow agent released to CPI the $1,380,684 remaining in the escrow account which had been established at the closing and we
exchanged mutual releases customary in the circumstances.
From time to time we
may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of
any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material
adverse effect on our business, financial condition or operating results. There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material
interest adverse to our interest.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Organization
Air Industries Group is a Nevada corporation
(“AIRI”). As of and for the year ended December 31, 2020 and 2019, the accompanying 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
loss from discontinued operations, since operations ceased on March 31, 2019. See Note 2 for details of discontinued operations.
Closing EPC and ECC
The Company completed its shut-down of EPC
and ECC and closed related operations on March 31, 2019. The results of both EPC and ECC are included in loss from discontinued
operations.
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, had 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 and their willingness to adopt further measures is uncertain.
The overall economic impact of the COVID-19 pandemic has been 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.
The Company, its employees, suppliers and
customers, and the global community continue to face challenges and the Company cannot predict how this dynamic situation will
evolve or the impact it will have. Throughout 2020 many of the Company’s suppliers were forced to reduce staffing or temporarily
close their facilities due to COVID-19, which impacted the Company’s delivery schedules. While this has largely been resolved
the Company cannot predict what future impacts will occur, particularly if new variants of Covid-19 result in a substantial increase
in new cases and governments elect to reimpose strict safety measures.
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. Suppliers are also experiencing liquidity pressures and disruptions
to their operations as a result of COVID-19. Although operating conditions have substantially returned to pre-COVID-19 conditions,
an increase in COVID-19 infections or changes in governmental regulations may force the Company to close or reduce operations as
a result in future periods.
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 Borrowers applied to SNB for forgiveness and SNB approved and submitted the forgiveness applications
to the SBA which approved the forgiveness in accordance with the applicable provisions of the federal statute authorizing the Loan
Program. See Note 9.
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 December 31, 2020, the Company has deferred
$627,000, which is classified as Deferred payroll tax liability – CARES Act on the accompanying Consolidated Balance Sheet.
In addition, as a result of the passage of
the CARES Act, the Company received a tax refund of $1,416,000 from the filing of a net operating loss carryback claim. See Note
15.
The Company did not
qualify for any significant new benefits in the recently enacted the American Rescue Plan Act of 2021 (“Rescue Act”)
and does not expect to qualify for any significant new government benefits that might be enacted.
Based on its expectations that sales in
fiscal 2021 will be higher than the level achieved in fiscal 2020, confirmed orders, funds generated from operations, amounts received
under government subsidized loan programs and amounts available under its credit facility, the Company believes it will have sufficient
cash on hand to support its activities through April 1, 2022.
Subsequent Events
Management has evaluated subsequent events
through the date of this filing.
Note 2. DISCONTINUED OPERATIONS
As discussed in Note 1, the Company closed
EPC and ECC as of March 31, 2019. As required, the Company has retrospectively recast its consolidated statements of operations
and balance sheets for all periods presented. The Company has not segregated the cash flows of these subsidiaries in the 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 Consolidated
Financial Statements refers to the Company’s continuing operations only.
As discussed in Note 14 on December 23,
2020, the Company and CPI Aerostructures (“CPI”), the buyer of WMI Group, reached an agreement to settle the working
capital dispute without additional litigation. The settlement provided that CPI and AIRI would instruct the escrow agent to release
the balance of $ 1,380,684 remaining in the escrow account to CPI. The Company and CPI exchanged mutual releases customary in the
circumstances. We originally placed a reserve of $1,770,000 against the $2,000,000 balance held in escrow, the remaining amount
of $230,000 was charged to discontinued operations as of and for the year ended December 31, 2020.
The following table presents a reconciliation
of the major financial lines constituting the results of operations for discontinued operations to the net loss from discontinued
operations presented separately in the consolidated statement of operations:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
-
|
|
|
$
|
132,000
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
105,000
|
|
Gross profit
|
|
|
-
|
|
|
|
27,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
155,000
|
|
Total operating loss
|
|
|
-
|
|
|
|
(128,000
|
)
|
Interest expense
|
|
|
-
|
|
|
|
(3,000
|
)
|
Other expense
|
|
|
(230,000
|
)
|
|
|
(3,000
|
)
|
Loss from discontinued operations before income taxes
|
|
$
|
(230,000
|
)
|
|
$
|
(134,000
|
)
|
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company, through its AIM subsidiary, is
primarily engaged in manufacturing aircraft structural parts and assemblies for prime defense contractors in the aerospace industry
in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter aircraft.
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.
Principles of Consolidation
The accompanying consolidated financial statements
include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Discontinued Operations
Prior to the closure of EPC and ECC, the results
of operations were included in continuing operations, once it was determined to close both subsidiaries, the results were reclassified
to discontinued operations (see “Note 2 – Discontinued Operations”).
Cash and Cash Equivalents
Cash and cash equivalents include all highly
liquid instruments with an original maturity of three months or less.
Accounts Receivable
Accounts receivable are reported at their outstanding
unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables
based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered
appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined
to be uncollectible.
Going Concern
At each reporting period, the Company evaluates
whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one
year after the date that the financial statements are issued. We are required to make certain additional disclosures if we conclude
that substantial doubt exists and such concerns are not alleviated by our plans or when our plans alleviate substantial doubt about
our ability to continue as a going concern. The evaluation entails analyzing prospective operating budgets and forecasts for expectations
of our cash needs and comparing those needs to the current cash and cash equivalent balance and expectations regarding cash to
be generated over the following year. We concluded that substantial doubt of going concern did not exist. See Note 1 – Impact
of COVID-19 for a further discussion.
Inventory Valuation
The Company values inventory at the lower
of cost on a first-in-first-out basis or an estimated net realizable value. The Company does not take physical inventories at interim
quarterly reporting periods, however, a full physical inventory is taken annually. Adjustments to reconcile the annual physical
inventory to the Company’s books are treated as changes in accounting estimates and are recorded in the fourth quarter.
The Company generally purchases raw materials
and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable contracts
for orders have been received for finished goods. It occasionally produces larger more complex products, such as landing gear,
in excess of purchase order quantities in anticipation of future purchase order demand. Historically this excess has been used
in fulfilling future purchase orders. The Company purchases supplies and materials useful in a variety of products as deemed necessary
even though orders have not been received. The Company periodically evaluates inventory items that are not secured by purchase
orders and establishes write-downs to estimated net realizable value for obsolescence accordingly. The Company also writes-down
inventory to estimated net realizable value for excess quantities, slow-moving goods, and for other impairments of value.
Prepaid Expenses and Other Current Assets
On December 23, 2020, the Company and
CPI reached an agreement to settle the working capital dispute. The settlement provided that the escrow agent would release the
balance of $ 1,380,684 remaining in the escrow account to CPI. The Company and CPI exchanged mutual releases customary in the
circumstances.
Prepaid expenses and other current assets
include purchase deposits, miscellaneous prepaid expenses and cash in escrow less a reserve. On December 31, 2020, the Company
settled its working capital dispute with CPI, see Note 14 - Contingencies. As a result of this settlement, the Company released
the cash that was held in escrow and therefore removed the reserve. The changes in the reserve are shown below and discussed in
Note 2 – Discontinued Operations.
Description
|
|
Balance at
Beginning
of Year
|
|
|
Charges to
Loss on Sale
of Subsidiary
|
|
|
Deductions
|
|
|
Balance at
end of year
|
|
Valuation reserve deducted from Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
|
$
|
1,770,000
|
|
|
$
|
-
|
|
|
$
|
(1,770,000
|
)
|
|
$
|
-
|
|
Year ended December 31, 2019
|
|
$
|
1,770,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,770,000
|
|
Property and Equipment
Property and equipment are carried at cost
net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred. Property, equipment,
and improvements are depreciated using the straight-line method over the estimated useful lives of the assets or the particular
improvements. Expenditures for repairs and improvements in excess of $10,000 that add to the productive capacity or extend the
useful life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts
and any related gain or loss is reflected in earnings.
Long-Lived and Intangible Assets
Identifiable intangible assets are amortized
using the straight-line method over the period of expected benefit.
Long-lived assets and intangible assets subject
to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related
carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less
than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of
the asset to fair value. For the year ended December 31, 2019 the Company recorded an impairment charge of $275,000 included in
continuing operations. See Note 10 – Operating Lease Liabilities.
Deferred Financing Costs
Costs incurred with obtaining and executing
revolving debt arrangements are capitalized and recorded in current assets and amortized using the effective interest method over
the term of the related debt. Costs incurred with obtaining and executing other debt arrangements are presented as a direct deduction
from the carrying value of the associated debt and also amortized using the effective interest method over the term of the related
debt. The amortization of financing costs is included in interest and financing costs in the statement of operations.
Derivative Liabilities
In connection with the issuances of equity
instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options
or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded
derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be
bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts
for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging.
Revenue Recognition
The Company accounts for revenue recognition
in accordance with accounting guidance codified as FASB ASC 606 “Revenue from Contracts with Customers” (“ASC
606”), as amended regarding revenue from contracts with customers. Under the standard an entity is required to recognize
revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods.
Under ASC 606, revenue is recognized as the
customer obtains control of the goods and services promised in the contract (i.e., performance obligations). In evaluating our
contracts with our customers under ASC 606, we have determined that there is no future performance obligation once delivery has
occurred.
The Company’s revenues are primarily derived from consideration
paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for
revenue recognition, as described below. There are no material upfront costs for operations that are incurred from contracts with
customers.
The Company’s rights to payments
for goods transferred to customers are conditional only on the passage of time and not on any other criteria. Payment terms and
conditions vary by contract, although terms generally include a requirement of payment within 30 to 75 days.
Payments received in advance from customers
are recorded as deferred revenue until earned, at which time revenue is recognized. The Terms and Conditions contained in our customer
purchase orders often provide for liquidated damages in the event that a stop work order is issued prior to the final delivery.
The Company utilizes a Returned Merchandise Authorization or RMA process for determining whether to accept returned products. Customer
requests to return products are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt
of the product. Net sales represent gross sales less returns and allowances.
Use of Estimates
In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes.
The more significant management estimates are the allowance for doubtful accounts, useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and whether to accrue for various contingencies. Actual results could differ
from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which
they become known.
Credit and Concentration Risks
A large percentage of the Company’s
revenues are derived from a small number of customers for U.S. Military Aviation.
There were three customers that represented
73.9% of total sales, and three customers that represented 76.0% of total sales for the years ended December 31, 2020 and 2019,
respectively. This is set forth in the table below.
Customer
|
|
Percentage of Sales
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
1
|
|
|
30.4
|
%
|
|
|
34.2
|
%
|
2
|
|
|
30.3
|
%
|
|
|
30.4
|
%
|
3
|
|
|
13.2
|
%
|
|
|
*
|
|
4
|
|
|
**
|
|
|
|
11.4
|
%
|
*
|
Customer was less than 10% of sales at December 31, 2019.
|
**
|
Customer was less than 10% of sales at December 31, 2020.
|
There were three customers that represented
80.3% of gross accounts receivable and 67.8% of gross accounts receivable at December 31, 2020 and 2019, respectively. This is
set forth in the table below.
|
|
Percentage of Receivables
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Customer
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
1
|
|
|
57.1
|
%
|
|
|
32.7
|
%
|
2
|
|
|
12.0
|
%
|
|
|
10.0
|
%
|
3
|
|
|
11.2
|
%
|
|
|
25.1
|
%
|
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.
Income Taxes
The Company accounts for income taxes in accordance
with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires that the Company recognize deferred
tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets
and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.
The provision for, or benefit from, income
taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability
method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future
realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available
under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income
tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred
tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration
of all available evidence, both positive and negative, regarding historical operating results including recent years with reported
losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive
of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an
operating loss or tax credit carryforward from expiring unused.
The Company accounts for uncertainties in income
taxes under the provisions of FASB ASC 740-10-05 (the “Subtopic”). The Subtopic clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements. The Subtopic prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Earnings (Loss) per share
Basic earnings (loss) per share (“EPS”)
is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock
outstanding for the period.
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 the calculation of income
(loss) from continuing operations applicable to common stockholders utilized to calculate the EPS:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations - Basic
|
|
$
|
1,326,000
|
|
|
$
|
(2,598,000
|
)
|
Add: Convertible Note Interest for Potential Note Conversion
|
|
|
499,000
|
|
|
|
-
|
|
Add: Convertible Note debt discount for Potential Note Conversion
|
|
|
149,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations used to calculate diluted earnings per share
|
|
$
|
1,974,000
|
|
|
$
|
(2,598,000
|
)
|
The following is a reconciliation of the denominators
of basic and diluted earnings per share computations:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used to compute basic earnings per share
|
|
|
30,742,154
|
|
|
|
28,851,816
|
|
Effect of dilutive stock options and warrants
|
|
|
1,590,000
|
|
|
|
-
|
|
Effect of dilutive convertible notes payable
|
|
|
4,414,929
|
|
|
|
-
|
|
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share
|
|
|
36,747,083
|
|
|
|
28,851,816
|
|
The following securities have been excluded
from the calculation as the exercise price was greater than the average market price of the common shares:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
549,000
|
|
|
|
800,000
|
|
Warrants
|
|
|
1,909,902
|
|
|
|
1,903,000
|
|
|
|
|
2,458,902
|
|
|
|
2,703,000
|
|
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 the years:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
570,000
|
|
Warrants
|
|
|
-
|
|
|
|
500
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
5,405,000
|
|
|
|
|
-
|
|
|
|
5,975,500
|
|
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 and stock grants at their
closing reported market value. Stock compensation expense for employees amounted to $308,000 and $378,000 for the years ended December
31, 2020 and 2019, respectively. Stock compensation expense for directors amounted to $211,000 and $244,000 for the years ended
December 31, 2020 and 2019, respectively. Stock compensation expenses for employees and directors were included in operating expenses
on the accompanying Consolidated Statement 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 December 31,
2020 and 2019 relates to the acquisition of NTW.
The Company accounts for the impairment of
goodwill under the provisions of ASU 2011-08 (“ASU 2011-08”), “Intangibles Goodwill and Other (Topic 350): Testing
Goodwill for Impairment.” ASU 2011-08 updated the guidance on the periodic testing of goodwill for impairment. The updated
guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount.
The Company performs impairment testing for
goodwill annually, or more frequently when indicators of impairment exist. As discussed above, the Company adopted ASU 2011-08
and performs a qualitative assessment in the fourth quarter of each year to determine whether it was more likely than not that
the fair value of a reporting unit is less than its carting amount.
The Company determined that there has been
no impairment of goodwill at December 31, 2020 and 2019.
Freight Out
Freight out is included in operating expenses
and amounted to $91,000 and $134,000 for the years ended December 31, 2020 and 2019, respectively.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06,
Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s
Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity
associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. For convertible
instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock,
and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share
guidance on the basis of feedback from financial statement users. ASU 2020-06 is effective for fiscal years, and interim periods
in those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning
after December 15, 2020, including interim periods with those fiscal years. The Company is evaluating the effect of adopting this
new accounting guidance on its financial statements.
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 consolidated financial statements and related disclosures.
In June 2016, the FASB issued
ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which significantly changes
how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair
value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires
entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13
credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis
of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets
to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company,
the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance
provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on
assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an
allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to
estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods,
including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early
adoption is permitted. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements.
The Company does not believe that any other
recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying
consolidated financial statements.
Reclassifications
Reclassifications occurred to certain 2019 amounts to conform
to the 2020 classification. These reclassifications had no impact on the statement of operations.
Note 4. ACCOUNTS RECEIVABLE
The components of accounts receivable at December
31, are detailed as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts Receivable Gross
|
|
$
|
9,762,000
|
|
|
$
|
8,717,000
|
|
Allowance for Doubtful Accounts
|
|
|
(964,000
|
)
|
|
|
(859,000
|
)
|
Accounts Receivable Net
|
|
$
|
8,798,000
|
|
|
$
|
7,858,000
|
|
The allowance for doubtful accounts for the
years ended December 31, 2020 and 2019 is as follows:
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
to
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
from
|
|
|
End of
|
|
|
|
Year
|
|
|
Expenses
|
|
|
Reserves
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020 Allowance for Doubtful Accounts
|
|
$
|
859,000
|
|
|
$
|
483,000
|
|
|
$
|
378,000
|
|
|
$
|
964,000
|
|
Year ended December 31, 2019 Allowance for Doubtful Accounts
|
|
$
|
524,000
|
|
|
$
|
556,000
|
|
|
$
|
221,000
|
|
|
$
|
859,000
|
|
Note 5. INVENTORY
The components of inventory at December 31,
consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
3,951,000
|
|
|
$
|
4,574,000
|
|
Work In Progress
|
|
|
21,933,000
|
|
|
|
18,452,000
|
|
Finished Goods
|
|
|
8,831,000
|
|
|
|
9,810,000
|
|
Reserve
|
|
|
(2,595,000
|
)
|
|
|
(4,190,000
|
)
|
Total Inventory
|
|
$
|
32,120,000
|
|
|
$
|
28,646,000
|
|
The Company periodically evaluates inventory and establishes reserves
for obsolescence, excess quantities, slow-moving goods, and for other impairment of value.
Note 6. PROPERTY AND EQUIPMENT
The components of property and equipment at
December 31, consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Buildings and Improvements
|
|
|
1,683,000
|
|
|
|
1,650,000
|
|
Machinery and Equipment
|
|
|
21,686,000
|
|
|
|
18,450,000
|
|
Finance Lease Machinery and Equipment
|
|
|
78,000
|
|
|
|
296,000
|
|
Tools and Instruments
|
|
|
12,116,000
|
|
|
|
11,021,000
|
|
Automotive Equipment
|
|
|
200,000
|
|
|
|
177,000
|
|
Furniture and Fixtures
|
|
|
290,000
|
|
|
|
290,000
|
|
Leasehold Improvements
|
|
|
855,000
|
|
|
|
530,000
|
|
Computers and Software
|
|
|
436,000
|
|
|
|
425,000
|
|
Total Property and Equipment
|
|
|
37,644,000
|
|
|
|
33,139,000
|
|
Less: Accumulated Depreciation
|
|
|
(28,063,000
|
)
|
|
|
(25,561,000
|
)
|
Property and Equipment, net
|
|
$
|
9,581,000
|
|
|
$
|
7,578,000
|
|
Depreciation expense for the years ended December
31, 2020 and 2019 was approximately $2,570,000 and $3,002,000, respectively. Assets held under finance 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 $28,000 and $289,000
as of December 31, 2020 and 2019, respectively.
Note 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued
expenses at December 31, are detailed as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
7,240,000
|
|
|
$
|
6,576,000
|
|
Accrued Payroll
|
|
|
663,000
|
|
|
|
444,000
|
|
Accrued Interest - related parties
|
|
|
400,000
|
|
|
|
210,000
|
|
Accrued Interest - others
|
|
|
42,000
|
|
|
|
294,000
|
|
Accrued expenses - other
|
|
|
337,000
|
|
|
|
581,000
|
|
Accounts Payable and accrued expenses
|
|
$
|
8,682,000
|
|
|
$
|
8,105,000
|
|
Note 8. SALE AND LEASEBACK TRANSACTION
On October 24, 2006, the Company consummated
a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New York (the “Bay
Shore Property”) for a purchase price of $6,200,000. The Company realized a gain on the sale of $1,051,000 of which $300,000
was recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized ratably over the remaining term
of the twenty - year lease at approximately $38,000 per year. The gain is included in Other Income in the accompanying Consolidated
Statements of Operations. The unrecognized portion of the gain in the amount of $219,000 and $257,000 as of December 31, 2020 and
2019, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets.
Simultaneous with the closing of the sale of
the Bay Shore Property, the Company entered into a 20-year triple- net lease (the “Lease”) with the purchaser for the
property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year, and thereafter increases
3% per year. The Lease grants the Company an option to renew the Lease for an additional period of five years. The Company has
on deposit with the purchaser of $89,000 as security for the performance of its obligations under the Lease. In addition, at December
31, 2019, the Company had on deposit $150,000 with the landlord as security for the completion of certain repairs and upgrades
to the Bay Shore Property. In 2020, the landlord utilized the amounts on deposit to install air conditioning throughout the manufacturing
facility. At December 31, 2019, this amount was included in the caption Deferred Finance costs, Net, Deposit and Other Assets in
the accompanying Consolidated Balance Sheets. Pursuant to the terms of the Lease, the Company is required to pay all of the costs
associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also
contains customary representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser
customary remedies upon a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable
for any deficiency in future rent. See Note 10 – Operating Lease Liabilities.
The Company accounted for these transactions
under the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions”.
Note 9. NOTES PAYABLE, RELATED PARTY NOTES
PAYABLE AND FINANCE LEASE OBLIGATIONS
Notes payable, related party notes payable
and finance lease obligations consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revolving credit note payable to Sterling National Bank (“SNB”)
|
|
$
|
15,649,000
|
|
|
$
|
12,543,000
|
|
Term loan, SNB
|
|
|
5,558,000
|
|
|
|
3,800,000
|
|
Finance lease obligations
|
|
|
6,000
|
|
|
|
22,000
|
|
Loans Payable - financed assets
|
|
|
48,000
|
|
|
|
385,000
|
|
Related party notes payable, net of debt discount
|
|
|
6,012,000
|
|
|
|
6,862,000
|
|
Convertible notes payable-third parties, net of debt discount
|
|
|
-
|
|
|
|
2,338,000
|
|
Subtotal
|
|
|
27,273,000
|
|
|
|
25,950,000
|
|
Less: Current portion of notes payable, related party notes payable and finance lease obligations
|
|
|
(16,475,000
|
)
|
|
|
(22,544,000
|
)
|
Notes payable, related party notes payable and finance lease obligations, net of current portion
|
|
$
|
10,798,000
|
|
|
$
|
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 initial repayment terms of the SNB term
loan provided 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.
On November 6, 2020, the Company entered into
the First Amendment to Loan and Security Agreement (“First Amendment”). The terms of the agreement increase the Term
Loan to $5,685,000. The repayment terms of the term loan were amended to provide monthly principal installments in the amount of
$67,679 beginning on December 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December
30, 2022. Additionally, the date by which certain subordinated third-party notes need to be extended by was changed from September
30, 2020 to November 30, 2020. The Company has paid an amendment fee of $20,000.
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 December 31, 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.
The aggregate payments for the term note at
December 31, 2020 are as follows:
For
the year ending
|
|
Amount
|
|
December 31, 2021
|
|
$
|
812,000
|
|
December 31, 2022
|
|
|
4,805,000
|
|
SNB Term Loans payable
|
|
|
5,617,000
|
|
Less: debt issuance costs
|
|
|
(59,000
|
)
|
Total SNB Term loan payable, net of debt issuance costs
|
|
|
5,558,000
|
|
Less: Current portion of SNB term loan payable
|
|
|
812,000
|
|
Total long-term portion of SNB term loan payable
|
|
$
|
4,746,000
|
|
Under the terms of the SNB Facility, both the
SNB revolving line of credit and the SNB term loan bear an interest rate equal to 30-day LIBOR, plus 2.5% (with a floor of 3.5%).
As of December 31, 2020, the Company’s
debt to SNB in the amount of $21,207,000 consisted of the SNB revolving line of credit note in the amount of $15,649,000 and the
SNB term loan in the amount of $5,558,000. Interest expense for the year ending December 31, 2020 amounted to $586,000 for this
credit facility.
As of December 31, 2019, the Company’s 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. No interest expense was incurred on the SNB Facility during 2019.
PNC Bank N.A. (“PNC”)
The Company previously maintained a financing
facility with PNC. Under such 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 $1,860,000 for the year ended December 31, 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.
Loans Payable – Financed Assets
The Company financed the 2019 acquisition of
manufacturing equipment with a third-party loan. The loan obligation totaled $0 and $385,000 as of December 31, 2020 and 2019,
respectively and bore interest at 3% per annum. This loan was repaid in full in conjunction with the First Amendment to the SNB
Term Loan.
The Company has also borrowed to purchase
a delivery vehicle in July 2020. The loan obligation totaled $48,000 as of December 31, 2020. The loan bears no interest and a
final payment is due and payable for all unpaid principal on July 20, 2026.
Annual maturities of this loan are as follows:
For
the year ending
|
|
Amount
|
|
December 31, 2021
|
|
$
|
9,000
|
|
December 31, 2022
|
|
|
9,000
|
|
December 31, 2023
|
|
|
9,000
|
|
December 31, 2024
|
|
|
9,000
|
|
December 31, 2025
|
|
|
9,000
|
|
Thereafter
|
|
|
3,000
|
|
Loans Payable - financed assets
|
|
|
48,000
|
|
Less: Current portion
|
|
|
9,000
|
|
Long-term portion
|
|
$
|
39,000
|
|
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 July 1, 2023.
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. The shares were valued 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 Facility, Michael and Robert
Taglich agreed to extend the maturity date of the 2019 Notes to July 1, 2023.
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 its 8% Subordinated Convertible Notes (the “8% Notes”), together with warrants
to purchase a total of 383,080 shares of its 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 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 the
Company’s 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 $6,012,000 and $6,862,000, as of December
31, 2020 and 2019, respectively. Unamortized debt discounts related to these notes amounted to $0 and $226,000 as of December 31,
2020 and 2019, respectively. Interest incurred on these related party notes amounted to approximately $526,000 and $446,000 for
the years ended December 31, 2020 and 2019, respectively Amortization of debt discount incurred on these related party notes amounted
to approximately $226,000 and $375,000 for the year ended December 31, 2020 and 2019 respectively. The amortization of the debt
discount is included in interest and financing costs in the Consolidated Statement of Operations.
Per the terms of the SNB Facility, the maturity
date of all related party notes has been extended to July 1, 2023 and are subordinated to the SNB Facility. There are no principal
payments due on these notes until such time.
On January 1, 2021, the related party subordinated
notes were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. The Note Holders
and the principal balance of the notes as amended on January 1, 2021 are shown below:
|
|
Michael
Taglich, Chairman
|
|
|
Robert Taglich, Director
|
|
|
Taglich Brothers
Inc.
|
|
|
Total
|
|
Convertible Subordinated Notes
|
|
$
|
2,666,000
|
|
|
$
|
1,905,000
|
|
|
$
|
241,000
|
|
|
$
|
4,812,000
|
|
Subordinated notes
|
|
|
1,250,000
|
|
|
|
350,000
|
|
|
|
-
|
|
|
|
1,600,000
|
|
Total
|
|
$
|
3,916,000
|
|
|
$
|
2,255,000
|
|
|
$
|
241,000
|
|
|
$
|
6,412,000
|
|
Convertible Notes Payable – Third
Parties
As discussed above in connection with the Private
Placement of Subordinated Notes due May 31, 2019, together with Shares of Common Stock, a $100,000 note issued to a third party
in May 2018 was repaid in January 2020.
In the years ended December 31, 2020 and
2019, the third party holders of $580,000 and $2,245,000 principal, respectively, with accrued interest thereon of $58,000 and
$344,000, respectively, converted their notes into approximately 426,000 and 1,831,000 shares, respectively, of common stock. These
notes were converted at a per share price between $1.35 and $1.50.
8% Notes payable to third parties totaled $0
and $2,338,000, net of unamortized debt discount at December 31, 2020 and 2019, respectively. Interest incurred on the 8% Notes
amounted to approximately $141,000 and $380,000 for the years ended December 31, 2020 and 2019, respectively, unamortized debt
discounts related to these notes amounted to $0 and $7,000 as of December 31, 2020 and 2019, respectively. Amortization of debt
discount on the 8% Notes amounted to approximately $7,000 and $135,000 for the years ended December 31, 2020 and 2019, respectively.
These costs are included in interest and financing costs in the Consolidated Statement of Operations.
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, which was forgiven by the SBA in December
of 2020. Each SBA Loan was evidenced by a Note. Subject to the terms of the Note, the SBA Loans bore interest at a fixed rate
of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was 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”). In December 2020, the Company was notified that the loans and all interest accrued
thereon had been forgiven.
The Company elected to treat the SBA Loans
as debt under FASB ASC 470. As such, the Company derecognized the liability when the loans were forgiven and the Company was legally
released from the loans.
Note 10. OPERATING LEASE LIABILITIES
The Company leases substantially all of its
office space, technology equipment and office equipment used to conduct its business. The Company adopted ASC 842 effective January
1, 2019. For contracts entered into on or after the effective date, at the inception of a contract it assesses whether the contract
is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified
asset, (2) whether its obtains the right to substantially all the economic benefit from the use of the asset throughout the period,
and (3) whether it has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration
in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered
into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed.
The aggregate undiscounted cash flows of operating
lease payments, with remaining terms greater than one year are as follows:
For the year ended
|
|
Amount
|
|
December 31, 2021
|
|
$
|
1,080,000
|
|
December 31, 2022
|
|
|
1,007,000
|
|
December 31, 2023
|
|
|
1,038,000
|
|
December 31, 2024
|
|
|
1,070,000
|
|
December 31, 2025
|
|
|
992,000
|
|
Thereafter
|
|
|
730,000
|
|
Total future minimum lease payments
|
|
|
5,917,000
|
|
Less: discount
|
|
|
(1,289,000
|
)
|
Total operating lease maturities
|
|
|
4,628,000
|
|
Less: current portion of operating lease liabilities
|
|
|
(701,000
|
)
|
Total long term portion of operating lease maturities
|
|
$
|
3,927,000
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted Average Remaining Lease Term - in years
|
|
|
5.53
|
|
|
|
6.32
|
|
Weighted Average discount rate - %
|
|
|
8.89
|
%
|
|
|
9.50
|
%
|
As part of the effort to reduce costs, corporate
executive offices were moved to an existing 5.4-acre corporate campus in Bay Shore, New York. The Company remains liable under
the lease for the office in Hauppauge, New York which is now vacant. This lease has a term which ends January 2022. The annual
rent was approximately $113,000 for the lease year which began in January 2019 and increases by approximately 3% per annum each
year thereafter. Accordingly, the Company recognized an impairment of $275,000 to its Operating Lease Right-of-Use-Asset for the
year ended December 31, 2019.
NTW’s warehouse lease was terminated
in May 2020 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.
Rent expense for the years ended December 31,
2020 and 2019 was $1,173,000 and $1,193,000, respectively.
Note 11. 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, Inc. 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 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 table below shows the activity within the
liability account for the years ended December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Cash received from sale of future proceeds from disposition of subsidiary
|
|
$
|
-
|
|
|
$
|
800,000
|
|
Liabilities related to sale of future proceeds from disposition of subsidiary – beginning balance
|
|
|
602,000
|
|
|
|
-
|
|
Non-Cash other income recognized
|
|
|
(402,000
|
)
|
|
|
(282,000
|
)
|
Non-Cash interest expense recognized
|
|
|
122,000
|
|
|
|
84,000
|
|
Liabilities related to sale of future proceeds from disposition of subsidiary – ending balance
|
|
|
322,000
|
|
|
|
602,000
|
|
Less: unamortized transaction costs
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Liability related to sale of future proceeds from disposition of subsidiary, net
|
|
$
|
319,000
|
|
|
$
|
599,000
|
|
Note 12. 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 a Form S-3 filed on October 10, 2019 as updated
on January 15, 2020. Costs of the sale amounted to $145,000.
During the year ended December 31, 2020,
the Company issued 1,830,631 shares of common stock to convert third party subordinated debt totaling $2,589,000 to equity.
During the year ended December 31, 2020,
the Company issued 178,405 shares of common stock in payment of directors’ fees totaling $211,000.
During the year ended December 31, 2019,
the Company issued 50,000 shares of common stock in lieu of cash payment for various services provided to the Company, 257,602
shares of common stock in payment of directors’ fees, 424,805 shares of common stock issued from the conversion of notes
payable, 180,000 shares issued in connection with the issuance of subordinated notes payable and 2,778 shares issued upon the exercise
of stock options.
During the first quarter of 2021, the Company
issued 41,960 shares of common stock in payment of directors’ fees totaling $52,000 and 51,224 shares of common stock upon
the exercise of stock options.
Note 13. EMPLOYEE BENEFITS PLANS
The Company employs both union and non-union
employees and maintains several benefit plans.
Union
Substantially the entire workforce at AIM
is subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the “Union”).
The Agreement was renewed as of December 31, 2018 and expires on December 31, 2021 and covers all of AIM’s production personnel,
of which there are approximately 93 people. AIM is required to make a monthly contribution to each of the Union’s United
Welfare Fund and the United Services Worker’s Security Fund. This is the only pension benefit required by the Agreement and
the Company is not obligated for any future defined benefit to retirees. The Agreement contains a “no-strike” clause,
whereby, during the term of the Agreement, the Union will not strike and AIM will not lockout its employees. Medical benefits for
union employees are provided through a policy with Insperity Services, Inc. (“Insperity”), the costs of which are substantially
borne by the Company. In addition, the Company is obligated to make contributions for union dues and a security fund (defined contribution
plan) for the benefit of each union employee. Contributions to the security fund amounted to $134,000 and $137,000 for the years
ended December 31, 2020 and 2019, respectively.
The Company adopted ASU No. 2011-09, “Compensation
- Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer
Plan” (“ASU 2011-09”). ASU 2011-09 requires additional disclosures about an employer’s participation in
a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans.
ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. The Union’s retirement plan is a
defined contribution plan. As such, the Company is not responsible for the obligations of other companies in the Union’s
retirement plan and no further disclosures are required.
Others
All of the Company’s employees are covered
under a co-employment agreement with Insperity, a professional employer organization (“PEO”) that provides out-sourced
human resource services.
The Company has a defined contribution plans
under Section 401(k) of the Internal Revenue Code (the “Plans”). Pursuant to the Plans, qualified employees may contribute
a percentage of their pre-tax eligible compensation to the Plan. The Company does not match any contributions that employees may
make to the Plans.
Note 14. 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.
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 that was formerly occupied by Welding Metallurgy, Inc., 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. The pace of litigation in the civil courts in New York has been slowed by
the impact of Covid-19. The Court has ordered us and Contract Pharmacal to complete discovery, which is ongoing.
On December 20, 2018, the Company completed
the sale of all of the outstanding shares of its subsidiary, WMI, to CPI.
There ensued a dispute with CPI regarding
amounts it claimed were due based upon the value it ascribed to the inventory as of the closing date. On December 23, 2020 the
Company and CPI reached an agreement to settle the working capital dispute. Pursuant to the settlement, the escrow agent released
to CPI the balance of $ 1,380,684 remaining in the escrow account which had been established at the closing and the Company and
CPI exchanged mutual releases customary in the circumstances.
From time to time the Company may be engaged
in various lawsuits and legal proceedings in the ordinary course of business. The Company is currently not aware of any legal proceedings
the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on
its business, financial condition or operating results. There are no proceedings in which any of the Company’s directors,
officers or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material
interest adverse to our interest.
Note 15. INCOME TAXES
The provision for (benefit from) income taxes
as of December 31, is set forth below:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Federal tax refund
|
|
$
|
(1,416,000
|
)
|
|
$
|
-
|
|
State
|
|
|
4,000
|
|
|
|
37,000
|
|
Total (Benefit from) Expense for Income Taxes
|
|
|
(1,412,000
|
)
|
|
|
37,000
|
|
Deferred Tax Benefit
|
|
|
-
|
|
|
|
-
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
Net (Benefit from) Provision for Income Taxes
|
|
$
|
(1,412,000
|
)
|
|
$
|
37,000
|
|
The following is a reconciliation of our income
tax rate computed using the federal statutory rate to our actual income tax rate as of December 31,
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
U.S. statutory income tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State taxes
|
|
|
-0.90
|
%
|
|
|
-1.11
|
%
|
Permanent difference, overaccruals, and non-deductible items
|
|
|
159.65
|
%
|
|
|
-3.33
|
%
|
Rate change and provision to return true-up
|
|
|
197.34
|
%
|
|
|
0.62
|
%
|
Expired stock options
|
|
|
0.00
|
%
|
|
|
1.54
|
%
|
Deferred tax valuation allowance
|
|
|
-393.63
|
%
|
|
|
-20.13
|
%
|
Cares Act Refund
|
|
|
458.76
|
%
|
|
|
0.00
|
%
|
Total
|
|
|
442.22
|
%
|
|
|
-1.41
|
%
|
The components of net deferred tax assets at December 31, 2020 and
2019 are set forth below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Net operation loss
|
|
$
|
6,594,000
|
|
|
$
|
8,017,000
|
|
Allowance for doubtful accounts
|
|
|
252,000
|
|
|
|
216,000
|
|
Inventory - IRC 263A adjustment
|
|
|
341,000
|
|
|
|
268,000
|
|
Stock based compensation - options and restricted stock
|
|
|
277,000
|
|
|
|
150,000
|
|
Capitalized engineering costs
|
|
|
336,000
|
|
|
|
323,000
|
|
Deferred rent
|
|
|
4,000
|
|
|
|
12,000
|
|
Amortization - NTW Transaction
|
|
|
495,000
|
|
|
|
442,000
|
|
Inventory reserve
|
|
|
1,250,000
|
|
|
|
1,000,000
|
|
Deferred gain on sale of real estate
|
|
|
132,000
|
|
|
|
84,000
|
|
Accrued Expenses
|
|
|
158,000
|
|
|
|
165,000
|
|
Disallowed interest
|
|
|
1,813,000
|
|
|
|
1,431,000
|
|
Right of Use Asset
|
|
|
292,000
|
|
|
|
329,000
|
|
Total non-current deferred tax asset before valuation allowance
|
|
|
11,944,000
|
|
|
|
12,437,000
|
|
Valuation allowance
|
|
|
(9,394,000
|
)
|
|
|
(10,663,000
|
)
|
Total non-current deferred tax asset after valuation allowance
|
|
|
2,550,000
|
|
|
|
1,774,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(2,150,000
|
)
|
|
|
(1,628,000
|
)
|
Other
|
|
|
(400,000
|
)
|
|
|
(146,000
|
)
|
Total deferred tax liabilities
|
|
|
(2,550,000
|
)
|
|
|
(1,774,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
During the years ended December 31, 2020
and 2019, the Company recorded a valuation allowance equal to its net deferred tax assets. The Company determined that due to a
recent history of net losses, that at this time, sufficient uncertainty exists regarding the future realization of these deferred
tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not that these deferred
tax benefits will be realized, the valuation allowances will be reduced or eliminated. With a full valuation allowance, any change
in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December 31, 2020
and 2019, the Company provided a valuation allowance on its net deferred tax assets of $9,394,000 and $10,663,000, respectively.
As of December 31, 2020, the Company had
a Federal net operating loss carry forward of approximately $27,576,000, of which $22,461,000 expire in years through 2037 and
$5,115,000 that do not expire. State net operating loss carry forwards total approximately $9,458,000 (with effective rates from
5.5% to 10%), expiring in years through 2040.
At December 31, 2020 and 2019, the Company
had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect
that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and
penalties related to uncertain tax positions in interest expense. As of December 31, 2020 and 2019, the Company has not recorded
any provisions for accrued interest and penalties related to uncertain tax positions.
In certain cases, the Company’s uncertain
tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The Company files federal
and state income tax returns in jurisdictions with varying statutes of limitations. The 2017 through 2020 tax years generally remain
subject to examination by federal and state tax authorities.
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.
Note 16. STOCK OPTIONS AND WARRANTS
Stock-Based Compensation
Stock Options
In July 2017, the Board of Directors adopted
the Company’s 2017 Equity Incentive Plan (“2017 Plan”) which authorized the grant of rights with respect to up
to 1,200,000 shares. The 2017 Plan was approved by affirmative vote of the Company’s stockholders on October 3, 2017.
During the year ended December 31, 2020,
the Company granted options to purchase 560,000 shares of common stock to certain of its employees and directors. The weighted
average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 0.22% to 1.61%; expected volatility factors of 71.5% to 75.4%; expected dividend yield of 0%; and expected
life of 2.5 to 4 years.
During the year ended December 31, 2019,
the Company granted options to purchase 613,000 shares of common stock to certain of its employees and directors. The weighted
average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 1.87% to 2.60%; expected volatility factors of 65.8% to 72.4%; expected dividend yield of 0%; and expected
life of 4.9 to 6.8 years.
The Company recorded stock based compensation expense
of $308,000 and $378,000 in its consolidated statement of operations for the years ended December 31, 2020 and 2019, respectively,
and such amounts were included as a component of general and administrative expense.
The fair values of stock options granted were
estimated using the Black-Sholes option-pricing model with the following assumptions for the years ended December 31:
|
|
2020
|
|
|
2019
|
|
Risk-free interest rates
|
|
|
0.22% - 1.61
|
%
|
|
|
1.87% - 2.60
|
%
|
Expected life (in years)
|
|
|
2.50 - 4.00
|
|
|
|
4.90 - 6.80
|
|
Expected volatility
|
|
|
71.5% - 75.4
|
%
|
|
|
65.8% - 72.4
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value per share
|
|
$
|
0.64
|
|
|
$
|
0.50
|
|
The expected life is the number of years that
the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture. Expected life
is determined using the “simplified method” permitted by Staff Accounting Bulletin No. 107. In addition to the inputs
referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture
rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based on the Company’s
experience.
A summary of the status of the Company’s
stock options as of December 31, 2020 and 2019, and changes during the two years then ended are presented below.
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Balance, January 1, 2019
|
|
|
838,149
|
|
|
$
|
3.08
|
|
Granted during the period
|
|
|
613,000
|
|
|
|
0.96
|
|
Exercised during the period
|
|
|
(15,000
|
)
|
|
|
0.88
|
|
Terminated/Expired during the period
|
|
|
(66,500
|
)
|
|
|
7.46
|
|
Balance, December 31, 2019
|
|
|
1,369,649
|
|
|
$
|
2.01
|
|
Granted during the period
|
|
|
560,000
|
|
|
|
1.20
|
|
Exercised during the period
|
|
|
-
|
|
|
|
-
|
|
Terminated/Expired during the period
|
|
|
(70,649
|
)
|
|
|
7.48
|
|
Balance, December 31, 2020
|
|
|
1,859,000
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
1,488,997
|
|
|
$
|
1.68
|
|
The following table summarizes information
about stock options at December 31, 2020:
|
|
Number
|
|
|
|
|
|
Wtd. Avg,
|
|
Wtd. Avg.
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
|
|
Exercise Price
|
|
$0.00 - $5.00
|
|
|
1,784,000
|
|
|
|
1,414,000
|
|
|
3.69 years
|
|
$
|
1.25
|
|
$5.01 - $15.00
|
|
|
75,000
|
|
|
|
75,000
|
|
|
0.32 years
|
|
$
|
8.85
|
|
$0.00 - $15.00
|
|
|
1,859,000
|
|
|
|
1,489,000
|
|
|
3.55 years
|
|
$
|
1.56
|
|
As of December 31, 2020, there was $80,000
of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted
average vesting period of 0.7 years.
The aggregate intrinsic value at December 31,
2020 was based on the Company’s closing stock price of $1.23 was approximately $269,000. The aggregate intrinsic value was
calculated based on the positive difference between the closing market price of the Company’s Common Stock and the exercise
price of the underlying options. The total number of in-the-money options exercisable as of December 31, 2020 was 205,000.
The weighted average fair value of options
granted during the years ended December 31, 2020 and 2019 was $0.64 and $0.50 per share, respectively. The total intrinsic value
of options exercised during both the years ended December 31, 2020 and 2019 was $0. The total fair value of shares vested during
the years ended December 31, 2020 and 2019 was $237,000 and $1,210,000, respectively.
Warrants
During both the years ended December 31, 2020
and 2019, the Company did not issue warrants, in connection with convertible notes payable and common stock issuances.
The following tables summarize the Company’s
outstanding warrants as of December 31, 2020 and changes during the two years then ended:
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life (years)
|
|
Balance, January 1, 2019
|
|
|
2,239,762
|
|
|
$
|
3.10
|
|
|
|
3.35
|
|
Granted during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Terminated/Expired during the period
|
|
|
(56,800
|
)
|
|
|
10.80
|
|
|
|
-
|
|
Balance, December 31, 2019
|
|
|
2,182,962
|
|
|
$
|
2.90
|
|
|
|
2.43
|
|
Granted during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Terminated/Expired during the period
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Balance, December 31, 2020
|
|
|
2,182,962
|
|
|
$
|
2.90
|
|
|
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
2,182,962
|
|
|
$
|
2.90
|
|
|
|
1.43
|
|
Note 17. 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 our corporate division as an independent segment.
The accounting policies of each of the segments
are the same as those described in Note 3 – Summary of Significant Accounting Policies. Intersegment transfers are recorded
at the transferors 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 years ended December 31, 2020 and 2019 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
44,659,000
|
|
|
$
|
48,226,000
|
|
Gross Profit
|
|
|
6,493,000
|
|
|
|
8,669,000
|
|
Pre Tax Income from continuing operations
|
|
|
4,965,000
|
|
|
|
5,266,000
|
|
Assets
|
|
|
51,368,000
|
|
|
|
45,268,000
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
5,438,000
|
|
|
|
6,347,000
|
|
Gross Profit
|
|
|
19,000
|
|
|
|
473,000
|
|
Pre Tax Loss from continuing operations
|
|
|
(31,000
|
)
|
|
|
(500,000
|
)
|
Assets
|
|
|
3,899,000
|
|
|
|
5,005,000
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
Pre Tax Loss from continuing operations
|
|
|
(5,020,000
|
)
|
|
|
(7,327,000
|
)
|
Assets
|
|
|
2,510,000
|
|
|
|
817,000
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
50,097,000
|
|
|
|
54,573,000
|
|
Gross Profit
|
|
|
6,512,000
|
|
|
|
9,142,000
|
|
Pre Tax Loss from continuing operations
|
|
|
(86,000
|
)
|
|
|
(2,561,000
|
)
|
(Benefit from) provision for Income Taxes
|
|
|
(1,412,000
|
)
|
|
|
37,000
|
|
Loss from Discontinued Operations, net of taxes
|
|
|
(230,000
|
)
|
|
|
(134,000
|
)
|
Net Income (Loss)
|
|
|
1,096,000
|
|
|
|
(2,732,000
|
)
|
Assets
|
|
$
|
57,777,000
|
|
|
$
|
51,090,000
|
|
F-33