NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Organization
Air Industries Group is a Nevada corporation (“AIRI”). As
of and for the three months ending March 31, 2021, the accompanying condensed consolidated financial statements presented are those of
AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”),
and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March
31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission,
from which the accompanying condensed consolidated balance sheet dated December 31, 2020 was derived.
Reclassifications
Reclassification occurred to certain 2020 amounts to conform to the
2021 classification. These reclassifications had no impact on the statement of operations.
Liquidity
At each reporting period, management evaluates whether there are conditions
or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date
that the financial statements are issued. The Company is required to make certain additional disclosures if management concludes that
substantial doubt exists about the Company’s ability to continue as a going concern and such doubt is not alleviated by the Company’s
plans or when the Company’s plans alleviate substantial doubt about its ability to continue as a going concern. The evaluation entails
analyzing prospective operating budgets and forecasts for expectations regarding 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.
Although the global outbreak of COVID-19 had a significant adverse
impact on the world economy and negatively impacted the Company’s revenues, earnings and operating cash flows in 2020, management
believes the Company’s operations substantially returned to normal in fiscal 2021 and the Company generated net cash from operations
of $567,000 in the quarter ended March 31, 2021. With the first quarter of fiscal 2021 now completed and the Company’s recent investments
in new machinery and equipment paying off, management believes the Company will continue to improve its liquidity. As such, based on current
best estimates of fiscal 2021 sales, confirmed and expected orders, the strength of existing backlog, overall market demand, expected
timing of future cash receipts and expenditures and the Company’s ability to access additional liquidity, if needed, the Company
believes it will have adequate cash to support operations through May 31, 2022.
Subsequent Events
Management has evaluated subsequent events through
the date of this filing.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory Valuation
For annual periods, the Company values inventory
at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical inventories at
interim quarterly reporting periods. For interim periods, substantially all of the inventory value has been estimated using a gross profit
percentage based on annual gross profit percentages of the immediately preceding year as applied to the net sales of the current period.
During the three months ended March 31, 2021, the Company determined that its gross profit for its Complex Machining segment was below
its 2020 gross profit percentages, and accordingly has adjusted margins to less than those of 2020. Adjustments to reconcile the annual
physical inventory to the Company’s books are recorded in the fourth quarter.
Credit and Concentration Risks
Net Sales and Accounts Receivable
There were three customers that represented 77.9%
and 79.9% of total net sales for the three months ended March 31, 2021 and 2020, respectively. This is set forth in the table below.
|
|
Percentage of Sales
|
|
Customer
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
1
|
|
|
33.8
|
%
|
|
|
36.2
|
%
|
2
|
|
|
26.6
|
%
|
|
|
31.5
|
%
|
3
|
|
|
17.5
|
%
|
|
|
12.2
|
%
|
There were three customers that represented
77.8% and 80.3% of gross accounts receivable at March 31, 2021 and December 31, 2020, respectively. This is set forth in the table below.
|
|
Percentage of Receivables
|
|
Customer
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
(unaudited)
|
|
|
|
|
1
|
|
|
46.7
|
%
|
|
|
57.1
|
%
|
2
|
|
|
17.6
|
%
|
|
|
*
|
|
3
|
|
|
13.5
|
%
|
|
|
12.0
|
%
|
4
|
|
|
**
|
|
|
|
11.2
|
%
|
|
*
|
Customer was less than 10% of Gross Accounts Receivable at
December 31, 2020.
|
|
**
|
Customer was less than 10% of Gross Accounts Receivable at
March 31, 2021.
|
Cash and Cash Equivalents
During the period, the Company had occasionally maintained balances
in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts.
Major Suppliers
The Company has several key sole-source suppliers
of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore,
in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed.
Leases
The Company accounts for leases under ASC 842,
“Leases.” All leases are required to be recorded on the balance sheet and are classified as either operating leases or finance
leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely
in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded in operating expenses
and an implied interest component is recorded in interest expense. See Note 4.
Earnings (Loss) per share
Basic earnings (loss) per share (“EPS”)
is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock
outstanding for the period.
For purposes of calculating diluted earnings per
common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the
period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number
of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially
include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method.
The following is the calculation of net income
(loss) applicable to common stockholders utilized to calculate EPS:
|
|
Three Months Ended
|
|
|
|
March 31,
2021
|
|
|
March 31,
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net (loss) income per statement of operations
|
|
$
|
(152,000
|
)
|
|
$
|
1,058,000
|
|
Add: Convertible Note Interest for Potential Note Conversion
|
|
|
-
|
|
|
|
170,000
|
|
(Loss) income used to calculate diluted earnings per share
|
|
$
|
(152,000
|
)
|
|
$
|
1,228,000
|
|
The following is a reconciliation of the denominators
of basic and diluted earnings per share computations:
|
|
Three Months Ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Weighted average shares outstanding used to compute basic earnings per share
|
|
|
31,971,922
|
|
|
|
30,380,234
|
|
Effect of dilutive stock options and warrants
|
|
|
-
|
|
|
|
1,137,769
|
|
Effect of dilutive convertible notes payable
|
|
|
-
|
|
|
|
5,003,451
|
|
Weighted average shares outstanding and dilutive securities used to compute
dilutive earnings per share
|
|
|
31,971,922
|
|
|
|
36,521,454
|
|
The following securities have been excluded from
the calculation as the exercise price was greater than the average market price of the common stock:
|
|
Three Months Ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Stock Options
|
|
|
191,000
|
|
|
|
234,000
|
|
Warrants
|
|
|
1,423,000
|
|
|
|
1,423,000
|
|
|
|
|
1,614,000
|
|
|
|
1,657,000
|
|
The following securities have been excluded from
the calculation even though the exercise price was less than the average market price of the common shares because the effect of including
these potential shares was anti-dilutive due to the net loss incurred during that period:
|
|
Three Months Ended
|
|
|
|
March 31,
2021
|
|
|
March 31,
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Stock Options
|
|
|
1,991,000
|
|
|
|
-
|
|
Warrants
|
|
|
760,000
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
4,058,000
|
|
|
|
-
|
|
|
|
|
6,809,000
|
|
|
|
-
|
|
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of
the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the
fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation expense
for employees amounted to $157,000 and $140,000 for the three months ended March 31, 2021 and 2020, respectively. Stock compensation expense
for directors amounted to $52,000 and $55,000 for the three months ended March 31, 2021 and 2020, respectively. Stock compensation expenses
for employees and directors were included in operating expenses on the accompanying Condensed Consolidated Statements of Operations.
Goodwill
Goodwill represents the excess of the acquisition
cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at both March 31, 2021
and December 31, 2020 relates to the acquisition of NTW.
Goodwill is not amortized, but is tested at least
annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying
amount.
The Company has determined that there has been
no impairment of goodwill at March 31, 2021 and 2020.
Recently Issued Accounting Pronouncements
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 will evaluate the impact of ASU 2016-13 on the Company’s consolidated financial statements in a future period closer
to the date of adoption.
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.
On January 1, 2021, the Company adopted 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 adoption
of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.
On January 1, 2021, the Company adopted ASU 2020-04, Reference Rate
Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for
a limited time to ease the potential burden in accounting for reference rate reform. In January 2021, the FASB issued ASU 2021-01, “Reference
Rate Reform (Topic 848): Scope: which clarified the scope of ASU 2020-04. The new guidance provides optional expedients and exceptions
for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria
are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be
discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications
made and hedging relationships entered into or evaluated on or before December 31, 2022. The adoption of these ASU’s did not have
a material impact on the Company’s condensed 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 condensed consolidated
financial statements.
Note 3. PROPERTY AND EQUIPMENT
The components of property and equipment at March
31, 2021 and December 31, 2020 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Land
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
Buildings and Improvements
|
|
|
1,720,000
|
|
|
|
1,683,000
|
|
|
31.50 years
|
Machinery and Equipment
|
|
|
21,838,000
|
|
|
|
21,738,000
|
|
|
5 - 8 years
|
Finance Lease Machinery and Equipment
|
|
|
78,000
|
|
|
|
78,000
|
|
|
5 - 8 years
|
Tools and Instruments
|
|
|
12,246,000
|
|
|
|
12,116,000
|
|
|
1.50 - 7 years
|
Automotive Equipment
|
|
|
148,000
|
|
|
|
148,000
|
|
|
5 years
|
Furniture and Fixtures
|
|
|
290,000
|
|
|
|
290,000
|
|
|
5 - 8 years
|
Leasehold Improvements
|
|
|
861,000
|
|
|
|
855,000
|
|
|
Term of Lease
|
Computers and Software
|
|
|
436,000
|
|
|
|
436,000
|
|
|
4 - 6 years
|
Total Property and Equipment
|
|
|
37,917,000
|
|
|
|
37,644,000
|
|
|
|
Less: Accumulated Depreciation
|
|
|
(28,776,000
|
)
|
|
|
(28,063,000
|
)
|
|
|
Property and Equipment, net
|
|
$
|
9,141,000
|
|
|
$
|
9,581,000
|
|
|
|
Depreciation expense for the three months ended
March 31, 2021 and 2020 was approximately $713,000 and $656,000, 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 2021 and 2020. Accumulated depreciation on these assets was approximately $30,000 and $28,000
as of March 31, 2021 and December 31, 2020, respectively.
Note 4. LEASES
The Company has operating and finance leases for
leased office and manufacturing facilities and equipment leases. The Company leases certain machinery and equipment under finance leases
and leases its offices and manufacturing facilities under operating leases. The leases have remaining lease terms of one to five years,
some of which include options to extend or terminate the leases.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Weighted Average Remaining Lease Term - in years
|
|
|
5.19
|
|
|
|
5.53
|
|
Weighted Average discount rate - %
|
|
|
8.31
|
%
|
|
|
8.90
|
%
|
The aggregate undiscounted cash flows of operating lease payments as
of March 31, 2021, with remaining terms greater than one year are as follows:
|
|
Amount
|
|
December 31, 2021 (remainder of the year)
|
|
$
|
808,000
|
|
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
|
|
|
5,645,000
|
|
Less: discount
|
|
|
(1,189,000
|
)
|
Total operating lease maturities
|
|
|
4,456,000
|
|
Less: current portion of operating lease liabilities
|
|
|
(693,000
|
)
|
Total long term portion of operating lease maturities
|
|
$
|
3,763,000
|
|
On April 29, 2021 the Company entered into an agreement to surrender
the possession of the premises of the former corporate office, located in Hauppauge, NY. The Company made a one-time payment of 40% of
the remaining balance due to the landlord as of May 1, 2021, of approximately $37,000. The Company had previously recognized a lease impairment
of $275,000 to its Operating Lease Right-of-Use-Asset for the year-ended December 31, 2019.
Note 5. NOTES PAYABLE, RELATED PARTY NOTES
PAYABLE AND FINANCE LEASE OBLIGATIONS
Notes payable, related party notes payable and
finance lease obligations consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Revolving credit note payable to Sterling National Bank (“SNB”)
|
|
$
|
14,781,000
|
|
|
$
|
15,649,000
|
|
Term loan, SNB
|
|
|
5,362,000
|
|
|
|
5,558,000
|
|
Finance lease obligations
|
|
|
4,000
|
|
|
|
6,000
|
|
Loans Payable - financed assets
|
|
|
46,000
|
|
|
|
48,000
|
|
Related party notes payable, net of debt discount
|
|
|
6,412,000
|
|
|
|
6,012,000
|
|
Subtotal
|
|
|
26,605,000
|
|
|
|
27,273,000
|
|
Less: Current portion of notes payable, related party notes payable and finance lease obligations
|
|
|
(15,606,000
|
)
|
|
|
(16,475,000
|
)
|
Notes payable, related party notes
payable and finance lease obligations, net of current portion
|
|
$
|
10,999,000
|
|
|
$
|
10,798,000
|
|
Sterling National Bank (“SNB”)
On December 31, 2019, the Company entered into
a loan facility (“SNB Facility”) with 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”).
In 2020, the Company entered into the First Amendment
to Loan and Security Agreement (“First Amendment”). The terms of the amendment 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 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 March 31, 2021, the Company was in compliance with all loan covenants. The SNB Facility also restricts the amount of dividends the
Company may pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the SNB Facility.
As of March 31, 2021 the future minimum principal
payments for the SNB term loan are as follows:
For the twelve months ending
|
|
Amount
|
|
December 31, 2021 (remainder of the year)
|
|
$
|
609,000
|
|
December 31, 2022
|
|
|
4,805,000
|
|
SNB Term Loan payable
|
|
|
5,414,000
|
|
Less: debt issuance costs
|
|
|
(52,000
|
)
|
Total SNB Term loan payable, net of debt issuance costs
|
|
|
5,362,000
|
|
Less: Current portion of SNB term loan payable
|
|
|
(812,000
|
)
|
Total long-term portion of SNB term loan payable
|
|
$
|
4,550,000
|
|
Under the terms of the SNB Facility, both the
SNB revolving line of credit and the SNB term loan will bear an interest rate equal to 30-day LIBOR (with a 1% floor) plus 2.5%. The average
interest rate charged during the period ended March 31, 2021 was 3.5%.
As of March 31, 2021, our debt to SNB in the amount
of $20,143,000 consisted of the SNB revolving line of credit note in the amount of $14,781,000 and the SNB term loan in the amount of
$5,362,000. As of December 31, 2020, our 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 related to the SNB Facility amounted
to approximately $181,000 and $120,000 for the three months ended March 31, 2021 and 2020, respectively.
Loan Payable – Financed Asset
The Company financed the purchase of a delivery
vehicle in July 2020. The loan obligation totaled $46,000 and $48,000 as of March 31, 2021 and December 31, 2020, respectively. The loan
bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.
The future minimum loan payments, are as follows:
For the twelve months ending
|
|
Amount
|
|
December 31, 2021 (remainder of the year)
|
|
$
|
7,000
|
|
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
|
|
|
46,000
|
|
Less: Current portion
|
|
|
9,000
|
|
Long-term portion
|
|
$
|
37,000
|
|
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.
From 2016 through 2020, the Company entered into various
subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich. These notes included proceeds totaling
$6,550,000. In connection with these notes, Michael and Robert were issued a total of 355,082 shares of common stock and Taglich Brothers
Inc. were issued promissory notes totaling $554,000 for placement agency fees.
On January 1, 2021, the related party subordinated
notes due to Michael and Robert Taglich and Taglich Brothers, Inc., were amended to include all accrued interest through December 31,
2020 in the principal balance of the notes. Per the terms of the SNB Facility, these notes remain subordinate to the SNB Facility and
are due on July 1, 2023. There are no principal payments due on these notes until such time. The Note Holders and the principal balance
of the notes as amended on January 1, 2021 are shown below:
|
|
Michael Taglich,
|
|
|
Robert Taglich,
|
|
|
Taglich Brothers,
|
|
|
|
|
|
|
Chairman
|
|
|
Director
|
|
|
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
|
|
For the three months ended March 31, 2021, no
principal payments have been made on these notes and the principal balances remain unchanged from the table above. Interest expense for
the three months ended March 31, 2021 and 2020 on all related party notes payable was $125,000 and $128,000, respectively.
Convertible Notes Payable – Third Parties
As of both March 31, 2021 and December 31, 2020
the notes payable to third parties totaled $0 as the notes were converted into shares of common stock in 2020. Interest incurred on these
amounted to approximately $42,000 for the three months ended March 31, 2020. Amortization of debt discount on these notes amounted to
approximately $4,000 for the three months ended March 31, 2020. These costs are included in interest and financing costs in the Condensed
Consolidated Statement of Operations.
NOTE 6. 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”).
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 Company recognized $104,000 and $92,000 of
non-cash income reflected in “other income, net” on the condensed consolidated statement of operations and recorded $31,000
and $28,000 of related non-cash interest expense related to the Purchase Agreement, for the three months ended March 31, 2021 and 2020,
respectively.
The table below shows the activity within the
liability account for:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance
|
|
$
|
322,000
|
|
|
$
|
602,000
|
|
Non-Cash other income recognized
|
|
|
(104,000
|
)
|
|
|
(402,000
|
)
|
Non-Cash interest expense recognized
|
|
|
31,000
|
|
|
|
122,000
|
|
Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance
|
|
|
249,000
|
|
|
|
322,000
|
|
Less: unamortized transaction costs
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Liability related to sale of future proceeds from disposition of subsidiary, net
|
|
$
|
246,000
|
|
|
$
|
319,000
|
|
Note 7. STOCKHOLDERS’ EQUITY
Common Stock – Sale of Securities
The Company issued 41,960 and 43,771 shares
of common stock in payment of director fees totaling $52,000 and $55,000 for the three months ended March 31, 2021 and 2020,
respectively. Additionally, the Company issued 51,224 shares of common stock upon the cashless exercise of stock options during the
three months ended March 31, 2021.
In January 2020, we issued and sold 419,597 shares
of our common stock for gross proceeds of $984,000 pursuant to our Form S-3 filed on October 10, 2019 as updated on January 15, 2020.
Costs of the sale amounted to $145,000.
During the three months ended March 31, 2020,
the Company issued 590,243 shares of common stock to convert third party subordinated debt totaling $885,000 to equity.
During the second quarter of 2021, the Company
issued 37,392 shares of common stock in payment of directors’ fees totaling $52,000.
Note 8. 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. (“Contact
Pharmacal”) commenced an action on October 2, 2018, relating to a Sublease entered into between the Company and Contract
Pharmacal in May 2018 with respect to the property at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal seeks
damages for an amount in excess of $1,000,000 for our failure to make the entire premises available by the Sublease commencement
date. The Company disputes the validity of the claims asserted by Contract Pharmacal and believes it has meritorious defenses to
those claims and have recently submitted a motion in opposition to its motion for summary judgement. As of March 31, 2021, it is not
possible to estimate if a loss will be incurred, as such there has been no accrual.
From time to time we also may be engaged in various
lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any legal proceedings the ultimate
outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial
condition or operating results. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial
stockholder of our common stock, is an adverse party or has a material interest averse to our interest.
Note 9. INCOME TAXES
The Company recorded no income tax expense for
the three months ended March 31, 2021 and 2020 because the estimated annual effective tax rate was zero. In determining the estimated
annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and
taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits
and net operating loss carry forwards, and available tax planning alternatives.
As a result of the passage of the CARES Act, the
Company filed for a net operating loss carryback claim of $1,416,000 in March 2020. The refund was received in April 2020.
As of March 31, 2021 and December 31, 2020, the
Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not
that its deferred tax assets will not be realized.
Note 10. SEGMENT REPORTING
In accordance with FASB ASC 280, “Segment
Reporting” (“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by
the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company follows ASC 280, which establishes
standards for reporting information about operating segments in annual and interim financial statements, and requires that companies report
financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards
for related disclosures about products and services, geographic areas and major customers.
The Company currently divides its operations into
two operating segments: Complex Machining, which consists of AIM and NTW; and Turbine Engine Components, which consists of Sterling. Along
with its operating subsidiaries, the Company reports the results of its corporate division as an independent segment.
The accounting policies of each of the segments
are the same as those described in the Summary of Significant Accounting Policies. Intersegment transfers are recorded at the 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 three months ended March 31, 2021 and 2020 are as follows:
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
12,166,000
|
|
|
$
|
12,064,000
|
|
Gross Profit
|
|
|
1,619,000
|
|
|
|
2,168,000
|
|
Income before benefit from income taxes
|
|
|
980,000
|
|
|
|
1,170,000
|
|
Assets
|
|
|
51,703,000
|
|
|
|
48,732,000
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,546,000
|
|
|
|
1,383,000
|
|
Gross Profit
|
|
|
178,000
|
|
|
|
13,000
|
|
Loss before benefit from income taxes
|
|
|
(15,000
|
)
|
|
|
(126,000
|
)
|
Assets
|
|
|
3,582,000
|
|
|
|
4,569,000
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
Loss before benefit from income taxes
|
|
|
(1,117,000
|
)
|
|
|
(1,400,000
|
)
|
Assets
|
|
|
2,075,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
13,712,000
|
|
|
|
13,447,000
|
|
Gross Profit
|
|
|
1,797,000
|
|
|
|
2,181,000
|
|
Loss before benefit from income taxes
|
|
|
(152,000
|
)
|
|
|
(356,000
|
)
|
Benefit from Income Taxes
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
Net Income (loss)
|
|
|
(152,000
|
)
|
|
|
1,058,000
|
|
Assets
|
|
$
|
57,360,000
|
|
|
$
|
54,051,000
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion
of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial
statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and
the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2020 (the “2020 Form 10-K”).
This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various
risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking
statements.
Business Overview
The financial statements contained
in this report as well as the discussion below principally reflect the status of our business and the results of our operations as of
March 31, 2021.
AIM became a public company
in 2005 and we are an aerospace company operating primarily in the defense industry. Our Complex Machining segment manufactures structural
parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants,
and other components. Our Turbine Engine Components segment makes components and provides services for jet engines and ground-power turbines.
Our products are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk,
Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter aircraft, Boeing 777 commercial
airliners. Our Turbine Engine segment makes components for jet engines that are used on the USAF F-15 and F-16, the Airbus A-330 and the
Boeing 777, in addition to a number of ground-power turbine applications.
The aerospace market is highly
competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our
revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process.
As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying
more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class
service but also by increasing our ability to produce more complex and complete assemblies for our customers.
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. In 2018 and
2019, we consolidated the operations of our Complex Machining segment in our main campus located in Bay Shore, New York. 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 where our Turbine Engine segment
is located. We believe these investments will increase the volume and efficiency of production, increase the size of product 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 ability to operate profitably
is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely basis
at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we
submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. Thus, when
submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we
can obtain from our subcontractors.
While our revenues are largely
determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs
are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing
and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. In addition,
the market for the skilled labor we require to operate our plants is highly competitive. The profit margin of the various products we
sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product
and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another,
a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold. Our operations have a
large percentage of fixed factory overhead. As a result, our profit margins are also highly variable with sales volumes as under-absorption
of factory overhead decreases profits.
A very large percentage of
the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already
in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and decreased usage
of aircraft reduces the demand for both new production and replacement spares. Recent increases in Defense Department spending have increased
orders for our products. Reductions to the Defense Department budget or decreased usage of aircraft reduces the demand for both new production
and replacement spares and could adversely impact our business and our revenues. We are focusing greater efforts on the civilian aircraft
market though we still remain dependent upon the military for an overwhelming portion of our revenues.
Segment Data
We follow Financial Accounting
Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes standards for
reporting information about operating segments in annual and interim financial statements, ASC 280 requires that companies report financial
and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
We currently divide our operations
into two operating segments: Complex Machining and Turbine Engine Components. Along with our operating subsidiaries, we report the results
of our corporate office as an independent segment.
The accounting policies of
our segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance based on revenue,
gross profit contribution and assets employed.
RESULTS OF OPERATIONS
Selected Financial Information:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
13,712,000
|
|
|
$
|
13,447,000
|
|
Cost of sales
|
|
|
11,915,000
|
|
|
|
11,266,000
|
|
Gross profit
|
|
|
1,797,000
|
|
|
|
2,181,000
|
|
Operating expenses and interest and financing costs
|
|
|
2,067,000
|
|
|
|
2,642,000
|
|
Other income, net
|
|
|
118,000
|
|
|
|
105,000
|
|
Benefit from income taxes
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
Net Income (loss)
|
|
$
|
(152,000
|
)
|
|
$
|
1,058,000
|
|
Balance Sheet Data:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,731,000
|
|
|
$
|
2,505,000
|
|
Working capital
|
|
$
|
16,984,000
|
|
|
$
|
16,284,000
|
|
Total assets
|
|
$
|
57,360,000
|
|
|
$
|
57,777,000
|
|
Total stockholders’ equity
|
|
$
|
15,166,000
|
|
|
$
|
15,109,000
|
|
The following sets forth
the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
Net Sales
|
|
$
|
12,166,000
|
|
|
$
|
12,064,000
|
|
Gross Profit
|
|
|
1,619,000
|
|
|
|
2,168,000
|
|
Income before benefit from income taxes
|
|
|
980,000
|
|
|
|
1,170,000
|
|
Assets
|
|
|
51,703,000
|
|
|
|
48,732,000
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,546,000
|
|
|
|
1,383,000
|
|
Gross Profit
|
|
|
178,000
|
|
|
|
13,000
|
|
Loss before benefit from income taxes
|
|
|
(15,000
|
)
|
|
|
(126,000
|
)
|
Assets
|
|
|
3,582,000
|
|
|
|
4,569,000
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
Loss before benefit from income taxes
|
|
|
(1,117,000
|
)
|
|
|
(1,400,000
|
)
|
Assets
|
|
|
2,075,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
13,712,000
|
|
|
|
13,447,000
|
|
Gross Profit
|
|
|
1,797,000
|
|
|
|
2,181,000
|
|
Loss before benefit from income taxes
|
|
|
(152,000
|
)
|
|
|
(356,000
|
)
|
Benefit from Income Taxes
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
Net Income (loss)
|
|
|
(152,000
|
)
|
|
|
1,058,000
|
|
Assets
|
|
$
|
57,360,000
|
|
|
$
|
54,051,000
|
|
Net Sales:
Consolidated net sales for the
three months ended March 31, 2021 were $13,712,000, an increase of $265,000, or 2.0%, compared with $13,447,000 for the three months ended
March 31, 2020. Net sales of our Complex Machining segment were $12,166,000, an increase of $102,000, or 0.8%, from $12,064,000 for
the three months ended March 31, 2020. Net sales in our Turbine Engine Components segment were $1,546,000, an increase of $163,000, or
11.8% compared with $1,383,000 for the three months ended March 31, 2020.
As indicated in the table
below, three customers represented 77.9% and 79.9% of total net sales for the three months ended March 31, 2021 and March 31, 2020, respectively.
|
|
Percentage of Sales
|
|
Customer
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Sikorsky Aircraft
|
|
|
33.8
|
%
|
|
|
36.2
|
%
|
Goodrich Landing Gear Systems
|
|
|
26.6
|
%
|
|
|
31.5
|
%
|
United States Department of Defense
|
|
|
17.5
|
%
|
|
|
12.2
|
%
|
Gross Profit:
Consolidated gross profit from
operations for the three months ended March 31, 2021 was $1,797,000, a decrease of $384,000, or 17.6%, as compared to gross profit of
$2,181,000 for the three months ended March 31, 2020. Consolidated gross profit as a percentage of sales was 13.1% and 16.2% for the three
months ended March 31, 2021 and 2020, respectively. This decrease was mainly attributable to an increase of approximately $518,000 in
manufacturing overhead costs primarily related to employee benefit costs and depreciation of new equipment, and a loss of approximately
$91,000 resulting from a termination of a contract by a customer.
Interest and Financing Costs
Interest and financing costs
for the three months ended March 31, 2021 were $297,000 a decrease of $83,000 or 21.8% compared to $380,000 for the three months ended
March 31, 2020. This decrease is attributable to the conversion of our third party Convertible Debt during fiscal 2020.
Operating Expense
Consolidated operating expenses
for the three months ended March 31, 2021 totaled $1,770,000 and decreased by $492,000 or 21.8% compared to $2,262,000 for the three months
ended March 31, 2020.
Net (Loss) Income
Net loss for the three months
ended March 31, 2021 was $152,000, a reduction of $1,210,000, compared to net income of $1,058,000 for the three months ended March 31,
2020 due to the reasons stated above. In addition, the Company recorded a benefit from income taxes of $1,414,000 for the three months
ended March 31, 2020 pursuant to the filing of a net operating loss claim (see below).
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2020, we took
advantage of a number of U.S. government programs to improve our liquidity to offset the negative impact to our business from COVID-19.
These steps included:
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1)
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Received Low Interest Loans from the SBA – In May 2020, our three operating subsidiaries entered into government subsidized
loans with Sterling National Bank (“SNB”) in an aggregate principal amount of $2.4 million (“SBA Loans”).
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|
2)
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Applied for and Received Forgiveness of the SBA Loans – In accordance with U.S. government regulations we applied to SNB for forgiveness
of each Loan in full and in December 2020 we received final approval from the SBA that the entire principal amount of our SBA Loans plus
accrued interest had been forgiven.
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|
3)
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Deferred Certain Tax Payments – In accordance with Section 2302 of the CARES Act, we elected to defer the deposit and payment of the employer’s portion of Social Security taxes. These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of December 31, 2020, we deferred $627,000, which is included in Deferred payroll tax liability – CARES Act on the accompanying Condensed Consolidated Balance Sheet.
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4)
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Received a Net Operating Loss Refund – Pursuant to the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter 2020.
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Also, the U.S. Department
of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred
and work performed on certain contracts.
In addition to taking advantage
of the aforementioned U.S. government programs, we took additional significant steps to improve our liquidity, including:
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1)
|
Entered into a Lower Cost Financing Facility – On December 31, 2019, we entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) which expires on December 30, 2022. The SNB Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). Proceeds from the SNB Facility repaid our outstanding PNC Facility with PNC Bank N.A. (“PNC”).
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|
|
|
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2)
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Increased Term Loan to Modernize Equipment – On November 6, 2020, we entered into the First Amendment to the Loan and Security Agreement, increasing the Term Loan to $5,685,000. This allowed us to finance the acquisition of the new equipment at what we believe to be a reasonable interest rate.
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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. We have paid an amendment fee of $20,000. Additionally,
the date by which certain subordinated third-party notes were to be extended by was changed from September 30, 2020 to November 30, 2020.
We caused all of these notes to be converted into common stock prior to December 31, 2020.
The formula to determine the amounts
of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible receivables
and inventory (as defined in the SNB Facility).
For so long as the SNB term loan remains
outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year, beginning with the year ending December 31, 2020,
we shall pay to SNB an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii)
the outstanding principal balance of the term loan. Such payment shall be made to SNB and applied to the outstanding principal balance
of the term loan, on or prior to the April 15 immediately following such Fiscal Year.
The terms of the SNB Facility require
that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning
with the Fiscal Quarter ending March 31, 2020. In addition, we are limited in the amount of Capital Expenditures we can make. As of March
31, 2021, we were in compliance with all loan covenants. The SNB Facility also restricts the amount of dividends we may pay to our stockholders.
Substantially all of our assets are pledged as collateral under the SNB Facility.
As of March 31, 2021, our debt to SNB
in the amount of $20,143,000 consisted of the SNB revolving line of credit note in the amount of $14,781,000 and the SNB term loan in
the amount of $5,362,000.
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3)
|
Conversion and Extension of Subordinated Notes – During 2020, third party holders of convertible subordinated notes of the remaining principal balance plus accrued interest, converted these notes into common stock. In addition, the maturity date of related party convertible subordinated notes and subordinated notes payable in the aggregate amount of $6,012,000 plus $400,000 of accrued interest was extended until July 1, 2023, and we were relieved of the obligation to make any principal payments on these notes prior to maturity.
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Because we continue to believe
our fiscal 2021 sales will be higher than the amount achieved in fiscal 2020, we believe our liquidity for the remainder of 2021 will
continue to improve.
Cash Flow
The following table summarizes
our net cash flow from operating, investing and financing activities for the periods indicated:
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|
Three Months Ended
|
|
|
|
March 31,
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|
|
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2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
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|
Cash (used in) provided by
|
|
|
|
|
|
|
Operating activities
|
|
$
|
567,000
|
|
|
$
|
(314,000
|
)
|
Investing activities
|
|
|
(273,000
|
)
|
|
|
(78,000
|
)
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Financing activities
|
|
|
(1,068,000
|
)
|
|
|
592,000
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(774,000
|
)
|
|
$
|
200,000
|
|
Cash Provided by (Used in) Operating Activities
Cash provided by (used in)
operating activities primarily consists of our net loss adjusted for certain non-cash items and changes to operating assets and liabilities.
For the three months ended March
31, 2021 cash provided by operating activities was $567,000. This was a result of our net loss of $152,000, offset by $915,000 of non-cash
items consisting primarily of depreciation of property and equipment of $713,000, non-cash employee stock compensation expense of $157,000,
amortization of right-of-use assets of $118,000 and non-cash directors’ compensation expense of $52,000. The remaining non-cash
items totaled $125,000.
Operating assets and liabilities
used cash in the net amount of $196,000 consisting primarily of the net increases in accounts receivable, inventory and prepaid expenses
and other current assets in the amounts of $816,000, $75,000 and $77,000, respectively and decreases in accounts payable and operating
lease liabilities of $36,000, and $172,000 respectively, partially offset by an increase in deferred revenue in the amount of $885,000
and a decrease in deposits in the amount of $95,000.
Cash Used in Investing Activities
Cash used in investing activities
consists of capital expenditures for property and equipment.
For the three months ended March
31, 2021, cash used in investing activities was $273,000. This was for the purchase of property and equipment.
Cash Provided by (Used in) Financing Activities
For the three months ended
March 31, 2021, cash used in financing activities consisted of net payments on our SNB revolving loan and term note in the amounts of
$868,000 and $196,000, respectively and payments of $2,000 and $2,000 on our financing lease obligations and loan payable – financed
asset.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance
sheet arrangements as of March 31, 2021.
Critical Accounting Policies and Estimates
A critical accounting policy
is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s
most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain.
Our condensed consolidated
financial statements are presented in accordance with U.S. GAAP, and all applicable U.S. GAAP accounting standards effective as of March
31, 2021 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation of condensed
consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from
those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments
and assumptions inherent in these policies could affect our condensed consolidated financial statements:
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●
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Stock-based compensation; and
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We base our estimates, to
the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and
various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities.
We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our estimates.
Recently Issued Accounting Pronouncements
See Note 2 of the Condensed
Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.