NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Organization
Air Industries Group is a Nevada corporation (“AIRI”). As
of and for the three and six months ended June 30, 2021 and 2020, 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 and six months ended
June 30, 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 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. With the first half of fiscal 2021 now completed and the Company beginning to see the benefits from
its’ recent investments in new machinery and equipment, management believes the Company will continue to improve its liquidity.
As such, based on the Company generating operating income of $239,000 and $87,000 for the three and six months ended June 30, 2021, respectively,
its 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 at least August 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 and six months ended June 30, 2021, the Company increased its estimate of its gross profit percentage for its Complex
Machining segment based on increased sales and the better absorption of Manufacturing Overhead, and accordingly has adjusted margins to
reflect such change. Adjustments to reconcile the annual physical inventory to the Company’s books are recorded in the fourth quarter.
Credit and Concentration Risks
There were three customers that represented 76.2%
and two customers that represented 71.9% of total net sales for the three months ended June 30, 2021 and 2020, respectively. This is set
forth in the table below.
|
|
Percentage of Sales
|
|
Customer
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
1
|
|
|
41.3
|
%
|
|
|
33.3
|
%
|
2
|
|
|
20.8
|
%
|
|
|
38.6
|
%
|
3
|
|
|
14.1
|
%
|
|
|
*
|
|
|
*
|
Customer was less than 10% of total
net sales for the three months ended June 30, 2020.
|
There were three customers that represented 77.0%
and two customers that represented 69.3% of total net sales for the six months ended June 30, 2021 and 2020, respectively. This is set
forth in the table below.
|
|
Percentage of Sales
|
|
Customer
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
1
|
|
|
34.4
|
%
|
|
|
32.2
|
%
|
2
|
|
|
26.9
|
%
|
|
|
37.1
|
%
|
3
|
|
|
15.7
|
%
|
|
|
*
|
|
|
*
|
Customer was less than 10% of total
net sales for the six months ended June 30, 2020.
|
There were three customers that represented 85.0% of gross accounts
receivable at June 30, 2021 and three customers that represented 80.3% of gross accounts receivable at December 31, 2020, respectively.
This is set forth in the table below.
|
|
Percentage of Receivables
|
|
Customer
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
1
|
|
|
60.4
|
%
|
|
|
57.1
|
%
|
2
|
|
|
12.6
|
%
|
|
|
*
|
|
3
|
|
|
12.0
|
%
|
|
|
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 June 30, 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net income (Loss) per condensed consolidated statements of operations
|
|
$
|
239,000
|
|
|
$
|
(1,584,000
|
)
|
|
$
|
87,000
|
|
|
$
|
(526,000
|
)
|
Add: Convertible Note Interest for Potential Note Conversion
|
|
|
77,000
|
|
|
|
-
|
|
|
|
155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) used to calculate diluted earnings per share
|
|
$
|
316,000
|
|
|
$
|
(1,584,000
|
)
|
|
$
|
242,000
|
|
|
$
|
(526,000
|
)
|
The following is a reconciliation of the denominators
of basic and diluted earnings per share computations:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Weighted average shares outstanding used to compute basic
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings per share
|
|
|
32,021,522
|
|
|
|
30,552,147
|
|
|
|
31,996,859
|
|
|
|
30,476,289
|
|
Effect of dilutive stock options and warrants
|
|
|
1,912,500
|
|
|
|
-
|
|
|
|
2,750,500
|
|
|
|
-
|
|
Effect of dilutive convertible notes payable
|
|
|
4,057,892
|
|
|
|
-
|
|
|
|
4,057,892
|
|
|
|
-
|
|
Weighted average shares outstanding and dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used to compute dilutive earnings per share
|
|
|
37,991,914
|
|
|
|
30,552,147
|
|
|
|
38,805,251
|
|
|
|
30,476,289
|
|
The following securities have been excluded from
the calculation as the exercise price was greater than the average market price of the common shares:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Stock options
|
|
|
456,000
|
|
|
|
216,000
|
|
|
|
98,000
|
|
|
|
216,000
|
|
Warrants
|
|
|
1,903,000
|
|
|
|
1,423,000
|
|
|
|
1,423,000
|
|
|
|
1,423,000
|
|
|
|
|
2,359,000
|
|
|
|
1,639,000
|
|
|
|
1,521,000
|
|
|
|
1,639,000
|
|
The following securities have been excluded
from the calculation even though the exercise price was less than the average market price of the common shares because the effect of
including these potential shares was anti-dilutive due to the net loss incurred during that period:
|
|
Three and Six Months Ended
|
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Stock options
|
|
|
-
|
|
|
|
1,696,000
|
|
Warrants
|
|
|
-
|
|
|
|
760,000
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
5,045,000
|
|
|
|
|
-
|
|
|
|
7,501,000
|
|
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 $57,000 and $74,000 for the three months ended June 30, 2021 and 2020, respectively, and $214,000 for both the
six months ended June 30, 2021 and 2020. Stock compensation expense for directors amounted to $52,000 and $46,000 for the three months
ended June 30, 2021 and 2020, respectively and $104,000 and $101,000 for the six months ended June 30, 2021 and 2020, respectively. Stock
compensation expense for employees and directors was included in operating expenses on the accompanying Condensed Consolidated Statements
of Operations.
Goodwill
Goodwill represents the excess of the acquisition
cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at both June 30, 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 June 30, 2021 and December 31, 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. 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 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.
In March 2021, the FASB issued ASU No. 2021-03,
Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, an amendment of the FASB Accounting
Standards Codification. The amendments in this ASU allow companies to elect not to monitor for goodwill impairment triggering events during
the reporting period and instead, to evaluate the facts and circumstances as of the end of the reporting period to determine whether it
is more likely than not that goodwill is impaired. This aligns the triggering event evaluation date with the reporting date, whether that
date is an interim or annual reporting date. This ASU is effective on a prospective basis for fiscal years beginning after December 15,
2019, with early adoption permitted for both interim and annual financial statements that have not yet been issued or made available for
issuance as of March 30, 2021. The Company does not expect this guidance to have a material impact to its consolidated financial statements
or related disclosures.
In May 2021, the FASB issued ASU No. 2021-04,
Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation
(Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for
Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which will clarify
and reduce diversity in practice. Specifically, the new standard includes a recognition model comprising four categories of transactions
and corresponding accounting treatment for each category. The category that would apply to a modification or an exchange of an equity-classified
warrant would depend on the substance of the modification transaction (e.g. a financing transaction to raise equity versus one to raise
debt). This recognition model is premised on the idea that the accounting for the transaction should not differ from what it would have
been had the issuer of the warrants paid cash instead of modifying the warrants. ASU 2021-04 will be effective for fiscal years beginning
after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. This ASU will be applied prospectively
to modifications or exchanges occurring on or after the effective date of the ASU. The Company is currently evaluating the impact this
new guidance will have on its 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 June 30, 2021 and December 31, 2020 consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Land
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
Buildings and Improvements
|
|
|
1,728,000
|
|
|
|
1,683,000
|
|
|
31.50 years
|
Machinery and Equipment
|
|
|
21,870,000
|
|
|
|
21,738,000
|
|
|
5 - 8 years
|
Finance Lease Machinery and Equipment
|
|
|
78,000
|
|
|
|
78,000
|
|
|
5 - 8 years
|
Tools and Instruments
|
|
|
12,417,000
|
|
|
|
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
|
|
|
583,000
|
|
|
|
436,000
|
|
|
4 - 6 years
|
Total Property and Equipment
|
|
|
38,275,000
|
|
|
|
37,644,000
|
|
|
|
Less: Accumulated Depreciation
|
|
|
(29,480,000
|
)
|
|
|
(28,063,000
|
)
|
|
|
Property and Equipment, net
|
|
$
|
8,795,000
|
|
|
$
|
9,581,000
|
|
|
|
Depreciation expense for the three months ended
June 30, 2021 and 2020 was $704,000 and $688,000, respectively. Depreciation expense for the six months ended June 30, 2021 and 2020 was
$1,417,000 and $1,344,000, respectively.
Assets held under financed lease obligations are
depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under finance leases
is included in depreciation expense for 2021 and 2020. Accumulated depreciation on these assets was approximately $31,000 and $28,000
as of June 30, 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.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Weighted Average Remaining Lease Term - in years
|
|
|
5.12
|
|
|
|
5.53
|
|
Weighted Average discount rate - %
|
|
|
8.89
|
%
|
|
|
8.90
|
%
|
The aggregate undiscounted cash flows of operating lease payments for
leases with remaining terms greater than one year are as follows:
|
|
Amount
|
|
December 31, 2021 (remainder of the year)
|
|
$
|
492,000
|
|
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
|
|
|
5,329,000
|
|
Less: discount
|
|
|
(1,091,000
|
)
|
Total operating lease maturities
|
|
|
4,238,000
|
|
Less: current portion of operating lease liabilities
|
|
|
(643,000
|
)
|
Total long term portion of operating lease maturities
|
|
$
|
3,595,000
|
|
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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Revolving credit note payable to Sterling National Bank (“SNB”)
|
|
$
|
15,256,000
|
|
|
$
|
15,649,000
|
|
Term loan, SNB
|
|
|
4,793,000
|
|
|
|
5,558,000
|
|
Finance lease obligations
|
|
|
3,000
|
|
|
|
6,000
|
|
Loan Payable - financed asset
|
|
|
44,000
|
|
|
|
48,000
|
|
Related party notes payable
|
|
|
6,412,000
|
|
|
|
6,012,000
|
|
Subtotal
|
|
|
26,508,000
|
|
|
|
27,273,000
|
|
Less: Current portion of notes payable, related party notes payable and finance lease obligations
|
|
|
(16,266,000
|
)
|
|
|
(16,475,000
|
)
|
Notes payable, related party notes payable and finance lease obligations,
|
|
|
|
|
|
|
|
|
net of current portion
|
|
$
|
10,242,000
|
|
|
$
|
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 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 was changed from September 30, 2020 to November 30, 2020. The Company paid an amendment
fee of $20,000.
On June 14, 2021, the Company entered into the Second Amendment to
the Loan and Security Agreement (“Second Amendment”). The purpose of the Second Amendment was to clarify the definition and
calculation of Excess Cash Flow, and to confirm the extension of the due date for the payment of the Excess Cash Flow payment. The amount
of the Excess Cash Flow payment for the year ended December 31, 2020 was calculated to be $558,750. Per the terms of the Second Amendment,
the Excess Cash Flow is payable in three installments of $186,250 on each of June 15, 2021, June 30, 2021, and September 15, 2021. As
of June 30, 2021, the Company paid the first two installments totaling $372,500. Additionally, the Company paid an amendment fee of $10,000.
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 June 30, 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 June 30, 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)
|
|
$
|
592,000
|
|
December 31, 2022
|
|
|
4,247,000
|
|
SNB Term Loan payable
|
|
|
4,839,000
|
|
Less: debt issuance costs
|
|
|
(46,000
|
)
|
Total SNB Term loan payable, net of debt issuance costs
|
|
|
4,793,000
|
|
Less: Current portion of SNB term loan payable
|
|
|
(998,000
|
)
|
Total long-term portion of SNB term loan payable
|
|
$
|
3,795,000
|
|
Under the terms of the SNB Facility, both the
SNB revolving line of credit and the SNB term loan will bear an interest rate equal to 30-day LIBOR, (with a 1% floor), plus 2.5%. The
average interest rate charged during the period ended June 30, 2021 was 3.5%.
As of June 30, 2021, our debt to SNB in the amount
of $20,049,000 consisted of the SNB revolving line of credit note in the amount of $15,256,000 and the SNB term loan in the amount of
$4,793,000. 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 $180,000 and $154,000 for the three months ended June 30, 2021 and 2020, respectively, and $361,000 and $274,000 for
the six months ended June 30, 2021 and 2020, respectively.
Loan Payable – Financed Asset
The Company financed the purchase of a delivery
vehicle in July 2020. The loan obligation totaled $44,000 and $48,000 as of June 30, 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)
|
|
$
|
5,000
|
|
December 31, 2022
|
|
|
9,000
|
|
December 31, 2023
|
|
|
9,000
|
|
December 31, 2024
|
|
|
9,000
|
|
December 31, 2025
|
|
|
9,000
|
|
Thereafter
|
|
|
3,000
|
|
Loan Payable - financed asset
|
|
|
44,000
|
|
Less: Current portion
|
|
|
9,000
|
|
Long-term portion
|
|
$
|
35,000
|
|
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 resulted in
proceeds to the Company 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. was 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 and six months ended June
30, 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 June 30, 2021 and 2020 on all related party notes payable was $125,000 and $125,000, respectively,
and $250,000 and $253,000 for the six months ended June 30, 2021 and 2020, respectively.
Convertible Notes Payable – Third Parties
As of both June 30, 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
notes amounted to approximately $38,000 and $80,000 for the three and six months ended June 30, 2020, respectively. Amortization of debt
discount on these notes amounted to approximately $3,000 and $7,000 for the three and six months ended June 30, 2020, respectively. 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 its 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 $91,000 and $119,000 of
non-cash income for the three months ended June 30, 2021 and 2020, respectively, and $195,000 and $211,000 of non-cash income for the
six months ended June 30, 2021 and 2020, respectively, reflected in “other income, net” on the condensed consolidated statements
of operations and recorded $27,000 and $36,000 of related non-cash interest expense related to the Purchase Agreement for the three months
ended June 30, 2021 and 2020, respectively, and $58,000 and $64,000 for the six months ended June 30, 2021 and 2020, respectively.
The table below shows the activity within the
liability account for:
|
|
June 30,
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
|
|
|
(195,000
|
)
|
|
|
(402,000
|
)
|
Non-Cash interest expense recognized
|
|
|
58,000
|
|
|
|
122,000
|
|
Liabilities related to sale of future proceeds from disposition of
|
|
|
|
|
|
|
|
|
subsidiary - ending balance
|
|
|
185,000
|
|
|
|
322,000
|
|
Less: unamortized transaction costs
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Liability related to sale of future proceeds from disposition of
|
|
|
|
|
|
|
|
|
subsidiary, net
|
|
$
|
182,000
|
|
|
$
|
319,000
|
|
Note 7. STOCKHOLDERS’ EQUITY
Common Stock – Sale and Other Issuances
The Company issued 37,392 and 47,126 shares of
common stock in payment of director fees totaling $52,000 and $46,000 for the three months ended June 30, 2021 and 2020, respectively,
and 79,352 and 90,897 shares totaling $104,000 and $101,000 for the six months ended June 30, 2021 and 2020, respectively. Additionally,
the Company issued 51,224 shares of common stock upon the cashless exercise of stock options during the six months ended June 30, 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 six months ended June 30, 2020, the
Company issued 590,243 shares of common stock to convert third party subordinated debt totaling $885,000 to equity.
During the third quarter of 2021, the Company issued 39,983 shares
of common stock in payment of directors’ fees totaling $52,000.
Issuance of Stock Options
On January 11, 2021, the Company granted to its directors,
stock options to purchase an aggregate of 70,000 shares of the Company’s common stock at a price of $1.32 per share. The options
expire on the seventh anniversary of the grant date and vest over a term of one year.
On March 24, 2021, the Company granted to certain
members of management and certain employees, stock options to purchase an aggregate of 327,500 shares of the Company’s common stock
at a price of $1.39 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.
On July 30, 2021, the Company granted to certain members
of management and certain employees, stock options to purchase an aggregate of 415,000 shares of the Company’s common stock at a
price of $1.22 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one to three years.
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 originally sought damages in excess
of $1,000,000 for the Company’s failure to make the entire premises available by the Sublease commencement date. On July 8, 2021,
the Court denied Contract Pharmacal’s Motion for Summary Judgement. In the Order, the Court granted Contract Pharmacal’s Motions
to drop its claim for specific performance and to amend its Complaint to reduce its claim for damages to $700,000. The Company continues
to dispute the validity of the claims asserted by Contract Pharmacal and believes it has meritorious defenses to those claims. As of June
30, 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 and six months ended June 30, 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 June 30, 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 transferor’s
cost, and there is no intercompany profit or loss on intersegment transfers. We evaluate performance based on revenue, gross profit contribution
and assets employed.
Financial information about the Company’s
reporting segments for the three and six months ended June 30, 2021 and 2020 are as follows:
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
13,783,000
|
|
|
$
|
7,308,000
|
|
|
$
|
25,949,000
|
|
|
$
|
19,372,000
|
|
Gross Profit
|
|
|
2,325,000
|
|
|
|
681,000
|
|
|
|
3,944,000
|
|
|
|
2,849,000
|
|
Income (Loss) before benefit from income taxes
|
|
|
1,573,000
|
|
|
|
(10,000
|
)
|
|
|
2,553,000
|
|
|
|
1,160,000
|
|
Assets
|
|
|
51,956,000
|
|
|
|
48,490,000
|
|
|
|
51,956,000
|
|
|
|
48,490,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,670,000
|
|
|
|
1,186,000
|
|
|
|
3,216,000
|
|
|
|
2,569,000
|
|
Gross Profit (Loss)
|
|
|
278,000
|
|
|
|
(67,000
|
)
|
|
|
456,000
|
|
|
|
(54,000
|
)
|
Income (Loss) before benefit from income taxes
|
|
|
114,000
|
|
|
|
(217,000
|
)
|
|
|
99,000
|
|
|
|
(343,000
|
)
|
Assets
|
|
|
3,471,000
|
|
|
|
4,430,000
|
|
|
|
3,471,000
|
|
|
|
4,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss before benefit from income taxes
|
|
|
(1,448,000
|
)
|
|
|
(1,357,000
|
)
|
|
|
(2,565,000
|
)
|
|
|
(2,757,000
|
)
|
Assets
|
|
|
823,000
|
|
|
|
1,808,000
|
|
|
|
823,000
|
|
|
|
1,808,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
15,453,000
|
|
|
|
8,494,000
|
|
|
|
29,165,000
|
|
|
|
21,941,000
|
|
Gross Profit
|
|
|
2,603,000
|
|
|
|
614,000
|
|
|
|
4,400,000
|
|
|
|
2,795,000
|
|
Income (Loss) before benefit from income taxes
|
|
|
239,000
|
|
|
|
(1,584,000
|
)
|
|
|
87,000
|
|
|
|
(1,940,000
|
)
|
Benefit from Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
Net Income (loss)
|
|
|
239,000
|
|
|
|
(1,584,000
|
)
|
|
|
87,000
|
|
|
|
(526,000
|
)
|
Assets
|
|
$
|
56,250,000
|
|
|
$
|
54,728,000
|
|
|
$
|
56,250,000
|
|
|
$
|
54,728,000
|
|