Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☐ No ☒
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☒
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
There were 3,259,367 shares of the registrant’s
common stock outstanding as of May 10, 2023.
PART
I
ITEM
1. BUSINESS
Introduction
As
used in this report, unless otherwise stated or the context requires otherwise, the “Company” and terms such as “we,”
“us” “our,” and “AIRI” refer to Air Industries Group, a Nevada corporation, and its wholly-owned
subsidiaries.
We
are a manufacturer of complex machined parts and assemblies for the Aerospace and Defense (“A&D”) market. Our products
are used by Original Equipment Manufacturers (“OEM”) in the manufacture of fixed wing aircraft, helicopters jet turbine engines,
and other complex sophisticated A&D products. We also manufacture parts for the ground power turbine industry and are in discussions
to manufacture products for submarines.
We
are a holding company with three legal subsidiaries, Air Industries Machining, (“AIM”) Nassau Tool Works (“NTW”)
and Sterling Engineering Company (“SEC”). Our subsidiaries have been manufacturers of A&D product for decades; SEC began
manufacturing aircraft components in 1941 – over 80-years ago – for use in World War II. NTW was formed in the early 1960’s
and AIM has been in business since 1951. Collectively, our subsidiaries have over 200 years of manufacturing experience in the A&D
market.
We
operate our business using two main facilities. One is located in Long Island, New York, and the other is in Barkhamsted, Connecticut.
We have over 150,000 square feet of manufacturing space, approximately 75,000 square feet in each location, and employ approximately
190 people.
Historically,
we operated our businesses and reported their results as two separate segments, with AIM and NTW comprising our Complex Machining Segment
(“CMS”) and our SEC as the Turbine & Engine Component Segment (“TEC”). Our CMS segment specializes in flight
critical components including flight controls and landing gear. Our TEC segment focuses on manufacturing components for jet engines.
Historically, each segment had different customers and utilized different production facilities.
In
recent years the operations of our CMS and TEC segments have become increasingly integrated. In addition, we have made significant capital
expenditures to modernize our manufacturing equipment and all of our operations now share the same manufacturing facilities and use most,
if not all, of the same sales and marketing functions. We made these changes to take advantage of the long-term growth opportunities
we see in the A&D market. In early fiscal 2022, we further changed our management approach and now make decisions regarding the allocation
of resources and assess operating performance based on one integrated business rather than two reporting segments. As such, effective
with our first quarter ended March 31, 2022, we began to present our operations as one reportable operating segment.
The
A&D business is comprised of a small number of OEM’s relying on several “tiers” or layers of many more numerous
smaller manufacturers supplying product. Each successive tier supplies increasingly larger, more complex product to the next higher tier
and OEM companies. Air Industries is generally either a tier one manufacturer supplying product directly to an OEM, or a tier two manufacturer
supplying product to a tier one supplier which delivers to an OEM.
Our
business has evolved over the years, our products becoming increasing complex. Where once we manufactured smaller individual components
for others to assemble into complex assemblies, we now manufacture those complex assemblies ourselves. For example, in the past we, along
with other suppliers, manufactured individual components to be assembled into a landing gear by an OEM customer. Today we manufacture
the entire landing gear, assembling over 200 individual parts, most manufactured internally, others sub-contracted or purchased into
a complete landing gear delivered directly to an OEM, ready to be installed on an aircraft.
We
are predominately a supplier of military aviation product. Defense products were 82.6% and 87.7% of our business in 2022 and 2021 respectively.
Our OEM customers in the defense sector include:
|
● |
Raytheon Technologies
Corporation (f/k/a United Technologies Corporation). We supply products for several units of Raytheon Technologies Corporation,
including: |
|
o |
Goodrich Landing Systems
– we manufacture landing gear components for the Northrop Grumman E2-D Hawkeye, airborne warning and control aircraft deployed
with the US Navy and several foreign governments, the Lockheed F-35 Lightning II Joint Strike multi-role fighter aircraft used by
all branches of the US military and multiple foreign militaries and for the F-15 Eagle fighter aircraft. |
Pratt
& Whitney – we manufacture jet turbine engine components for several military and commercial jet engines.
|
● |
Lockheed Martin Corporation.
We supply products for the Sikorsky Aircraft unit of Lockheed primarily for the UH-60 BlackHawk multi-purpose helicopter used
by the US and many foreign militaries. |
|
● |
General Electric Corporation.
We supply products used in General Electric jet turbine aircraft engines used by several military aircraft platforms. |
|
● |
US Department of Defense.
We supply landing gear product for the US Navy F-18 fighter aircraft directly to the Defense Department. |
|
● |
Northrop Grumman Corporation.
We supply product used on the E2-D Hawkeye, airborne warning and control aircraft. |
The
balance of our business, comprising 17.4% and 12.3% of our business in 2022 and 2021 respectively, is in commercial aviation and to a
minor degree in ground power electricity generation. Our OEM customers in the commercial sector include:
|
● |
Rohr Inc., (a wholly
owned subsidiary of Raytheon Technologies) We manufacture a component used in several versions of the Pratt & Whitney new geared
turbine fan commercial jet turbine engine. |
|
● |
General Electric Corporation.
We supply products used in General Electric jet turbine aircraft engines used by several commercial aircraft platforms and ground
power electricity generation. |
Our
business is concentrated on five aircraft platforms which comprised 76.9% and 76.6% of our business in 2022 and 2021 respectively.
|
● |
UH-60 BlackHawk.
We have manufactured many components and assemblies for the BlackHawk and its many variants for more than 20 years. BlackHawk helicopters
entered service in 1979 and remain in production today. It is the primary helicopter used by the US Army and other branches of the
US military. The BlackHawk is also used by many foreign countries and militaries. Over 4,000 aircraft have been produced with many,
perhaps as many as 3,000, remaining in use today and generating significant after-market demand. |
|
● |
F-35 Lightning II.
The F-35 Lightning also known as the Joint Strike Fighter is a new aircraft that will in coming years replace the US Air Force F-15
and the US Navy and Marine Corps F-18 fighters. Eight other nations have participated in the development of the aircraft and will
be users of the aircraft, as will other international militaries. There are three variants of the aircraft, conventional take-off
and landing F-35A, short take-off and vertical landing F-35B and a carrier based variant F-35C. The aircraft entered service with
the US Marine Corps in 2015 and approximately 2,300 are expected to be produced. |
|
● |
F-18 Hornet. The
F-18 Hornet currently is the primary fighter aircraft for the US Navy operating primarily from aircraft carriers. The F-18 is also
in service internationally, notably Finland and Australia. We manufacture complete landing gear and landing gear components for the
many variants of the aircraft. |
|
● |
Northrop Grumman E2-D
Advanced Hawkeye. The ED-D Hawkeye is a US Navy carrier-based aircraft used to provide airborne warning and control for carrier-based
air operations. The aircraft’s role is to maintain control of the airspace surrounding an aircraft carrier for protection of
the vessel and aircraft in operation. The “D” version, the most current of the E2 remains in production. The aircraft
is also used by seven foreign militaries notably Japan. |
|
● |
Pratt & Whitney
Geared Turbo-Fan. The P&W Geared Turbo-Fan (“GTF”) is a next generation jet turbine engine used in commercial
aviation. The GTF engine is widely acknowledged to deliver improved fuel economy and a lower noise footprint than existing jet engines.
There are several versions of the GTF. Air Industries produces a component for the smaller versions of the engine used on the popular
A-220 and Embraer narrow body aircraft. |
Our
Market
The
A&D industry has become very consolidated, now dominated by just a few very large prime contractors and OEM’s. These include
Airbus, Boeing, General Electric, Lockheed Martin, Northrop Grumman, and Raytheon Technologies. Many if not most of the large prime contractors
and OEM’s are our direct Tier One customers, and we also supply product as a Tier two supplier to many of their Tier one suppliers.
We also sell directly to the US Department of Defense (“DOD”).
Our
products are incorporated into many aircraft platforms, the majority of which remain in production today. The demand for after-market
products for the maintenance, repair and overhaul (“MRO”) of aircraft can continue for many years, even decades, after the
production line for new aircraft is shut-down.
We
target products that are flight critical, whose flawless operation is essential to the safe operation of the aircraft. To qualify to
produce these products a manufacturer needs to maintain various accreditations. Obtaining accreditation while not impossible is difficult,
time consuming and thus a barrier to entry for competitors. Further, flight critical components are frequently replaced on aircraft on
a flight time, or flight cycle basis. Thus, demand for these products arises from both production of new aircraft, and MRO demand based
on the flight hours of existing fleets of aircraft.
For
many of our products we are the sole or single source of product for our customers. Sole source product means that we are the only manufacturer
of the product. Single source means that while other manufacturers could supply the product, we are the only producer currently in the
market. Single or sole sourcing is more likely to occur with legacy aircraft. OEM’s generally prefer to have multiple sources of
product to support a production line of new aircraft and avoid single point of failure issues, particularly in light of the supply chain
disruptions caused by the outbreak of Covid-19.
Our
market is predominately military. As such demand for our products is closely aligned with the budget of the DOD. We monitor two components
of the DOD budget; procurement which affects demand resulting from new production and operations & maintenance which affects demand
resulting from the maintaining of existing aircraft. For Fiscal Year 2022, procurement and operations and maintenance accounted for more
than 50% of the entire defense budget.
Sales
and Marketing
We
are generally recognized as a Tier 1 or Tier 2 supplier in the A&D industry. We are also recognized as having extensive experience
and accreditation to produce and assemble complex flight safety products.
Most
of our contracts with our customers are in the form of a Long-Term Agreement (“LTA”). These LTA’s specify the number
and price of products that the customer may order from us for a period of time. The quantity and price in any year may vary from other
years within the LTA. Once awarded, the customer places orders against the LTA. These orders are called releases. Once released the order
is a firm order. While a firm order may be cancelled the customer is subject to termination liability and must pay us for the cost of
material, labor and other costs incurred up to the date of termination.
Our
sales cycle is highly variable, ranging from a few weeks to several years depending upon the complexity of the product and the number
of steps necessary to complete manufacturing. Contracts for product can be very short, just a few months to as long as ten-years.
We
obtain new or follow-on LTA’s through competitive bidding. We respond to a customer’s Request for Quotation (“RFQ”)
with proposed prices based on quantities, sometimes varying quantities per year, for shipments over a number of years. There may be several
rounds of submissions from us and from competitive suppliers, and a period of negotiation before an LTA is awarded. In addition to products
sold pursuant to LTA’s there are also “spot buys” of product by customers.
LTA’s,
particularly for defense products, may be extended or new orders placed without competitive bidding. In this instance and in some others
our price for the product must be supported by an analysis or audit and approval of our costs by the customer or by the Government.
In 2021 and to a lesser extent
in the first half of 2022 our sales and marketing efforts were negatively affected by Covid travel restrictions limiting our ability
to visit customers and the reluctance of the employees of some of our customers to return to the office and attend trade shows, complicating
our ability to contact them. As a result of these challenges our “book-to-bill” ratio (new orders booked divided by sales)
was 0.75 to 1.00 and 0.9 to 1.00 for the years ended December 31, 2022 and 2021 respectively, below historic levels.
Our
approach to sales and marketing can be best understood through the concept of customer alignment. The aerospace industry is dominated
by a small number of large prime contractors and OEM’s. These customers rely heavily upon subcontractors to supply quality parts
meeting specifications on a timely and cost effective basis. These customers and other customers we supply routinely rate their suppliers
based on a variety of performance factors. One of our principal goals is to be highly rated and thus deemed reliable by all of our customers
and throughout the industry.
The
large prime contractors are increasingly seeking subcontractors who can supply and are qualified to integrate the fabrication of larger,
more complex and more complete subassemblies. We seek to position ourselves within the supply chain of these contractors and manufacturers
to be selected for subcontracted projects. Successful positioning requires that we qualify to be a preferred supplier by achieving and
maintaining independent third party quality approval certifications, specific customer quality system approvals and top supplier ratings
through strong performance on existing contracts.
During
our sales and marketing efforts we let customers know that we have employees with the talent and experience to manage the manufacture
of sections of aircraft structures to be delivered to the final assembly phase of the aircraft manufacturing cycle, and customers have
now engaged us for these services.
Initial
contracts are usually obtained through competitive bidding against other qualified subcontractors, while follow-on contracts are usually
retained by successfully performing initial contracts. Our long term business generally benefits from barriers to entry resulting from
investments, certifications, familiarization with the needs and systems of customers, and manufacturing techniques developed during the
initial manufacturing phase. We endeavor to develop each of our relationships to one of a “partnership” where we participate
in the resolution of pre-production design and build issues, and initial contracts are obtained as single source awards and follow-on
pricing is determined through negotiations. In response to the impediments to traditional means of marketing our products and services
encountered during 2020 and 2021 as a result of the cancellation of industry-wide events and the difficulties in scheduling meetings
with our customers, we have adapted our business development efforts to increase our use of social media and online presentations, and
will continue to look for new ways to interact with our customers.
Our
Backlog
The
backlog we report consists solely of firm orders received from customers. We do not estimate possible or probable future orders pursuant
to LTA’s or anticipated contract renewals. Our backlog exists due to the long lead times necessary to produce many of our products.
Our production cycle from ordering raw material to delivering finished product can vary from several weeks to more than one year. Customers
must place orders in light of these lead-times creating a back-log of future deliveries. The production cycle for jet engine products
is much shorter and accordingly the backlog for jet engine products is much lower. Our total 18-Month firm backlog was $60.1 and $75.0
Million at December 31, 2022 and 2021, respectively.
Our
backlog today is the result of purchase orders for the Sikorsky Black Hawk, the F-25 Joint Strike Fighter, the Northrop Grumman E2-D,
the F-18 fighter aircraft and the Pratt & Whitney Geared Turbo-Fan jet engine.
Competition
Winning a new contract is highly competitive. We manufacture to customer
design specifications. We compete against companies that have similar, or better manufacturing capabilities and often greater financial,
physical and technical resources in the domestic and, to a lesser degree, in the global marketplace. Our ability to win new contracts
requires providing quality products on a timely basis at competitive prices. This requires that we strive for continuous improvement in
our capabilities to enhance our competitiveness. To accomplish this, we have made significant investments in new machinery and equipment
totaling approximately $3,725,000; $1,364,000 and $2,361,000 in 2021 and 2022, respectively. This new equipment improves the productive
capacity of our employees, increases efficiency and speed, while maintaining closer tolerances, and increasing the size of product we
can manufacture with a larger working “envelope”. We anticipate spending an additional $1,750,000 to $2,500,000 in 2023 to
continue to expand our productive capacity.
Our
marketing strategy involves developing long-term working relationships with customers. These relationships enable us to develop barriers
to entry to competitors by establishing and maintaining advanced quality approvals, certifications and tooling investments that are difficult
and expensive to duplicate.
Among
our competitors are: Monitor Aerospace, a division of Stellex Aerospace; Hydromil, a division of Triumph Aerospace Group; Heroux Aerospace
and Ellanef Manufacturing, a division of Magellan Corporation.
Raw
Materials and Replacement Parts
The
manufacturing process for certain products, particularly those for which we serve as product integrator, requires significant purchases
of raw materials, hardware and subcontracted details. As a result, much of our success in profitably meeting customer demand for these
products requires efficient and effective subcontract management. Price and availability of many raw materials utilized in the aerospace
industry are subject to volatile global markets and political conditions. Most suppliers of raw materials are unwilling to commit to
long-term contracts at fixed prices. This is a substantial risk as our strategy often involves long term fixed price commitments to our
customers.
Employees
As of May 1, 2023, we employed
185 people. Of these, 76 were in administration, 9 were in sales and procurement, and 100 were in manufacturing.
AIM
is a party to a collective bargaining agreement (the “Agreement”) with the United Service Workers, IUJAT, Local 355 (the
“Union”) with which we believe we maintain good relations. The Agreement was renewed as of December 31, 2021 and expires
on December 31, 2024 and covers the majority of AIM’s personnel, approximately 130 individuals, which equates to approximately
70% of all of our employees.
AIM
is required to make a monthly contribution to each of the Union’s United Welfare Fund and the United Services Worker’s Security
Fund. This is the only pension benefit required by the Agreement and the Company is not obligated for any future defined benefit to retirees.
The Agreement contains a “no-strike” clause, whereby, during the term of the Agreement, the Union will not strike and AIM
will not lockout its employees.
All
of our employees are covered under a co-employment agreement with Insperity Services, LLC, a professional employer organization that
provides out-sourced human resource and payroll services.
Regulations
Environmental
Regulation; Employee Safety
We
are subject to regulations administered by the United States Environmental Protection Agency, the Occupational Safety and Health Administration,
various state agencies and county and local authorities acting in cooperation with federal and state authorities. Among other things,
these regulatory bodies impose restrictions that require us to control air, soil and water pollution, to protect against occupational
exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of
certain hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and financial and operating
risks on us. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose
civil and criminal fines in the case of violations.
The
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and several
liabilities on the present and former owners and operators of facilities that release hazardous substances into the environment. The
Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. New York and Connecticut, the states where our production facilities are located, also have stringent laws
and regulations governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable
hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the
presence of hazardous chemicals and to train employees in the use of such substances.
Federal
Aviation Administration
We
are subject to regulation by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation Act
of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to
inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with
FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations. We have never been subject to such fines or disqualifications.
Government
Contract Compliance
Our
government contracts and those of many of our customers are subject to the procurement rules and regulations of the United States government,
including the Federal Acquisition Regulations. Many of the contract terms are dictated by these rules and regulations. During and after
the fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed to the project.
These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquiries and investigations
because of our participation in government procurement. Any inquiry or investigation can result in fines or limitations on our ability
to continue to bid for government contracts and fulfill existing contracts.
We
believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
ITEM
1A. RISK FACTORS
The
purchase of our common stock involves a very high degree of risk.
In
evaluating our common stock and our business, you should carefully consider the risks and uncertainties described below and the other
information and our consolidated financial statements and related notes included herein. If any of the events described in the risks
below actually occurs, our financial condition or operating results may be materially and adversely affected, the price of our common
stock may decline, perhaps significantly, and you could lose all or a part of your investment.
The
risks below can be characterized into four groups:
|
1) |
Risks related to disruptive
global events such as a widespread public health crisis, the outbreak of an international conflict, a terrorist event or a banking
crisis, such as Covid-19 and the war in Ukraine, and responses to such events; |
|
|
|
|
2) |
Risks related to our business,
including risks specific to the defense and aerospace industry; |
|
|
|
|
3) |
Risks arising from our
indebtedness; and |
|
|
|
|
4) |
Risks related to our common
stock. |
The
financial statements contained in this Report, as well as the description of our business contained herein, unless otherwise indicated,
principally reflect the status of our business and the result of operations as of December 31, 2022.
Risks
Related to Global Events
Disruptive national and international events,
such as the outbreak of a public health crisis, an international conflict, a terrorist event, a banking crisis, the possibility of default
by the United States on its obligations due to its debt ceiling or the actuality of such an event, and the response of the United States,
other countries and the public to such events, and the resulting macroeconomic disruption to the financial markets and the businesses
of our customers and suppliers, could have a negative impact on our results of operation and financial condition.
The outbreak of the Covid-19
pandemic, the invasion of Ukraine by the Russian Federation and the measures adopted by various governments and agencies, as well as the
decision by many individuals and businesses to voluntarily shut down or self-quarantine and work from home in response to the outbreak
of Covid-19 had serious adverse impacts on domestic and foreign economies, the financial markets and our ability, as well as the ability
of some of our customers and suppliers, to operate in the ordinary course. While we continued to operate substantially in the normal course
of business since the outbreak of Covid-19, we were forced to adjust our sales and marketing practices due to difficulties encountered
in contacting our customers to maintain existing programs and win new orders and did not receive new contracts during 2021 and 2022 at
a rate consistent with historical levels. Although business has substantially returned to pre-Covid-19 operating levels and our ability
to win new orders appears to be returning to historical levels, there is no assurance that there will not be another event, such as a
public health crisis, an international conflict, a terrorist event, a banking crisis or the possibility of a default by the United States
on its obligations due to its debt ceiling or the actuality of such an event, which will have a material adverse impact on our industry,
operations or financial condition. Moreover, although our industry appears to be operating in the normal course, employees of certain
customers continue to work from home impacting our ability to communicate with them and the future economic impact of changes in business
practices which resulted from Covid-19 or which might result from a future event, cannot be predicted with certainty. Covid-19 caused
significant disruption to the commercial travel and aerospace industries. Although air travel has increased, it may take several years
for overall economic conditions to return to normal, particularly in the aerospace industry, for air travel and the resulting demand for
new and refurbished aircraft to return to normal. If conditions do not improve, or if they worsen, it could make it difficult for us to
access debt and equity capital on attractive terms, or at all, and impact our ability to fund business activities and repay debt on a
timely basis.
Russia’s
invasion of Ukraine, continued tensions between the US and the European Union with China and Russia, may alter countries’
willingness to rely on others as the source of certain products and material.
Historically, prime contractors and OEMs in the United States A &
D industry have relied upon suppliers outside the United States for products and raw materials, including suppliers in Russia and China.
Supply chain disruptions resulting from China’s initial response to Covid-19, Russia’s invasion of Ukraine and the economic
disruption resulting from retaliatory measures, continued tensions between the US and other countries, may cause many companies in the
A&D industry and the governments of the countries in which they are located, including the United States, to rethink these strategies
and seek or mandate that such companies obtain more reliable sources of supply. To the extent they do so, it could disrupt the markets
for raw materials and supplies, our ability and the ability of our suppliers to obtain raw materials and supplies and the market for the
skilled laborers we need to manufacture our products.
We
cannot forecast with any certainty whether such disruptions, restrictions imposed by various governments in response thereto and resulting
changes in business practices, may materially impact our ability and the ability of our suppliers to obtain necessary raw material, our
business and our consolidated financial position, results of operations, and cash flows.
In
reading the remaining risk factors set forth below, in each case, consider the additional uncertainties caused by the potential for disruptive
global events such as a widespread public health crisis, the outbreak of an international conflict, terrorist event or banking crisis
and continued rivalries between various countries.
Risks
Related to Our Business
We
may need additional financing.
We may need to obtain additional
financing to fund acquisitions of capital items necessary for our growth and to upgrade equipment to remain competitive. We may also
need to obtain the agreement of holders of portions of our debt to extend or otherwise refinance such debt. We may need to offer these
holders increases in the rates of interest they receive or otherwise compensate them through payments of cash or issuances of our equity
securities. Future financings or refinancings may involve the issuance of debt, equity and/or securities convertible into or exercisable
or exchangeable for our equity securities. Additional funding may not be available to us on reasonable terms, if at all. If we are able
to consummate such financings or re-financings, the trading price of our common stock could be adversely affected and the terms of such
financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required
would have a material adverse effect on our business and financial condition and may result in a decline in our stock price. Any issuances
of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable
for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.
A
reduction in government spending on defense could materially adversely impact our revenues, results of operations and financial condition.
A
large percentage of our revenue is derived from products for US military aviation. There are risks associated with programs that are
subject to appropriation by Congress, which could be potential targets for reductions in funding. Reductions in United States Government
spending on defense or future changes in the mix of defense products required by United States Government agencies could limit demand
for our products and may have a materially adverse effect on our operating results and financial condition. For the past several years,
our operations have been impacted by volatility in government procurement cycles and spending patterns. There can be no assurance that
our financial condition and results of operations will not be materially adversely impacted by future volatility in defense spending
or a change in the mix of products purchased by defense departments in the United States or other countries, or the perception on the
part of our customers that such changes are about to occur.
We
depend on revenues from a few significant relationships. Any loss, cancellation, reduction, or interruption in these relationships could
harm our business.
We
derive most of our revenues from a small number of customers. Four customers represented approximately 77% and three customers represented
75% of total sales for the years ended December 31, 2022 and 2021, respectively. The markets in which we sell our products are dominated
by a relatively small number of customers which have contracts with United States governmental agencies, thereby limiting the number
of potential customers. Our success depends on our ability to develop and manage relationships with significant customers. We cannot
be sure that we will be able to retain our largest customers or that we will be able to attract additional customers, or that our customers
will continue to buy our products in the same amounts as in prior years. The loss of one or more of our largest customers, any reduction
or interruption in sales to these customers, our inability to successfully develop relationships with additional customers or future
price concessions that we may have to make, could significantly harm our business.
We
depend on revenues from components for a few aircraft platforms and the cancellation or reduction of either production or use of these
aircraft platforms could harm our business.
We
derive a significant portion of our revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter,
the Northrop Grumman E-2 Hawkeye naval aircraft, the F-18 Hornet and the Pratt & Whitney Geared TurboFan Jet engine. A reduction
in demand for our products as a result of either a reduction in the production of new aircraft or a reduction in the use of existing
aircraft in the fleet (reducing after-market demand) would have a material adverse effect on our operating results and financial condition.
Intense
competition in our markets may lead to a reduction in our revenues and market share.
The
defense and aerospace component manufacturing market is highly competitive and we expect that competition will increase and perhaps intensify.
In particular, we anticipate that manufacturers which have historically operated predominately in the commercial sector may seek to increase
the revenue derived in the defense aerospace market to utilize excess capacity. Many competitors have significantly greater technical,
manufacturing, financial and marketing resources than we do. We may not be able to compete successfully against either current or future
competitors. Increased competition could result in reduced revenue, lower margins or loss of market share, any of which could significantly
harm our business, our operating results and financial condition.
We
may lose sales if we fail to timely meet the needs of any of our customers.
Our
customers incorporate our products into larger aircraft assemblies or completed aircraft. They rely upon us to deliver products meeting
their specifications on a timely basis to ensure smooth operation of their assembly lines. If a customer were to conclude that it could
not rely upon us for timely delivery of quality products, it could look to dual source a product or rely upon another party altogether.
A customer could reach such a conclusion even if our failure to timely deliver product was the result of events beyond our control, such
as the failure of the customer to place an order for a long lead time product on a timely basis or supply us with agreed upon raw materials
for processing. Any decision by a customer to rely upon an alternate supplier for some or all of its needs could significantly harm our
business, our operating results and our financial condition.
We
may lose sales if our suppliers fail to meet our needs or shipments of raw materials are not timely made.
Although
we procure most of our raw materials, parts and components from multiple sources and rely upon a number of subcontractors to perform
detailed services, or believe that these materials, components and services are readily available from numerous sources, certain materials,
components and services are available only from a sole or limited number of sources and often need to be sourced by our customer. While
we believe that substitute supplies, components or assemblies and subcontractors could be obtained, use of substitutes would require
development of new suppliers or would require us to re-engineer our products, or both, which could delay shipment of our products and
could have a materially adverse effect on our operating results and financial condition. Any delays in the shipment of raw materials
or the performance of subcontracted services could significantly harm our business, our operating results and our financial condition.
A
reduction in our revenues could have a disproportionate effect on our gross profit as a percentage of sales.
Our operations have a large
percentage of fixed factory overhead relative to our overall expenses. As a result, our gross profit as a percentage of sales is highly
linked with sales volume. Any reduction in our sales volume causes us to absorb the fixed overhead costs over a smaller base of sales,
likely causing our profit margin to decrease. Any reduction in our profit margin adversely impacts our reported performance and would
have a material adverse impact on results of operation and consolidated financial position.
There
are risks associated with the bidding processes in which we compete.
We
obtain many contracts through a competitive bidding process. We must devote substantial time and resources to prepare bids and proposals
and may not have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have bid will be
sufficient to allow us to generate a profit from any particular contract. There are significant costs involved with producing a small
number of initial units of any new product and it may not be possible to recoup such costs on later production runs.
Due
to fixed contract pricing, increasing contract costs expose us to reduced profitability and the potential loss of future business.
The
cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity
of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect
of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any
claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material effect
on our consolidated financial position or results of operations.
The
prices of raw materials we use are volatile.
The
prices of raw materials used in our manufacturing processes are volatile. Our contracts generally allow us to increase our prices due
to increases in the price of raw materials. Many contracts, however, require that we absorb all or a portion of the increase in expense
resulting from inflation before passing the increase on to the customer. If the prices of raw materials rise, we may not be able to pass
along all of such increases to our customers and this could have an adverse impact on our consolidated financial position and results
of operations. It is possible that some of the raw materials we use might become subject to new or increased tariffs. Significant increases
in the prices of raw materials could adversely impact our customers’ demand for certain products which could lead to a reduction
in our revenues and have a material adverse impact on our revenues and on our consolidated financial position and results of operations.
Some
of the products we produce have long lead times.
Some of the products we produce require months to produce and we sometimes
produce products in excess of the number ordered intending to sell the excess as spares when orders arise. As a result, our inventory
turns slowly and ties up our working capital. Our inventory represented approximately 60% of our assets as of December 31, 2022. Any requirement
to write down the value of our inventory due to obsolescence, excess and slow moving, or a drop in the price of materials could have a
material adverse effect on our consolidated financial position, results of operations and could result in a breach of the financial covenants
in our Loan Facility with Webster Bank (“Webster”).
We
do not own the intellectual property rights to products we produce.
Nearly
all the parts and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any,
related to the product. Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would
be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.
There
are risks associated with new programs.
New
programs typically carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or
changing specifications, timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program
may experience delays for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs
to the customers’ satisfaction or if a new program in which we had made a significant investment was terminated or experienced
weak demand, delays or other problems, then our business, financial condition and results of operations could be materially adversely
affected. This could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings
in excess of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.
To
perform on new programs, we may be required to incur material up-front costs which may not have been separately negotiated and may not
be recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.
The
need to control our expenses will place a significant strain on our management and operational resources. If we are unable to control
our expenses effectively, our business, results of operations and financial condition may be adversely affected.
There
are risks associated with offering new services.
To
reduce our dependence on subcontractors we may offer new services to our customers, such as painting and finishing products we manufacture.
There are risks associated with offering new services and even if such services are performed timely and correctly, it is likely that
our margins will be low in the initial phases when volume is low.
Attracting
and retaining executive talent and other key personnel is an essential element of our future success.
Our
future success depends to a significant extent upon our ability to attract executive talent, as well as the continued service of our
existing executive officers and other key management and technical personnel. Experienced management and technical, marketing and support
personnel in the defense and aerospace industries are in demand and competition for their talents is intense. Our failure to attract
executive talent, or retain our existing executive officers and key personnel, could have a material adverse effect on our business,
financial condition and results of operations.
We
are subject to intense competition for the skilled machinists necessary to manufacture our products.
We
are subject to intense competition for the services of skilled machinists necessary to manufacture our products and those of other companies
in the A & D industry. Since the outbreak of COVID-19, the competition for skilled employees has intensified. Moreover, certain large
employers in our industry in the Northeast are currently seeking to hire a large number of skilled technicians. We are currently seeking
to hire machinists for our Long Island and Connecticut manufacturing facilities to expand our business. The demand for these individuals
may increase as other manufacturers seek to bring to the United States manufacturing processes currently outsourced overseas. If the
United States economy undergoes a period of inflation, our labor costs may increase which could have a material adverse effect on our
business, financial condition and results of operations.
We
are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense in the
event of non-compliance.
We
are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among
other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure
to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain
hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us.
In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on
or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required to
provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to
employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances.
Our operations require the use of chemicals and other materials for painting and cleaning that are classified under applicable laws as
hazardous chemicals and substances. If we are found to be in violation of any of these rules, regulations or permits, we may be subject
to fines, remediation expenses and the obligation to change our business practice, any of which could result in substantial costs that
would adversely impact our business operations and financial condition.
We
may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.
We
are subject to regulation by the FAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards
and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines
and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse
effect on our operations. We have never been subject to such fines or disqualification.
Cyber
security attacks, internal system or service failures may adversely impact our business and operations.
Any
system or service disruptions, including those caused by projects to improve our information technology systems, if not anticipated and
appropriately mitigated, could disrupt our business and impair our ability to effectively provide products and related services to our
customers and could have a material adverse effect on our business. We could also be subject to systems failures, including network,
software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters,
power shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software, unauthorized
attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products, customers or suppliers,
or other acts that could lead to disruptions in our business. Any such failures could cause loss of data and interruptions or delays
in our business, cause us to incur remediation costs or require us to pay ransom to a hacker which takes over our systems, or subject
us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt
or suspend our operations or otherwise adversely affect our business. Although we utilize various procedures and controls to monitor
and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. Our property
and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational
failure or disruption which would adversely affect our business, results of operations and financial condition. Moreover, expenditures
incurred in implementing cyber security and other procedures and controls could adversely affect our results of operations and financial
condition.
Terrorist
acts and acts of war may seriously harm our business, results of operations and financial condition.
United
States and global responses to actual or potential military conflicts such as Russia’s invasion of Ukraine, terrorism, perceived
nuclear, biological and chemical threats and other global political crises increase uncertainties with respect to the U.S. and other
business and financial markets. Several factors associated, directly or indirectly, with actual or potential military conflicts, terrorism,
perceived nuclear, biological and chemical and cyber threats, and other global political crises and responses thereto, may adversely
affect the mix of products purchased by defense departments in the United States or other countries to platforms not serviced by us.
A shift in defense budgets to product lines we do not produce could have a material adverse effect on our business, financial condition
and results of operations.
Risks
Related to Our Indebtedness
Our
indebtedness may have a material adverse effect on our operations.
We
have substantial indebtedness under our loan facility with Webster (“Loan Facility”). As of December 31, 2022, we had
approximately $18,748,000 of indebtedness outstanding under the Loan Facility. All of our indebtedness under the Loan Facility is secured
by substantially all of our assets.
We
also have approximately $6,162,000 of indebtedness outstanding in the form of subordinated notes payable on July 1, 2026. These notes
are held by related parties, specifically Michael N. Taglich (our Chairman) and Robert F. Taglich (a Director), and their affiliates.
Notes
with a principal value of approximately $2,732,000 carry an interest rate of 6% per annum and are convertible into approximately 182,000
shares of common stock at a conversion price of $15.00 per share. Notes with a principal value of approximately $2,080,000 carry an interest
rate of 7% per annum and are convertible into approximately 224,000 shares of common stock at a conversion price of $9.30 per share.
If we are unable to pay amounts due under our Loan Facility or the
subordinated notes when due, our operations may be materially and adversely affected. We may need to offer the holders of this debt increases
in the rates of interest they receive or otherwise compensate them through payments of cash or issuances of our equity securities. Future
financings or re-financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable
for our equity securities. If we are able to consummate such financings or re-financings, the terms of such financings may adversely affect
the trading price of our common stock and the interests of our existing stockholders. Any failure to obtain additional working capital
when required would have a material adverse effect on our business and financial condition and may result in a decline in our stock price.
Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or
exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.
Our
leverage may adversely affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities
and may make our results of operations more susceptible to adverse economic conditions.
The
interest rate associated with portions of our current debt may increase.
Under the terms of the Webster Facility, amounts due to Webster bear
interest at a per annum rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from time
to time in the “Money Rates” table of the Wall Street Journal (or such other presentation within The Wall Street Journal as
may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial
bank, less sixty-five hundredths (-0.65%) of one percent per annum. Consequently, the rate of interest we paid under the Facility did
not increase despite the initial increases in the target rates set by the Federal Reserve, though the more recent increases have resulted
increases in the interest rate we pay under the Webster Facility. The weighted average interest rate paid during the year-ended December
31, 2022 was 4.50%. Given current interest rates, the interest rate we pay under the Webster Facility will increase as the Federal Reserve
continues to increase its target rate of interest. In addition, under the terms of the Webster Facility we are required to maintain a
defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each fiscal quarter. If we were to fail to meet such covenant, Webster
would have the right to increase the rate of interest payable on amounts outstanding under the Facility. The Company was in compliance
with the covenant at December 31, 2022. The Company was in default of its covenant to provide its audited financial statements to Webster
bank within ninety (90) days of its fiscal year end. The Company has subsequently received a waiver from the bank for this default. Any
increase in the rate of interest payable under the Webster Facility would increase our interest expense and have a material adverse impact
on our on our consolidated financial position and results of operations.
Our
indebtedness may limit our ability to pay dividends in the future.
We currently do not pay dividends
and the terms of our Loan Facility require that we maintain certain financial covenants. In the future should we decide to pay dividends,
we would need to seek covenant changes or a waiver under our Loan Facility. There can be no assurance our lenders would agree to covenant
changes or waivers acceptable to us or at all. In addition, we may in the future incur indebtedness or otherwise become subject to agreements
whose terms restrict our ability to pay dividends in the future. Even if our lender would agree to allow us to pay a dividend, our Board
of Directors may choose to use the amount which could be paid as a dividend to reduce our outstanding indebtedness.
Risks
Related to our common stock
The
price of our common stock can fluctuate.
The
financial markets have been impacted in various ways by the reactions to the outbreak of the COVID-19 pandemic and government stimulus
programs adopted in response to the pandemic, and Russia’s invasion of Ukraine and government responses thereto. The price of our
common stock has and is expected to continue to be volatile. We cannot forecast with any certainty whether and to what degree the disruption
caused by the COVID-19 pandemic, Russia’s invasion of Ukraine and reactions thereto will continue to adversely impact financial
markets and the impact to our common stock. Likewise, we cannot state with certainty the degree to which financial markets were supported
by government stimulus programs and whether such support will continue as governments elect not to adopt similar measures in the future.
The
ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.
Two
of our directors, Michael N. Taglich and Robert F. Taglich, and their affiliates own a significant number of shares of our outstanding
common stock as well as a significant amount of debt convertible into our common stock, which together with their position as directors
of our Company, give them significant influence over the outcome of corporate actions, including those requiring stockholder approval
and the terms on which we complete transactions with their affiliates. The interests of these directors may be different from the interests
of other stockholders on these and other matters. This concentration of ownership could also have the effect of delaying or preventing
a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce
the price of our common stock.
We
can provide no assurance that our common stock will continue to meet NYSE American listing requirements. If we fail to comply with the
continuing listing standards of the NYSE American, our common stock could be delisted.
If
we fail to satisfy the continued listing requirements of the NYSE American, the NYSE American may take steps to delist our common stock.
The delisting of our common stock would likely have a negative effect on the price of our common stock and would impair your ability
to sell or purchase common stock when you wish to do so.
There
is only a limited public market for our common stock.
Our
common stock is listed on the NYSE American. However, there is only a limited number of our shares available in the public float and
the market capitalization of the shares in our public float is relatively small. The trading volume for our common stock has been limited
and a more active public market for our common stock may not develop or be sustained over time. The lack of a robust market may impair
a stockholder’s ability to sell shares of our common stock. In the absence of a more active trading market, any attempt to sell
our shares could result in a decrease in the price of our stock. Specifically, you may not be able to resell your shares of common stock
at or above the price you paid for such shares or at all.
Moreover,
sales of our common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our
common stock. As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly at all, and
the price per share of our common stock may fluctuate significantly.
If
we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.
Our
quarterly and annual operating results fluctuate significantly due to a variety of factors, some of which are outside our control. Accordingly,
we believe period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications
of future performance. Some of the factors that could cause quarterly or annual operating results to fluctuate include conditions inherent
in government contracting and our business such as the timing of cost and expense recognition for contracts, the United States Government
contracting and budget cycles, introduction of new government regulations and standards, contract closeouts, variations in manufacturing
efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers, general economic conditions
and economic conditions specific to the defense market and disruptions caused by global events such as COVID-19 and Russia’s invasion
of Ukraine. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the
short term, any delay in generating or recognizing forecasted revenues could significantly harm our business.
Fluctuations
in quarterly results or announcements of extraordinary events such as an award of a new contract, acquisitions or litigation, may cause
earnings to fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could
significantly decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market
price of our common stock, as well as our overall operating results. Consequently, our share price may experience significant volatility
and may not necessarily reflect the value of our expected performance.
Future
financings or acquisitions may adversely affect the market price of our common stock.
Future
sales or issuances of our common stock, including upon conversion of our outstanding convertible notes, upon exercise of our outstanding
warrants and options, or as part of future financings or acquisitions, would be substantially dilutive to the outstanding shares of common
stock. Any dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward movement
in the price of common stock.
We
incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance
requirements, including establishing and maintaining internal controls over financial reporting, and we may be exposed to potential risks
if we are unable to comply with these requirements.
As
a public company, we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules
implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public
companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial
amount of time to these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and
will make some activities more time-consuming and costlier.
The
Sarbanes-Oxley Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial
reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section
404 of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant
management efforts. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material
weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate
in a timely manner, the market price of our stock could decline if investors and others lose confidence in the reliability of our financial
statements and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.
If
we are unable to effectively maintain a system of internal control over financial reporting, we may not be able to accurately or timely
report our financial results and our stock price could be adversely affected.
Our
management determined that as of December 31, 2022, our disclosure controls and procedures and internal control over financial reporting
were not effective due to certain material weaknesses in our internal control over financial reporting related to our review controls
related to the preparation of our income tax provision, appropriate segregation of duties with respect to and validation of data produced
by certain portions of our financial IT systems and the establishment of appropriate inventory reserves. Any failure to maintain our
controls or operation of these controls, could harm our operations, decrease the reliability of our financial reporting, and cause us
to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
lease a 5.4-acre corporate campus in Bay Shore, New York, which houses our executive offices and a majority of our operations. This lease
expires in September 2026. We also maintain a warehouse lease nearby in Bohemia, New York. That lease term commenced on April 1, 2020
and expires on May 31, 2025.
The
balance of our operations are conducted in a 74,923 square foot facility in Barkhamsted, Connecticut, which we own.
ITEM
3. LEGAL PROCEEDINGS
On October 2, 2018, Contract
Pharmacal Corp. (“Contract Pharmacal”) commenced an action, relating to a Sublease entered into between us and Contract Pharmacal
in May 2018 with respect to the property formerly occupied by our subsidiary Welding Metallurgy, Inc. (“WMI”), at 110 Plant
Avenue, Hauppauge, New York. In the action, Contract Pharmacal sought damages for an amount in excess of $1,000,000 for our failure to
make the entire premises available by the Sublease commencement date. On July 8, 2021, the Court denied Contract Phamacal’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. Subsequently, Contract Phamacal moved to amend its Complaint. We opposed
and the Court denied the request to amend the Complaint. Contract Pharmacal filed a Motion to reargue which the Court denied on November
30, 2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which we have
opposed. We dispute the validity of the claims asserted by Contract Pharmacal, continue to believe we have a meritorious defense to those
claims and intend to dispute the validity of the claim asserted by Contract Pharmacal.
From
time to time we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not
aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a
material adverse effect on our business, financial condition or operating results. There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material interest
adverse to our interest.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Air Industries Group is a Nevada corporation
(“AIRI”). As of and for the year ended December 31, 2022 and 2021, the accompanying consolidated financial statements
presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works,
Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).
Principal Business Activity
The Company is a Tier 1 or Tier 2 manufacturer
of precision assemblies and components for mission-critical aerospace and defense applications and a prime contractor to the U.S. Department
of Defense. The Company’s AIM and NTW subsidiaries manufacture flight critical or flight safety aircraft components including landing
gear, arresting gear, flight controls, primarily for military aircraft, including the UH-60 Helicopter, the E2-D, and F-35, F-18 fighter
aircraft, and the Pratt & Whitney Geared Turbofan jet engine. Sterling manufactures components used in jet engines of military and
commercial aircraft and ground power turbine engines. The Company’s primary customers are large publicly traded companies including
the four largest suppliers to the US Department of Defense.
Basis of Presentation
The accompanying consolidated financial statements
of the Company included in this report have been prepared in accordance with accounting principles generally accepted in the United States
of America and the rules and regulations of the Securities and Exchange Commission.
Historically the Company operated its businesses
and reported its results as two separate segments with AIM and NTW comprising the Complex Machining segment (“CMS”) and Sterling
as the Turbine & Engine Component segment (“TEC”). The CMS segment specialized in flight critical components including
flight controls and landing gear. The TEC segment focused on manufacturing components for jet engines. Along with its operating subsidiaries,
the Company reported the results of its corporate division as an independent segment.
In recent years the Company integrated and consolidated
the business of AIM and NTW into one facility on Long Island and the operations of its CMS and TEC segments have become increasingly
integrated. The Company also made significant capital expenditures and all of its operations now share the same manufacturing facilities
and use most, if not all, of the same sales and marketing functions. The Company made these changes to take advantage of the long-term
growth opportunities it sees in the aerospace and defense market. In early fiscal 2022, the Company further changed its management approach
and is now making decisions about resources to be allocated and assesses performance based on one integrated business rather than two
reporting segments. As such, effective with the fiscal quarter ended March 31, 2022, the Company is presenting its operations as one
reportable operating segment.
Liquidity
At each reporting period, management evaluates
whether there are conditions or events that raise any 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 if substantial doubt exists about the Company’s ability to continue as a going concern provided that
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. This 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.
The global outbreak of COVID-19 negatively impacted
the Company’s revenues, earnings and operating cash flows in 2020. While operations substantially returned to normal in fiscal
2021 and 2022, there remains some substantial issues and problems receiving raw materials and prompt processing of its products.
With fiscal 2022 now completed and the Company continuing to see the
benefits from its recent investments in machinery and equipment, management believes the Company will continue to improve its liquidity.
During 2022, the Company generated $448,000 of cash from operating activities. Based on the Company’s current best estimates of
fiscal 2023 and first half of fiscal 2024 sales, confirmed orders from existing backlog and expected orders from existing and new customers
expected timing of future cash receipts and expenditures and the Company’s ability to access additional liquidity, if needed, the
Company firmly believes it will have adequate cash to support operations through at least one year from the date of the accompanying financial
statements are issued.
Reverse Stock Split
On October 4, 2022, the Company announced a reverse
stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective
on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. All share and per share amounts of
its common stock presented have been retroactively adjusted to reflect the 1-for-10 reverse stock split. As result of the reverse stock
split there were no fractional shares issued and all holders were rounded up to the next whole share. See Note 11 – Stockholders’
Equity for more information.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The accompanying consolidated financial statements
include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated
in consolidation.
Accounts Receivable
Accounts receivable are reported at their outstanding
unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables
based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate.
The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible.
Inventory Valuation
The Company values inventory at the lower of
cost on a first-in-first-out basis or an estimated net realizable value.
The Company generally purchases raw materials and supplies uniquely
suited to the production of larger more complex parts, such as landing gear, only when non-cancellable contracts for orders have been
received for finished goods. It occasionally produces larger more complex products, such as landing gear, in excess of purchase order
quantities in anticipation of future purchase order demand, when it is economically advantageous to do so, since historically this excess
has been used in fulfilling future purchase orders. The Company purchases supplies and materials useful in a variety of products as deemed
necessary even though orders have not been received. The Company periodically evaluates inventory items that are not secured by purchase
orders and establishes write-downs to estimated net realizable value. The Company writes-down inventory to estimated net realizable value
for excess quantities, slow-moving goods, obsolescence and for other impairments of value.
Property and Equipment
Property and equipment are carried at cost net
of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred. Property, equipment, and improvements
are depreciated using the straight-line method over the estimated useful lives of the assets or the particular improvements. Expenditures
for repairs and improvements in excess of $10,000 that add to the productive capacity or extend the useful life of an asset are capitalized.
Upon disposition, the cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected
in earnings.
Long-Lived and Intangible Assets
Identifiable intangible assets are amortized
using the straight-line method over the period of expected benefit.
Long-lived assets and intangible assets subject
to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related
carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than
the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset
to fair value.
Deferred Financing Costs
Costs incurred with obtaining and executing revolving
debt arrangements are capitalized and recorded in other current assets and amortized using the effective interest method over the term
of the related debt. Costs incurred with obtaining and executing other debt arrangements are presented as a direct deduction from the
carrying value of the associated debt and also amortized using the effective interest method over the term of the related debt. The amortization
of financing costs is included in interest and financing costs in the Consolidated Statements of Operations.
Contract Costs Receivable
Contract costs receivable represent costs to be
reimbursed from a terminated contract. The Company expects to collect the receivable in the next twelve months. Contract costs receivable
totals $296,000 and $0 as of December 31, 2022 and 2021, respectively.
Revenue Recognition
The Company recognizes revenue to depict the transfer
of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for
those goods.
Revenue is recognized as the customer obtains
control of the goods and services promised in the contract (i.e., performance obligations). In evaluating our contracts with our customers,
we have determined that there is no future performance obligation once delivery has occurred.
Our revenue is generated from fixed-price contracts. Under fixed-price
contracts, we agree to perform the specified work for a pre-determined price, which we estimate during the bidding process before the
contract is awarded. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more
or less profit or could incur a loss.
We evaluate the products promised in each contract at inception to
determine whether the contract should be accounted for as having one or more performance obligations. Our contracts are typically accounted
for as one performance obligation. We classify net sales as products on our consolidated statements of operations based on the predominant
attributes of the performance obligations.
We determine the transaction price for each contract
based on the consideration we expect to receive for the products being provided under the contract.
At the inception of a contract, we estimate the
transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on
contracts until they become legally enforceable. Contracts can be subsequently modified to include changes in specifications, requirements
or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we
consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications
to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the
context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized
as a cumulative adjustment to revenue.
We recognize revenue at the point in time in which
the performance obligation is fully satisfied. This is fully satisfied when the product has shipped, which is the point in time the customer
obtains control of the product and we no longer maintain control of the product.
The Company’s rights to payments for goods
transferred to customers are conditional only on the passage of time and not on any other criteria. Payment terms and conditions vary
by contract, although terms generally include a requirement of payment within 30 to 75 days.
Payments received in advance from customers are recorded as customer deposits
until earned, at which time revenue is recognized. The Terms and Conditions contained in our customer purchase orders often provide for
liquidated damages in the event that a stop work or contract termination order is issued prior to final delivery. While the products we
manufacture are specific to the type of aircraft that they are used on, there are alternate customers that can acquire and utilize these
products. The Company utilizes a Returned Merchandise Authorization or RMA process for determining whether to accept returned products.
Customer requests to return products are reviewed by the contracts department and if the request is approved, a credit is issued upon
receipt of the product. Net sales represent gross sales less these returns and allowances.
Customer Deposits
The Company receives advance payments on certain
contracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves
the product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s
invoice.
At December 31, 2022 and 2021, customer deposits
were $781,000 and $1,470,000 respectively. The Company recognized revenue of $440,000 during year ended December 31, 2022, that was included
in the customer deposits balance as of December 31, 2021. The Company recognized revenue of $507,000 during the year ended December 31,
2021, that was included in the customer deposits balance of $917,000 as of December 31, 2020.
Backlog
Backlog represents executed non-cancellable contracts
that represent firm purchase orders that are deliverable over the next 18-month period. As of December 31, 2022, backlog relating to remaining
performance obligations in contracts was approximately $60,000,000. The Company expects to recognize revenue amounts in future periods
related to these remaining performance obligations as follows: approximately $22,500,000 to $26,500,000 from January 1, 2023 - June 30,
2023, and approximately $15,000,000 to $18,000,000 from July 1, 2023 through December 31, 2023. This expectation assumes that raw material
suppliers and outsourced processing is completed and delivered on-time and that the Company’s customers will accept delivery as
scheduled. The Company anticipates that sales during the aforementioned periods will also include sales pursuant to contracts that are
not currently in backlog.
Use of Estimates
In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. The
more significant management estimates are the allowance for doubtful accounts, useful lives of property and equipment, provisions for
obsolescence, excess and slow moving inventory, accrued expenses and income taxes, which
includes the determination of the valuation allowance for deferred tax assets. Actual results could differ from those estimates. Changes
in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.
Credit and Concentration Risks
A large percentage of the Company’s revenues
are derived from a small number of customers for U.S. Military Aviation.
There were four customers that represented 76.5%
of total sales, and three customers that represented 75.4% of total sales for the years ended December 31, 2022 and 2021, respectively.
This is set forth in the table below.
Customer | |
Percentage of Sales | |
| |
2022 | | |
2021 | |
| |
| | |
| |
1 | |
| 29.3 | % | |
| 37.2 | % |
2 | |
| 21.4 | % | |
| 25.7 | % |
3 | |
| 14.3 | % | |
| 12.5 | % |
4 | |
| 11.5 | % | |
| * | |
| * | Customer was less than 10% of sales for the year-ended December 31, 2021 |
There were three customers that represented 70.3%
of gross accounts receivable and three customers that represented 74.7% of gross accounts receivable at December 31, 2022 and 2021, respectively.
This is set forth in the table below.
| |
Percentage of Receivables | |
| |
December 31, | | |
December 31, | |
Customer | |
2022 | | |
2021 | |
| |
| | |
| |
1 | |
| 33.1 | % | |
| 50.3 | % |
2 | |
| 23.6 | % | |
| 12.7 | % |
3 | |
| 13.6 | % | |
| ** | |
4 | |
| * | | |
| 11.7 | % |
| * | Customer was less than 10% of accounts receivable at December 31, 2022 |
** | Customer
was less than 10% of accounts receivable at December 31, 2021 |
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers
for the years ended December 31, 2022 and 2021:
Product | |
December 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Military | |
$ | 43,993,000 | | |
$ | 51,559,000 | |
Commercial | |
| 9,245,000 | | |
| 7,380,000 | |
| |
| | | |
| | |
Total | |
$ | 53,238,000 | | |
$ | 58,939,000 | |
Cash
During the year, the Company had occasionally
maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts.
Major Suppliers
The Company has several key sole-source suppliers
of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore,
in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed.
Income Taxes
The Company accounts for income taxes in accordance
with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires that the Company recognize deferred
tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and
liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.
The provision for, or benefit from, income taxes
includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method.
Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization
of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We
evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable.
Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized.
The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive
and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals
of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards,
and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The Company accounts for uncertainties in income taxes under the provisions
of FASB ASC 740 which clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.
The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. The Subtopic provides guidance on the de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
Earnings (Loss) per share
Basic earnings (loss) per share (“EPS”)
is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding
for the period.
For purposes of calculating diluted earnings
(loss) per common share, the numerator includes net income (loss) plus interest on convertible notes payable assumed converted as of
the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the
period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock
equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted
method.
The following is the calculation of income applicable
to common stockholders utilized to calculate the numerator for EPS:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Net (Loss) Income – Basic | |
$ | (1,076,000 | ) | |
$ | 1,627,000 | |
Add: Convertible Note Interest for Potential Note Conversion | |
| - | | |
| 322,000 | |
Add: Convertible Note debt discount for Potential Note Conversion | |
| - | | |
| - | |
| |
| | | |
| | |
Net (Loss) Income used to calculate diluted earnings per share | |
$ | (1,076,000 | ) | |
$ | 1,949,000 | |
The following is a reconciliation of the denominators
of basic and diluted EPS computations:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Weighted average shares outstanding used to compute basic earnings
per share | |
| 3,227,116 | | |
| 3,204,937 | |
Effect of dilutive stock options and warrants | |
| - | | |
| 31,737 | |
Effect of dilutive convertible
notes payable | |
| - | | |
| 405,743 | |
Weighted average shares outstanding
and dilutive securities used to compute dilutive earnings per share | |
| 3,227,116 | | |
| 3,642,417 | |
| |
| | | |
| | |
Per share amount – basic | |
$ | (0.33 | ) | |
$ | 0.51 | |
Per share amount – diluted | |
$ | (0.33 | ) | |
$ | 0.45 | |
The following securities have been excluded from
the calculation as the exercise price was greater than the average market price of the common shares:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Stock Options | |
| 245,466 | | |
| 118,350 | |
Warrants | |
| 28,000 | | |
| 122,721 | |
| |
| 273,466 | | |
| 241,071 | |
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of
the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the
fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing
reported market value. Stock compensation expense for employees amounted to $310,000 and $443,000 for the years ended December 31, 2022
and 2021, respectively. Stock compensation expense for directors amounted to $216,000 and $210,000 for the years ended December 31, 2022
and 2021, respectively. Stock compensation expenses for employees and directors were included in operating expenses in the accompanying
Consolidated Statements of Operations.
Goodwill
Goodwill represented the excess of the acquisition
cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at December 31, 2021 related
to the acquisition of NTW.
The Company accounts for the impairment of goodwill
under the provisions of ASU 2017-04 (“ASU 2017-04”), “Intangibles Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment.” ASU 2017-04 gives companies the option to perform a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount.
The Company performed impairment testing for goodwill
annually, or more frequently when indicators of impairment existed.
The Company determined that the goodwill was
fully impaired at December 31, 2022. The impairment charge of $163,000 is included in operating expenses in the Consolidated Statement
of Operations.
Freight Out
Freight out is included in operating expenses
and amounted to $162,000 and $135,000 for the years ended December 31, 2022 and 2021, respectively.
Leases
In accordance with FASB ASC 842, “Leases”
(“ASC 842”), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months and classifies them as either operating 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.
At the inception of an arrangement, the Company
determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of
the lease including whether the contract involves the use of a distinct identified asset, whether the Company obtains the right to substantially
all the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset. Leases with
a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease
liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient.
For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account
for the lease and non-lease components as a single lease component.
Lease liabilities and their corresponding ROU
assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating
leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date
to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment.
The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors
including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes
any lease prepayments, offset by lease incentives.
An option to extend the lease is considered in
connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to
terminate is considered unless it is reasonably certain we will not exercise the option.
Recently Issued Accounting Pronouncements
Effective January 1, 2022, the Company adopted
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 accounting principles generally accepted in the United States of America 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.
The adoption of ASU 2020-06 did not have a material effect on the Company’s financial statements.
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.
The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements.
The Company does not believe that any other recently
issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated
financial statements.
Note 3. ACCOUNTS RECEIVABLE
The components of accounts receivable at December
31, are detailed as follows:
| |
December 31,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
Accounts Receivable Gross | |
$ | 9,764,000 | | |
$ | 11,067,000 | |
Allowance for Doubtful Accounts | |
| (281,000 | ) | |
| (594,000 | ) |
Accounts Receivable Net | |
$ | 9,483,000 | | |
$ | 10,473,000 | |
The allowance for doubtful accounts for the years
ended December 31, 2022 and 2021 is as follows:
| |
Balance at | | |
Charged to | | |
Deductions | | |
Balance at | |
| |
Beginning of | | |
Costs and | | |
from | | |
End of | |
| |
Year | | |
Expenses | | |
Reserves | | |
Year | |
Year ended December 31, 2022 Allowance for
Doubtful Accounts | |
$ | 594,000 | | |
$ | 16,000 | | |
$ | 329,000 | | |
$ | 281,000 | |
Year ended December 31, 2021 Allowance for Doubtful Accounts | |
$ | 964,000 | | |
$ | 134,000 | | |
$ | 504,000 | | |
$ | 594,000 | |
Note 4. INVENTORY
The components of inventory at December 31, consisted
of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Raw Materials | |
$ | 4,198,000 | | |
$ | 3,410,000 | |
Work In Progress | |
| 20,848,000 | | |
| 20,926,000 | |
Finished Goods | |
| 10,748,000 | | |
| 8,350,000 | |
Reserve | |
| (3,973,000 | ) | |
| (3,154,000 | ) |
Total Inventory | |
$ | 31,821,000 | | |
$ | 29,532,000 | |
Note 5. PROPERTY AND EQUIPMENT
The components of property and equipment at December
31, consisted of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Land | |
$ | 300,000 | | |
$ | 300,000 | |
Buildings and Improvements | |
| 1,789,000 | | |
| 1,723,000 | |
Machinery and Equipment | |
| 23,566,000 | | |
| 22,013,000 | |
Finance Lease ROU Assets - Machinery and Equipment | |
| 375,000 | | |
| 375,000 | |
Tools and Instruments | |
| 13,744,000 | | |
| 12,866,000 | |
Automotive Equipment | |
| 266,000 | | |
| 200,000 | |
Furniture and Fixtures | |
| 290,000 | | |
| 290,000 | |
Leasehold Improvements | |
| 941,000 | | |
| 882,000 | |
Computers and Software | |
| 604,000 | | |
| 583,000 | |
Total Property and Equipment | |
| 41,875,000 | | |
| 39,232,000 | |
Less: Accumulated Depreciation | |
| (33,282,000 | ) | |
| (30,828,000 | ) |
Property and Equipment, net | |
$ | 8,593,000 | | |
$ | 8,404,000 | |
Depreciation expense for the years ended December
31, 2022 and 2021 was approximately $2,522,000 and $2,803,000, 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 2022 and 2021. Accumulated depreciation on these assets was approximately $0 and $36,000 as of December 31,
2022 and 2021, respectively.
Note 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued
expenses at December 31, are detailed as follows:
| |
December 31,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
Accounts Payable | |
$ | 6,442,000 | | |
$ | 5,460,000 | |
Accrued Payroll | |
| 674,000 | | |
| 852,000 | |
Accrued Expenses - other | |
| 426,000 | | |
| 411,000 | |
Accounts Payable and accrued expenses | |
$ | 7,542,000 | | |
$ | 6,723,000 | |
During the year ending December 31, 2022, the Company, reviewed all
old outstanding payables that were not paid and based on the statute of limitations, a claim would no longer be enforceable. The Company
determined that approximately $317,000 of old payables fell into this category. This adjustment is recorded as Write-off of accounts payable
on the accompanying Statement of Operations.
Note 7. SALE AND LEASEBACK TRANSACTION
On October 24, 2006, the Company consummated
a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New York (the “Bay
Shore Property”) for a purchase price of $6,200,000. The Company realized a gain on the sale of $1,051,000 of which $300,000 was
recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized ratably over the remaining term of the
twenty - year lease at approximately $38,000 per year. The gain is included in Other Income in the accompanying Consolidated Statements
of Operations. The unrecognized portion of the gain in the amount of $143,000 and $181,000 as of December 31, 2022 and 2021, respectively,
is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets.
The Company accounted for these transactions under
the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions.”
Simultaneous with the closing of the sale of
the Bay Shore Property, the Company entered into a 20-year triple- net lease (the “Lease”) expiring in September 2026 with
the purchaser for the property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year, and
thereafter increases 3% per year. The Lease grants the Company an option to renew the Lease for an additional period of five years. The
Company has on deposit with the purchaser $89,000 as security for the performance of its obligations under the Lease. In addition, at
December 31, 2021, the Company had on deposit $150,000 with the purchaser as security for the completion of certain repairs and upgrades
to the Bay Shore Property. In 2020, the landlord utilized the amounts on deposit to install air conditioning throughout the manufacturing
facility. At December 31, 2022, this amount was included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the
accompanying Consolidated Balance Sheets. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated
with the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also contains customary
representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary remedies upon
a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency in future
rent. See Note 9 – Operating Lease Liabilities.
Note 8. Debt
Debt consists of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Revolving loan to Webster Bank (“Webster”) | |
$ | 13,352,000 | | |
$ | 12,456,000 | |
Term loan, Webster | |
| 5,396,000 | | |
| 4,192,000 | |
Finance lease obligations | |
| 328,000 | | |
| 263,000 | |
Loans payable - financed assets | |
| 30,000 | | |
| 39,000 | |
Related party notes payable | |
| 6,162,000 | | |
| 6,412,000 | |
Subtotal | |
| 25,268,000 | | |
| 23,362,000 | |
Less: Current portion | |
| (14,477,000 | ) | |
| (14,112,000 | ) |
Long Term Portion | |
$ | 10,791,000 | | |
$ | 9,250,000 | |
Webster Bank (F/K/A Sterling National Bank)
(“Webster”)
The Company has a loan facility (“Webster Facility”) with Webster
Bank that expires on December 30, 2025. The Webster Facility, which was entered into on December 31, 2019, was amended several times,
and now provides for a $20,000,000 revolving loan (“Revolving Line of Credit”), a $5,000,000 term loan (“Term Loan”)
and a $2,000,000 Equipment Line of Credit, which as it is drawn upon is added to the balance of the Term Loan.
As of December 31, 2022, there was $1,122,000
remaining available under the equipment line of credit. The below table shows the timing of payments due under the Term Loan:
For the year ending | |
Amount | |
December 31, 2023 | |
$ | 1,037,000 | |
December 31, 2024 | |
| 840,000 | |
December 31, 2025 | |
| 3,584,000 | |
Webster Term Loan payable | |
| 5,461,000 | |
Less: debt issuance costs | |
| (65,000 | ) |
Total Webster Term Loan payable, net of debt issuance costs | |
| 5,396,000 | |
Less: Current portion of Webster Term Loan payable | |
| (1,037,000 | ) |
Total long-term portion of Webster Term Loan payable | |
$ | 4,359,000 | |
As of December 31, 2022, our debt to Webster in the amount of $18,748,000
consisted of the Webster Revolving Loan in the amount of $13,352,000 and the Webster term loan in the amount of $5,396,000 which includes
$878,000 of what was drawn on the equipment line of credit.
Interest expense related to the Webster Facility
amounted to approximately $780,000 and $704,000 for the years ended December 31, 2022 and 2021, respectively.
The below summarizes historical amendments to
the Webster Facility and various terms:
In 2020, the Company entered into the First Amendment
to the Webster Facility which increased the Term Loan to $5,685,000 and required the Company to make monthly principal installments in
the amount of $67,679 beginning on December 1, 2020. Other minor modifications were made and the Company paid an amendment fee of $20,000.
In June 2021, the Company entered into the Second
Amendment to the Webster Facility, which clarified the definition and calculation of Excess Cash Flow, and to confirm the due date of
the required payment of the Excess Cash Flow. For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined)
is a positive number for any fiscal year the Company shall pay to Webster 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
Webster and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such fiscal
year. In connection with these changes, the Company paid an amendment fee of $10,000. The Company made Excess Cash Flow payments of $558,750
in 2021 (for the fiscal year ended December 31, 2020) and $854,000 in April 2022 (for fiscal year ended December 31, 2021). As required,
the Company provided the calculation for the Excess Cash Flow payment of $208,000 for fiscal year ended December 31, 2022 to Webster prior
to the April 15, 2023 deadline for such payment. Additionally, the Company authorized such payment to be made from the Revolving Loan.
As of the date of this filing such payment has not been processed by Webster.
On December 7, 2021, the Company entered into
the Third Amendment to the Webster Facility (“Third Amendment”). The purpose of the amendment was to provide a maturity date
for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022. Such amendment also increased
the Revolving Line of Credit to its current limit of $20,000,000 (up from the original $16,000,000) and also provided for a similar increase
in the inventory sublimit to $14,000,000 (up from the original $11,000,000). The Third Amendment, also allows the Company, subject to
certain limitations, to begin amortizing $250,000 of its related party subordinated notes payable each quarter as long as certain conditions
are met. In connection with these changes, the Company paid an amendment fee of $75,000.
On May 17, 2022, the Company entered into the
Fourth Amendment to the Webster Facility (“Fourth Amendment”). The purpose of the amendment was to increase the Term Loan
to $5,000,000, generating proceeds of $1,945,000, reduce the monthly principal installments to be made in respect to the term loan, and
establish a capital expenditure line of credit in the amount of $2,000,000 which the Company can draw upon from time to time to finance
purchases of machinery and equipment, thereby increasing the amount of capital expenditures that the Company may make each year. The
principal payments are $59,524 per month commencing in June 2022 with a balloon payment due on December 30, 2025. In connection with
these changes, the Company paid an amendment fee of $20,000.
On December 15, 2022, the Company made a draw
against the capital expenditure line of credit in the amount of $877,913. The principal payments are $10,451 per month commencing in
February 2023 with a balloon payment due on December 30, 2025.
On January 4, 2023, the Company made an additional
draw against the capital expenditure line of credit in the amount of $739,500. The principal payments are $8,804 per month commencing
in March 2023 with a balloon payment due on December 30, 2025.
Under the terms of the Webster Facility, both
the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii)
a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal
(or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate
for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum. The
average interest rate charged was 4.50% and 3.50% for the years ended December 31, 2022 and 2021, respectively.
Amendment fees paid in connection with the Webster
Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance
Sheets and are amortized over the term of the loan.
In connection with the Webster Facility, the
Company is required to maintain a defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter. The Webster
Facility limits the amount of Capital Expenditures and dividends the Company can pay to its stockholders. Substantially all of the Company’s
assets are pledged as collateral under the Webster Facility.
As of December 31, 2022, the Company was in compliance
with all financial loan covenants. However, the Company was in default of its covenant to provide its audited financial statements to
Webster bank within ninety (90) days of its fiscal year end. The Company has subsequently received a waiver from the bank for this default.
Finance Lease Obligations
The Company entered into a finance lease in November of 2022 for the
purchase of new manufacturing equipment. The obligation for the finance lease totaled $328,000 as of December 31, 2022. The lease has
an imputed interest rate of 7.48% per annum and is payable monthly with the final payment due in September of 2026.
The Company entered into a finance lease in December of 2021 for the
purchase of new manufacturing equipment. The obligation for the finance lease totaled $0 and $263,000 as of December 31, 2022 and 2021,
respectively. The lease had an imputed interest rate of 4.2% per annum and was payable monthly with the final payment due on December
17, 2026. In connection with the Fourth Amendment to the Webster Facility, this finance lease was paid in full.
| |
Year Ended | | |
Year Ended | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Finance Lease cost: | |
| | |
| |
Amortization of ROU assets | |
$ | - | | |
$ | 36,000 | |
Interest on lease liabilities | |
| 2,182 | | |
| - | |
Total Lease Costs | |
$ | 2,182 | | |
$ | 36,000 | |
| |
| | | |
| | |
Other Information: | |
| | | |
| | |
Cash Paid for amounts included in the measurement lease liabilities: | |
| | | |
| | |
Financing cash flow from finance lease obligations | |
$ | 284,000 | | |
$ | 5,000 | |
| |
| | | |
| | |
Supplemental disclosure of non-cash activity | |
| | | |
| | |
Acquisition of finance lease ROU asset | |
$ | 350,000 | | |
$ | - | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Weighted Average Remaining Lease Term - in years | |
| 3.9 | | |
| 5.0 | |
Weighted Average Discount rate - % | |
| 7.48 | % | |
| 4.20 | % |
As of December 31, 2022, the aggregate future
minimum Finance lease payment, including imputed interest are as follows:
For the year ending | |
Amount | |
December 31, 2023 | |
$ | 100,000 | |
December 31, 2024 | |
| 100,000 | |
December 31, 2025 | |
| 100,000 | |
December 31, 2026 | |
| 77,000 | |
Total future minimum finance lease payments | |
| 377,000 | |
Less: imputed interest | |
| (49,000 | ) |
Less: Current portion | |
| (79,000 | ) |
Long-term portion | |
$ | 249,000 | |
Loans Payable – Financed Assets
The Company financed the purchase a delivery
vehicle in July 2020. The loan obligation totaled $30,000 and $39,000 as of December 31, 2022 and 2021, respectively. The loan bears
no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.
Annual maturities of this loan are as follows:
For the year ending | |
Amount | |
December 31, 2023 | |
$ | 9,000 | |
December 31, 2024 | |
| 9,000 | |
December 31, 2025 | |
| 9,000 | |
December 31, 2026 | |
| 3,000 | |
Loans Payable - financed assets | |
| 30,000 | |
Less: Current portion | |
| (9,000 | ) |
Long-term portion | |
$ | 21,000 | |
Related Party Notes Payable
Taglich Brothers, Inc. is a corporation co-founded
by two directors of the Company, Michael and Robert Taglich.
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 35,508 shares
of common stock and Taglich Brothers, Inc. was issued promissory notes totaling $554,000 for placement agency fees. At December 31, 2020,
related party notes payable totaled $6,012,000 and accrued interest totaled $400,000.
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 Webster Facility, these notes remain subordinate to the Webster Facility
and are due on July 1, 2026. Approximately $2,732,000 of the related party convertible subordinated notes can be converted at the option
of the holder into Common Stock of the Company at $15.00 per share, while the remaining $2,080,000 of the related party convertible subordinated
notes can be converted at the option of the holder into common stock of the Company at $9.30 per share. There are no principal payments
due on these notes. Under the terms of the Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations,
to make principal payments of $250,000 per quarter of this subordinated debt.
During the year ended December 31, 2022, a principal
payment of $250,000 was made against the Subordinated Notes due to Michael Taglich. This payment was made pursuant to the conditions
set forth in the Third Amendment to the Webster Facility.
The note holders and the principal balance of
the notes of December 31, 2022 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 | |
| 1,000,000 | | |
| 350,000 | | |
| - | | |
| 1,350,000 | |
Total | |
$ | 3,666,000 | | |
$ | 2,255,000 | | |
$ | 241,000 | | |
$ | 6,162,000 | |
Interest expense for the years ended December
31, 2022 and 2021 on all related party notes payable was $487,000 and $460,000, respectively. Approximately $2,732,000 of these notes
have an annual rate of interest of 6%, $2,080,000 have an annual interest rate of 7% and $1,600,000 have an annual interest rate of 12%.
Note 9. OPERATING LEASE LIABILITIES
The Company has operating leases for leased office
and manufacturing facilities. The leases have remaining lease terms of one to five years, some of which include options to extend or terminate
the leases.
| |
Year Ended | | |
Year Ended | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Operating lease cost: | |
$ | 972,000 | | |
$ | 1,069,000 | |
Total lease cost | |
$ | 972,000 | | |
$ | 1,069,000 | |
| |
| | | |
| | |
Other Information | |
| | | |
| | |
Cash paid for amounts included in the measurement lease liability: | |
| | | |
| | |
Operating cash flow from operating leases | |
$ | 1,006,000 | | |
$ | 977,000 | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Weighted Average Remaining Lease Term - in years | |
| 3.64 | | |
| 4.53 | |
Weighted Average discount rate - % | |
| 8.89 | % | |
| 8.89 | % |
The aggregate undiscounted cash flows of operating
lease payments, with remaining terms greater than one year are as follows:
| |
Amount | |
December 31, 2023 | |
$ | 1,038,000 | |
December 31, 2024 | |
| 1,070,000 | |
December 31, 2025 | |
| 992,000 | |
December 31, 2026 | |
| 729,000 | |
Total future minimum lease payments | |
| 3,829,000 | |
Less: discount | |
| (588,000 | ) |
Total operating lease maturities | |
| 3,241,000 | |
Less: current portion of operating lease liabilities | |
| (778,000 | ) |
Total long term portion of operating lease maturities | |
$ | 2,463,000 | |
Note 10. 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.
The Company recognized $94,000 and $326,000 of
non-cash income for the years ended December 31, 2022 and 2021, respectively, reflected in “other income, net” on the Consolidated
Statements of Operations and recorded $35,000 and $98,000 of related non-cash interest expense related to the Purchase Agreement for
the years ended December 31, 2022 and 2021, respectively.
The table below shows the activity within the
liability account for the years ended December 31, 2022 and 2021:
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Liabilities related to sale of future proceeds
from disposition of subsidiaries - beginning balance | |
$ | 59,000 | | |
$ | 322,000 | |
Non-Cash other income recognized | |
| (94,000 | ) | |
| (360,000 | ) |
Non-Cash interest expense recognized | |
| 35,000 | | |
| 97,000 | |
Liabilities related to sale of future proceeds from disposition
of subsidiary - ending balance | |
| - | | |
| 59,000 | |
Less: unamortized transaction costs | |
| - | | |
| (3,000 | ) |
Liability related to sale of future
proceeds from disposition of subsidiary, net | |
$ | - | | |
$ | 56,000 | |
Note 11. STOCKHOLDERS’ EQUITY
On October 4, 2022 the Company announced a reverse
stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective
on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. As result of the reverse stock split
there were no fractional shares issued and all holders were rounded up to the next whole share. An additional 7,287 shares were issued
to account for this. As such all references to shares and per share price has been adjusted to retrospectively account for this transaction.
Common Stock – Issuances of Securities
The Company issued 27,849 and 16,981 shares totaling
$216,000 and $210,000 for the years ended December 31, 2022 and 2021, respectively. Additionally, the Company issued 5,122 shares of common
stock upon the cashless exercise of stock options during the year ended December 30, 2022.
During the first quarter of 2023, the Company
issued 12,331 shares of common stock in payment of directors’ fees totaling $54,000.
Note 12. EMPLOYEE BENEFITS PLANS
The Company employs both union and non-union
employees and maintains several benefit plans.
Union
Substantially the entire workforce at AIM is
subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the “Union”). The Agreement
was renewed as of December 31, 2021 and expires on December 31, 2024 and covers all of AIM’s production personnel, of which there
are approximately 131 people. AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the
United Services Worker’s Security Fund. This is the only pension benefit required by the Agreement and the Company is not obligated
for any future defined benefit to retirees. The Agreement contains a “no-strike” clause, whereby, during the term of the
Agreement, the Union will not strike and AIM will not lockout its employees. Medical benefits for union employees are provided through
a policy with Insperity Services, Inc. (“Insperity”), the costs of which are substantially borne by the Company. In addition,
the Company is obligated to make contributions for union dues and a security fund (defined contribution plan) for the benefit of each
union employee. Contributions to the security fund amounted to $155,000 and $147,000 for the years ended December 31, 2022 and 2021,
respectively.
The Union’s retirement plan is a defined contribution plan. As
such, the Company is not responsible for the obligations of other companies in the Union’s retirement plan.
Others
All of the Company’s employees are covered
under a co-employment agreement with Insperity, a professional employer organization that provides out-sourced human resource services.
The Company has defined contribution plans under
Section 401(k) of the Internal Revenue Code (the “Plans”). Pursuant to the Plans, qualified employees may contribute a percentage
of their pre-tax eligible compensation to the Plan. The Company does not match any contributions that employees may make to the Plans.
Note 13. CONTINGENCY
On October 2, 2018, Contract Pharmacal Corp. (“Contract
Pharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with
respect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York.
In the action Contract Pharmacal sought damages for an amount 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 Phamacal’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. Subsequently, Contact Pharmacal moved to amend its Complaint. The Company opposed this and
the Court denied the request to amend the Complaint. Contract Pharmacal filed a Motion to reargue which the Court denied on November 30,
2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company
has opposed. The Company disputes the validity of the claims asserted by Contract Pharmacal and intends contest them vigorously.
From time to time the Company may be engaged
in various lawsuits and legal proceedings in the ordinary course of business. The Company is currently not aware of any legal proceedings
the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its
business, financial condition or operating results. There are no proceedings in which any of the Company’s directors, officers
or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse
to our interest.
Note 14. INCOME TAXES
The provision for income taxes for the years ended
December 31, 2022 and 2021, is set forth below:
Current and Deferred | |
| Year
Ended
December 31,
2022 | | |
| Year
Ended
December 31,
2021 | |
| |
| | | |
| | |
Federal | |
$ | - | | |
$ | - | |
States | |
| - | | |
| - | |
| |
| | | |
| | |
Total Provision for Income Taxes | |
$ | - | | |
$ | - | |
The following is a reconciliation of our income
tax rate computed using the federal statutory rate to our actual income tax rate for the years ended December 31, 2022 and 2021 is set
forth below:
| |
Year Ended December 31, 2022 | | |
Year Ended December 31, 2021 As Revised | |
U.S. statutory income tax rate | |
| 21.0 | % | |
| 21.0 | % |
State taxes, net of federal benefit | |
| 4.1 | % | |
| 4.1 | % |
Permanent difference, overaccruals, and non-deductible items | |
| (6.9 | )% | |
| 6.3 | % |
Change in state rate | |
| 0.7 | % | |
| 8.3 | % |
Deferred tax valuation allowance | |
| (18.4 | )% | |
| (38.7 | )% |
Other | |
| (.5 | )% | |
| (1.0 | )% |
Total | |
| 0.00 | % | |
| 0.00 | % |
The components of net deferred tax assets at
December 31, are set forth below:
| |
| | |
December 31, | |
| |
December 31, 2022 | | |
2021 As Revised | |
Deferred tax assets: | |
| | |
| |
Current: | |
| | |
| |
Net operating loss | |
$ | 5,075,000 | | |
$ | 4,959,000 | |
Allowance for doubtful accounts | |
| 71,000 | | |
| 149,000 | |
Inventory - IRC 263A adjustment | |
| 411,000 | | |
| 377,000 | |
Stock based compensation - options and restricted stock | |
| 183,000 | | |
| 183,000 | |
Capitalized engineering costs | |
| 331,000 | | |
| 430,000 | |
Amortization - NTW Transaction | |
| 359,000 | | |
| 445,000 | |
Inventory reserve | |
| 932,000 | | |
| 790,000 | |
Deferred gain on sale of real estate | |
| 36,000 | | |
| 45,000 | |
Accrued expenses | |
| 30,000 | | |
| 18,000 | |
Disallowed interest | |
| 1,663,000 | | |
| 1,576,000 | |
Operating lease liabilities | |
| 814,000 | | |
| 984,000 | |
Total deferred tax asset before valuation allowance | |
| 9,905,000 | | |
| 9,956,000 | |
Valuation allowance | |
| (7,701,000 | ) | |
| (7,503,000 | ) |
Total deferred tax asset after valuation allowance | |
| 2,204,000 | | |
| 2,453,000 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Property and equipment | |
| (1,583,000 | ) | |
| (1,697,000 | ) |
Operating Lease ROU assets | |
| (621,000 | ) | |
| (756,000 | ) |
Total deferred tax liabilities | |
| (2,204,000 | ) | |
| (2,453,000 | ) |
| |
| | | |
| | |
Net deferred tax asset | |
$ | - | | |
$ | - | |
During the year ended December 31, 2022, the Company
determined that certain attributes of Deferred Tax Assets and Liabilities were incorrect for December 31, 2021 and 2020. See Note 16 for
further information.
During the years ended December 31, 2022 and 2021, the Company recorded
a valuation allowance equal to its net deferred tax assets. The Company determined that due to a recent history of net losses, at this
time sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income. If, in
the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances
will be reduced or eliminated. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a
corresponding change in the valuation allowance. At December 31, 2022 and 2021, the Company provided a valuation allowance on its net
deferred tax assets of $7,701,000 and $7,503,000, respectively.
As of December 31, 2022, the Company had a
Federal net operating loss carry forward of approximately $22,420,000, of which approximately $12,220,000 expires from 2023 through
2037 and $10,200,000 does not expire. In addition, the Company has net operating loss carry forwards from various states of
approximately $22,600,000 which expire from 2035 through 2042.
At December 31, 2022 and 2021, the Company had
no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that
its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and penalties related
to uncertain tax positions in interest expense. As of December 31, 2022, and 2021, the Company has not recorded any provisions for accrued
interest and penalties related to uncertain tax positions.
In certain cases, the Company’s uncertain
tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The Company files federal
and state income tax returns in jurisdictions with varying statutes of limitations. The 2019 through 2022 tax years generally remain
subject to examination by federal and state tax authorities.
In August 2022, the Inflation Reduction Act of
2022, (the “IRA”), was signed into law which includes a stock buyback excise tax of 1% on share repurchases, which will
apply to net stock buybacks after December 31, 2022. We do not expect this to have a material impact if and when share repurchases
occur.
Note 15. STOCK OPTIONS AND WARRANTS
Stock-Based Compensation
Stock Options
In June 2022, the shareholders of the Company
approved the adoption of the Company’s 2022 Equity Incentive Plan (“2022 Plan”) which authorized the grant of rights
with respect to up to 100,000 shares.
During the years ended December 31, 2022 and 2021, the Company granted
options to purchase 62,000 and 84,750 shares of common stock, respectively, to certain of its employees and directors.
The Company recorded stock based compensation expense
of $310,000 and $443,000 in its Consolidated Statements of Operations for the years ended December 31, 2022 and 2021, respectively,
and such amounts were included as a component of operating expenses.
The fair values of stock options granted were
estimated using the Black-Sholes option-pricing model with the following assumptions for the years ended December 31:
| |
2022 | | |
2021 | |
Risk-free interest rates | |
| 1.38% - 2.73 | % | |
| 0.31% - 0.83 | % |
Expected life (in years) | |
| 2.50 - 4.00 | | |
| 2.50 - 4.00 | |
Expected volatility | |
| 71.6% - 72.0 | % | |
| 73.2% - 75.2 | % |
Dividend yield | |
| 0.00 | % | |
| 0.00 | % |
| |
| | | |
| | |
Weighted-average grant date fair value per share | |
$ | 3.97 | | |
$ | 6.01 | |
The expected life is the number of years that
the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture. Expected life is determined
using the “simplified method” permitted by Staff Accounting Bulletin No. 107. In addition to the inputs referenced above
regarding the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture rates that are
revised prospectively according to forfeiture experience. The stock volatility factor is based on the Company’s experience.
A summary of the status of the Company’s
stock options as of December 31, 2022 and 2021, and changes during the two years then ended are presented below.
| |
| | |
Wtd. Avg. | |
| |
| | |
Exercise | |
| |
Options | | |
Price | |
Balance, January 1, 2021 | |
| 185,900 | | |
$ | 15.60 | |
Granted during the year | |
| 84,750 | | |
| 13.00 | |
Exercised during the year | |
| (11,000 | ) | |
| 10.41 | |
Terminated/Expired during the year | |
| (12,800 | ) | |
| 61.70 | |
Balance, December 31, 2021 | |
| 246,850 | | |
$ | 12.54 | |
Granted during the year | |
| 62,000 | | |
| 8.40 | |
Exercised during the year | |
| - | | |
| - | |
Terminated/Expired during the year | |
| (5,800 | ) | |
| 12.04 | |
Balance, December 31, 2022 | |
| 303,050 | | |
$ | 11.70 | |
| |
| | | |
| | |
Exercisable at December 31, 2022 | |
| 245,466 | | |
$ | 12.07 | |
Issuance of Stock Options
Issued in 2022
On January 31, 2022, the Company granted certain
employees, stock options to purchase an aggregate of 3,000 shares of the Company’s common stock at a price of $8.50 per share. The
options expire on the fifth anniversary of the grant date and vest over a term of three years.
On April 6, 2022, the Company granted to its directors,
stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $8.40 per share. The options
expire on the fifth anniversary of the grant date and vest over a term of one year.
On April 11, 2022, the Company granted to certain
members of management and certain employees, stock options to purchase an aggregate of 53,000 shares of the Company’s common stock
at a price of $8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.
Issued in 2021
On January 11, 2021, the Company granted to its
directors, stock options to purchase an aggregate of 7,000 shares of the Company’s common stock at a price of $13.20 per share.
The options expire on the seventh anniversary of the grant date and vested 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 32,750 shares of the Company’s common stock
at a price of $13.90 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 41,500 shares of the Company’s common stock
at a price of $12.20 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one to three years.
On January 11, 2021, the Company granted to its
directors, stock options to purchase an aggregate of 7,000 shares of the Company’s common stock at a price of $13.20 per share.
The options expire on the seventh anniversary of the grant date and vested over a term of one year.
The following table summarizes information about
outstanding stock options at December 31, 2022:
Range of Exercise Price | |
Number
Outstanding | | |
Wtd. Avg,
Life | | |
Wtd. Avg.
Exercise
Price | |
$8.40 - $15.60 | |
| 303,050 | | |
| 2.7 years | | |
$ | 11.70 | |
The following table summarizes information about exercisable stock options at December 31, 2022:
Range of Exercise Price | |
Number
Exercisable | | |
Wtd. Avg,
Life | | |
Wtd. Avg.
Exercise Price | |
$8.40 - $15.60 | |
| 246,466 | | |
| 2.4 years | | |
$ | 12.07 | |
As of December 31, 2022, there was $95,000 of
unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average
vesting period of 1.3 years.
The aggregate intrinsic value at December 31,
2022 was based on the Company’s closing stock price of $4.25 was $0. The aggregate intrinsic value at December 31,
2021 was based on the Company’s closing stock price of $9.10 was approximately $12,000. The aggregate intrinsic value was calculated
based on the positive difference between the closing market price of the Company’s Common Stock and the exercise prices of the
underlying options.
The weighted average fair value of options granted
during the years ended December 31, 2022 and 2021 was $8.40 and $6.00 per share, respectively. The total intrinsic value of options exercised
during the years ended December 31, 2022 and 2021 was $0 and $100,000 respectively. The total fair value of shares vested during the
years ended December 31, 2022 and 2021 was $316,000 and $339,000, respectively.
Warrants
During both the years ended December 31, 2022
and 2021, the Company did not issue any warrants.
The following tables summarize the Company’s
outstanding warrants as of December 31, 2022 and changes during the two years then ended:
| |
| | |
| | |
Wtd. Avg. | |
| |
| | |
Wtd. Avg. | | |
Remaining | |
| |
| | |
Exercise | | |
Contractual | |
| |
Warrants | | |
Price | | |
Life (years) | |
Balance, January 1, 2021 | |
| 218,290 | | |
$ | 29.00 | | |
| 1.43 | |
Granted during the period | |
| - | | |
| - | | |
| - | |
Terminated/Expired during the period | |
| (67,569 | ) | |
| - | | |
| - | |
Balance, December 31, 2021 | |
| 150,721 | | |
$ | 21.94 | | |
| 0.75 | |
Granted during the period | |
| - | | |
| - | | |
| - | |
Terminated/Expired during the period | |
| (122,721 | ) | |
$ | 23.75 | | |
| - | |
Balance, December 31, 2022 | |
| 28,000 | | |
$ | 14.00 | | |
| 0.75 | |
| |
| | | |
| | | |
| | |
Exercisable at December 31, 2022 | |
| 28,000 | | |
$ | 14.00 | | |
| 0.75 | |
The aggregate intrinsic value at both December
31, 2022 and 2021 was $0 based on the Company’s closing stock price of $4.15 and $9.10, respectively.
Note 16. Revision of Previously Issued Consolidated
Financial Statement
Due to errors discovered in the Company’s
2020 tax return, the Company revised certain previously issued disclosures related to the components of its deferred tax assets and liabilities
and valuation allowance as of December 31, 2021 and 2020. Additionally, the Company has revised the reconciliation of its income tax rate
computed using the federal statutory rate for the year ended December 31, 2021. The errors related primarily to the misapplication of
the carryback of net operating losses under the CARES Act provision and mathematical errors related to the Company’s inventory reserve.
Since the Company provided a full valuation allowance on its net deferred tax assets, there was no impact to the Consolidated Balance
Sheet as of December 31, 2021 and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the year ended
December 31, 2021. As a result of the errors, the Company will be amending its 2020 and 2021 income tax returns.
The Company had previously disclosed that its net operating loss carry
forward as of December 31, 2021 was $29,100,000. The proper amount that should have been disclosed was $21,971,000. Along with this finding,
the Company further reviewed its disclosure of the rate reconciliation and deferred tax calculation along with the valuation allowance
of its net deferred tax assets. Other items that were corrected in the disclosure included disallowed interest, stock based compensation
and operating lease liability along with the associated operating lease ROU assets.
The below table summarizes the revisions to the
reconciliation of our income tax rate computed using the federal statutory rate to our actual income tax rate for the year ended December
31, 2021:
| |
Year Ended December 31, | | |
| | |
Year Ended December 31, | |
| |
2021 As Reported | | |
Adjustment | | |
2021 As Revised | |
U.S. statutory income tax rate | |
| 21.0 | % | |
| 0.0 | % | |
| 21.0 | % |
State taxes, net of federal benefit | |
| 5.1 | % | |
| (1.0 | )% | |
| 4.1 | % |
Permanent difference, overaccruals, and non-deductible items | |
| (40.4 | )% | |
| 46.7 | % | |
| 6.3 | % |
Change in state rate | |
| 0.0 | % | |
| 8.3 | % | |
| 8.3 | % |
Deferred tax valuation allowance | |
| 14.3 | % | |
| (53.0 | )% | |
| (38.7 | )% |
Other | |
| 0.0 | % | |
| (1.0 | )% | |
| (1.0 | )% |
Total | |
| 0.0 | % | |
| 0.0 | % | |
| 0.0 | % |
The table below summarizes the revisions to the attributes of the Deferred
Tax Assets as of December 31, 2021:
| |
December 31, | | |
| | |
December 31, | |
| |
2021 As Reported | | |
Adjustment | | |
2021 As Revised | |
Deferred tax assets: | |
| | |
| | |
| |
Net operating loss | |
$ | 6,737,000 | | |
$ | (1,778,000 | ) | |
$ | 4,959,000 | |
Allowance for doubtful accounts | |
| 155,000 | | |
| (6,000 | ) | |
| 149,000 | |
Inventory - IRC 263A adjustment | |
| 394,000 | | |
| (17,000 | ) | |
| 377,000 | |
Stock based compensation - options and restricted stock | |
| 393,000 | | |
| (210,000 | ) | |
| 183,000 | |
Capitalized engineering costs | |
| 449,000 | | |
| (19,000 | ) | |
| 430,000 | |
Amortization - NTW Transaction | |
| 442,000 | | |
| 3,000 | | |
| 445,000 | |
Inventory reserve | |
| 824,000 | | |
| (34,000 | ) | |
| 790,000 | |
Deferred gain on sale of real estate | |
| 47,000 | | |
| (2,000 | ) | |
| 45,000 | |
Accrued expenses | |
| 204,000 | | |
| (186,000 | ) | |
| 18,000 | |
Disallowed interest | |
| 1,286,000 | | |
| 290,000 | | |
| 1,576,000 | |
Operating lease liability | |
| 235,000 | | |
| 749,000 | | |
| 984,000 | |
Capital loss carryforward | |
| 88,000 | | |
| (88,000 | ) | |
| - | |
Total non-current deferred tax asset before valuation allowance | |
| 11,254,000 | | |
| (1,298,000 | ) | |
| 9,956,000 | |
Valuation allowance | |
| (9,628,000 | ) | |
| 2,125,000 | | |
| (7,503,000 | ) |
Total non-current deferred tax asset after valuation allowance | |
| 1,626,000 | | |
| 827,000 | | |
| 2,453,000 | |
| |
| | | |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | | |
| | |
Property and equipment | |
| (1,626,000 | ) | |
| (71,000 | ) | |
| (1,697,000 | ) |
Operating lease ROU assets | |
| - | | |
| (756,000 | ) | |
| (756,000 | ) |
Total deferred tax liabilities | |
| (1,626,000 | ) | |
| (827,000 | ) | |
| (2,453,000 | ) |
| |
| | | |
| | | |
| | |
Net deferred tax asset | |
$ | - | | |
$ | - | | |
$ | - | |
The table below summarizes the revisions to the attributes of the Deferred
Tax Assets as of December 31, 2020:
| |
December 31, | | |
| | |
December 31, | |
| |
2020 As Reported | | |
Adjustment | | |
2020 As Revised | |
Deferred tax assets: | |
| | |
| | |
| |
Net operating loss | |
$ | 6,594,000 | | |
$ | (1,422,000 | ) | |
$ | 5,172,000 | |
Allowance for doubtful accounts | |
| 252,000 | | |
| (3,000 | ) | |
| 249,000 | |
Inventory - IRC 263A adjustment | |
| 341,000 | | |
| (3,000 | ) | |
| 338,000 | |
Stock based compensation - options and restricted stock | |
| 277,000 | | |
| (73,000 | ) | |
| 204,000 | |
Capitalized engineering costs | |
| 336,000 | | |
| 228,000 | | |
| 564,000 | |
Deferred Rent | |
| 4,000 | | |
| - | | |
| 4,000 | |
Amortization - NTW Transaction | |
| 495,000 | | |
| (73,000 | ) | |
| 422,000 | |
Inventory reserve | |
| 1,250,000 | | |
| (579,000 | ) | |
| 671,000 | |
Deferred gain on sale of real estate | |
| 132,000 | | |
| (1,000 | ) | |
| 131,000 | |
Accrued expenses | |
| 158,000 | | |
| (158,000 | ) | |
| - | |
Disallowed interest | |
| 1,813,000 | | |
| (18,000 | ) | |
| 1,795,000 | |
Operating lease liability | |
| 292,000 | | |
| 905,000 | | |
| 1,197,000 | |
Total non-current deferred tax asset before valuation allowance | |
| 11,944,000 | | |
| (1,197,000 | ) | |
| 10,747,000 | |
Valuation allowance | |
| (9,394,000 | ) | |
| 1,262,000 | | |
| (8,132,000 | ) |
Total non-current deferred tax asset after valuation allowance | |
| 2,550,000 | | |
| 65,000 | | |
| 2,615,000 | |
| |
| | | |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | | |
| | |
Property and equipment | |
| (2,150,000 | ) | |
| 443,000 | | |
| (1,707,000 | ) |
Operating lease ROU assets | |
| - | | |
| (908,000 | ) | |
| (908,000 | ) |
Other | |
| (400,000 | ) | |
| 400,000 | | |
| - | |
Total deferred tax liabilities | |
| (2,550,000 | ) | |
| (65,000 | ) | |
| (2,615,000 | ) |
| |
| | | |
| | | |
| | |
Net deferred tax asset | |
$ | - | | |
$ | - | | |
$ | - | |
Note 17. Subsequent Events
On April 18, 2023, we received a notice from NYSE
American (the “Exchange”) stating that the Company is not in compliance with the continued listing standards of the Exchange
under the timely filing criteria included in Section 1007 of the NYSE American Company Guide because the Company failed to file by the
extended due date of April 17, 2023, its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”).
In accordance with Section 1007 of the Company
Guide, the Company will have six months from the date of the filing delinquency, or until October 17, 2023 (the “Initial Cure Period”),
to file the Form 10-K with the Securities and Exchange Commission. If the Company fails to file the Form 10-K during the Initial Cure
Period, the Exchange may, in its sole discretion, provide an additional six-month cure period depending on the Company’s specific
circumstances.
Upon filing of the Form 10-K the Company will cure this delinquency.
F-32
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