What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-09 compared with 2020-08-07 · 917 added, 817 removed, 495 unchanged (78% of the section changed)

Financial statements

Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)

Consolidated Financial Statements:

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

Condensed Consolidated Statements of Stockholders’

Equity for the three and six months ended June 30, 2020 and 2019 (unaudited)

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Balance Sheets

INDUSTRIES GROUP

Consolidated Balance Sheets

September 30,

Current Assets

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Prepaid Expenses and Other Current Assets

Prepaid Taxes

Total Current Assets

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Current Liabilities

Notes Payable and Finance Lease Obligations - Current Portion

Notes Payable - Related Party - Current Portion

Notes Payable and Finance Lease Obligations

Related Party Notes Payable

Accounts Payable and Accrued Expenses

Operating Lease Liabilities - Current Portion

Deferred Gain on Sale - Current Portion

Operating Lease Liabilities

Deferred Gain on Sale

Deferred Revenue

Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - Current Portion

Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary

Income Taxes Payable

1 unchanged sentence

Long Term Liabilities

Notes Payable and Finance Lease Obligations - Net of Current Portion

Operating Lease Liabilities - Net of Current Portion

Deferred Gain on Sale - Net of Current Portion Liability Related to the Sale of Future Proceeds from

Disposition of Subsidiary - Net of Current Portion

Other Liability

Notes Payable and Finance Lease Obligations

Related Party Notes Payable

Operating Lease Liabilities

Deferred Gain on Sale

Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary

Deferred payroll tax liability - CARES Act

TOTAL LIABILITIES

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Stockholders’

Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both June 30, 2020 and December 31, 2019.

Common Stock - Par Value $.001 - Authorized 60,000,000 Shares, 30,579,075 and 29,478,338 Shares Issued and Outstanding as of June 30, 2020 and December 31, 2019, respectively

Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both September 30, 2020 and December 31, 2019.

Common Stock - Par Value $.001 - Authorized 60,000,000 Shares, 30,620,990 and 29,478,338 Shares Issued and Outstanding as of September 30, 2020 and December 31, 2019, respectively

Additional Paid-In Capital

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TOTAL LIABILITIES AND STOCKHOLDERS’

See Notes to Condensed Consolidated Financial

AIR INDUSTRIES GROUP

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Condensed Consolidated Statements of Operations

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of Sales

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Loss on abandonment of Leases

(Loss)/Income from Operations

Interest and Financing Costs

Income (Loss) from Operations

Interest Expense –

Third Parties

Interest Expense - Related Parties

Other Income, Net

Loss before Benefit from Income Taxes

Benefit from Income Taxes

Loss from Continuing Operations

Income from Discontinued Operations, net of tax

Income (Loss) before Provision for (Benefit from) Income Taxes

Provision for (Benefit from) Income Taxes

Income (Loss) from Continuing Operations

Loss from Discontinued Operations, net of tax

Net Income (Loss)

$ (1,003,000 )

$ (1,471,000 )

Net Income (Loss) per share - Basic

Net Income (Loss) per share –

Continuing Operations

Discontinued Operations

Net Income (Loss) per share - Diluted

Net Income (Loss) per share –

Continuing Operations

Discontinued Operations

Weighted Average Shares Outstanding - Basic and Diluted - continuing operations

Weighted Average Shares Outstanding - Basic - discontinued operations

Weighted Average Shares Outstanding - Diluted - discontinued operations

See Notes to Condensed Consolidated Financial

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of

Stockholders’

For the Three and Six Months Ended June

30, 2020 and 2019

Weighted Average Shares Outstanding - Basic - continuing operations

Weighted Average Shares Outstanding - Diluted - continuing operations

Weighted Average Shares Outstanding - Basic and Diluted - discontinued operations

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Consolidated Statements of Stockholders’

the Three and Nine Months Ended September 30, 2020 and 2019

Stockholders’

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$ (67,257,000 )

Common stock issued for directors fees

Common stock issued for directors’

Costs related to issuance of stock

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$ (66,199,000 )

Common stock issued for directors fees

Common stock issued for directors’

Stock Compensation Expense

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$ (67,783,000 )

Common stock issued for directors’

Stock Compensation Expense

Balance, September 30, 2020

$ (68,260,000 )

Balance, January 1, 2019

$ (64,523,000 )

Common stock issued for directors fees

Common stock issued for directors’

Costs related to issuance of stock

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$ (66,181,000 )

See Notes to Condensed Consolidated Financial

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of

Cash Flows For the Six Months Ended June 30,

Common stock issued for directors’

Issuance of Common Stock

Stock Compensation Expense

Other Adjustments - Rounding

Balance, September 30, 2019

$ (65,994,000 )

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

$ (1,003,000 )

Adjustments to reconcile net loss to net cash used in in operating

$ (1,471,000 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Depreciation of property and equipment

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Non-cash interest expense

Non-cash deferred payroll tax expense - CARES Act

Abandonment of lease

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Deferred revenue

Other Liability

NET CASH USED IN OPERATING ACTIVITIES

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES

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CASH FLOWS FROM FINANCING ACTIVITIES

Note payable - revolver - net - Sterling National Bank

Note payable - revolver - net - PNC

Note payable - revolver - net - Sterling National

Note payable - revolver - net –

Payments of note payable - term notes - Sterling National Bank

Payments of note payable - term notes - PNC

SBA Loan Proceeds - SNB

Payments of note payable - term notes –

SBA Loan Proceeds –

Proceeds from sale of future proceeds from disposition of subsidiary

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Costs related to issuance of stock

Payments of notes payable issuances- related party

Payments of related party notes payable

Payments of notes payable - third party

Payments of loan payable - equipment

NET CASH PROVIDED BY FINANCING ACTIVITIES

Payments of loan payable - financed assets

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

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CASH AND CASH EQUIVALENTS AT END OF PERIOD

See Notes to Condensed Consolidated Financial

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of

Cash Flows For the Six Months Ended June 30, (Continued)

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Consolidated Statements of Cash Flows For the Nine Months Ended September 30, (Continued)

Supplemental cash flow information

Cash paid during the period for interest

Cash paid during the period for income taxes

Cash paid for interest

Supplemental disclosure of non-cash transactions

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Write-off deferred rent under ASC 842

Acquisition of financed asset

Acquisition of property and equipment

Supplemental disclosure of non-cash investing and financing activities

Common stock issued in lieu of cash for services

Common Stock issued for conversion of note payable and accrued interest

See Notes to Condensed Consolidated Financial

AIR INDUSTRIES GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

FORMATION AND BASIS

OF PRESENTATION

Air Industries Group is a Nevada

corporation (“AIRI”).

As of and for the three and six months ended June 30, 2020 and 2019, the accompanying

condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries;

Air Industries

Machining Corp.

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FORMATION AND BASIS OF PRESENTATION

Industries Group is a Nevada corporation (“AIRI”).

As of and for the three and nine months ended September 30,

2020 and 2019, the accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned

subsidiaries;

Air Industries Machining Corp.

(“AIM”), Nassau Tool Works, Inc.

(“NTW”), and the Sterling Engineering

Corporation (“Sterling”), (together, the “Company”).

The results of Eur-Pac Corporation

(“EPC”) and Electronic Connection Corporation (“ECC”) are included in discontinued operations since

operations ceased on March 31, 2019.

(“NTW”), and the Sterling

Engineering Corporation (“Sterling”), (together, the “Company”).

The results of Eur-Pac Corporation (“EPC”)

and Electronic Connection Corporation (“ECC”) are included in discontinued operations since operations ceased on March

See Note 2 for details of discontinued operations.

Principal Business Activities

The Company through its AIM subsidiary

is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace

industry in the United States.

NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter

Sterling manufactures components and provides services for jet engines and ground-power turbines.

The Company’s

customers consist mainly of publicly traded companies in the aerospace industry.

Basis of Presentation

The accompanying unaudited condensed consolidated

financial statements of the Company have been prepared in accordance with U.S.

generally accepted accounting principles for interim

financial information and with Rule 8-03 of Regulation S-X.

Accordingly, they do not include all of the information and footnotes

required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments

(consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for

the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending

December 31, 2020.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated

financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,

2019, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated

December 31, 2019 was derived.

The Company is primarily engaged in manufacturing

aircraft structural parts, and assemblies for prime defense contractors in the aerospace industry in the United States.

a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter aircraft.

Sterling manufactures components

and provides services for jet engines and ground-power turbines.

The Company’s customers consist mainly of publicly traded

companies in the aerospace industry.

of Presentation

accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S.

accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X.

Accordingly, they do not

include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation

have been included.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of

the results that may be expected for the year ending December 31, 2020.

These unaudited condensed consolidated financial statements

should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s

Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission, from which

the accompanying condensed consolidated balance sheet dated December 31, 2019 was derived.

Reclassifications

Certain account balances in 2019 have been reclassified to conform

to the current period presentation.

Impact of Covid-19

On March 11, 2020, the World Health Organization

announced that infections caused by the coronavirus disease of 2019 (“COVID-19”) had become pandemic, and on March

13, 2020, the U.S.

account balances in 2019 have been reclassified to conform to the current period presentation.

March 11, 2020, the World Health Organization announced that infections caused by the coronavirus disease of 2019 (“COVID-19”)

had become pandemic, and on March 13, 2020, the U.S.

President announced a national emergency relating to the disease.

National, state and local authorities have

adopted various regulations and orders, including mandates on the number of people that may gather in one location and closing

non-essential businesses.

To date, the Company has been deemed an essential business and has not curtailed its operations.

The measures adopted by various governments

and agencies, as well as the decision by many individuals and businesses to voluntarily shut down or self-quarantine, have and

are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.

state and local authorities have adopted various regulations and orders, including mandates on the number of people that may gather

in one location and closing non-essential businesses.

To date, the Company has been deemed an essential business and has not curtailed

its operations.

measures adopted by various governments and agencies, as well as the decision by many individuals and businesses to voluntarily

shut down or self-quarantine, have and are expected to continue to have serious adverse impacts on domestic and foreign economies

of uncertain severity and duration.

The effectiveness of economic stabilization efforts adopted by governments is uncertain.

The likely overall economic impact

of the COVID-19 pandemic will be highly negative to the general economy and has been particularly negative on the commercial travel

industry and commercial aerospace industries.

likely overall economic impact of the COVID-19 pandemic will be highly negative to the general economy and has been particularly

negative on the commercial travel industry and commercial aerospace industries.

In accordance with the Department of Defense

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military, however, facility closures or work slowdowns or temporary stoppages could occur.

Although the Company’s facilities are open, it has been unable to operate at full capacity or achieve high levels of productivity

due to the implementation of enhanced safety procedures, increased employee absenteeism and intermittent closings of other businesses

that supply goods or services to the Company.

Financial impacts related to COVID-19,

including actions and costs in response to the pandemic, were not material to the Company’s first quarter 2020 financial

position, results of operations or cash flows.

Beginning in April 2020, the COVID–19 crisis resulted in a reduction to 2020

revenue and operating margins in portions of its business.

This negative effect continued in May 2020 and to a lesser extent in

The decrease in revenue resulted from employee absenteeism, supplier disruption, changes in employee productivity,

and related program delays or challenges.

The Company and its employees, suppliers, customers and its global community are facing

tremendous challenges and the Company cannot predict how this dynamic situation will evolve or the impact it will have on the

Company’s results of operations.

The Company has implemented procedures to

promote employee safety including more frequent and enhanced cleaning and adjusted schedules and work flows to support physical

Although the Company’s facilities are open, it was unable to operate at full capacity or achieve high levels of productivity

particularly in the second calendar quarter of fiscal 2020 due to the implementation of enhanced safety procedures, increased employee

absenteeism and intermittent closings of other businesses that supply goods or services to the Company.

These impediments began

to dissipate in the third calendar quarter.

By September 2020 operating conditions were close to normal;

however, business and

operating conditions remain volatile.

Beginning in April 2020, the COVID–19

crisis resulted in a reduction to 2020 revenue and operating margins in portions of its business.

This negative effect continued

in May 2020 and to a lesser extent in June 2020.

The decrease in revenue resulted from employee absenteeism, supplier disruption,

changes in employee productivity, and related program delays or challenges.

The Company and its employees, suppliers, customers

and its global community continue to face tremendous challenges.

While these challenges lessened in the third calendar quarter,

the Company cannot predict how this dynamic situation will evolve or the impact it will have on the Company’s results of

The Company has implemented procedures

to promote employee safety including more frequent and enhanced cleaning and adjusted schedules and work flows to support physical

These actions have resulted in increased operating costs.

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Suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of COVID-19.

the three months ended June 30, 2020, we had large numbers of employees working remotely.

Beginning in June, and continuing into

July, that number has declined.

challenges with our suppliers have been ameliorated during the third quarter and their operations have substantially returned to

During the three months ended June 30, 2020, we had large numbers of employees working remotely.

As of September 30, 2020

essentially all employees have returned to work at our facilities.

On March 27, 2020, the Coronavirus Aid,

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and related costs.

In May 2020, AIM, NTW and Sterling (each a

“Borrower”) entered into government subsidized loans with Sterling National Bank (“SNB”) as the lender

In May 2020, AIM, NTW and Sterling (each

a “Borrower”) entered into government subsidized loans with Sterling National Bank (“SNB”) as the lender

in an aggregate principal amount of approximately $2.4 million (“SBA Loans”).

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“Loan Program”).

The Borrower may apply to SNB for forgiveness of a portion of the SBA Loan in accordance with the

applicable provisions of the federal statute authorizing the Loan Program.

The Borrower has applied to SNB for forgiveness and SNB has approved and submitted the forgiveness

application to the SBA for final approval in accordance with the applicable provisions of the federal statute authorizing the Loan

The Company has elected to defer the deposit

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must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022.

As of June 30, 2020, the Company has deferred

$199,000, which is classified as Other Liability on the accompanying Condensed Consolidated Balance Sheet.

As of September 30, 2020, the Company has

deferred $429,000, which is classified as Deferred payroll tax liability –

CARES Act on the accompanying Condensed Consolidated

Balance Sheet.

In addition, as a result of the passage

of the CARES Act, the Company received $1,416,000 from the filing of a net operating loss carryback claim.

The Company believes that based on

its confirmed orders, funds generated from operations, amounts received under government subsidized loan programs and amounts

available under its credit facility, it will have sufficient cash on hand to support its activities through

September 1, 2021.

Subsequent Events

Management has evaluated subsequent events

through the date of this filing.

of the CARES Act, the Company received a tax refund of $1,416,000 from the filing of a net operating loss carryback claim.

The Company believes that based on its

confirmed orders, funds generated from operations, amounts received under government subsidized loan programs and amounts available

under its credit facility, it will have sufficient cash on hand to support its activities through November 1, 2021.

has evaluated subsequent events through the date of this filing.

DISCONTINUED OPERATIONS

As discussed in Note 1, the Company disposed

of its EPC and ECC subsidiaries in March 2019.

As required, the Company has retrospectively recast its condensed consolidated statements

of operations for the 2019 period presented.

As such, these businesses are reported as discontinued operations for the three and

six months ended June 30, 2019.

The Company has not segregated the cash flows of these businesses in the condensed consolidated

statements of cash flows.

Management was also required to make certain assumptions and apply judgment to determine historical expenses

related to the discontinued operations presented in prior periods.

Unless noted otherwise, discussion in the Notes to Condensed

Consolidated Financial Statements refers to the Company’s continuing operations.

The following table presents the results

of discontinued operations presented separately in the condensed consolidated statement of operations for the three and six months

ended June 30, 2019:

Three Months Ended

Six Months Ended

discussed in Note 1, the Company disposed of its EPC and ECC subsidiaries in March 2019.

As required, the Company has retrospectively

recast its condensed consolidated statements of operations for the 2019 period presented.

As such, these businesses are reported

as discontinued operations for the three and nine months ended September 30, 2019.

The Company has not segregated the cash flows

of these businesses in the condensed consolidated statements of cash flows.

Management was also required to make certain assumptions

and apply judgment to determine historical expenses related to the discontinued operations presented in prior periods.

noted otherwise, discussion in the Notes to Condensed Consolidated Financial Statements refers to the Company’s continuing

following table presents the results of discontinued operations presented separately in the condensed consolidated statement of

operations for the three and nine months ended September 30, 2019:

September 30,

Cost of goods sold

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Selling, general and administrative

Gain on impairment of assets

Total operating loss

Loss from operations

Interest expense

Income from discontinued operations before income taxes

Other expense

Loss from discontinued operations before income taxes

Provision for income taxes

Income from discontinued operations, net of income tax

Non-cash operating amounts for discontinued

operations for the three and six months ended June 30, 2019 include depreciation and amortization of $0 and $6,000, respectively.

There were no capital expenditures for discontinued operations for both the three and six months ended June 30, 2019.

no other significant non-cash operating amounts or investing items of the discontinued operations for the period.

SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Inventory Valuation

Loss from discontinued operations, net of income tax

operating amounts for discontinued operations for the three and nine months ended September 30, 2019 include depreciation and

amortization of $0 and $6,000, respectively.

There were no capital expenditures for discontinued operations for both the three

and nine months ended September 30, 2019.

There were no other significant non-cash operating amounts or investing items of the

discontinued operations for the period.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For annual periods, the Company values

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inventories at interim quarterly reporting periods.

Historically, substantially all of the inventory value has been estimated using

a gross profit percentage based on gross profit percentages of previous periods as applied to the net sales of the current period.

During the three months ended June 30, 2020, the Company determined that its gross profits by segment were below its 2019 gross

profit percentages and has adjusted margins accordingly.

Adjustments to reconcile the annual physical inventory to the Company’s

books are treated as changes in accounting estimates and are recorded in the fourth quarter.

Credit and Concentration Risks

There were two customers that represented

71.9% and three customers that represented 75.6% of total net sales for the three months ended June 30, 2020 and 2019, respectively.

Historically, in each period, substantially all of the inventory value has

been estimated using a gross profit percentage based on annual gross profit percentages of the immediately preceding year as applied

to the net sales of the current period.

During the three months ended September 30, 2020, the Company determined that its gross

profits by segment were below its 2019 gross profit percentages and accordingly has adjusted margins to less than those of 2019.

Adjustments to reconcile the annual physical inventory to the Company’s books are recorded in the fourth quarter.

and Concentration Risks

were three customers that represented 70.6% and two customers that represented 61.7% of total net sales for the three months ended

September 30, 2020 and 2019, respectively.

This is set forth in the table below.

Percentage of Sales

* Customer was less than 10% of total net sales for the three months ended June 30, 2020.

There were two customers that represented

69.3% and three customers that represented 74.7% of total net sales for the six months ended June 30, 2020 and 2019, respectively.

September 30,

was less than 10% of sales for the three months ended September 30, 2019.

were three customers that represented 74.2% and 73.4% of total sales for the nine months ended September 30, 2020 and 2019, respectively.

This is set forth in the table below.

Percentage of Sales

* Customer was less than 10% of total net sales for the six months ended June 30, 2020.

There was one customer that represented 49.7% of gross accounts

receivable at June 30, 2020 and three customers that represented 67.8% of gross accounts receivable at December 31, 2019, respectively.

September 30,

was less than 10% of sales for the nine months ended September 30, 2020 and 2019.

were two customers that represented 63.6% and three customers that represented 67.8% of gross accounts receivable at September

30, 2020 and December 31, 2019, respectively.

This is set forth in the table below.

Percentage of Receivables

* Customer was less than 10% of Gross Accounts Receivable at June 30, 2020.

Cash and Cash Equivalents

September 30,

was less than 10% of accounts receivable sales at September 30, 2020.

and Cash Equivalents

During the year, the Company had occasionally maintained balances

in its bank accounts that were in excess of the FDIC limit.

in its bank accounts that were in excess of the FDIC insurance 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.

The Company accounts for leases under ASC

842, “Leases.”

All leases are required to be recorded on the balance sheet and are classified as either operating leases

or finance leases.

The lease classification affects the expense recognition in the income statement.

Operating lease charges are

recorded entirely in operating expenses.

Finance lease charges are split, where amortization of the right-of- use asset is recorded

in operating expenses and an implied interest component is recorded in interest expense.

Earnings (Loss) per share

Basic earnings (loss) per share (“EPS”)

is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common

stock outstanding for the period.

For purposes of calculating diluted earnings

per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first

day of the period.

The denominator includes both the weighted-average number of shares of common stock outstanding during the period

and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive.

Dilutive common stock

equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using

the if-converted method.

The following is a reconciliation of the denominators of basic

and diluted earnings per share for discontinued operations computations:

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 or unwilling

to provide parts for any reason, its business could be severely harmed.

Company accounts for leases under ASC 842, “Leases.”

All leases are required to be recorded on the balance sheet and

are classified as either operating leases or finance leases.

The lease classification affects the expense recognition in the income

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.

(Loss) per share

earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders

by the weighted-average number of shares of common stock outstanding for the period.

purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes

payable assumed converted as of the first day of the period.

The denominator includes both the weighted-average number of shares

of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock

equivalents is dilutive.

Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock

method and convertible notes payable using the if-converted method.

following is the calculation of net (loss) income applicable to common stockholders utilized to calculate the EPS:

Three Months Ended

Six Months Ended

Discontinued Operations

Nine Months Ended

Continuing Operations

Income (loss) from continuing operations

$ (1,003,000 )

$ (1,332,000 )

Convertible Note Interest for Potential Note Conversion

Income (loss) used to calculate earnings per share

$ (1,003,000 )

$ (1,332,000 )

following is a reconciliation of the denominators of basic and diluted earnings per share computations:

Three Months Ended

Nine Months Ended

September 30,

Continuing Operations

Weighted average shares outstanding used to compute basic earnings per share

Effect of dilutive stock options and warrants

Weighted average shares

outstanding and dilutive securities used to compute dilutive earnings per share

The following securities have been excluded

from the calculation as the exercise price was greater than the average market price of the common shares:

Three and Six Months Ended

Effect of dilutive convertible notes payable

Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share

following securities have been excluded from the calculation as the exercise price was greater than the average market price of

the common shares:

Three and Nine Months Ended

September 30,

Stock Options

The following securities have been excluded

from the calculation even though the exercise price was less than the average market price of the common shares because the effect

of including these potential shares was anti-dilutive due to the net loss incurred during that period:

Three and Six Months Ended

following securities have been excluded from the calculation even though the exercise price was less than the average market price

of the common shares during the periods set forth below because the effect of including these potential shares was anti-dilutive

due to the net loss incurred during these periods:

Three Months Ended

Nine Months Ended

September 30,

Stock Options

Convertible notes payable

Stock-Based Compensation

The Company accounts for stock-based compensation

in accordance with FASB ASC 718, “Compensation –

Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation –

Stock Compensation.”

Under the fair value recognition provision

of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award.

The Company estimates

the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model.

Stock based compensation

expense for employees amounted to $74,000 and $93,000 for the three months ended June 30, 2020 and 2019, respectively, and $214,000

and $326,000 for the six months ended June 30, 2020 and 2019, respectively.

Stock compensation expense for directors amounted to

$46,000 and $0 for the three months ended June 30, 2020 and 2019, respectively and $101,000 and $131,000 for the six months ended

June 30, 2020 and 2019, respectively.

Stock compensation expense for employees and directors was included in operating expenses

on the accompanying Condensed Consolidated Statements of Operations.

Goodwill represents the excess of the acquisition

cost of businesses over the fair value of the identifiable net assets acquired.

The goodwill amount of $163,000 at both June 30,

2020 and December 31, 2019 relates to the acquisition of NTW.

Goodwill is not amortized, but is tested

at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit

below its carrying amount.

The COVID-19 pandemic was a triggering event for testing whether

goodwill has been impaired.

The Company performed a qualitative assessment and determined it is more likely than not that the fair

value exceeds the carrying value of $163,000 as of June 30, 2020.

The Company will continue to monitor the impacts of the COVID-19

pandemic in future quarters.

Changes in the Company’s forecasts or further decreases in the value of its common stock could

cause book values to exceed fair values which may result in goodwill impairment charges in future periods.

The Company has determined that there has

been no impairment of goodwill at June 30, 2020 and December 31, 2019.

Recently Issued Accounting

Pronouncements

In December 2019, the FASB issued ASU No.

Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the

fair value of the award.

The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton

option pricing model.

Stock based compensation expense for employees amounted to $52,000 and $25,000 for the three months ended

September 30, 2020 and 2019, respectively, and $266,000 and $351,000 for the nine months ended September 30, 2020 and 2019, respectively.

Stock compensation expense for directors amounted to $58,000 and $56,000 for the three months ended September 30, 2020 and 2019,

respectively and $159,000 and $187,000 for the nine months ended September 30, 2020 and 2019, respectively.

Stock compensation

expense for employees and directors was included in operating expenses on the accompanying Condensed Consolidated Statements of

represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired.

amount of $163,000 at September 30, 2020 and December 31, 2019 relates to the acquisition of NTW.

is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the

fair value of the reporting unit below its carrying amount.

COVID-19 pandemic was a triggering event for testing whether goodwill has been impaired.

The Company performed a qualitative assessment

and determined it is more likely than not that the fair value exceeds the carrying value of $163,000 as of September 30, 2020.

The Company will continue to monitor the impacts of the COVID-19 pandemic in future quarters.

Changes in the Company’s forecasts

or further decreases in the value of its common stock could cause book values to exceed fair values which may result in goodwill

impairment charges in future periods.

Issued Accounting Pronouncements

August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives

and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which is intended to address issues

identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics

of liabilities and equity.

For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt

instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures

for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users.

is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

Early adoption

is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal

The Company is evaluating the effect of adopting this new accounting guidance on its financial statements.

December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to

simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles

in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for

fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related

The Company does not believe that any other

recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying

condensed consolidated financial statements.

Simplifying the Accounting for Income Taxes (“ASU

2019-12”), which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain

exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,

with early adoption permitted.

The Company is currently evaluating the impact of this standard on its condensed consolidated financial

statements and related disclosures.

Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would

have a material effect on the accompanying condensed consolidated financial statements.

PROPERTY AND EQUIPMENT

The components of property and

equipment at June 30, 2020 and December 31, 2019 consisted of the following:

components of property and equipment at September 30, 2020 and December 31, 2019 consisted of the following:

September 30,

Buildings and Improvements

13 unchanged sentences

Property and Equipment, net

Depreciation expense for the three months

ended June 30, 2020 and 2019 was $688,000 and $760,000, respectively.

Depreciation expense for the six months ended June 30, 2020

and 2019 was $1,344,000 and $1,455,000, respectively.

Assets held under financed lease obligations

are depreciated over the shorter of their related lease terms or their estimated productive lives.

Depreciation of assets under

finance leases is included in depreciation expense for 2020 and 2019.

Accumulated depreciation on these assets was approximately

$6,304,000 and $5,396,000 as of June 30, 2020 and December 31, 2019, respectively.

The Company has operating and finance leases

for leased office and manufacturing facilities and equipment leases.

The Company leases certain machinery and equipment under finance

leases and leases its offices and manufacturing facilities under operating leases.

The leases have remaining lease terms of one

to six years, some of which include options to extend or terminate the leases.

During the three months ended June 30, 2020,

NTW’s warehouse lease was terminated by its landlord under the terms of its lease agreement.

expense for the three months ended September 30, 2020 and 2019 was $576,000 and $712,000, respectively.

Depreciation expense for

the nine months ended September 30, 2020 and 2019 was $1,920,000 and $2,085,000, respectively.

held under financed lease obligations are depreciated over the shorter of their related lease terms or their estimated productive

Depreciation of assets under finance leases is included in depreciation expense for 2020 and 2019.

Accumulated depreciation

on these assets was approximately $6,359,000 and $5,936,000 as of September 30, 2020 and December 31, 2019, respectively.

Company has operating and finance leases for leased office and manufacturing facilities and equipment leases.

The Company leases

certain machinery and equipment under finance leases and leases its offices and manufacturing facilities under operating leases.

The leases have remaining lease terms of one to six years, some of which include options to extend or terminate the leases.

warehouse lease was terminated in May 2020 by its landlord under the terms of its lease agreement.

Additionally, the Company entered

4 unchanged sentences

months are equal installments of $1,746.

Rent expense for the three months ended

September 30, 2020 and 2019 was $280,000 and $310,000, respectively.

Rent expense for the nine months ended September 30, 2020

and 2019 was $892,000 and $936,000, respectively.

September 30,

Weighted Average Remaining Lease Term - in years

Weighted Average discount rate - %

The aggregate undiscounted cash flows of operating lease

payments for leases with remaining terms greater than one year are as follows:

aggregate undiscounted cash flows of operating lease payments for leases with remaining terms greater than one year are as follows:

September 30,

For the twelve months ended December 31,

December 31, 2020 (remaining six months)

December 31, 2020 (remaining three months)

December 31, 2021

6 unchanged sentences

Total long term portion of operating lease maturities

NOTES PAYABLE, RELATED PARTY

NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS

Notes payable, related party

notes payable and finance lease obligations consist of the following:

NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS

payable and finance lease obligations at September 30, 2020 and December 31, 2019 consisted of the following:

September 30,

Revolving credit note payable to Sterling National Bank (“SNB”)

1 unchanged sentence

Finance lease obligations

Loan Payable - equipment

Loans Payable - financed assets

Related party notes payable, net of debt discount

4 unchanged sentences

Notes payable, related party notes payable and finance lease obligations, net of current portion

Sterling National Bank (“SNB”)

National Bank (“SNB”)

On December 31, 2019, the Company entered

2 unchanged sentences

(“SNB term loan”).

Proceeds from the SNB Facility repaid the Company’s

outstanding loan facility (“PNC Facility”) with PNC Bank N.A.

from the SNB Facility repaid the Company’s outstanding loan facility (“PNC Facility”) with PNC Bank N.A.

(“PNC”).

The formula to determine the amounts of

revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of the Company’s

eligible receivables and eligible inventory (as defined in the SNB Facility).

Each day, the Company’s cash collections are

swept directly by SNB to reduce the SNB revolving loan balance and the Company then borrows according to a borrowing base formula.

The Company’s receivables are payable directly into a lockbox controlled by SNB (subject to the terms of the SNB Facility).

The repayment terms of the SNB term loan

provide for monthly principal installments in the amount of $45,238, payable on the first business day of each month, beginning

on February 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022.

for so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year,

beginning with the year ending December 31, 2020, the Company shall pay to SNB an amount equal to the lesser of (i) twenty-five

percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan.

shall be made to SNB and applied to the outstanding principal balance of the term loan, on or prior to April 15 of the Fiscal Year

immediately following such Fiscal Year.

The Company may voluntarily prepay balances

under the SNB Facility.

Any prepayment of less than all of the outstanding principal of the SNB term loan is applied to the principal

of the SNB term loan.

The terms of the SNB Facility require that,

among other things, the Company maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter

beginning with the Fiscal Quarter ending March 31, 2020.

In addition, the Company is limited in the amount of Capital Expenditures

As of June 30, 2020 the Company was in compliance with all loan covenants.

The SNB Facility also restricts the amount

of dividends the Company may pay to its stockholders.

Substantially all of the Company’s assets are pledged as collateral

under the SNB Facility.

As of June 30, 2020 the future minimum

principal payments for the SNB term loan are as follows:

formula to determine the amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based

on a percentage of the Company’s eligible receivables and eligible inventory (as defined in the SNB Facility).

the Company’s cash collections are swept directly by SNB to reduce the SNB revolving loan balance and the Company then borrows

according to a borrowing base formula.

The Company’s receivables are payable directly into a lockbox controlled by SNB (subject

to the terms of the SNB Facility).

repayment terms of the SNB term loan provide for monthly principal installments in the amount of $45,238, payable on the first

business day of each month, beginning on February 1, 2020, with a final payment of any unpaid balance of principal and interest

payable on December 30, 2022.

In addition, for so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined)

is a positive number for any fiscal year, beginning with the year ending December 31, 2020, the Company shall pay to SNB an amount

equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal

balance of the term loan.

Such payment shall be made to SNB and applied to the outstanding principal balance of the term loan,

on or prior to April 15 of the Fiscal Year immediately following such Fiscal Year.

On November 6, 2020, the Company entered

into the First Amendment to Loan and Security Agreement (“First Amendment”).

The terms of the agreement increase the

Term Loan to $5,685,000.

The repayment terms of the term loan were amended to provide monthly principal installments in the amount

of $67,679 beginning on December 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December

Additionally, the date by which certain subordinated third-party notes need to be extended by was changed from September

30, 2020 to November 30, 2020.

The Company has paid an amendment fee of $20,000.

Company may voluntarily prepay balances under the SNB Facility.

Any prepayment of less than all of the outstanding principal of

the SNB term loan is applied to the principal of the SNB term loan.

The terms of the SNB Facility require

that, among other things, the Company maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal

Quarter beginning with the Fiscal Quarter ending March 31, 2020.

In addition, the Company is limited in the amount of Capital

Expenditures it can make.

The SNB Loan Agreement required the Company by September 30, 2020, to either (i) extend

the maturity date of certain subordinate convertible notes to a date more than six months after December 31, 2022 or alternatively

(ii) convert these notes to common stock of the Company.

As of September 30, 2020, the Company was not in compliance with all

loan covenants.

As a result, the full balance due under the term note was classified as a current liability in the condensed consolidated

balance sheet as of September 30, 2020.

In connection with the First Amendment, the bank waived all events of default identified

as of and through September 30, 2020.

The SNB Facility also restricts the amount of dividends the Company may pay to its stockholders.

Substantially all of the Company’s assets are pledged as collateral under the SNB Facility.

The aggregate payments for the term note at September 30, 2020

are as follows:

For the twelve months ending

2 unchanged sentences

December 31, 2022

SNB Term Loan payable

SNB Term Loans payable

debt issuance costs

2 unchanged sentences

Total long-term portion of SNB term loan payable

Under the terms of the SNB Facility, both

the SNB revolving line of credit and the SNB term loan will bear an interest rate equal to 30-day LIBOR, (with a 1% floor), plus

The average interest rate charged during the period ended June 30, 2020 was 3.5%.

As of June 30, 2020, our debt to SNB in

the amount of $16,488,000 consisted of the SNB revolving line of credit note in the amount of $12,972,000 and the SNB term loan

in the amount of $3,516,000.

As of December 31, 2019, our debt to SNB in the amount of $16,343,000 consisted of the SNB revolving

line of credit note in the amount of $12,543,000 and the SNB term loan in the amount of $3,800,000.

Interest expense related to the SNB Facility

amounted to approximately $154,000 for the three months ended June 30, 2020, and $274,000 for the six months ended June 30, 2020.

PNC Bank N.A.

the terms of the SNB Facility, both the SNB revolving line of credit and the SNB term loan will bear an interest rate equal to

30-day LIBOR (with a 1% floor) plus 2.5%.

The average interest rate charged during the period ended September 30, 2020 was 3.5%.

of September 30, 2020, our debt to SNB in the amount of $19,269,000 consisted of the SNB revolving line of credit note in the

amount of $15,883,000 and the SNB term loan in the amount of $3,386,000.

As of December 31, 2019, our debt to SNB in the amount

of $16,343,000 consisted of the SNB revolving line of credit note in the amount of $12,543,000 and the SNB term loan in the amount

of $3,800,000.

expense related to the SNB Facility amounted to approximately $147,000 for the three months ended September 30, 2020, and $420,000

for the nine months ended September 30, 2020.

(“PNC”)

The Company previously maintained the PNC

Under the PNC Facility, substantially all of the Company’s assets were pledged as collateral.

The Company previously maintained a financing

facility with PNC.

Under such facility, substantially all of the Company’s assets were pledged as collateral.

The PNC Facility

2 unchanged sentences

Interest expense related to the PNC Facility

amounted to approximately $333,000 for the three months ended June 30, 2019 and $563,000 for the six months ended June 30, 2019.

amounted to approximately $391,000 for the three months ended September 30, 2019 and $954,000 for the nine months ended September

On December 31, 2019, both the PNC revolving

line of credit and PNC term loan were paid in full and all assets that were previously pledged as collateral were released.

Loan Payable –

The Company is committed to a loan for

manufacturing equipment purchased during 2019.

The loan payable obligation totaled $242,000 and $385,000 as of June 30, 2020 and

December 31, 2019, respectively.

The loan bears interest at 3% per annum.

The future minimum loan payments are as

Loans Payable –

Financed Assets

The Company financed the 2019 acquisition

of manufacturing equipment with a third-party loan.

The loan obligation totaled $170,000 and $385,000 as of September 30, 2020

and December 31, 2019, respectively and bears interest at 3% per annum.

The Company has also borrowed to purchase

a delivery vehicle in July 2020.

The loan obligation totaled $50,000 and $0 as of September 30, 2020 and December 31, 2019, respectively.

The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.

maturities of these loans are as follows:

For the twelve months ending

1 unchanged sentence

December 31, 2021

Total Loan Payable - equipment

Current portion of loan payable - equipment

Long-term portion of loan payable - equipment

Related Party Notes Payable

Taglich Brothers, Inc.

is a corporation

co-founded by two directors of the Company, Michael and Robert Taglich.

In addition, a third director of the Company is a vice

president of Taglich Brothers, Inc.

Taglich Brothers, Inc.

has acted as placement

agent for various debt and equity financing transactions and has received cash and equity compensation for their services.

On January 15, 2019, the Company issued

its 7% senior subordinated convertible promissory notes due December 31, 2020, each in the principal amount of $1,000,000 (together,

the “7% Notes”), to Michael Taglich and Robert Taglich, each for a purchase price of $1,000,000.

The 7% Notes bear

interest at the rate of 7% per annum, are convertible into shares of the Company’s common stock at a conversion price of

$0.93 per share, subject to the anti-dilution adjustments set forth in the 7% Notes and are subordinate to the Company’s

indebtedness under the SNB Facility.

In connection with the 7% Notes, the Company

paid Taglich Brothers, Inc.

a fee of $80,000 (4% of the purchase price of the 7% Notes), paid in the form of a promissory note

having terms similar to the 7% Notes.

On June 26, 2019, the Company was advanced $250,000 from each of Michael and Robert Taglich.

These notes bear interest at a rate of 12% per annum.

In connection with these notes, the Company issued 37,500 shares of stock

to each of Michael and Robert Taglich.

December 31, 2022

December 31, 2023

December 31, 2024

Loans Payable - financed assets

Current portion

Long-term portion

Party Notes Payable

Brothers, Inc.

is a corporation co-founded by two directors of the Company, Michael and Robert Taglich.

In addition, a third director

of the Company is a vice president of Taglich Brothers, Inc.

Brothers, Inc.

has acted as placement agent for various debt and equity financing transactions and has received cash and equity

compensation for their services.

January 15, 2019, the Company issued its 7% senior subordinated convertible promissory notes due December 31, 2020, each in the

principal amount of $1,000,000 (together, the “7% Notes”), to Michael Taglich and Robert Taglich, each for a purchase

price of $1,000,000.

The 7% Notes bear interest at the rate of 7% per annum, are convertible into shares of the Company’s

common stock at a conversion price of $0.93 per share, subject to the anti-dilution adjustments set forth in the 7% Notes and

are subordinate to the Company’s indebtedness under the SNB Facility.

connection with the 7% Notes, the Company paid Taglich Brothers, Inc.

a fee of $80,000 (4% of the purchase price of the 7% Notes),

paid in the form of a promissory note having terms similar to the 7% Notes.

June 26, 2019, the Company was advanced $250,000 from each of Michael and Robert Taglich.

These notes bear interest at a rate

of 12% per annum.

In connection with these notes, the Company issued 37,500 shares of stock to each of Michael and Robert Taglich.

The maturity date, of these notes, was June 30, 2020, but was extended to December 31, 2020.

On October 21, 2019, the Company was advanced

$1,000,000 from Michael Taglich.

October 21, 2019, the Company was advanced $1,000,000 from Michael Taglich.

This advance was repaid on January 2, 2020.

The interest rate on this advance was 12% per annum.

Private Placement of Subordinated Notes due May 31, 2019,

together with Shares of Common Stock

On March 29, 2018 and April 4, 2018, Michael

Taglich and Robert Taglich advanced $1,000,000 and $100,000, respectively, to the Company for use as working capital.

subsequently issued its Subordinated Notes originally due May 31, 2019 to Michael Taglich and Robert Taglich, together with shares

of common stock, in the financing described below, to evidence its obligation to repay the foregoing advances.

In May 2018, the Company issued $1,200,000

of Subordinated Notes due May 31, 2019 (the “2019 Notes”), together with a total of 214,762 shares of common stock

to Michael Taglich, Robert Taglich and another accredited investor.

As part of the financing, the Company issued to Michael Taglich

$1,000,000 principal amount of 2019 Notes and 178,571 shares of common stock for a purchase price of $1,000,000 and to Robert Taglich

$100,000 principal amount of 2019 Notes and 17,857 shares of common stock.

The Company issued and sold a 2019 Note in the principal

amount of $100,000, plus 18,334 shares of common stock to the other accredited investor for a purchase price of $100,000.

additional note was paid in full on January 2, 2020.

Interest on the 2019 Notes is payable on

the outstanding principal amount thereof at the rate of one percent (1%) per month, payable monthly commencing June 30, 2018.

the occurrence and continuation of a failure to pay accrued interest, interest shall accrue and be payable on such amount at the

rate of 1.25% per month;

provided that upon the occurrence and continuation of a failure to timely pay the principal amount of

the 2019 Note, interest shall accrue and be payable on such principal amount at the rate of 1.25% per month and shall no longer

be payable on interest accrued but unpaid.

The 2019 Notes are subordinate to the Company’s obligations to SNB.

Taglich Brothers acted as placement agent

for the offering and received a commission in the aggregate amount of 4% of the amount invested which was paid in kind.

During the second quarter of 2019, the

maturity date of the 2019 Notes was extended to June 30, 2020.

The interest rate of the notes remains at 12% per annum.

In connection

with the extension, 180,000 shares of common stock were issued on a pro-rata basis to each of the note holders, including 150,000

shares to Michael Taglich and 15,000 shares to Robert Taglich at $1.01 per share or $182,000.

The costs have been recorded as a

debt discount, and are being accreted over the revised term.

In connection with the SNB Loan facility, Michael and Robert Taglich

agreed to extend the maturity date of the 2019 Notes to December 31, 2020.

Private Placements of 8% Subordinated

Convertible Notes

From November 23, 2016 through March 21,

2017, the Company received gross proceeds of $4,775,000, of which $1,950,000 were received from Robert and Michael Taglich, from

the sale of an equal principal amount of our 8% Subordinated Convertible Notes (the “8% Notes”), together with warrants

to purchase a total of 383,080 shares of our common stock, in private placement transactions with accredited investors (the “8%

Note Offerings”).

In connection with the offering of the 8% Notes, the Company issued 8% Notes in the aggregate principal

amount of $382,000 to Taglich Brothers, Inc., placement agent for the 8% Note Offerings, in lieu of payment of cash compensation

for sales commissions, together with warrants to purchase a total of 180,977 shares of our common stock.

Payment of the principal

and accrued interest on the 8% Notes are junior and subordinate in right of payment to our indebtedness under the SNB Facility.

Interest on the 8% Notes is payable on

the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in cash, or

at our option, in additional 8% Notes, provided that if accrued interest payable on $1,269,000 principal amount of the 8% Notes

issued in December 2016 is paid in additional 8% Notes, interest for that quarterly interest payment shall be calculated at the

rate of 12% per annum.

Upon the occurrence and continuation of an event of default, interest shall accrue at the rate of 12% per

Related party advances and notes payable,

net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled $5,992,000 and $6,862,000, as of June

30, 2020 and December 31, 2019, respectively.

Unamortized debt discounts related to these notes amounted to $76,000 and $226,000

as of June 30, 2020 and December 31, 2019, respectively.

Interest incurred on these related party notes amounted to approximately

$125,000 and $362,000 for the three months ended June 30, 2020 and 2019, respectively, and $253,000 and $475,000 for the six months

ended June 30, 2020 and 2019 respectively.

Amortization of debt discount incurred on these related party notes amounted to approximately

$77,000 and $101,000 for the three months ended June 30, 2020 and 2019, respectively and $151,000 and $231,000 for the six months

ended June 30, 2020 and 2019, respectively.

The amortization of the debt discount is included in interest and financing costs in

the Condensed Consolidated Statement of Operations.

All related party notes are due on December

31, 2020 and are subordinated to the SNB Facility.

rate on this advance was 12% per annum.

Placement of Subordinated Notes due May 31, 2019, together with Shares of Common Stock

March 29, 2018 and April 4, 2018, Michael Taglich and Robert Taglich advanced $1,000,000 and $100,000, respectively, to the Company

for use as working capital.

The Company subsequently issued its Subordinated Notes originally due May 31, 2019 to Michael Taglich

and Robert Taglich, together with shares of common stock, in the financing described below, to evidence its obligation to repay

the foregoing advances.

May 2018, the Company issued $1,200,000 of Subordinated Notes due May 31, 2019 (the “2019 Notes”), together with a

total of 214,762 shares of common stock to Michael Taglich, Robert Taglich and another accredited investor.

As part of the financing,

the Company issued to Michael Taglich $1,000,000 principal amount of 2019 Notes and 178,571 shares of common stock for a purchase

price of $1,000,000 and to Robert Taglich $100,000 principal amount of 2019 Notes and 17,857 shares of common stock.

issued and sold a 2019 Note in the principal amount of $100,000, plus 18,334 shares of common stock to the other accredited investor

for a purchase price of $100,000.

This additional note was paid in full on January 2, 2020.

on the 2019 Notes is payable on the outstanding principal amount thereof at the rate of one percent (1%) per month, payable monthly

commencing June 30, 2018.

Upon the occurrence and continuation of a failure to pay accrued interest, interest shall accrue and

be payable on such amount at the rate of 1.25% per month;

provided that upon the occurrence and continuation of a failure to timely

pay the principal amount of the 2019 Note, interest shall accrue and be payable on such principal amount at the rate of 1.25%

per month and shall no longer be payable on interest accrued but unpaid.

The 2019 Notes are subordinate to the Company’s

obligations to SNB.

Brothers acted as placement agent for the offering and received a commission in the aggregate amount of 4% of the amount invested

which was paid in kind.

the second quarter of 2019, the maturity date of the 2019 Notes was extended to June 30, 2020.

The interest rate of the notes

remains at 12% per annum.

In connection with the extension, 180,000 shares of common stock were issued on a pro-rata basis to

each of the note holders, including 150,000 shares to Michael Taglich and 15,000 shares to Robert Taglich.

The shares were valued

at $1.01 per share or $182,000.

The costs have been recorded as a debt discount, and are being accreted over the revised term.

In connection with the SNB Facility, Michael and Robert Taglich agreed to extend the maturity date of the 2019 Notes to December

Placements of 8% Subordinated Convertible Notes

November 23, 2016 through March 21, 2017, the Company received gross proceeds of $4,775,000, of which $1,950,000 were received

from Robert and Michael Taglich, from the sale of an equal principal amount of its 8% Subordinated Convertible Notes (the “8%

Notes”), together with warrants to purchase a total of 383,080 shares of its common stock, in private placement transactions

with accredited investors (the “8% Note Offerings”).

In connection with the offering of the 8% Notes, the Company

issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc., placement agent for the 8% Note Offerings,

in lieu of payment of cash compensation for sales commissions, together with warrants to purchase a total of 180,977 shares of

common stock.

Payment of the principal and accrued interest on the 8% Notes are junior and subordinate in right of payment to

our indebtedness under the SNB Facility.

on the 8% Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing

February 28, 2017, in cash, or at the Company’s option, in additional 8% Notes, provided that if accrued interest payable

on $1,269,000 principal amount of the 8% Notes issued in December 2016 is paid in additional 8% Notes, interest for that quarterly

interest payment shall be calculated at the rate of 12% per annum.

Upon the occurrence and continuation of an event of default,

interest shall accrue at the rate of 12% per annum.

party advances and notes payable, net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled

$6,018,000 and $6,862,000, as of September 30, 2020 and December 31, 2019, respectively.

Unamortized debt discounts related to

these notes amounted to $38,000 and $226,000 as of September 30, 2020 and December 31, 2019, respectively.

Interest incurred on

these related party notes amounted to approximately $125,000 and $265,000 for the three months ended September 30, 2020 and 2019,

respectively, and $378,000 and $740,000 for the nine months ended September 30, 2020 and 2019 respectively.

Amortization of debt

discount incurred on these related party notes amounted to approximately $38,000 and $76,000 for the three months ended September

30, 2020 and 2019, respectively and $189,000 and $227,000 for the nine months ended September 30, 2020 and 2019, respectively.

The amortization of the debt discount is included in interest and financing costs in the Condensed Consolidated Statement of Operations.

the terms of the SNB Facility, the maturity date of all related party notes has been extended to July 1, 2023 and are subordinated

to the SNB Facility.

There are no principal payments due on these notes until such time.

Per the terms of the SNB Facility, prior to September 30, 2020,

with respect to any and all related party notes payable and Subordinated Notes, (i) the maturity date shall be extended to a date

that is more than six months after December, 30, 2022 or (ii) shall be converted to common stock of the Company.

Convertible Notes Payable –

In January 2020, the third party holders

of $805,000 principal of the 8% Notes with accrued interest thereon of $80,000 converted their notes into approximately 590,243

shares of common stock at a per share price of $1.50.

8% Notes payable to third parties totaled

$1,440,000 and $2,338,000, as of June 30, 2020 and December 31, 2019, respectively.

Interest incurred on the 8% Notes amounted

to approximately $38,000 and $168,000 for the three months ended June 30, 2020 and 2019, respectively, and $80,000 and $256,000

for the six months ended June 30, 2020 and 2019, respectively.

Unamortized debt discounts related to these notes amounted to $0

and $7,000 as of June 30, 2020 and December 31, 2019, respectively.

Amortization of debt discount on the 8% Notes amounted to approximately

$3,000 and $5,000 for the three months ended June 30, 2020 and 2019, respectively, and $7,000 and $128,000 for the six months ended

June 30, 2020 and 2019, respectively.

These costs are included in interest and financing costs in the Condensed Consolidated Statement

of Operations.

All convertible notes with third parties

are due on December 31, 2020 and are subordinated to the SNB Facility.

There are no principal payments due on these notes until

Per the terms of the SNB Facility, prior

to September 30, 2020, with respect to any and all of the convertible notes payable, (i) the maturity date shall be extended to

a date that is more than six months after December, 30, 2022 or (ii) shall be converted to common stock of the Company.

Notes Payable –

Third Parties

Notes payable to third parties totaled $1,440,000 and $2,338,000, as of September 30, 2020 and December 31, 2019, respectively.

Interest incurred on the 8% Notes amounted to approximately $38,000 and $63,000 for the three months ended September 30, 2020

and 2019, respectively, and $118,000 and $319,000 for the nine months ended September 30, 2020 and 2019, respectively.

debt discounts related to these notes amounted to $0 and $7,000 as of September 30, 2020 and December 31, 2019, respectively.

Amortization of debt discount on the 8% Notes amounted to approximately $0 and $3,000 for the three months ended September 30,

2020 and 2019, respectively, and $7,000 and $131,000 for the nine months ended September 30, 2020 and 2019, respectively.

costs are included in interest and financing costs in the Condensed Consolidated Statement of Operations.

convertible notes with third parties are due on December 31, 2020 and are subordinated to the SNB Facility.

There are no principal

payments due on these notes until such time.

the terms of the SNB Facility, as amended, prior to November 30, 2020, the maturity date of each third party convertible note

payable must be extended to a date that is more than six months after December, 30, 2022 or converted into common stock of the

On November 3, 2020 third party holders

of $1,225,000 principal of the 8% Notes with accrued interest thereon of $210,282 converted their notes into 1,063,272 shares of

common stock at a per share price of $1.35.

In May 2020, AIM, NTW and Sterling entered

into SBA Loans with SNB as the lender in an aggregate principal amount of $2,414,000.

Each SBA Loan is evidenced by a Note.

to the terms of the Note, the SBA Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months

of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the SBA.

At least 60% of the proceeds

of each Loan must be used for payroll and payroll-related costs, in accordance with the applicable provisions of the federal statute

authorizing the loan program administered by the SBA and the rules promulgated thereunder (the “Loan Program”).

Company may apply to SNB for forgiveness of a portion of the SBA Loan in accordance the applicable provisions of the federal statute

authorizing the Loan Program.

Each Note provides for customary events of default including, among other things, cross-defaults

on any other loan with SNB.

into SBA Loans with SNB as the lender in an aggregate principal amount of $2,414,000 all of which remains outstanding.

Loan is evidenced by a Note.

Subject to the terms of the Note, the SBA Loan bears interest at a fixed rate of one percent (1%)

per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by

At least 60% of the proceeds of each Loan must be used for payroll and payroll-related costs, in accordance with the applicable

provisions of the federal statute authorizing the loan program administered by the SBA and the rules promulgated thereunder (the

“Loan Program”).

Each Note provides for customary events of default including, among other things, cross-defaults on

any other loan with SNB.

Each SBA Loan may be accelerated upon the occurrence of an event of default.

As of June 30, 2020, SBA

Loans totaled $2,414,000.

The future minimum loan payments are as

The Company has elected to treat the SBA

Loans as debt under FASB ASC 470.

As such, the Company will derecognize the liability only when the loans are forgiven in whole

or in part and the Company is legally released or repays the loans.

The Company used the $2,414,000 of loans

for allowed payroll and benefits expenses and expects the majority of the loans, if not all, will be forgiven.

The Company has

applied to the SNB for forgiveness and SNB has approved the application and submitted it to the SBA for final approval in accordance

with the applicable provisions of the federal statute authorizing the Loan Program.

The SBA will, subject to any SBA review of

the loan or loan application, remit the appropriate forgiveness amount to SNB, plus any interest accrued through the date of payment,

not later than 90 days after the lender issues its decision to the SBA.

No assurance can be given that the Company will obtain

forgiveness of the loan in whole or in part.

In addition, as a borrower that received over $2 million, the Company expects to be

subject to an audit to review our eligibility under the Loan Program.

The timing and scope of the audit remains unclear and as

a result, the Company is not able to forecast when it can expect a decision on loan forgiveness.

The Company does not expect the

audit will impact its eligibility for forgiveness under the program.

If the loans are not ultimately forgiven,

the future minimum loan payments are as follows:

For the twelve months ending

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financial statements reporting date.

Company recognized $119,000 and $0 of non-cash income for the three months ended June 30, 2020 and 2019, respectively, and $211,000

and $109,000 of non-cash income for the six months ended June 30, 2020 and 2019, respectively, reflected in “other income,

Company recognized $91,000 and $89,000 of non-cash income for the three months ended September 30, 2020 and 2019, respectively,

and $302,000 and $198,000 of non-cash income for the nine months ended September 30, 2020 and 2019, respectively, reflected in

“Other income, net”

on the condensed consolidated statement of operations.

Additionally, the Company recorded $36,000 and $0 of related

non-cash interest expense related to the Purchase Agreement, for the three months ended June 30, 2020 and 2019, respectively,

and $64,000 and $33,000 for the six months ended June 30, 2020 and 2019, respectively.

table below shows the activity within the liability account for the six months ended June 30, 2020:

Additionally, the Company recorded $26,000

and $27,000 of related non-cash interest expense related to the Purchase Agreement, for the three months ended September 30, 2020

and 2019, respectively, and $90,000 and $60,000 for the nine months ended September 30, 2020 and 2019, respectively.

table below shows the activity within the liability account for the nine months ended September 30, 2020:

Liabilities related to sale of future proceeds from disposition of subsidiaries - as of December 31, 2019

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Non-Cash interest expense recognized

Liabilities related to sale of future proceeds from disposition of subsidiary - as of June 30, 2020

Liabilities related to sale of future proceeds from disposition of subsidiary - as of September 30, 2020

unamortized transaction costs

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Sale of Securities

In January 2020, the Company issued and sold

419,597 shares of its common stock for gross proceeds of $984,000 pursuant to our Form S-3 filed on October 10, 2019 as updated

on January 15, 2020.

January 2020, the Company issued and sold 419,597 shares of its common stock for gross proceeds of $984,000 pursuant to a Form

S-3 filed on October 10, 2019 as updated on January 15, 2020.

Costs of the sale amounted to $145,000.

Company issued 47,126 and 0 shares of common stock in lieu of cash payments for director fees for the three months ended June

30, 2020 and 2019, respectively, and 90,897 and 147,830 for the six months ended June 30, 2020 and 2019, respectively.

Company issued 41,915 and 57,433 shares of common stock in lieu of cash payments for director fees for the three months ended

September 30, 2020 and 2019, respectively, and 132,812 and 205,263 for the nine months ended September 30, 2020 and 2019, respectively.

CONTINGENCIES

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it cannot offer an opinion as to the probable outcome.

As of June 30, 2020, there has been no new developments.

October 1, 2020, the court issued an order which stated that “CPI must commence a special proceeding to obtain the relief”

sought by its Motion despite the fact that the stipulation of discontinuance entered into by CPI and the Company with respect

to the action to enforce the SPA commenced by CPI on July 5, 2018, provided that the court would retain jurisdiction over the

The court stated further that a special proceeding requires pleadings consisting of, among others, a petition which complies

with the requirements for a complaint in an action and an answer.

Since CPI brought the action in the form of a motion and not

a complaint, neither party complied with the pleading requirements which the court stated is required.

Consequently, the court

denied CPI’s Motion and denied the Company’s cross motion to vacate BDO’s determination and conduct discovery.

court’s decision does not resolve the Company’s dispute with CPI.

CPI’s Motion was denied for procedural issues

and the court did not consider the substance of the dispute.

CPI, among other options, may choose to appeal this decision or commence

a new proceeding.

In either event, the Company intends to contest vigorously any claim CPI may make based on the BDO report.

Pharmacal Corp.

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claims and have recently submitted a motion in opposition to its motion for summary judgement.

As of June 30, 2020, it is not

possible to estimate if a loss will be incurred, as such there has been no accrual.

As of September 30, 2020, it is

not possible to estimate if a loss will be incurred, as such there has been no accrual.

time to time we also may be engaged in various lawsuits and legal proceedings in the ordinary course of our business.

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or has a material interest averse to our interest.

Company recorded no income tax expense for the three and six months ended June 30, 2020 and 2019 because the estimated annual

effective tax rate was zero.

In determining the estimated annual effective income tax rate, the Company analyzes various factors,

including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated,

Company recorded no federal income tax expense for the three and nine months ended September 30, 2020 and 2019 because the estimated

annual effective tax rate was zero.

In determining the estimated annual effective income tax rate, the Company analyzes various

factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated,

the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available

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not believe it has a material impact at this time.

Company recorded no other federal income tax benefit for both of the three and six months ended June 30, 2020 and 2019.

of June 30, 2020, and December 31, 2019, the Company provided a full valuation allowance against its net deferred tax assets since

the Company believes it is more likely than not that its deferred tax assets will not be realized.

Company recorded no other federal income tax benefit for both of the three and nine months ended September 30, 2020 and 2019.

of September 30, 2020, and December 31, 2019, the Company provided a full valuation allowance against its net deferred tax assets

since the Company believes it is more likely than not that its deferred tax assets will not be realized.

SEGMENT REPORTING

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areas and major customers.

Company currently divides its operations into two operating segments:

Complex Machining, which consists of AIM and NTW;

Company divides its operations into two operating segments:

Complex Machining which consists of AIM and NTW and Turbine

Engine Components which consists of Sterling.

Along with its operating subsidiaries, the Company reports the results of its corporate

division as an independent segment.

reporting purposes, EPC and ECC have been classified as discontinued operations for the three and six months ending June 30, 2019.

Along with the Company’s operating subsidiaries, the Company reports the results

of its corporate division as an independent segment.

reporting purposes, EPC and ECC have been classified as discontinued operations for the three and nine months ending September

accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies.

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We evaluate performance based on revenue, gross profit contribution and assets employed.

information about the Company’s reporting segments for the three and six months ended June 30, 2020 and 2019 are as follows:

information about the Company’s operating segments for the three and nine months ended September 30, 2020 and 2019 are as

For the Three Months Ended

For the Six Months Ended

September 30,

For the Nine Months Ended

September 30,

COMPLEX MACHINING

Pre Tax (Loss) Income from continuing operations

Pre Tax Income from continuing operations

TURBINE ENGINE COMPONENTS

Gross (Loss) Profit

Gross Profit (Loss)

Pre Tax Loss from continuing operations

Pretax net loss from continuing operations

Benefit from Income Taxes

Income from Discontinued Operations, net of taxes

Pretax net income (loss) from continuing operations

Provision for (benefit from) Income Taxes

Loss from Discontinued Operations, net of taxes

Net Income (Loss)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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financial statements contained in this report as well as the discussion below principally reflect the status of our business and

the results of our operations as of June 30, 2020.

are an aerospace company operating primarily in the defense industry.

Our Complex Machining segment manufactures structural parts

and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants,

and other components.

Our Turbine Engine Components segment makes components and provides services for jet engines and ground-power

Our products are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky

UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter

aircraft, Boeing 777 and Airbus 380 commercial airliners.

Our Turbine Engine segment makes components for jet engines that are

used on the USAF F-15 and F-16, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground-power turbine

applications.

Industries Machining, Corp.

(“AIM”) became a public company in 2005.

In response to recent operating losses and their

impact on our working capital, we have repositioned our business through the sale and liquidation of certain subsidiaries we acquired

since becoming a public company.

We also consolidated our headquarters and the operations of our subsidiaries, AIM and Nassau

Tool Works, Inc.

(“NTW”), at our primary location in Bay Shore, New York, allowing us to re-focus our operations on

our core competencies.

In March 2019 we closed our subsidiaries Eur-Pac Corporation (“EPC”) and Electronic Connection

Corporation (“ECC”).

As a result of our restructuring, Complex Machining and Turbine Engine Components constitute

all of our operations.

addition to repositioning our business to obtain profitability and positive cash flow, we remain resolute on meeting customers’

needs and continue to align production schedules to meet the needs of customers.

We believe that an unyielding focus on our customers

will allow us to execute on our existing backlog in a timely fashion and take on additional commitments.

We are pleased with our

progress and the positive responses received from our customers.

the results of our operations as of September 30, 2020.

Air Industries Machining,

(“AIM”) became a public company in 2005 and we are an aerospace company operating primarily in the defense industry.

Our Complex Machining segment manufactures structural parts and assemblies that focus on flight safety, including landing gear,

arresting gear, engine mounts, flight controls, throttle quadrants, and other components.

Our Turbine Engine Components segment

makes components and provides services for jet engines and ground-power turbines.

Our products are currently deployed on a wide

range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike

Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter aircraft, Boeing 777 and Airbus 380 commercial airliners.

Our Turbine Engine segment makes components for jet engines that are used on the USAF F-15 and F-16, the Airbus A-330 and A-380,

and the Boeing 777, in addition to a number of ground-power turbine applications.

aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas

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complex and complete assemblies for our customers.

We are currently focused

on positioning our business to obtain profitability, achieve positive cash flow and we remain resolute on meeting customers’

We believe that an unyielding focus on our customers will allow us to execute on our existing backlog in a timely fashion.

In fiscal 2020, in order to take advantage of the long-term growth opportunities we see in our markets, we made significant

capital investments in new equipment.

Additionally, we expanded our operations and manufacturing cells located in our Connecticut

We believe these investments will increase the volume and efficiency of production, increase the size of product we can

make and allow us to offer additional services to our customers.

We are pleased with the positive responses received from our customers

ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill

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our operations.

The measures adopted by

various governments and agencies, as well as the decision by many individuals and businesses to voluntarily shut down or self-quarantine,

have and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.

measures adopted by various governments and agencies, as well as the decision by many individuals and businesses to voluntarily

shut down or self-quarantine, have and are expected to continue to have serious adverse impacts on domestic and foreign economies

of uncertain severity and duration.

The effectiveness of economic stabilization efforts adopted by governments is uncertain.

The likely overall economic impact of

the COVID-19 pandemic will be highly negative to the general economy and has been particularly negative on the commercial travel

industry and commercial aerospace industries.

In accordance with the

Department of Defense guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce,

likely overall economic impact of the COVID-19 pandemic will be highly negative to the general economy and has been particularly

negative on the commercial travel industry and commercial aerospace industries.

In accordance with

the Department of Defense guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce,

our facilities have continued to operate in support of essential products and services required to meet national security commitments

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military, however, facility closures or work slowdowns or temporary stoppages could occur.

Although our facilities are open, we have been unable to operate at full capacity or achieve high levels of productivity due

to the implementation of enhanced safety procedures, increased employee absenteeism and intermittent closings of other businesses

that supply goods or services to us.

Our Company, employees, suppliers and customers, and our global community are facing tremendous

challenges and we cannot predict how this dynamic situation will evolve or the impact it will have.

have implemented procedures to promote employee safety including more frequent and enhanced cleaning and adjusted schedules and

work-flows to support physical distancing.

Although our facilities are open, we were unable to operate at full capacity or achieve high levels of productivity particularly

in the second calendar quarter due to the implementation of enhanced safety procedures, increased employee absenteeism and intermittent

closings of other businesses that supply goods or services to us.

By September operating conditions were close to normal.

Company, employees, suppliers and customers, and our global community are facing tremendous challenges and we cannot predict how

this dynamic situation will evolve or the impact it will have.

We have implemented

procedures to promote employee safety including more frequent and enhanced cleaning and adjusted schedules and work-flows to support

physical distancing.

These actions have resulted in increased operating costs.

In addition, a number of

our suppliers and customers have intermittently suspended or otherwise reduced their operations, and we are experiencing some

supply chain challenges.

Suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of

During the three months ended June 30, 2020 we had large numbers of employees working remotely.

In June and July, the

number of employees working remotely began to decline.

March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law.

Act provides aid to small businesses through programs administered by the Small Business Administration (“SBA”).

CARES Act, among other things, includes provisions relating to payroll tax credits and deferrals, net operating loss carryback

periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property.

The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible

for a loan to fund payroll expenses, rent, and related costs.

Funds made available to us through these programs have supplemented

the cash available to support our operations as more specifically discussed below under “Liquidity and Capital Resources.”

In addition, a number of our suppliers and customers

have intermittently suspended or otherwise reduced their operations, and we are experiencing some supply chain challenges.

are also experiencing liquidity pressures and disruptions to their operations as a result of COVID-19.

During the three months

ended June 30, 2020 we had large numbers of employees working remotely.

By September 30, 2020, essentially all employees have returned

to work at our facilities.

follow Financial Accounting Standards Board (“FASB”) ASC 280, “Segment Reporting”

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ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.

currently divide our operations into two operating segments:

We divide our operations

into two operating segments:

Complex Machining and Turbine Engine Components.

Along with our operating

subsidiaries, we report the results of our corporate office as an independent segment.

reporting purposes, EPC and ECC have been classified as discontinued operations for the three and six months ending June 30, 2019.

Along with our operating subsidiaries, we report

the results of our corporate office as an independent segment.

EPC and ECC were closed

on March 31, 2019, and are classified as discontinued operations for the three and nine months ending September 30, 2019.

accounting policies of our segments are the same as those described in the Summary of Significant Accounting Policies.

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OF OPERATIONS

operations of EPC and its subsidiary ECC were closed on March 31, 2019.

For purposes of the following discussion of our selected

financial information and operating results, we have presented our financial information based on our continuing operations unless

otherwise noted.

For purposes of the

following discussion of our selected financial information and operating results, we have presented our financial information based

on our continuing operations unless otherwise noted.

Financial Information:

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Cost of sales

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Other income, net

Benefit from income taxes

Loss from continuing operations

Provision for (benefit from) income taxes

Income (Loss) from continuing operations

$ (1,003,000 )

$ (1,332,000 )

September 30,

Cash and cash equivalents

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For the Three Months Ended

For the Six Months Ended

September 30,

For the Nine Months Ended

September 30,

COMPLEX MACHINING

Pre Tax (Loss) Income from continuing operations

Pre Tax Income from continuing operations

TURBINE ENGINE COMPONENTS

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Pre Tax Loss from continuing operations

Pretax net loss from continuing operations

Benefit from Income Taxes

Income from Discontinued Operations, net of taxes

of Operations for the three months ended June 30, 2020

net sales for the three months ended June 30, 2020 were $8,494,000, a decrease of $4,874,000, or 36.5%, compared with $13,368,000

for the three months ended June 30, 2019.

Pretax net income (loss) from continuing operations

Provision for (benefit from) Income Taxes

Loss from Discontinued Operations, net of taxes

Net Income (Loss)

of Operations for the three months ended September 30, 2020

Consolidated net sales

for the three months ended September 30, 2020 were $13,662,000, a decrease of $335,000, or 2.4%, compared with $13,997,000 for

the three months ended September 30, 2019.

Net sales of our Complex Machining segment were $12,423,000 in the three months ended

June 30, 2020, a decrease of $4,393,000, or 37.5%, from $11,701,000 in the three months ended June 30, 2019.

our Turbine Engine Components segment for the three months ended June 30, 2020 were $1,186,000, a decrease of $481,000, or 28.9%,

compared with $1,667,000 for the three months ended June 30, 2019.

These decreases were directly attributable to the impact of

indicated in the table below, two customers represented 71.9% and three customers represented 75.6% of total sales for the three

months ended June 30, 2020 and June 30, 2019, respectively.

September 30, 2020, an increase of $140,000, or 1.1%, from $12,283,000 in the three months ended September 30, 2019.

in our Turbine Engine Components segment for the three months ended September 30, 2020 were $1,239,000, a decrease of $475,000,

or 27.7%, compared with $1,714,000 for the three months ended September 30, 2019.

The decrease at our Turbine Engine Components

segment was directly attributable to the negative business impacts caused by COVID-19.

indicated in the table below, three customers represented 70.6% and two customers represented 61.7% of total sales for the three

months ended September 30, 2020 and September 30, 2019, respectively.

Percentage of Sales

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Goodrich Landing Gear Systems

Customer was less than 10% of total net sales for the three months ended June 30, 2020.

gross profit from operations for the three months ended June 30, 2020 was $614,000, a decrease of $1,577,000, or 72.0%, as compared

to gross profit of $2,191,000 for the three months ended June 30, 2019.

Consolidated gross profit as a percentage of sales was

7.2% and 16.4% for the three months ended June 30, 2020 and 2019, respectively.

These decreases were directly attributable to

the impact of COVID-19.

United States Government

was less than 10% of sales for the three months ended September 30, 2019.

Consolidated gross

profit from operations for the three months ended September 30, 2020 was $1,656,000, a decrease of $1,307,000, or 44.1%, as compared

to gross profit of $2,963,000 for the three months ended September 30, 2019.

Consolidated gross profit as a percentage of sales

was 12.1% and 21.2% for the three months ended September 30, 2020 and 2019, respectively.

These decreases were directly attributable

to the negative business impact of COVID-19 which resulted in significant operating inefficiencies and increased safety related

and Financing Costs

and financing costs for the three months ended June 30, 2020 were $428,000 a decrease of $564,000 or 56.9% compared to $992,000

for the three months ended June 30, 2019.

and financing costs for the three months ended September 30, 2020 were $359,000 a decrease of $476,000 or 57.0% compared to $835,000

for the three months ended September 30, 2019.

This decrease was due to lower interest rates and finance costs under the Company’s

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(“PNC”) as of December 31, 2019.

operating expenses for the three months ended June 30, 2020 totaled $1,906,000 and decreased by $66,000 or 3.3% compared to $1,972,000

for the three months ended June 30, 2019.

loss for the three months ended June 30, 2020 was $1,584,000, compared to a net loss of $735,000 for the three months ended June

The increase in net loss was largely attributable to the impact of COVID-19 as discussed above.

of Operations for the six months ended June 30, 2020

net sales for the six months ended June 30, 2020 were $21,941,000, a decrease of $5,305,000, or 19.5%, compared with $27,246,000

for the six months ended June 30, 2019.

Net sales of our Complex Machining segment were $19,372,000 in the six months ended June

30, 2020, a decrease of $4,747,000, or 19.7%, from $24,119,000 in the six months ended June 30, 2019.

Net sales in our Turbine

Engine Components segment were $2,569,000 for the six months ended June 30, 2020, a decrease of $558,000, or 17.8% compared with

$3,127,000 for the six months ended June 30, 2019.

These decreases were directly attributable to the impact of COVID-19.

indicated in the table below, two customers represented 69.3% and three customers represented 74.7% of total sales for the six

months ended June 30, 2020 and June 30, 2019, respectively.

operating expenses for the three months ended September 30, 2020 totaled $1,896,000 and increased by $88,000 or 4.9% compared

to $1,808,000 for the three months ended September 30, 2019.

(Loss) Income

loss for the three months ended September 30, 2020 was $477,000, compared to a net income of $187,000 for the three months ended

September 30, 2019.

The net loss was largely attributable to the impact of COVID-19 as discussed above.

Losses for the three months

ended September 30, 2020 from continuing operations were $477,000 compared to income of $398,000 from continuing operations for

the three months ended September 30, 2019.

Our net income for the three months ended September 30, 2019 includes a net loss from

the discontinued operations of EPC and ECC in the amount of $211,000.

of Operations for the nine months ended September 30, 2020

Consolidated net sales

for the nine months ended September 30, 2020 were $35,603,000, a decrease of $5,640,000, or 13.7%, compared with $41,243,000 for

the nine months ended September 30, 2019.

Net sales of our Complex Machining segment were $31,795,000 in the nine months ended

September 30, 2020, a decrease of $4,607,000, or 12.7%, from $36,402,000 in the nine months ended September 30, 2019.

sales in our Turbine Engine Components segment were $3,808,000 for the nine months ended September 30, 2020, a decrease of $1,033,000,

or 21.3% compared with $4,841,000 for the nine months ended September 30, 2019.

These decreases were directly attributable to the

negative business impacts caused by COVID-19.

indicated in the table below, three customers represented 74.2% and 73.4% of total sales for the nine months ended September 30,

2020 and September 30, 2019, respectively.

Percentage of Sales

1 unchanged sentence

Goodrich Landing Gear Systems

Customer was less than 10% of total net sales for the six months ended June 30, 2020.

gross profit from operations for the six months ended June 30, 2020 was $2,795,000, a decrease of $1,670,000, or 37.4%, as compared

to gross profit of $4,465,000 for the six months ended June 30, 2019.

United States Government

was less than 10% of sales for the nine months ended September 30, 2020 and 2019.

Consolidated gross

profit from operations for the nine months ended September 30, 2020 was $4,451,000, a decrease of $2,977,000, or 40.1%, as compared

to gross profit of 7,428,000 for the nine months ended September 30, 2019.

Consolidated gross profit as a percentage of sales was

and 16.4% for the six months ended June 30, 2020 and 2019, respectively.

These decreases were directly attributable to the impact

12.5% and 18.0% for the nine months ended September 30, 2020 and 2019, respectively.

These decreases were directly attributable

to the negative business impacts of COVID-19 which resulted in significant operating inefficiencies and increased safety related

and Financing Costs

and financing costs for the six months ended June 30, 2020 were $808,000 a decrease of $1,147,000 or 58.7% compared to $1,955,000

for the six months ended June 30, 2019.

This decrease was due to lower interest rates and finance costs under SNB Facility, which

replaced the PNC Facility as of December 31, 2019.

operating expenses for the six months ended June 30, 2020 totaled $4,168,000 and increased by $134,000 or 3.3% compared to $4,034,000

for the six months ended June 30, 2019.

loss for the six months ended June 30, 2020 was $526,000, compared to a net loss of $1,658,000 for the six months ended June 30,

2019, for the reasons discussed above.

Losses for the six months ended June 30, 2020 from continuing operations was $526,000 compared

to losses of $1,730,000 from continuing operations for the six months ended June 30, 2019.

Our net loss for the six months ended

June 30, 2019 includes a net gain from the discontinued operations of EPC and ECC in the amount of $72,000.

in net loss was largely attributable to the impact of COVID-19 as discussed above.

and financing costs for the nine months ended September 30, 2020 were $1,167,000 a decrease of $1,623,000 or 58.2% compared to

$2,790,000 for the nine months ended September 30, 2019.

This decrease was due to lower interest rates and finance costs under

SNB Facility, which replaced the PNC Facility as of December 31, 2019.

operating expenses for the nine months ended September 30, 2020 totaled $6,064,000 and increased by $222,000 or 3.8% compared

to $5,842,000 for the nine months ended September 30, 2019.

loss for the nine months ended September 30, 2020 was $1,003,000, compared to a net loss of $1,471,000 for the nine months ended

September 30, 2019, for the reasons discussed above.

Losses for the nine months ended September 30, 2020 from continuing operations

were $1,003,000 compared to losses of $1,332,000 from continuing operations for the nine months ended September 30, 2019.

net loss for the nine months ended September 30, 2019 includes a net loss from the discontinued operations of EPC and ECC in the

amount of $139,000.

AND CAPITAL RESOURCES

impacts related to COVID-19, including our actions and costs in response to the pandemic, were not material to our first quarter

2020 financial position, results of operations or cash flows.

Beginning in April 2020 the COVID–19 crisis resulted in a

reduction to revenue and operating margins in portions of our business.

This negative effect continued in May 2020 and to a somewhat

lesser extent in June 2020.

The decrease in revenue resulted from employee absenteeism, supplier disruption, changes in employee

productivity, and related program delays or challenges.

respect to the remainder of 2020, the negative impact COVID-19 may have on the broader global economy and the pace of the economic

recovery and the aerospace industry is unknown.

Given the unknown magnitude of the depth and duration of this crisis, we anticipate

a more challenging macroeconomic environment in the remainder of the year.

impact of COVID-19 on the commercial aerospace industry has been severe while the defense aerospace industry has not been as adversely

Beginning in April

2020 the COVID–19 crisis resulted in a reduction to revenue and operating margins in portions of our business.

This negative

effect continued in May 2020 and to a somewhat lesser extent in June 2020.

The decrease in revenue for the second quarter resulted

from employee absenteeism, supplier disruption, changes in employee productivity, and related program delays or challenges.

September 30, 2020, essentially all employees had returned to work at our facilities.

The challenges with our suppliers have largely

been ameliorated and their operations have substantially returned to normal.

With respect to the

remainder of 2020 and 2021, the negative impact COVID-19 may have on the broader global economy and the pace of the economic recovery

and the aerospace industry is unknown.

Given the unknown magnitude of the depth and duration of this crisis, we anticipate a more

challenging macroeconomic environment in the remainder of the year.

Although the impact

of COVID-19 on the commercial aerospace industry has been severe, the defense aerospace industry has not been as adversely impacted.

We continue to have a substantial backlog.

We believe that the contraction in commercial demand may result in orders

being shifted to suppliers who are in a position to maintain their operations despite the impact of COVID-19.

As previously announced,

we recently issued purchase orders for $2.5 million of machinery.

This equipment is expected to be delivered in September and

October and come on line shortly thereafter.

This new equipment will not only increase our production efficiency, it will also

increase the number of parts we can make allowing us to offer additional services to our customers.

We are currently in the process

of obtaining loans to cover the cost of this equipment.

Though there can be no assurance that such loans will be made available

to us, we have received indications of interest from a number of commercial lenders and believe that the payments made to satisfy

such loans will be more than absorbed by cost savings in production and new business.

The CARES Act and Significant Transactions Which Have Impacted

Our Liquidity

In May 2020, AIM, NTW and

Sterling (each a “Borrower”) entered into government subsidized loans with SNB in an aggregate principal amount of

$2.4 million (“SBA Loans”).

Subject to the terms of the note evidencing each loan (the “Notes”), each SBA

Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has an initial

term of two years, and is unsecured and guaranteed by the SBA.

At least 60% of the proceeds of each Loan must be used for payroll

and payroll-related costs, in accordance with the applicable provisions of the Federal statute authorizing the loan program administered

by the SBA and the rules promulgated thereunder (the “Loan Program”).

The Borrower may apply to SNB for forgiveness

of a portion of the SBA Loan in accordance the applicable provisions of the federal statute authorizing the Loan Program.

Note provides for customary events of default including, among other things, cross-defaults on any other loan with SNB.

Loan may be accelerated upon the occurrence of an event of default.

The foregoing summary is qualified in its entirety by reference

to the Notes, a copy of which were filed with our Form 10Q for the period ended March 31, 2020 on May 14, 2020 as Exhibits 10.1,

10.2 and 10.3 and are incorporated herein by reference.

We have elected to defer

the deposit and payment of the employer’s portion of Social Security taxes pursuant to Section 2302 of the CARES Act.

deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022.

As of June 30, 2020, we deferred

$199,000, which is included in Other Liability on the accompanying Condensed Consolidated Balance Sheet.

Pursuant to the CARES Act,

we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter of this year.

as discussed above we will defer the employer’s portion of social security taxes incurred between March 27, 2020 and December

31, 2020 and pay such taxes in two installments in 2021 and 2022, In addition to the support received through the CARES Act, the

We believe that the contraction in commercial demand may result in orders being shifted

to suppliers who are in a position to maintain their operations despite the impact of COVID-19.

We have made capital investments

in new machinery aggregating $2.5 million for four state-of-the-art machines.

One machine was delivered in September and is fully

operational, the balance of the machines are expected to be fully operational by December 31, 2020.

In connection with these capital

investments, we expanded our operations in Connecticut.

We believe these investments will increase the volume and efficiency of

production, increase the size of product we can make and allow us to offer additional services to our customers.

We are pleased

with the positive responses received to-date from our customers.

Although COVID-19

did negatively impact our liquidity, we took advantage of US government incentive programs to improve our liquidity as discussed

These actions should help mitigate COVID-19 related negative impacts to our operating cash flows for the remainder

Nevertheless, our cash flows from operations could be affected by various risks and uncertainties, including, but

not limited to the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A of this Quarterly Report.

1) Received Low Interest Loans from the SBA –

In May 2020, AIM, NTW and Sterling (each a “Borrower”) entered into government subsidized loans with SNB in an aggregate

principal amount of $2.4 million (“SBA Loans”).

Subject to the terms of the note evidencing each loan (the “Notes”),

each SBA Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has

an initial term of two years, and is unsecured and guaranteed by the SBA.

At least 60% of the proceeds of each Loan must be used

for payroll and payroll-related costs, in accordance with the applicable provisions of the Federal statute authorizing the loan

program administered by the SBA and the rules promulgated thereunder (the “Loan Program”).

2) Applied for and Expect Forgiveness of the SBA Loans

In accordance with U.S.

government regulations we have applied to SNB for forgiveness of each Loan in full and SNB

has approved the applications and submitted them to the SBA for final approval.

We expect our SBA Loans which approximate $2,414,000

as of September 30, 2020, to be ultimately forgiven.

3) Deferred Certain Tax Payments –

In accordance

with Section 2302 of the CARES Act, we have elected to defer the deposit and payment of the employer’s portion of Social

Security taxes.

These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022.

of September 30, 2020, we deferred $429,000, which is included in Deferred payroll tax liability –

CARES Act on the accompanying

Condensed Consolidated Balance Sheet.

a Net Operating Loss Refund –

the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter of this

In addition to the support received through the CARES Act, the

Department of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent

for costs incurred and worked performed on relevant contracts.

These actions should help mitigate COVID-19 related negative impacts

to our operating cash flows for the remainder of the year.

Nevertheless, our cash flows from operations could be affected by various

risks and uncertainties, including, but not limited to the effects of the COVID-19 pandemic and other risks detailed in Part II,

Item 1A of this Quarterly Report.

On December 31, 2019, we

entered into the SNB Facility with SNB expiring on December 30, 2022.

The SNB Facility provides for a $16,000,000 revolving loan

(“SNB revolving line of credit”) and a term loan (“SNB term loan”).

Proceeds from the SNB Facility

repaid our outstanding PNC Facility.

The formula to determine

the amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible

We have taken the following additional

significant steps to improve our liquidity:

1) Entered into a Lower Cost

Financing Facility –

On December 31, 2019, we entered into the SNB Facility which

expires on December 30, 2022.

The SNB Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”)

and a term loan (“SNB term loan”).

Proceeds from the SNB Facility repaid our outstanding PNC Facility.

The formula to determine the

amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible

receivables and inventory (as defined in the SNB Facility).

The repayment terms of

the SNB term loan provide for monthly principal installments in the amount of $45,238, payable on the first business day of each

month, beginning on February 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December

In addition, for so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number

for any fiscal year, beginning with the year ending December 31, 2020, we shall pay to SNB an amount equal to the lesser of (i)

twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan.

Such payment shall be made to Lender and applied to the outstanding principal balance of the term loan, on or prior to April 15

of the Fiscal Year immediately following such Fiscal Year.

Prior to the increase in the

SNB term loan described below, the SNB term loan provided for monthly principal installments in the amount of $45,238, payable

on the first business day of each month, beginning on February 1, 2020, with a final payment of any unpaid balance of principal

and interest payable on December 30, 2022.

In addition, for so long as the SNB term loan remains outstanding, if Excess Cash Flow

(as defined) is a positive number for any fiscal year, beginning with the year ending December 31, 2020, we shall pay to SNB an

amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding

principal balance of the term loan.

Such payment shall be made to Lender and applied to the outstanding principal balance of the

term loan, on or prior to April 15 of the Fiscal Year immediately following such Fiscal Year.

The terms of the SNB Facility

2 unchanged sentences

In addition, we are limited in the amount of Capital Expenditures

As of June 30, 2020 we were in compliance with all loan covenants.

The SNB Facility also restricts the amount of dividends

we may pay to our stockholders.

Substantially all of our assets are pledged as collateral under the SNB Facility.

As of June 30, 2020, our

debt to SNB in the amount of $16,488,000 consisted of the SNB revolving line of credit note in the amount of $12,972,000 and the

SNB term loan in the amount of 3,516,000.

The following table summarizes

our net cash flow from operating, investing and financing activities for the periods indicated below:

Six Months Ended

Cash provided by (used in)

The SNB Facility required us by September 30, 2020, to cause the holders of certain subordinated convertible

notes to either (i) extend the maturity date of such notes to a date more than six months after December 31, 2022, or (ii) convert

the notes into common stock of the Company.

As of September 30, 2020, we were not in compliance with all loan covenants.

In connection with the First Amendment, the bank waived all events of default identified as of and through September 30, 2020.

The SNB Facility also restricts the amount of dividends we may pay to our stockholders.

Substantially all of our assets are pledged

as collateral under the SNB Facility.

2) Increased Term Loan to modernize equipment

- On November 6, 2020, we entered into the First Amendment to Loan and Security Agreement, increasing the Term Loan to $5,685,000.

This allowed us to finance the acquisition of the new equipment at what we believe to be a reasonable interest rate.

The repayment terms of the term

loan were amended to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final

payment of any unpaid balance of principal and interest payable on December 30, 2022.

Additionally, the date by which certain

subordinated third party notes need to be extended by was changed from September 30, 2020 to November 30, 2020.

We have paid an

amendment fee of $20,000.

of September 30, 2020, our debt to SNB in the amount of $19,269,000 consisted of the SNB revolving line of credit note in the

amount of $15,883,000 and the SNB term loan in the amount of $3,386,000.

following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below:

Nine Months Ended

September 30,

Cash (used in) provided by

Operating activities

$ (3,184,000 )

$ (1,493,000 )

Investing activities

1 unchanged sentence

Net increase (decrease) in cash and cash equivalents

Used in Operating Activities

Cash used in operating

activities primarily consists of our net loss adjusted for certain non-cash items and changes to working capital items.

For the six months ended

June 30, 2020, net cash was impacted by a net loss of $526,000, offset by $2,298,000 of non-cash items consisting of depreciation

of property and equipment of $1,344,000, bad debt expense of $322,000, non-cash employee compensation expense of $214,000, and

other non-cash items totaling $418,000.

Operating assets and liabilities

used cash in the net amount of $2,815,000 consisting of net increases in inventory and deposits and other assets in the amounts

of $5,213,000 and $185,000, respectively, and decreases in operating lease liabilities of $349,000 and income taxes payable of

$25,000, partially offset by decreases in accounts receivable and prepaid expenses in the amounts of $1,380,000 and $74,000, respectively,

and increases in accounts payable and accrued expense, other liability and deferred revenue of $1,301,000, $199,000 and $3,000,

respectively.

Cash Used in Investing Activities

For the six months ended

June 30, 2020, cash used in investing activities was $309,000.

$ (1,679,000 )

Provided by (Used in) Operating Activities

provided by (used in) operating activities primarily consists of our net loss adjusted for certain non-cash items and changes

to working capital items.

For the nine months

ended September 30, 2020, cash used in operating activities was $3,184,000.

This was the result of our net loss of $1,003,000,

offset by $3,551,000 of non-cash items consisting of depreciation of property and equipment of $1,920,000, amortization of debt

discount on convertible notes payable of $196,000, amortization of right-of-use assets of $366,000, non-cash employee compensation

expense of $266,000, non-cash deferral payroll tax expense –

CARES Act of $429,000, bad debt expense of $367,000 and other

non-cash items totaling $7,000.

Operating assets and liabilities used cash in the net amount

of $5,732,000 consisting of net increases in inventory, accounts receivable, prepaid taxes and deposits and other assets in the

amounts of $4,194,000, $2,257,000, $6,000 and $213,000, respectively, and decreases in operating lease liabilities of $506,000,

deferred revenue of $176,000 and income taxes payable of $27,000, partially offset by a decrease in prepaid expenses in the amount

of $53,000, and an increase in accounts payable and accrued expense of $1,594,000.

Used in Investing Activities

For the nine months

ended September 30, 2020, cash used in investing activities was $1,471,000.

This was comprised of the purchase of equipment.

Cash Provided by Financing Activities

Cash provided by financing

activities consists of the borrowings and repayments under our credit facilities with our senior lender, amounts borrowed pursuant

to the CARES Act, increases in and repayments of financing lease obligations and other notes payable, and the proceeds from the

sale of our equity.

For the six months, ended

June 30, 2020, net cash provided by financing activities was $2,126,000.

This was primarily comprised of proceeds from our SBA

loan in the amount of $2,414,000, SNB revolving loan and the sale of common stock in the amounts of $429,000 and $984,000, respectively,

partially offset by repayments of $1,020,000 on our notes payable-related parties, $100,000 on our notes payable –

party, $284,000 on our term loan, $143,000 on our loan for equipment and $9,000 on our finance lease obligations.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance

sheet arrangements as of June 30, 2020.

Critical Accounting Policies and Estimates

A critical accounting policy

is one that is both important to the portrayal of a company’s financial condition and results of operations and requires

management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect

of matters that are inherently uncertain.

Our condensed consolidated

financial statements are presented in accordance with U.S.

Provided by (Used in) Financing Activities

provided by financing activities consists of the borrowings and repayments under our credit facilities with our senior lender,

amounts borrowed pursuant to the CARES Act, increases in and repayments of financing lease obligations and other notes payable,

and the proceeds from the sale of our equity offset by expenses associated with our financing activities and payments of our loans,

equipment leases and finance lease obligations.

the nine months ended September 30, 2020, net cash provided by financing activities was $4,821,000.

This was primarily comprised

of proceeds from our SBA loans and SNB revolving loan in the amount of $2,414,000 and $3,340,000, respectively, and the sale of

common stock in the amount $984,000, partially offset by costs related to the issuance of stock of $145,000 and repayments of

$1,032,000 on our notes payable-related parties, $100,000 on our notes payable –

third party, $414,000 on our term loan,

$215,000 on our loan for equipment and $11,000 on our finance lease obligations.

SHEET ARRANGEMENTS

did not have any off-balance sheet arrangements as of September 30, 2020.

Accounting Policies and Estimates

critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results

of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to

make estimates about the effect of matters that are inherently uncertain.

condensed consolidated financial statements are presented in accordance with U.S.

GAAP, and all applicable U.S.

GAAP accounting standards effective as

of June 30, 2020 have been taken into consideration in preparing the condensed consolidated financial statements.

The preparation

of condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities,

revenues, expenses and related disclosures.

Some of those estimates are subjective and complex, and, consequently, actual results

could differ from those estimates.

The following accounting policies and estimates have been highlighted as significant because

changes to certain judgments and assumptions inherent in these policies could affect our condensed consolidated financial statements:

Revenue recognition;

Inventory valuation;

Lease accounting;

Legal contingencies;

Stock-based compensation;

We base our estimates,

to the extent possible, on historical experience.

Historical information is modified as appropriate based on current business factors

and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and

GAAP accounting

standards effective as of September 30, 2020 have been taken into consideration in preparing the condensed consolidated financial

The preparation of condensed consolidated financial statements requires estimates and assumptions that affect the

reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Some of those estimates are subjective and

complex, and, consequently, actual results could differ from those estimates.

The following accounting policies and estimates

have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect

our condensed consolidated financial statements:

contingencies;

● Stock-based

compensation;

base our estimates, to the extent possible, on historical experience.

Historical information is modified as appropriate based

on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the

carrying value of assets and liabilities.

We evaluate our estimates on an on-going basis and make changes when necessary.

Actual results could differ from our

Recently Issued Accounting Pronouncements

In December 2019, the FASB

issued ASU No.

results could differ from our estimates.

Issued Accounting Pronouncements

August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives

and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which is intended to address issues

identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics

of liabilities and equity.

For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt

instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures

for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users.

is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

Early adoption

is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal

The Company is evaluating the effect of adopting this new accounting guidance on its financial statements.

December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which

is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general

principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective

for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related

The Company does not believe

that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on

the accompanying condensed consolidated financial statements.

Simplifying the Accounting for Income Taxes (“ASU

2019-12”), which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain

exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,

with early adoption permitted.

The Company is currently evaluating the impact of this standard on its condensed consolidated financial

statements and related disclosures.

Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would

have a material effect on the accompanying condensed consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements