AIR INDUSTRIES GROUP 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market for Our Common Stock Our common stock is listed on the NYSE American under the symbol “AIRI.” Holders On March 19, 2021, there were 229 stockholders of record of our common stock. The number of record holders does not include persons who held our Common Stock in nominee or “street name” accounts through brokers. Securities Authorized for Issuance Under Equity Compensation Plans The following table summarizes shares of our Common Stock to be issued upon exercise of options and warrants, the weighted-average exercise price of outstanding options and warrants and options available for future issuance pursuant to our equity compensation plans as of December 31, 2020: Plan Category Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price Of Outstanding Options, Warrants and Rights Number of Remaining Shares Available for Future Securities Issuance Under Equity Compensation Plans Equity compensation plans approved by security holders 2,108,054 $ 2.01 392,244 Equity compensation plans not approved by security holders 2,182,902 2.90 None Total 4,290,956 392,244 Recent Sales of Unregistered Equity Securities Except as previously reported in our periodic reports filed under the Exchange Act, we did not issue any unregistered equity securities during the fiscal year ended December 31, 2020. Purchases of Our Equity Securities No repurchases of our common stock were made during the fiscal year ended December 31, 2020. ITEM 6. SELECTED FINANCIAL DATA Not required. 13 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2020 and 2019 and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking statements. Business Overview AIM became a public company in 2005 and we are an aerospace company operating primarily in the defense industry. Our Complex Machining segment manufactures structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. Our Turbine Engine Components segment makes components and provides services for jet engines and ground-power turbines. Our products are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter aircraft, Boeing 777 commercial airliners. Our Turbine Engine segment makes components for jet engines that are used on the USAF F-15 and F-16, the Airbus A-330 and the Boeing 777, in addition to a number of ground-power turbine applications. The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete assemblies for our customers. We are currently focused on positioning our business to obtain profitability, achieve positive cash flow and we remain resolute on meeting customers’ needs. We believe that an unyielding focus on our customers will allow us to execute on our existing backlog in a timely fashion. In 2018 and 2019, we consolidated the operations of our Complex Machining segment in our main campus located in Bay Shore, New York. In 2020, in order to take advantage of the long-term growth opportunities we see in our markets, we made significant capital investments in new equipment. Additionally, we expanded our operations and manufacturing cells located in our Connecticut facility where our Turbine Engine segment is located. We believe these investments will increase the volume and efficiency of production, increase the size of product we can make and allow us to offer additional services to our customers. We are pleased with the positive responses received from our customers to date. Our ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors. While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive. The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold. Our operations have a large percentage of fixed factory overhead. As a result, our profit margins are also highly variable with sales volumes as under-absorption of factory overhead decreases profits. 14 A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and decreased usage of aircraft reduces the demand for both new production and replacement spares. Recent increases in Defense Department spending have increased orders for our products. Reductions to the Defense Department budget or decreased usage of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business and our revenues. We are focusing greater efforts on the civilian aircraft market though we still remain dependent upon the military for an overwhelming portion of our revenues. COVID -19 On March 11, 2020, the World Health Organization announced that infections caused by the coronavirus disease of 2019 (“COVID-19”) had become pandemic, and on March 13, 2020, the U.S. President announced a national emergency relating to the disease. National, state and local authorities have adopted various regulations and orders, including mandates on the number of people that may gather in one location and closing non-essential businesses. To date, we have been deemed an essential business and have not curtailed 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, had and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts adopted by governments and their willingness to adopt further measures is uncertain. The overall economic impact of the COVID-19 pandemic has been highly negative to the general economy and has been particularly negative on the commercial travel industry and commercial aerospace industries. In accordance with the Department of Defense guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our facilities have continued to operate in support of essential products and services required to meet national security commitments to the U.S. Government and the U.S. military, however, facility closures or work slowdowns or temporary stoppages could occur. Although our facilities are open, during portions of 2020 we were 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. We implemented procedures to promote employee safety including more frequent and enhanced cleaning of our machines and adjusted schedules and work-flows to support physical distancing. This resulted in increased operating costs to our business. As we enter into fiscal 2021, operating conditions have substantially returned to normal; however, our Company, employees, suppliers and customers, and our global community continue to face challenges and we cannot predict how this dynamic situation will evolve or the impact it will have. Throughout 2020, many of our suppliers were forced to reduce staffing or temporarily close their facilities due to COVID-19, which impacted our delivery schedules. We cannot predict what future impacts will occur, particularly if new variants of Covid-19 result in a substantial increase in new cases and governments elect to reimpose strict safety measures. The future impact of COVID-19 on our business is difficult to predict as the course of the pandemic, the effectiveness of health measures, and the impact and continuation of ongoing economic stabilization efforts are uncertain and government assistance payments may not provide enough funding to support current spending levels. We did not qualify for any significant new government benefits in the recently enacted American Rescue Plan Act of 2021 and do not expect to qualify for any significant new government benefits that might be enacted. 15 Segment Data We follow Financial Accounting Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes standards for reporting information about operating segments in annual and interim financial statements, ASC 280 requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. We currently divide our operations into two operating segments: Complex Machining and Turbine Engine Components. Along with our operating subsidiaries, we report the results of our corporate office as an independent segment. The accounting policies of our segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance based on revenue, gross profit contribution and assets employed. RESULTS OF OPERATIONS-CONTINUING OPERATIONS Years ended December 31, 2020 and 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. Selected Financial Information: 2020 2019 Net sales $ 50,097,000 $ 54,573,000 Cost of sales 43,585,000 45,431,000 Gross profit 6,512,000 9,142,000 Operating expenses and interest and financing costs 9,442,000 12,100,000 Loss on abandonment of leases - (275,000 ) Other income, net 430,000 672,000 Forgiveness of notes payable - SBA Loan 2,414,000 - Provision for (benefit from) income taxes (1,412,000 ) 37,000 Income (Loss) from continuing operations $ 1,326,000 $ (2,598,000 ) 16 Balance Sheet Data: December 31, December 31, 2020 2019 Cash and cash equivalents $ 2,505,000 $ 1,294,000 Working capital $ 16,284,000 $ 5,623,000 Total assets $ 57,777,000 $ 51,090,000 Total stockholders’ equity $ 15,109,000 $ 10,206,000 The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated: Year Ended December 31, 2020 2019 COMPLEX MACHINING Net Sales $ 44,659,000 $ 48,226,000 Gross Profit 6,493,000 8,669,000 Pre Tax Income from continuing operations 4,965,000 5,266,000 Assets 51,368,000 45,268,000 TURBINE ENGINE COMPONENTS Net Sales 5,438,000 6,347,000 Gross Profit 19,000 473,000 Pre Tax Loss from continuing operations (31,000 ) (500,000 ) Assets 3,899,000 5,005,000 CORPORATE Net Sales - - Gross Profit - - Pre Tax Loss from continuing operations (5,020,000 ) (7,327,000 ) Assets 2,510,000 817,000 CONSOLIDATED Net Sales 50,097,000 54,573,000 Gross Profit 6,512,000 9,142,000 Pre Tax Loss from continuing operations (86,000 ) (2,561,000 ) (Benefit from) provision for Income Taxes (1,412,000 ) 37,000 Loss from Discontinued Operations, net of taxes (230,000 ) (134,000 ) Net Income (Loss) 1,096,000 (2,732,000 ) Assets $ 57,777,000 $ 51,090,000 17 Net Sales: Consolidated net sales for the year ended December 31, 2020 were $50,097,000, a decrease of $4,476,000, or 8.2%, compared with $54,573,000 for the year ended December 31, 2019. Net sales of our Complex Machining segment were $44,659,000, a decrease of $3,567,000, or 7.4%, from $48,226,000 in the prior year. Net sales in our Turbine Engine Components segment were $5,438,000, a decrease of $909,000 or 14.3%, compared with $6,347,000 for the year ended December 31, 2019. These decreases were directly attributable to the negative business impacts caused by COVID-19, which significantly reduced our ability to ship finished product to end-customers. While we were able to continue certain production processes in our own facility, our ability to have our product further processed by subcontractors was severely impacted. This resulted in an increase in partially finished product remaining in Work in Process. This situation caused our inventory to increase. These supply chain interruptions abated somewhat later in the year, but remain a challenge. As indicated in the table below, three customers represented 73.9% and 76.0% of total sales for the years ended December 31, 2020 and 2019, respectively. Customer Percentage of Sales 2020 2019 Goodrich Landing Gear Systems 30.4 % 34.2 % Sikorsky Aircraft 30.3 % 30.4 % US DOD 13.2 % * Rohr ** 11.4 % * Customer was less than 10% of sales in 2019 ** Customer was less than 10% of sales in 2020 As indicated in the table below, three customers represented 80.3% and 67.8% of gross accounts receivable at December 31, 2020 and 2019, respectively. Customer Percentage of Receivables 2020 2019 Goodrich Landing Gear Systems 57.1 % 32.7 % United States Department of Defense 12.0 % 10.0 % Rohr 11.2 % 25.1 % Gross Profit: Consolidated gross profit from operations for the year ended December 31, 2020 was $6,512,000, a decrease of $2,630,000, or 28.8%, as compared to gross profit of $9,142,000 for the year ended December 31, 2019. Consolidated gross profit as a percentage of sales was 13.0% and 16.8% for the years ended December 31, 2020 and 2019, respectively. These decreases were directly attributable to the reduction in sales caused by the negative business impact of COVID-19 and increased costs associated with implementing procedures to promote employee safety including more frequent and enhanced cleaning of our machines and adjusted schedules and work-flow to support physical distancing. The reduction in sales decreased the absorption of Manufacturing Overhead costs, reducing gross profit. Interest and Financing Costs Our interest and financing costs for the year ended December 31, 2020 totaled $1,491,000 in 2020, a decrease of $ 2,070,000 or 58.1% from $3,561,000 in 2019, as a result of the refinancing of our credit facility at the end of 2019, at a significantly lower interest rate. Impairment Charges In connection with the consolidation of operations into our Bayshore, New York facility, we incurred a lease impairment charge of $275,000 in 2019. 18 Operating Expense Consolidated operating expenses were $7,951,000 and $8,539,000 for fiscal 2020 and 2019, respectively, representing a decrease of $588,000 or 6.9%. As a percentage of consolidated net sales, operating expenses were 15.8% and 15.6% for fiscal 2020 and 2019, respectively. The reduction in operating expenses in fiscal 2020 (in dollars) as compared to fiscal 2019 primarily reflects a concerted effort to reduce operating expenses to offset the negative business impact of COVID-19. Cost savings achieved included lower salaries and travel expenses (by curtailing most business travel) that were partially offset by incurring significantly higher information technology costs to support various activities including remote working arrangements. Because we expect consolidated net sales in fiscal 2021 to increase as compared to fiscal 2020, we are optimistic that we can reduce operating expenses, as a percentage of consolidated net sales from current levels. Income (Loss) from Continuing Operations, Net of Taxes Income from continuing operations, net of tax for the year ended December 31, 2020 was $1,326,000, an improvement of $3,924,000 compared to a loss from continuing operations, net of tax of $2,598,000 for the year ended December 31, 2019. This improvement is almost entirely attributable to income resulting from the SBA Loan forgiveness in the amount of approximately $2.4 million and a tax refund afforded to the Company under the CARES Act in the amount of approximately $1.4 million. Net Income (Loss) Net income for the year ended December 31, 2020 was $1,096,000, an improvement of $3,828,000, compared to a net loss of $2,732,000 for the year ended December 31, 2019, for the reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES During fiscal 2020, we took advantage of a number of U.S. government programs to improve our liquidity to offset the negative impact to our business from COVID-19. These steps include: 1) Received Low Interest Loans from the SBA – In May 2020, our three operating subsidiaries (each a “Borrower”) entered into government subsidized loans with Sterling National Bank (“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”). 19 2) Applied for and Received 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. In December 2020 we received final approval from the SBA that our SBA Loans which approximated $2,414,000 plus accrued interest had been forgiven. 3) Deferred Certain Tax Payments – In accordance with Section 2302 of the CARES Act, we elected to defer the deposit and payment of the employer’s portion of Social Security taxes. These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of December 31, 2020, we deferred $627,000, which is included in Deferred payroll tax liability – CARES Act on the accompanying Consolidated Balance Sheet. 4) Received a Net Operating Loss Refund – Pursuant to the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter of this year. Also, the U.S. Department of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred and worked performed on certain contracts. In addition to taking advantage of the aforementioned U.S. government programs, we took additional significant steps to improve our liquidity, including: 1) Entered into a Lower Cost Financing Facility – On December 31, 2019, we entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) which expires on December 30, 2022. The SNB Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). Proceeds from the SNB Facility repaid our outstanding PNC Facility with PNC Bank N.A. (“PNC”). 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). 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 SNB and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such Fiscal Year. The terms of the SNB Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, we are limited in the amount of Capital Expenditures we can make. In accordance with the SNB Facility by September 30, 2020, we were required 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 December 31, 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. 20 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. We have paid an amendment fee of $20,000. As of December 31, 2020, our debt to SNB in the amount of $21,207,000 consisted of the SNB revolving line of credit note in the amount of $15,649,000 and the SNB term loan in the amount of $5,558,000. Because we believe our fiscal 2021 sales will be higher than the amount achieved in fiscal 2020, we believe our liquidity in 2021 will improve. Nevertheless, our liquidity may be adversely impacted by various risks and uncertainties, including, but not limited to future effects of the COVID-19 pandemic and other risks detailed in Part1, Item 1A of this Annual Report. Changes in our cash flow during fiscal 2020 and 2019 are discussed further below. Cash Flow The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated (in thousands): Year Ended December 31, 2020 2019 Cash (used in) provided by Operating activities $ (1,525 ) $ (888 ) Investing activities (3,797 ) (764 ) Financing activities 6,533 934 Net increase (decrease) in cash and cash equivalents $ 1,211 $ (718 ) The above cash flows include the cash flows from our continuing and discontinued operations. Cash Used In Operating Activities Cash used in operating activities reflects our net income (loss) adjusted for certain non-cash items and changes to working capital items. For the year ended December 31, 2020, net income of $1,096,000 and $1,990,000 of non-cash items, consisting primarily of employees and directors stock based compensation of $519,000, amortization of right-of-use assets of $482,000, depreciation of property and equipment of $2,570,000 and amortization of debt discount on convertible notes payable of $233,000, were partially offset by the forgiveness of notes payable – SBA Loan and non-cash other income recognized in the amounts of $2,414,000 and $402,000, respectively. Operating assets and liabilities used cash in the net amount of $4,611,000, consisting primarily of the net increases in accounts receivable and inventory of $1,045,000 and $3,474,000, and net decreases in operating lease liabilities and deferred revenue in the amounts of $673,000 and $94,000, which were partially offset primarily by increases in accounts payable and accrued expenses in the amounts of $275,000 and by decreases in prepaid expenses and other current assets and deposits and other assets in the amounts of $274,000 and $168,000, respectively. For the year ended December 31, 2019, our net loss of $2,732,000 was offset by $5,217,000 of non-cash items, consisting primarily of employees and directors stock based compensation of $622,000, amortization of right-of-use assets of $470,000, depreciation of property and equipment of $3,002,000 and amortization of debt discount on convertible notes payable of $510,000. Operating assets and liabilities used cash in the net amount of $3,373,000, consisting primarily of the net increases in deposits and other assets, accounts receivable and prepaid expenses and other current assets of $713,000, $1,647,000 and $33,000, and net decrease in operating lease liabilities and accounts payable and accrued expenses in the amounts of $601,000 and $970,000, partially offset primarily by an increase in deferred revenue and a decrease in inventory of $130,000 and $405,000. 21 Cash Used in Investing Activities Cash used in investing activities consists of cash used for capital expenditures for property and equipment. For the year ended December 31, 2020, cash used in investing activities was $3,797,000. Primarily this was for the purchase of state of the art machinery installed at our Bay Shore facility. For the year ended December 31, 2019, cash used in investing activities was $764,000. This was for the purchase of property and 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, increases in and repayments of finance lease obligations and other notes payable, and the proceeds from the sale of our equity. For the year ended December 31, 2020, cash provided by financing activities was $6,533,000. This was comprised primarily of net proceeds from SNB of $5,443,000, SBA loan proceeds of $2,414,000 and proceeds from issuances of stock of $984,000, offset primarily by repayments of $1,000,000 on our related party notes payable, $100,000 of our third party notes payable, $579,000 on our SNB term loan, $18,000 on our financed lease obligations and $385,000 on our financed asset note payable and payment of stock issuances costs of $145,000. For the year ended December 31, 2019, cash provided by financing activities was $934,000. This was comprised primarily of net proceeds from the SNB refinancing of $16,343,000 and proceeds of related party note issuances of $1,500,000 and proceeds from our sale of future proceeds from disposition of a subsidiary of $800,000 offset by repayments of $1,572,000 on our PNC term loan, $14,043,000 on our PNC revolving loan, $1,764,000 on our financed lease obligations, $186,000 on our financed asset note payable, $28,000 on our related party notes payable, and payment of financing and stock issuances costs of $113,000. CONTRACTUAL OBLIGATIONS The following table sets forth our future contractual obligations as of December 31, 2020 (in thousands): Payment due by period Less than 1-3 3-5 More than Total 1 year years years 5 years Debt and Finance Leases $ 27,273 $ 16,476 $ 10,776 $ 18 $ 3 Operating Leases $ 5,917 $ 1,080 $ 2,045 $ 2,062 $ 730 Total $ 33,190 $ 17,556 $ 12,821 $ 2,080 $ 733 OFF-BALANCE SHEET ARRANGEMENTS We did not have any off-balance sheet arrangements as of December 31, 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 judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 22 Our consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All applicable U.S. GAAP accounting standards effective as of December 31, 2020 have been taken into consideration in preparing the consolidated financial statements. The preparation of 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 judgements and assumptions inherent in these policies could affect our consolidated financial statements: ● Going Concern ● Inventory Valuation ● Revenue Recognition ● Income Taxes ● Stock-Based Compensation ● Goodwill Recently Issued Accounting Pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users. ASU 2020-06 is effective for fiscal years, and interim periods in those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods with those fiscal years. The Company is evaluating the effect of adopting this new accounting guidance on its financial statements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements. The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements. 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARTKET RISK . No disclosure is required in response to this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements The financial statements required by this item begin on page F-1 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.