AIR INDUSTRIES GROUP 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”), its principal executive officer, and Chief Financial Officer (“CFO”), its principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of December 31, 2020. Based on that evaluation, the CEO and CFO concluded our disclosure controls and procedures were effective as of December 31, 2020. Management’s Report on Internal Control over Financial Reporting Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal controls over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal controls over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal controls over financial reporting refers to the process designed by, or under the supervision of our Chief Executive Officer and our Chief Accounting Officer, and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 24 Our management relies upon the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in designing a system intended to meet the needs of our Company and provide reasonable assurance for its assessment. In connection with their review of our internal controls over financial reporting for the fiscal year ended December 31, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that our internal controls over financial reporting were effective as of December 31, 2020 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U. S. G.A.A.P. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. The rules of the Securities and Exchange Commission do not require an attestation of the Management’s report by our registered public accounting firm in this annual report. Change in Internal Control over Financial Reporting During 2020, we took various steps to maintain the effectiveness of our financial reporting system, primarily the acquisition of additional software to increase the utility of our financial reporting systems and additional steps taken to increase our cybersecurity defenses. Except for these additions to our software, there have been no changes in our internal control over financial reporting that occurred during our fiscal quarter and year ended December 31, 2020 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None 25 PART III Item 10. Directors, Executive Officers, and Corporate Governance The information required by Paragraph (a), and Paragraphs (c) through (g) of Item 401 of Regulation S-K (except for information required by Paragraph (e) of that Item to the extent the required information pertains to our executive officers) and Item 405 of Regulation S-K is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year. The following table presents the information required by Paragraph (b) of Item 401 of Regulation S-K. Our directors and executive officers are: Name: Age Position Luciano (Lou) Melluzzo 56 President and Chief Executive Officer Michael E. Recca 70 Chief Financial Officer Michael N. Taglich 55 Chairman of the Board Robert F. Taglich 54 Director David J. Buonnano 65 Director Peter D. Rettaliata 70 Director Robert C. Schroeder 54 Director Michael Brand 63 Director Michael D. Porcelain 52 Director Luciano (Lou) Melluzzo has been our President and Chief Executive Officer since November 15, 2017. He joined our company on September 11, 2017 as Chief Executive Officer. From November 2003 to September 2011, Mr. Melluzzo was employed in various capacities by EDAC Technologies Corporation (“EDAC”), a designer, manufacturer and distributor of precision aerospace components and assemblies, precision spindles and complex fixturing, tooling and gauging with design and build capabilities, whose shares were then listed on the Nasdaq Capital Market. He served as EDAC’s Vice President and Chief Operating Officer from November 2005 until February 2010. From September 2011 to November 2015, Mr. Melluzzo was self-employed in the residential real estate redevelopment industry. From November 2015 to January 2017, he was general manager of Polar Corporation, a privately-held company specializing in computer numeric controlled milling and turning of small hardware components for the aerospace industry. Michael E. Recca has been our Chief Financial Officer since October 1, 2016. Mr. Recca has been engaged by us since September 2008 in a variety of positions related to our capital finance and acquisition programs. Most recently he served as Chief of Corporate Development & Capital Markets, a position in which he directed our acquisition program and coordinated with our lenders. Mr. Recca received a Bachelor of Arts degree from the SUNY Stony Brook and an MBA from Columbia University. Michael N. Taglich has been Chairman of our Board of Directors since September 22, 2008. He is Chairman and President of Taglich Brothers, a New York City based securities firm which he co-founded in 1992 and which is focused on public and private micro-cap companies. Mr. Taglich is currently Chairman of the Board of Mare Island Dry Dock LLC, a company engaged in ship repair services, and Vice Chairman of the Board of BioVentrix, Inc., a privately held medical device company whose products are directed at heart failure. He also serves as a Director of Bridgeline Digital Inc., a publicly traded company, Icagen Inc., a reporting but not trading company engaged in early stage pharmaceutical research, Decision Point Systems Inc., a private company engaged in field service automation, Dilon Technologies, a private medical device company and Autonet Mobile Inc., a private company focused on connecting automobiles to the internet. 26 Robert F. Taglich has been a director of our company since 2008. He is a Managing Director of Taglich Brothers, which he co-founded in 1992. Prior to founding Taglich Brothers, Mr. Taglich was a Vice President at Weatherly Securities. Mr. Taglich has served in various positions in the securities brokerage industry for the past 25 years. Mr. Taglich serves on the board of privately held BioVentrix, Inc., a medical device company whose products are directed at heart failure. Mr. Taglich holds a Bachelor’s degree from New York University. David J. Buonanno has been a director of our company since 2008. He is the Founder and President of Buonanno Enterprises Consulting, providing strategic management, supply chain/operations and recruitment services to aerospace and defense industry clients. Mr. Buonanno has extensive experience in manufacturing, supply management and operations. He was employed by Sikorsky Aircraft, Inc., a subsidiary of United Technologies Corporation, as Vice President, Supply Management and International Offset (from January 1997 to July 2006) and as Director, Systems Subcontracts (from November 1992 to January 1997). From May 1987 to November 1992, he was employed by General Electric Company serving as Operations Manager and Manager, Program Materials Management of GE’s Astro-Space Division. From June 1977 to May 1987, he was employed by RCA and affiliated companies. Mr. Buonanno attended Lehigh University College of Electrical Engineering and holds a B.S. in Business Administration from Rutgers University. He completed the Program for Management Development at Harvard Business School in 1996. Peter D. Rettaliata has been a director of our company since 2005. He served as our Acting President and Chief Executive Officer from March 2, 2017 to November 15, 2017, and served as our President and Chief Executive Officer from November 30, 2005 to December 31, 2014. He also served as the President of our wholly-owned subsidiary, AIM, from 1994 to 2008. Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman Aerospace Corporation for twenty-two years, where he attained the position of Senior Procurement Officer. Professionally, Mr. Rettaliata has served as the Chairman of “ADDAPT”, an organization of regional aerospace companies, as a member of the Board of Governors of the Aerospace Industries Association, and as a member of the Executive Committee of the AIA Supplier Council. He is a graduate of Niagara University where he received a B.A. in History and Harvard Business School where he completed the PMD Program. Robert C. Schroeder has been a director of our company since 2008. He is Vice President - Investment Banking of Taglich Brothers and specializes in advisory services and capital raising for small public and private companies. Mr. Schroeder joined Taglich Brothers in April 1993 as an Equity Analyst publishing sell-side research. Prior to joining Taglich Brothers, he served in various positions in the brokerage and public accounting industry. Mr. Schroeder also serves as a director of the following publicly traded companies: DecisionPoint Systems, Inc., a private company engaged in field service automation, and Intellinetics, Inc., a provider of cloud-based enterprise content management solutions and Akers Biosciences, Inc., a developer and manufacturer of rapid diagnostic screening and testing products. Mr. Schroeder received a B.S. degree in accounting and economics from New York University. He is a Chartered Financial Analyst and a member of the Association for Investment Management and Research and a member of the New York Society of Security Analysts. Michael Brand has been a director of our company since 2012, and from March 2017 to November 2017 served as a consultant to our company focused on day to day production issues, scheduling of the products to be manufactured and related operational issues such as the maintenance of appropriate inventory levels. He was the President of Goodrich Landing Gear, a unit of Goodrich Corporation, from July 2005 to June 2012. Prior to joining Goodrich for over 25 years he held senior management positions in the Aerospace industry. He began his career at General Electric Corporation and rose to senior management in its jet engine manufacturing operations. Mr. Brand is a graduate of Clarkson University, with advanced degrees and certificates from Xavier University and the Wharton School. Michael Porcelain has a director of our company since October 23, 2017. Mr. Porcelain has served as President and Chief Operating Officer of Comtech Telecommunications Corp., a publicly traded company and leading provider of advanced communication solutions for both commercial and government customers worldwide, since 2019, and prior to that served as the Chief Financial Officer from 2006 through 2018, and from 2002 to March 2006, he served as Vice President of Finance and Internal Audit of Comtech. From 1998 to 2002, Mr. Porcelain was Director of Corporate Profit and Business Planning for Symbol Technologies, a mobile wireless information solutions company. Previously, he spent five years in public accounting holding various positions, including Manager in the Transaction Advisory Services Group of PricewaterhouseCoopers. In March 2021, Mr. Porcelain was elected to the Board of Directors of The Fund for Modern Court, an independent court reform organization that advocates for the improvements of the New York State Court system to ensure a diverse, highly qualified, and independent judiciary. Since 1998, he has owned and operated The Independent Adviser Corporation, a privately held company which holds the rights to use certain intellectual properties and trademarks (including various Internet websites) related to the financial planning and advisory industry. Mr. Porcelain is an Adjunct Professor at St. John’s University located in New York where he teaches graduate level accounting courses. Mr. Porcelain has a B.S. in Business Economics from State University of Oneonta, New York, a M.S. in Accounting and an M.B.A. degree from Binghamton University. Michael N. Taglich and Robert F. Taglich are brothers. 27 Code of Ethics We have adopted a written code of ethics that applies to our principal executive officers, senior financial officers and persons performing similar functions. Upon written request to our corporate secretary, we will provide you with a copy of our code of ethics, without cost. Corporate Governance The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year. Item 11. Executive Compensation The information required by this Item is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by Item 403 of Regulation S-K is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year. Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this Item is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year. Item 14. Principal Accountant Fees and Services The information required by this Item is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year. 28 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following exhibits are included as part of this report. References to “the Company” in this Exhibit List mean Air Industries Group, a Nevada Corporation. Exhibit No. Description 2.1 Agreement and Plan of Merger dated July 29, 2013 between Air Industries Group, Inc. and Air Industries Group (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed August 30, 2013). 2.2 Articles of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 28, 2013 (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed August 30, 2013). 2.3 Certificate of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 29, 2013 (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed August 30, 2013). 3.1 Articles of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 30, 2013). 3.2 Certificate of Amendment increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017). 3.3 Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015). 3.4 Certificate of Amendment increasing number of authorized shares of common stock to 60,000,000 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 filed on August 8, 2019) 4.1 Description of the Company’s securities registered pursuant to Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 27, 2020). 29 Agreements Relating to Sterling Loan Facility 10.1 Loan and Security Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 6, 2020) 10.2 Guaranty Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 6, 2020) 10.3 Pledge Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 6, 2020) 10.4 First Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 9, 2020) Agreements Relating to Acquisitions/Dispositions 10.5 Stock Purchase Agreement dated March 21, 2018 with CPI Aerostructures, Inc. (“CPI SPA”) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 23, 2018). 10.6 Second Amendment dated as of December 20, 2018 to CPI SPA (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed April 1, 2019). 10.7 Settlement Agreement and Release between the Company and CPI Aerostructures, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 29, 2020). 10.8 Promissory Note dated May 6, 2020, between Sterling National Bank and Air Industries Machining Corp. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2020). 10.9 Promissory Note dated May 6, 2020, between Sterling National Bank and Nassau Tool Works Inc. (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2020). 10.10 Promissory Note dated May 6, 2020, between Sterling National Bank and Sterling Engineering Corporation (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2020). Agreements Relating to Issuance of Securities 30 10.11 At the Market Offering Agreement dated January 15, 2020 with Roth Capital Partners, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on January 15, 2020). Other Material Agreements 10.12 Purchase Agreement with the Purchasers dated January 15, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 17, 2019). Equity Incentive Plans 10.13 2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-191560) filed on October 4, 2013). 10.14 2015 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-206341) filed on August 13, 2015). 10.15 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016). 10.16 2017 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.79 to the Company’s Registration Statement on Form S-1 (Registration No. 333-219490) filed July 26, 2017 and declared effective August 4, 2017). 14.1 Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2017 filed on April 30, 2018. 21.1 Subsidiaries (incorporated herein by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on April 1, 2019. 23.1 Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. 31.1 Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934. 31.2 Certification of principal financial officer pursuant to Rule 13a-14 or Rule 15d-14 of the Exchange Act of 1934. 32.1 Certification of principal executive officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). 32.2 Certification of principal financial officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). 101.SCH XBRL Taxonomy Extension Schema Document* 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document* 101.DEF XBRL Taxonomy Extension Definition Linkbase Document* 101.LAB XBRL Taxonomy Extension Label Linkbase Document* 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document* 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 2021 AIR INDUSTRIES GROUP By: /s/ Luciano Melluzzo Luciano Melluzzo President and Chief Executive Officer (principal executive officer) By: /s/ Michael E. Recca Michael E. Recca Chief Financial Officer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on March 29, 2021 in the capacities indicated. Signature Capacity /s/ Luciano Melluzzo President and CEO Luciano Melluzzo (principal executive officer) /s/ Michael E. Recca Chief Financial Officer Michael E. Recca (principal financial and accounting officer) /s/ Michael N. Taglich Chairman of the Board Michael N. Taglich /s/ Peter D. Rettaliata Director Peter D. Rettaliata /s/ Robert F. Taglich Director Robert F. Taglich /s/ David J. Buonanno Director David J. Buonanno /s/ Robert Schroeder Director Robert Schroeder /s/ Michael Brand Director Michael Brand /s/ Michael Porcelain Director Michael Porcelain 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Air Industries Group Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Air Industries Group and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Refer to Note 3 of the consolidated financial statements Description of the Matter The Company’s revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering and other services according to the specifications of the customers. The majority of the Company’s performance obligations under these contractual agreements are satisfied at a point in time when the customer obtains control of the product, which is generally upon acceptance by the customer and shipment of the goods. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its observable standalone selling price for products and services. F- 1 Revenue Recognition – Refer to Note 3 of the consolidated financial statements (continued) Description of the Matter (continued) Given the judgment necessary to make reasonably dependable estimates of revenues associated with such contracts, auditing management’s evaluation of contracts with customers required extensive audit effort due to analyzing the terms and conditions of the Company’s various customer contracts given that such terms and conditions are nonstandard. This included the identification and determination of the performance obligations and the timing of revenue recognition. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures included obtaining an understanding of the Company’s revenue recognition process, among others: ● We reviewed management’s assessment of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time. ● We reviewed management’s conclusions over completeness of the contract reviews and appropriateness of the accounting conclusions. ● We selected a sample of contracts with customers and performed the following: o Compared the transaction price to the consideration expected to be received based on current rights and obligations under the contracts and any modification that were agreed upon with the customers. o Tested the completeness and accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. Inventories, net – Refer to Note 3 of the consolidated financial statements Description of the Matter The Company records inventory at the lower of cost of net realizable value. The Company periodically evaluates the carrying value of inventory, which requires management to make significant estimates and assumptions related to sales patterns and expected future demand in order to estimate the amount necessary to adjust to net realizable value as a result of slow moving or obsolete inventory. Changes in the assumptions could have a significant impact on the valuation of inventory. We identified the adjustment to net realizable value of the inventory as a critical audit matter. Auditing such estimates required a high degree of subjective auditor judgment and an increased extent of effort when performing audit procedures and evaluating the results of those procedures. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures used to address the adjustment to net realizable value of inventories included the follow: ● We tested the Company’s raw materials and hardware inventory by evaluating the number of days transpiring from the date the inventory was originally received and/or from the last date of movement, and reviewing the historical sales of the inventory. ● We selected a sample of finished goods and performed the following: o We tested the finished goods inventory report for any finished goods with no movement in the last two years. o Reviewed the transaction history detail reports, which display all types of movement of that particular part. o Evaluated the accuracy and completeness of the valuation reserve by selecting a sample of inventory items and obtaining supporting documentation regarding current and historical sales patterns. ● We tested the accuracy of the Company’s material burden rate calculations to determine proper application of manufacturing overhead costs applied to the cost of work in process and finished goods. We have served as the Company’s auditors since 2008. /s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C. Rotenberg Meril Solomon Bertiger & Guttilla, P.C. Saddle Brook, New Jersey March 29, 2021 F- 2 AIR INDUSTRIES GROUP Consolidated Balance Sheets December 31, December 31, 2020 2019 ASSETS Current Assets Cash and Cash Equivalents $ 2,505,000 $ 1,294,000 Accounts Receivable, Net of Allowance for Doubtful Accounts of $964,000 and $859,000 8,798,000 7,858,000 Inventory 32,120,000 28,646,000 Prepaid Expenses and Other Current Assets 173,000 447,000 Prepaid Taxes 15,000 - Total Current Assets 43,611,000 38,245,000 Property and Equipment, Net 9,581,000 7,578,000 Operating Lease Right-Of-Use-Asset 3,510,000 3,623,000 Deferred Financing Costs, Net, Deposits and Other Assets 912,000 1,481,000 Goodwill 163,000 163,000 TOTAL ASSETS $ 57,777,000 $ 51,090,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Notes Payable and Finance Lease Obligations - Current Portion $ 16,475,000 $ 15,682,000 Notes Payable - Related Party - Current Portion - 6,862,000 Accounts Payable and Accrued Expenses (related parties of $400,000 and $210,000) 8,682,000 8,105,000 Operating Lease Liabilities - Current Portion 701,000 697,000 Deferred Gain on Sale - Current Portion 38,000 38,000 Deferred Revenue 917,000 1,011,000 Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - Current Portion 200,000 200,000 Income Taxes Payable - 27,000 Deferred payroll tax liability - CARES Act - Current Portion 314,000 - Total Current Liabilities 27,327,000 32,622,000 Long Term Liabilities Notes Payable and Finance Lease Obligations - Net of Current Portion 4,786,000 3,406,000 Notes Payable - Related Party - Net of Current Portion 6,012,000 - Operating Lease Liabilities - Net of Current Portion 3,927,000 4,235,000 Deferred Gain on Sale - Net of Current Portion 181,000 219,000 Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - Net of Current Portion 122,000 402,000 Deferred payroll tax liability - CARES Act - Net of Current Portion 313,000 - TOTAL LIABILITIES 42,668,000 40,884,000 Commitments and Contingencies Stockholders’ Equity Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both December 31, 2020 and December 31, 2019. - - Common Stock - Par Value $.001 - Authorized 60,000,000 Shares, 31,906,971 and 29,478,338 Shares Issued and Outstanding as of December 31, 2020 and December 31, 2019, respectively 32,000 29,000 Additional Paid-In Capital 81,238,000 77,434,000 Accumulated Deficit (66,161,000 ) (67,257,000 ) TOTAL STOCKHOLDERS’ EQUITY 15,109,000 10,206,000 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 57,777,000 $ 51,090,000 See Notes to Consolidated Financial Statements F- 3 AIR INDUSTRIES GROUP Consolidated Statements of Operations For the Years Ended December 31, 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 7,951,000 8,539,000 Loss on abandonment of Leases - (275,000 ) Income (Loss) from Operations (1,439,000 ) 328,000 Interest and Financing Costs (965,000 ) (3,115,000 ) Interest Expense - Related Parties (526,000 ) (446,000 ) Other Income, Net 430,000 672,000 Forgiveness of notes payable - SBA Loan 2,414,000 - Loss before (Benefit From) Provision for Income Taxes (86,000 ) (2,561,000 ) Provision for (Benefit from) Income Taxes (1,412,000 ) 37,000 Income (Loss) from Continuing Operations, net of tax 1,326,000 (2,598,000 ) Loss from Discontinued Operations, net of tax (230,000 ) (134,000 ) Net Income (Loss) $ 1,096,000 $ (2,732,000 ) Income (Loss) per share from continuing Operations - Basic $ 0.04 $ (0.09 ) Loss per share from Discontinued Operations - Basic $ (0.01 ) $ (0.00 ) Income (Loss) per share from Continuing Operations - Diluted $ 0.05 $ (0.09 ) Loss per share from Discontinued Operations - Diluted $ (0.01 ) $ (0.00 ) Weighted Average Shares Outstanding - basic 30,742,154 28,851,816 Weighted Average Shares Outstanding - diluted 36,747,083 28,851,816 See Notes to Consolidated Financial Statements F- 4 AIR INDUSTRIES GROUP Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2020 and 2019 Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance, January 1, 2019 28,392,853 $ 28,000 $ 76,101,000 $ (64,523,000 ) $ 11,606,000 Common Stock issued for legal fees 50,000 - 126,000 - 126,000 Issuance of Common Stock 182,778 - 186,000 - 186,000 Issuance of Common Stock for Note Conversion 424,805 1,000 638,000 - 639,000 Common Stock issued for directors fees 257,602 - 244,000 - 244,000 Share Issuance Costs - - (113,000 ) - (113,000 ) Stock Compensation Expense - - 378,000 - 378,000 Other Adjustments - Shares Issued 170,300 - - - - Other Adjustments - FV Allocation - - (126,000 ) - (126,000 ) Other Adjustments - Rounding - - - (2,000 ) (2,000 ) Net Loss - - - (2,732,000 ) (2,732,000 ) Balance, December 31, 2019 29,478,338 $ 29,000 $ 77,434,000 $ (67,257,000 ) $ 10,206,000 Common Stock issued for directors fees 178,405 - 211,000 - 211,000 Costs related to issuance of stock - - (145,000 ) - (145,000 ) Issuance of Common Stock 419,597 1,000 983,000 - 984,000 Common Stock Issued for Convertible Notes 1,830,631 2,000 2,587,000 - 2,589,000 Stock Compensation Expense - - 308,000 - 308,000 Adjustments for other note conversions - - (140,000 ) - (140,000 ) Net Income - - - 1,096,000 1,096,000 Balance, December 31, 2020 31,906,971 $ 32,000 $ 81,238,000 $ (66,161,000 ) $ 15,109,000 See Notes to Consolidated Financial Statements F- 5 AIR INDUSTRIES GROUP Consolidated Statements of Cash Flows For the Years Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 1,096,000 $ (2,732,000 ) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation of property and equipment 2,570,000 3,002,000 Non-cash employee compensation expense 211,000 244,000 Non-cash directors compensation 308,000 378,000 Non-cash legal expenses paid by issuance of stock - 126,000 Non-cash other income recognized (402,000 ) (282,000 ) Non-cash interest expense 122,000 85,000 Non-cash deferred payroll tax expense - CARES Act 627,000 - Loss on abandonment of lease - 275,000 Amortization of Right-of-Use Asset 482,000 470,000 Deferred gain on sale of real estate (38,000 ) (38,000 ) Loss on disposal of equipment 60,000 - Loss on sale of equipment - 136,000 Amortization of debt discount on convertible notes payable 233,000 510,000 Bad debt expense 105,000 311,000 Amortization of deferred financing costs 126,000 - Forgiveness of notes payable - SBA loan (2,414,000 ) - Changes in Assets and Liabilities (Increase) Decrease in Operating Assets: Accounts receivable (1,045,000 ) (1,647,000 ) Inventory (3,474,000 ) 405,000 Prepaid expenses and other current assets 274,000 (33,000 ) Prepaid taxes (15,000 ) 49,000 Deposits and other assets 168,000 (713,000 ) Increase (Decrease) in Operating Liabilities: Accounts payable and accrued expenses 275,000 (970,000 ) Operating lease liabilities (673,000 ) (601,000 ) Deferred revenue (94,000 ) 130,000 Income taxes payable (27,000 ) 7,000 NET CASH USED IN OPERATING ACTIVITIES (1,525,000 ) (888,000 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (3,797,000 ) (764,000 ) NET CASH USED IN INVESTING ACTIVITIES (3,797,000 ) (764,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Note payable - revolver - net - Sterling National Bank 3,106,000 12,543,000 Note payable - revolver - net - PNC - (14,043,000 ) Proceeds from note payable - term notes - Sterling National Bank 2,337,000 3,800,000 Payments of note payable - term notes - SNB (579,000 ) - Payments of note payable - term notes - PNC - (1,572,000 ) SBA Loan Proceeds - SNB 2,414,000 - Proceeds from sale of future proceeds from disposition of subsidiary - 800,000 Transaction costs from sale of future proceeds from disposition of subsidiary - (3,000 ) Payments of finance lease obligations (18,000 ) (1,764,000 ) Share issuance costs (145,000 ) (113,000 ) Proceeds from notes payable - related party - 1,500,000 Payments of notes payable - related party (1,000,000 ) (28,000 ) Payments of notes payable - third party (100,000 ) - Payments of loan payable - financed assets (385,000 ) (186,000 ) Deferred financing costs (81,000 ) - Proceeds from issuance of common stock 984,000 - NET CASH PROVIDED BY FINANCING ACTIVITIES 6,533,000 934,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,211,000 (718,000 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,294,000 2,012,000 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,505,000 $ 1,294,000 See Notes to Consolidated Financial Statements F- 6 AIR INDUSTRIES GROUP Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued) 2020 2019 Supplemental cash flow information Cash paid during the period for interest $ 924,000 $ 2,274,000 Cash paid during the period for income taxes $ 9,000 $ 22,000 Supplemental disclosure of non-cash transactions Right of Use Asset additions under ASC 842 $ 642,000 $ 4,368,000 Operating Lease Liabilities under ASC 842 $ 642,000 $ 5,397,000 Write-off deferred rent under ASC 842 $ - $ 1,165,000 Acquisition of financed asset $ 52,000 $ - Supplemental disclosure of non-cash investing and financing activities Common Stock issued for notes payable - third parties $ 2,245,000 $ 580,000 Common Stock issued in lieu of accrued interest $ 344,000 $ 58,000 See Notes to Consolidated Financial Statements F- 7 AIR INDUSTRIES GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. FORMATION AND BASIS OF PRESENTATION Organization Air Industries Group is a Nevada corporation (“AIRI”). As of and for the year ended December 31, 2020 and 2019, the accompanying consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and The Sterling Engineering Corporation (“Sterling”), (together, the “Company”). The results of Eur-Pac Corporation (“EPC”) and Electronic Connection Corporation (“ECC”) are included in loss from discontinued operations, since operations ceased on March 31, 2019. See Note 2 for details of discontinued operations. Closing EPC and ECC The Company completed its shut-down of EPC and ECC and closed related operations on March 31, 2019. The results of both EPC and ECC are included in loss from discontinued operations. 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. 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, 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, the Company’s 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. The Company, its employees, suppliers and customers, and the global community continue to face challenges and the Company cannot predict how this dynamic situation will evolve or the impact it will have. Throughout 2020 many of the Company’s suppliers were forced to reduce staffing or temporarily close their facilities due to COVID-19, which impacted the Company’s delivery schedules. While this has largely been resolved the Company 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 Company has 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. Suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of COVID-19. Although operating conditions have substantially returned to pre-COVID-19 conditions, an increase in COVID-19 infections or changes in governmental regulations may force the Company to close or reduce operations as a result in future periods. F- 8 On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides aid to small businesses through programs administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things, 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. 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”). Each SBA Loan is evidenced by a promissory note. 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 Borrowers applied to SNB for forgiveness and SNB approved and submitted the forgiveness applications to the SBA which approved the forgiveness in accordance with the applicable provisions of the federal statute authorizing the Loan Program. See Note 9. The Company has elected to defer the deposit and payment of employer’s portion of Social Security taxes pursuant to Section 2302 of the CARES Act. These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of December 31, 2020, the Company has deferred $627,000, which is classified as Deferred payroll tax liability – CARES Act on the accompanying Consolidated Balance Sheet. In addition, as a result of the passage of the CARES Act, the Company received a tax refund of $1,416,000 from the filing of a net operating loss carryback claim. See Note 15. The Company did not qualify for any significant new benefits in the recently enacted the American Rescue Plan Act of 2021 (“Rescue Act”) and does not expect to qualify for any significant new government benefits that might be enacted. Based on its expectations that sales in fiscal 2021 will be higher than the level achieved in fiscal 2020, confirmed orders, funds generated from operations, amounts received under government subsidized loan programs and amounts available under its credit facility, the Company believes it will have sufficient cash on hand to support its activities through April 1, 2022. Subsequent Events Management has evaluated subsequent events through the date of this filing. Note 2. DISCONTINUED OPERATIONS As discussed in Note 1, the Company closed EPC and ECC as of March 31, 2019. As required, the Company has retrospectively recast its consolidated statements of operations and balance sheets for all periods presented. The Company has not segregated the cash flows of these subsidiaries in the 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 Consolidated Financial Statements refers to the Company’s continuing operations only. As discussed in Note 14 on December 23, 2020, the Company and CPI Aerostructures (“CPI”), the buyer of WMI Group, reached an agreement to settle the working capital dispute without additional litigation. The settlement provided that CPI and AIRI would instruct the escrow agent to release the balance of $ 1,380,684 remaining in the escrow account to CPI. The Company and CPI exchanged mutual releases customary in the circumstances. We originally placed a reserve of $1,770,000 against the $2,000,000 balance held in escrow, the remaining amount of $230,000 was charged to discontinued operations as of and for the year ended December 31, 2020. F- 9 The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net loss from discontinued operations presented separately in the consolidated statement of operations: December 31, December 31, 2020 2019 Net revenue $ - $ 132,000 Cost of goods sold - 105,000 Gross profit - 27,000 Operating expenses: Selling, general and administrative - 155,000 Total operating loss - (128,000 ) Interest expense - (3,000 ) Other expense (230,000 ) (3,000 ) Loss from discontinued operations before income taxes $ (230,000 ) $ (134,000 ) Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principal Business Activity 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 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. Principles of Consolidation The accompanying consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Discontinued Operations Prior to the closure of EPC and ECC, the results of operations were included in continuing operations, once it was determined to close both subsidiaries, the results were reclassified to discontinued operations (see “Note 2 – Discontinued Operations”). Cash and Cash Equivalents Cash and cash equivalents include all highly liquid instruments with an original maturity of three months or less. Accounts Receivable Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. F- 10 Going Concern At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued. We are required to make certain additional disclosures if we conclude that substantial doubt exists and such concerns are not alleviated by our plans or when our plans alleviate substantial doubt about our ability to continue as a going concern. The evaluation entails analyzing prospective operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balance and expectations regarding cash to be generated over the following year. We concluded that substantial doubt of going concern did not exist. See Note 1 – Impact of COVID-19 for a further discussion. Inventory Valuation The Company values inventory at the lower of cost on a first-in-first-out basis or an estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods, however, a full physical inventory is taken annually. 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. The Company generally purchases raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable contracts for orders have been received for finished goods. It occasionally produces larger more complex products, such as landing gear, in excess of purchase order quantities in anticipation of future purchase order demand. Historically this excess has been used in fulfilling future purchase orders. The Company purchases supplies and materials useful in a variety of products as deemed necessary even though orders have not been received. The Company periodically evaluates inventory items that are not secured by purchase orders and establishes write-downs to estimated net realizable value for obsolescence accordingly. The Company also writes-down inventory to estimated net realizable value for excess quantities, slow-moving goods, and for other impairments of value. Prepaid Expenses and Other Current Assets On December 23, 2020, the Company and CPI reached an agreement to settle the working capital dispute. The settlement provided that the escrow agent would release the balance of $ 1,380,684 remaining in the escrow account to CPI. The Company and CPI exchanged mutual releases customary in the circumstances. Prepaid expenses and other current assets include purchase deposits, miscellaneous prepaid expenses and cash in escrow less a reserve. On December 31, 2020, the Company settled its working capital dispute with CPI, see Note 14 - Contingencies. As a result of this settlement, the Company released the cash that was held in escrow and therefore removed the reserve. The changes in the reserve are shown below and discussed in Note 2 – Discontinued Operations. Description Balance at Beginning of Year Charges to Loss on Sale of Subsidiary Deductions Balance at end of year Valuation reserve deducted from Prepaid Expenses and Other Current Assets: Year ended December 31, 2020 $ 1,770,000 $ - $ (1,770,000 ) $ - Year ended December 31, 2019 $ 1,770,000 $ - $ - $ 1,770,000 Property and Equipment Property and equipment are carried at cost net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred. Property, equipment, and improvements are depreciated using the straight-line method over the estimated useful lives of the assets or the particular improvements. Expenditures for repairs and improvements in excess of $10,000 that add to the productive capacity or extend the useful life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in earnings. F- 11 Long-Lived and Intangible Assets Identifiable intangible assets are amortized using the straight-line method over the period of expected benefit. Long-lived assets and intangible assets subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to fair value. For the year ended December 31, 2019 the Company recorded an impairment charge of $275,000 included in continuing operations. See Note 10 – Operating Lease Liabilities. Deferred Financing Costs Costs incurred with obtaining and executing revolving debt arrangements are capitalized and recorded in current assets and amortized using the effective interest method over the term of the related debt. Costs incurred with obtaining and executing other debt arrangements are presented as a direct deduction from the carrying value of the associated debt and also amortized using the effective interest method over the term of the related debt. The amortization of financing costs is included in interest and financing costs in the statement of operations. Derivative Liabilities In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging. Revenue Recognition The Company accounts for revenue recognition in accordance with accounting guidance codified as FASB ASC 606 “Revenue from Contracts with Customers” (“ASC 606”), as amended regarding revenue from contracts with customers. Under the standard an entity is required to recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. Under ASC 606, revenue is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). In evaluating our contracts with our customers under ASC 606, we have determined that there is no future performance obligation once delivery has occurred. The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition, as described below. There are no material upfront costs for operations that are incurred from contracts with customers. The Company’s rights to payments for goods transferred to customers are conditional only on the passage of time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 75 days. Payments received in advance from customers are recorded as deferred revenue until earned, at which time revenue is recognized. The Terms and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop work order is issued prior to the final delivery. The Company utilizes a Returned Merchandise Authorization or RMA process for determining whether to accept returned products. Customer requests to return products are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt of the product. Net sales represent gross sales less returns and allowances. F- 12 Use of Estimates In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. The more significant management estimates are the allowance for doubtful accounts, useful lives of property and equipment, provisions for inventory obsolescence, accrued expenses and whether to accrue for various contingencies. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Credit and Concentration Risks A large percentage of the Company’s revenues are derived from a small number of customers for U.S. Military Aviation. There were three customers that represented 73.9% of total sales, and three customers that represented 76.0% of total sales for the years ended December 31, 2020 and 2019, respectively. This is set forth in the table below. Customer Percentage of Sales 2020 2019 1 30.4 % 34.2 % 2 30.3 % 30.4 % 3 13.2 % * 4 ** 11.4 % * Customer was less than 10% of sales at December 31, 2019. ** Customer was less than 10% of sales at December 31, 2020. There were three customers that represented 80.3% of gross accounts receivable and 67.8% of gross accounts receivable at December 31, 2020 and 2019, respectively. This is set forth in the table below. Percentage of Receivables December 31, December 31, Customer 2020 2019 1 57.1 % 32.7 % 2 12.0 % 10.0 % 3 11.2 % 25.1 % Cash and Cash equivalents During the year, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts. Major Suppliers The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed. Income Taxes The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. F- 13 The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The Company accounts for uncertainties in income taxes under the provisions of FASB ASC 740-10-05 (the “Subtopic”). The Subtopic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The Subtopic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Earnings (Loss) per share Basic earnings (loss) per share (“EPS”) is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. For purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method. The following is the calculation of income (loss) from continuing operations applicable to common stockholders utilized to calculate the EPS: 2020 2019 Income (loss) from continuing operations - Basic $ 1,326,000 $ (2,598,000 ) Add: Convertible Note Interest for Potential Note Conversion 499,000 - Add: Convertible Note debt discount for Potential Note Conversion 149,000 - Income (loss) from continuing operations used to calculate diluted earnings per share $ 1,974,000 $ (2,598,000 ) F- 14 The following is a reconciliation of the denominators of basic and diluted earnings per share computations: 2020 2019 Weighted average shares outstanding used to compute basic earnings per share 30,742,154 28,851,816 Effect of dilutive stock options and warrants 1,590,000 - Effect of dilutive convertible notes payable 4,414,929 - Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share 36,747,083 28,851,816 The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares: December 31, 2020 December 31, 2019 Stock Options 549,000 800,000 Warrants 1,909,902 1,903,000 2,458,902 2,703,000 The following securities have been excluded from the calculation even though the exercise price was less than the average market price of the common shares because the effect of including these potential shares was anti-dilutive due to the net loss incurred during the years: December 31, 2020 December 31, 2019 Stock Options - 570,000 Warrants - 500 Convertible notes payable - 5,405,000 - 5,975,500 Stock-Based Compensation The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing reported market value. Stock compensation expense for employees amounted to $308,000 and $378,000 for the years ended December 31, 2020 and 2019, respectively. Stock compensation expense for directors amounted to $211,000 and $244,000 for the years ended December 31, 2020 and 2019, respectively. Stock compensation expenses for employees and directors were included in operating expenses on the accompanying Consolidated Statement of Operations. Goodwill Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at December 31, 2020 and 2019 relates to the acquisition of NTW. F- 15 The Company accounts for the impairment of goodwill under the provisions of ASU 2011-08 (“ASU 2011-08”), “Intangibles Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 updated the guidance on the periodic testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company performs impairment testing for goodwill annually, or more frequently when indicators of impairment exist. As discussed above, the Company adopted ASU 2011-08 and performs a qualitative assessment in the fourth quarter of each year to determine whether it was more likely than not that the fair value of a reporting unit is less than its carting amount. The Company determined that there has been no impairment of goodwill at December 31, 2020 and 2019. Freight Out Freight out is included in operating expenses and amounted to $91,000 and $134,000 for the years ended December 31, 2020 and 2019, respectively. 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. F- 16 Reclassifications Reclassifications occurred to certain 2019 amounts to conform to the 2020 classification. These reclassifications had no impact on the statement of operations. Note 4. ACCOUNTS RECEIVABLE The components of accounts receivable at December 31, are detailed as follows: December 31, 2020 December 31, 2019 Accounts Receivable Gross $ 9,762,000 $ 8,717,000 Allowance for Doubtful Accounts (964,000 ) (859,000 ) Accounts Receivable Net $ 8,798,000 $ 7,858,000 The allowance for doubtful accounts for the years ended December 31, 2020 and 2019 is as follows: Charged Balance at to Deductions Balance at Beginning of Costs and from End of Year Expenses Reserves Year Year ended December 31, 2020 Allowance for Doubtful Accounts $ 859,000 $ 483,000 $ 378,000 $ 964,000 Year ended December 31, 2019 Allowance for Doubtful Accounts $ 524,000 $ 556,000 $ 221,000 $ 859,000 Note 5. INVENTORY The components of inventory at December 31, consisted of the following: December 31, December 31, 2020 2019 Raw Materials $ 3,951,000 $ 4,574,000 Work In Progress 21,933,000 18,452,000 Finished Goods 8,831,000 9,810,000 Reserve (2,595,000 ) (4,190,000 ) Total Inventory $ 32,120,000 $ 28,646,000 The Company periodically evaluates inventory and establishes reserves for obsolescence, excess quantities, slow-moving goods, and for other impairment of value. F- 17 Note 6. PROPERTY AND EQUIPMENT The components of property and equipment at December 31, consisted of the following: December 31, December 31, 2020 2019 Land $ 300,000 $ 300,000 Buildings and Improvements 1,683,000 1,650,000 Machinery and Equipment 21,686,000 18,450,000 Finance Lease Machinery and Equipment 78,000 296,000 Tools and Instruments 12,116,000 11,021,000 Automotive Equipment 200,000 177,000 Furniture and Fixtures 290,000 290,000 Leasehold Improvements 855,000 530,000 Computers and Software 436,000 425,000 Total Property and Equipment 37,644,000 33,139,000 Less: Accumulated Depreciation (28,063,000 ) (25,561,000 ) Property and Equipment, net $ 9,581,000 $ 7,578,000 Depreciation expense for the years ended December 31, 2020 and 2019 was approximately $2,570,000 and $3,002,000, respectively. Assets held under finance lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under finance leases is included in depreciation expense for 2020 and 2019. Accumulated depreciation on these assets was approximately $28,000 and $289,000 as of December 31, 2020 and 2019, respectively. Note 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The components of accounts payable and accrued expenses at December 31, are detailed as follows: December 31, 2020 December 31, 2019 Accounts Payable $ 7,240,000 $ 6,576,000 Accrued Payroll 663,000 444,000 Accrued Interest - related parties 400,000 210,000 Accrued Interest - others 42,000 294,000 Accrued expenses - other 337,000 581,000 Accounts Payable and accrued expenses $ 8,682,000 $ 8,105,000 Note 8. SALE AND LEASEBACK TRANSACTION On October 24, 2006, the Company consummated a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New York (the “Bay Shore Property”) for a purchase price of $6,200,000. The Company realized a gain on the sale of $1,051,000 of which $300,000 was recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized ratably over the remaining term of the twenty - year lease at approximately $38,000 per year. The gain is included in Other Income in the accompanying Consolidated Statements of Operations. The unrecognized portion of the gain in the amount of $219,000 and $257,000 as of December 31, 2020 and 2019, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets. F- 18 Simultaneous with the closing of the sale of the Bay Shore Property, the Company entered into a 20-year triple- net lease (the “Lease”) with the purchaser for the property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year, and thereafter increases 3% per year. The Lease grants the Company an option to renew the Lease for an additional period of five years. The Company has on deposit with the purchaser of $89,000 as security for the performance of its obligations under the Lease. In addition, at December 31, 2019, the Company had on deposit $150,000 with the landlord as security for the completion of certain repairs and upgrades to the Bay Shore Property. In 2020, the landlord utilized the amounts on deposit to install air conditioning throughout the manufacturing facility. At December 31, 2019, this amount was included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the accompanying Consolidated Balance Sheets. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also contains customary representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary remedies upon a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency in future rent. See Note 10 – Operating Lease Liabilities. The Company accounted for these transactions under the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions”. Note 9. NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS Notes payable, related party notes payable and finance lease obligations consist of the following: December 31, December 31, 2020 2019 Revolving credit note payable to Sterling National Bank (“SNB”) $ 15,649,000 $ 12,543,000 Term loan, SNB 5,558,000 3,800,000 Finance lease obligations 6,000 22,000 Loans Payable - financed assets 48,000 385,000 Related party notes payable, net of debt discount 6,012,000 6,862,000 Convertible notes payable-third parties, net of debt discount - 2,338,000 Subtotal 27,273,000 25,950,000 Less: Current portion of notes payable, related party notes payable and finance lease obligations (16,475,000 ) (22,544,000 ) Notes payable, related party notes payable and finance lease obligations, net of current portion $ 10,798,000 $ 3,406,000 Sterling National Bank (“SNB”) On December 31, 2019, the Company entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) expiring on December 30, 2022. The new loan facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). Proceeds 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 initial repayment terms of 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, 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. F- 19 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 30, 2022. Additionally, the date by which certain subordinated third-party notes need to be extended by was changed from September 30, 2020 to November 30, 2020. The Company has paid an amendment fee of $20,000. The 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. As of December 31, 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. The aggregate payments for the term note at December 31, 2020 are as follows: For the year ending Amount December 31, 2021 $ 812,000 December 31, 2022 4,805,000 SNB Term Loans payable 5,617,000 Less: debt issuance costs (59,000 ) Total SNB Term loan payable, net of debt issuance costs 5,558,000 Less: Current portion of SNB term loan payable 812,000 Total long-term portion of SNB term loan payable $ 4,746,000 Under the terms of the SNB Facility, both the SNB revolving line of credit and the SNB term loan bear an interest rate equal to 30-day LIBOR, plus 2.5% (with a floor of 3.5%). As of December 31, 2020, the Company’s debt to SNB in the amount of $21,207,000 consisted of the SNB revolving line of credit note in the amount of $15,649,000 and the SNB term loan in the amount of $5,558,000. Interest expense for the year ending December 31, 2020 amounted to $586,000 for this credit facility. As of December 31, 2019, the Company’s 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. No interest expense was incurred on the SNB Facility during 2019. PNC Bank N.A. (“PNC”) 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 provided for a $15,000,000 revolving line of credit (“PNC revolving line of credit”) and a term loan (“PNC term loan”). Interest expense related to the PNC Facility amounted to approximately $1,860,000 for the year ended December 31, 2019. 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. F- 20 Loans Payable – Financed Assets The Company financed the 2019 acquisition of manufacturing equipment with a third-party loan. The loan obligation totaled $0 and $385,000 as of December 31, 2020 and 2019, respectively and bore interest at 3% per annum. This loan was repaid in full in conjunction with the First Amendment to the SNB Term Loan. The Company has also borrowed to purchase a delivery vehicle in July 2020. The loan obligation totaled $48,000 as of December 31, 2020. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026. Annual maturities of this loan are as follows: For the year ending Amount December 31, 2021 $ 9,000 December 31, 2022 9,000 December 31, 2023 9,000 December 31, 2024 9,000 December 31, 2025 9,000 Thereafter 3,000 Loans Payable - financed assets 48,000 Less: Current portion 9,000 Long-term portion $ 39,000 Related Party Notes Payable Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich. In addition, a third director of the Company is a vice president of Taglich Brothers, Inc. Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received cash and equity compensation for their services. 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. The maturity date of these notes, was June 30, 2020, but was extended to July 1, 2023. On 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. F- 21 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. 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. 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. This 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. 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. 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. 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 July 1, 2023. 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 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. 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 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. Related party advances and notes payable, net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled $6,012,000 and $6,862,000, as of December 31, 2020 and 2019, respectively. Unamortized debt discounts related to these notes amounted to $0 and $226,000 as of December 31, 2020 and 2019, respectively. Interest incurred on these related party notes amounted to approximately $526,000 and $446,000 for the years ended December 31, 2020 and 2019, respectively Amortization of debt discount incurred on these related party notes amounted to approximately $226,000 and $375,000 for the year ended December 31, 2020 and 2019 respectively. The amortization of the debt discount is included in interest and financing costs in the Consolidated Statement of Operations. F- 22 Per 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. On January 1, 2021, the related party subordinated notes were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. The Note Holders and the principal balance of the notes as amended on January 1, 2021 are shown below: Michael Taglich, Chairman Robert Taglich, Director Taglich Brothers Inc. Total Convertible Subordinated Notes $ 2,666,000 $ 1,905,000 $ 241,000 $ 4,812,000 Subordinated notes 1,250,000 350,000 - 1,600,000 Total $ 3,916,000 $ 2,255,000 $ 241,000 $ 6,412,000 Convertible Notes Payable – Third Parties As discussed above in connection with the Private Placement of Subordinated Notes due May 31, 2019, together with Shares of Common Stock, a $100,000 note issued to a third party in May 2018 was repaid in January 2020. In the years ended December 31, 2020 and 2019, the third party holders of $580,000 and $2,245,000 principal, respectively, with accrued interest thereon of $58,000 and $344,000, respectively, converted their notes into approximately 426,000 and 1,831,000 shares, respectively, of common stock. These notes were converted at a per share price between $1.35 and $1.50. 8% Notes payable to third parties totaled $0 and $2,338,000, net of unamortized debt discount at December 31, 2020 and 2019, respectively. Interest incurred on the 8% Notes amounted to approximately $141,000 and $380,000 for the years ended December 31, 2020 and 2019, respectively, unamortized debt discounts related to these notes amounted to $0 and $7,000 as of December 31, 2020 and 2019, respectively. Amortization of debt discount on the 8% Notes amounted to approximately $7,000 and $135,000 for the years ended December 31, 2020 and 2019, respectively. These costs are included in interest and financing costs in the Consolidated Statement of Operations. SBA Loans 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, which was forgiven by the SBA in December of 2020. Each SBA Loan was evidenced by a Note. Subject to the terms of the Note, the SBA Loans bore interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was 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”). In December 2020, the Company was notified that the loans and all interest accrued thereon had been forgiven. The Company elected to treat the SBA Loans as debt under FASB ASC 470. As such, the Company derecognized the liability when the loans were forgiven and the Company was legally released from the loans. Note 10. OPERATING LEASE LIABILITIES The Company leases substantially all of its office space, technology equipment and office equipment used to conduct its business. The Company adopted ASC 842 effective January 1, 2019. For contracts entered into on or after the effective date, at the inception of a contract it assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether its obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed. F- 23 The aggregate undiscounted cash flows of operating lease payments, with remaining terms greater than one year are as follows: For the year ended Amount December 31, 2021 $ 1,080,000 December 31, 2022 1,007,000 December 31, 2023 1,038,000 December 31, 2024 1,070,000 December 31, 2025 992,000 Thereafter 730,000 Total future minimum lease payments 5,917,000 Less: discount (1,289,000 ) Total operating lease maturities 4,628,000 Less: current portion of operating lease liabilities (701,000 ) Total long term portion of operating lease maturities $ 3,927,000 December 31, December 31, 2020 2019 Weighted Average Remaining Lease Term - in years 5.53 6.32 Weighted Average discount rate - % 8.89 % 9.50 % As part of the effort to reduce costs, corporate executive offices were moved to an existing 5.4-acre corporate campus in Bay Shore, New York. The Company remains liable under the lease for the office in Hauppauge, New York which is now vacant. This lease has a term which ends January 2022. The annual rent was approximately $113,000 for the lease year which began in January 2019 and increases by approximately 3% per annum each year thereafter. Accordingly, the Company recognized an impairment of $275,000 to its Operating Lease Right-of-Use-Asset for the year ended December 31, 2019. NTW’s warehouse lease was terminated in May 2020 by its landlord under the terms of its lease agreement. Additionally, the Company entered into a new lease agreement for warehouse space in Bohemia, NY. The new lease term commenced on April 1, 2020 and expires on May 31, 2025. During the first year of the lease, the monthly rent is $10,964 and increases 3% each year thereafter. The final two months are equal installments of $1,746. Rent expense for the years ended December 31, 2020 and 2019 was $1,173,000 and $1,193,000, respectively. Note 11. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY In connection with the sale of the Company’s wholly-owned subsidiary, AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., (“Meyer”) in 2017, Meyer was obligated to pay the Company within 30 days after the end of each calendar quarter, commencing April 1, 2017, an amount equal to five (5%) percent of the net sales of AMK for that quarter until the aggregate payments made to the Company (the “Meyer Agreement”) equals $1,500,000 (the “Maximum Amount”). As of December 31, 2018, the Company received an aggregate of $363,000 under the Meyer Agreement. In order to increase liquidity, on January 15, 2019, the Company entered into a “Purchase Agreement” with 15 accredited investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to which the Company assigned to the Purchasers all of their rights, title and interest to the remaining $1,137,000 of the $1,500,000 in payments due from Meyer for the sale of AMK (the “Remaining Amount”) for an immediate payment of $800,000, including $100,000 from each of Michael and Robert Taglich, and $75,000 for the benefit of the children of Michael Taglich. The timing of the payments is based upon the net sales of AMK. If the Purchasers have not received the entire Remaining Amount by March 31, 2023, they have the right to demand payment of their pro rata portion of the unpaid Remaining Amount from the Company (“Put Right”). To the extent the Purchasers exercise their Put Right, the remaining payments from Meyer will be retained by the Company. F- 24 The Purchasers have agreed to pay Taglich Brothers, Inc. a fee equal to 2% per annum of the purchase price paid by such Purchasers, payable quarterly, to be deducted from the payments of the Remaining Amount, for acting as paying agent in connection with the payments from Meyer. Although the Company sold all of its rights to the Remaining Amount, as a result of its obligation to the Purchasers, the Company is required to account for the Remaining Amount or portion thereof as income when earned. The Company recorded the $800,000 in proceeds as a liability on its consolidated balance sheet, net of transaction costs of $3,000. Transaction costs will be amortized to interest expense over the estimated life of the Purchase Agreement. As payments are remitted to the Purchasers, the balance of the recorded liability will be effectively repaid over the life of the Purchase Agreement. To determine the amortization of the recorded liability, the Company is required to estimate the total amount of future payment to be received by the Purchasers. The Company estimates that the entire Remaining Amount will be received, and accordingly, the Remaining Amount less the $800,000 purchase price received (the “Discount”) will be amortized into the liability balance and recorded as interest expense. The Discount will be amortized through the earliest date that the Purchasers can exercise their Put Right, using the straight line method (which is not materially different than the effective interest method) over the estimated life of the Purchase Agreement with the Purchasers. Periodically, the Company will assess the estimated payments to be made to the Purchasers related to the Meyer Agreement, and to the extent the amount or timing of the payments is materially different from their original estimates, the Company will prospectively adjust the amortization of the liability. The amount or timing of the payments from Meyer are not within the Company’s control. Since the inception of the Purchase Agreement, the Company estimates the effective annual interest rate over the life of the agreement to be approximately 18%. The liability is classified between the current and non-current portion of liability related to sale of future proceeds from disposition of subsidiary based on the estimated recognition of the payments to be received by the purchasers in the next 12 months from the financial statements reporting date. The table below shows the activity within the liability account for the years ended December 31, 2020 and 2019: December 31, 2020 December 31, 2019 Cash received from sale of future proceeds from disposition of subsidiary $ - $ 800,000 Liabilities related to sale of future proceeds from disposition of subsidiary – beginning balance 602,000 - Non-Cash other income recognized (402,000 ) (282,000 ) Non-Cash interest expense recognized 122,000 84,000 Liabilities related to sale of future proceeds from disposition of subsidiary – ending balance 322,000 602,000 Less: unamortized transaction costs (3,000 ) (3,000 ) Liability related to sale of future proceeds from disposition of subsidiary, net $ 319,000 $ 599,000 F- 25 Note 12. STOCKHOLDERS’ EQUITY Common Stock – 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 a Form S-3 filed on October 10, 2019 as updated on January 15, 2020. Costs of the sale amounted to $145,000. During the year ended December 31, 2020, the Company issued 1,830,631 shares of common stock to convert third party subordinated debt totaling $2,589,000 to equity. During the year ended December 31, 2020, the Company issued 178,405 shares of common stock in payment of directors’ fees totaling $211,000. During the year ended December 31, 2019, the Company issued 50,000 shares of common stock in lieu of cash payment for various services provided to the Company, 257,602 shares of common stock in payment of directors’ fees, 424,805 shares of common stock issued from the conversion of notes payable, 180,000 shares issued in connection with the issuance of subordinated notes payable and 2,778 shares issued upon the exercise of stock options. During the first quarter of 2021, the Company issued 41,960 shares of common stock in payment of directors’ fees totaling $52,000 and 51,224 shares of common stock upon the exercise of stock options. Note 13. EMPLOYEE BENEFITS PLANS The Company employs both union and non-union employees and maintains several benefit plans. Union Substantially the entire workforce at AIM is subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the “Union”). The Agreement was renewed as of December 31, 2018 and expires on December 31, 2021 and covers all of AIM’s production personnel, of which there are approximately 93 people. AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the United Services Worker’s Security Fund. This is the only pension benefit required by the Agreement and the Company is not obligated for any future defined benefit to retirees. The Agreement contains a “no-strike” clause, whereby, during the term of the Agreement, the Union will not strike and AIM will not lockout its employees. Medical benefits for union employees are provided through a policy with Insperity Services, Inc. (“Insperity”), the costs of which are substantially borne by the Company. In addition, the Company is obligated to make contributions for union dues and a security fund (defined contribution plan) for the benefit of each union employee. Contributions to the security fund amounted to $134,000 and $137,000 for the years ended December 31, 2020 and 2019, respectively. The Company adopted ASU No. 2011-09, “Compensation - Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan” (“ASU 2011-09”). ASU 2011-09 requires additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. The Union’s retirement plan is a defined contribution plan. As such, the Company is not responsible for the obligations of other companies in the Union’s retirement plan and no further disclosures are required. Others All of the Company’s employees are covered under a co-employment agreement with Insperity, a professional employer organization (“PEO”) that provides out-sourced human resource services. The Company has a defined contribution plans under Section 401(k) of the Internal Revenue Code (the “Plans”). Pursuant to the Plans, qualified employees may contribute a percentage of their pre-tax eligible compensation to the Plan. The Company does not match any contributions that employees may make to the Plans. F- 26 Note 14. CONTINGENCIES A number of actions have been commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result of an injury suffered on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts included in accounts payable they are not specifically discussed herein. Contract Pharmacal Corp. commenced an action on October 2, 2018, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with respect to the property that was formerly occupied by Welding Metallurgy, Inc., at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal seeks damages for an amount in excess of $1,000,000 for our failure to make the entire premises available by the Sublease commencement date. The Company disputes the validity of the claims asserted by Contract Pharmacal and believes it has meritorious defenses to those claims. The pace of litigation in the civil courts in New York has been slowed by the impact of Covid-19. The Court has ordered us and Contract Pharmacal to complete discovery, which is ongoing. On December 20, 2018, the Company completed the sale of all of the outstanding shares of its subsidiary, WMI, to CPI. There ensued a dispute with CPI regarding amounts it claimed were due based upon the value it ascribed to the inventory as of the closing date. On December 23, 2020 the Company and CPI reached an agreement to settle the working capital dispute. Pursuant to the settlement, the escrow agent released to CPI the balance of $ 1,380,684 remaining in the escrow account which had been established at the closing and the Company and CPI exchanged mutual releases customary in the circumstances. From time to time the Company may be engaged in various lawsuits and legal proceedings in the ordinary course of business. The Company is currently not aware of any legal proceedings the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its business, financial condition or operating results. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse to our interest. F- 27 Note 15. INCOME TAXES The provision for (benefit from) income taxes as of December 31, is set forth below: 2020 2019 Current Federal tax refund $ (1,416,000 ) $ - State 4,000 37,000 Total (Benefit from) Expense for Income Taxes (1,412,000 ) 37,000 Deferred Tax Benefit - - Valuation Allowance - - Net (Benefit from) Provision for Income Taxes $ (1,412,000 ) $ 37,000 The following is a reconciliation of our income tax rate computed using the federal statutory rate to our actual income tax rate as of December 31, 2020 2019 U.S. statutory income tax rate 21.00 % 21.00 % State taxes -0.90 % -1.11 % Permanent difference, overaccruals, and non-deductible items 159.65 % -3.33 % Rate change and provision to return true-up 197.34 % 0.62 % Expired stock options 0.00 % 1.54 % Deferred tax valuation allowance -393.63 % -20.13 % Cares Act Refund 458.76 % 0.00 % Total 442.22 % -1.41 % F- 28 The components of net deferred tax assets at December 31, 2020 and 2019 are set forth below: December 31, December 31, 2020 2019 Deferred tax assets: Current: Net operation loss $ 6,594,000 $ 8,017,000 Allowance for doubtful accounts 252,000 216,000 Inventory - IRC 263A adjustment 341,000 268,000 Stock based compensation - options and restricted stock 277,000 150,000 Capitalized engineering costs 336,000 323,000 Deferred rent 4,000 12,000 Amortization - NTW Transaction 495,000 442,000 Inventory reserve 1,250,000 1,000,000 Deferred gain on sale of real estate 132,000 84,000 Accrued Expenses 158,000 165,000 Disallowed interest 1,813,000 1,431,000 Right of Use Asset 292,000 329,000 Total non-current deferred tax asset before valuation allowance 11,944,000 12,437,000 Valuation allowance (9,394,000 ) (10,663,000 ) Total non-current deferred tax asset after valuation allowance 2,550,000 1,774,000 Deferred tax liabilities Property and equipment (2,150,000 ) (1,628,000 ) Other (400,000 ) (146,000 ) Total deferred tax liabilities (2,550,000 ) (1,774,000 ) Net deferred tax asset $ - $ - During the years ended December 31, 2020 and 2019, the Company recorded a valuation allowance equal to its net deferred tax assets. The Company determined that due to a recent history of net losses, that at this time, sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reduced or eliminated. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December 31, 2020 and 2019, the Company provided a valuation allowance on its net deferred tax assets of $9,394,000 and $10,663,000, respectively. As of December 31, 2020, the Company had a Federal net operating loss carry forward of approximately $27,576,000, of which $22,461,000 expire in years through 2037 and $5,115,000 that do not expire. State net operating loss carry forwards total approximately $9,458,000 (with effective rates from 5.5% to 10%), expiring in years through 2040. At December 31, 2020 and 2019, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2020 and 2019, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions. In certain cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The Company files federal and state income tax returns in jurisdictions with varying statutes of limitations. The 2017 through 2020 tax years generally remain subject to examination by federal and state tax authorities. F- 29 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 is currently evaluating the impact of other provisions of the CARES Act on its accounting for income taxes and does not believe it has a material impact at this time. Note 16. STOCK OPTIONS AND WARRANTS Stock-Based Compensation Stock Options In July 2017, the Board of Directors adopted the Company’s 2017 Equity Incentive Plan (“2017 Plan”) which authorized the grant of rights with respect to up to 1,200,000 shares. The 2017 Plan was approved by affirmative vote of the Company’s stockholders on October 3, 2017. During the year ended December 31, 2020, the Company granted options to purchase 560,000 shares of common stock to certain of its employees and directors. The weighted average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 0.22% to 1.61%; expected volatility factors of 71.5% to 75.4%; expected dividend yield of 0%; and expected life of 2.5 to 4 years. During the year ended December 31, 2019, the Company granted options to purchase 613,000 shares of common stock to certain of its employees and directors. The weighted average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 1.87% to 2.60%; expected volatility factors of 65.8% to 72.4%; expected dividend yield of 0%; and expected life of 4.9 to 6.8 years. The Company recorded stock based compensation expense of $308,000 and $378,000 in its consolidated statement of operations for the years ended December 31, 2020 and 2019, respectively, and such amounts were included as a component of general and administrative expense. The fair values of stock options granted were estimated using the Black-Sholes option-pricing model with the following assumptions for the years ended December 31: 2020 2019 Risk-free interest rates 0.22% - 1.61 % 1.87% - 2.60 % Expected life (in years) 2.50 - 4.00 4.90 - 6.80 Expected volatility 71.5% - 75.4 % 65.8% - 72.4 % Dividend yield 0.00 % 0.00 % Weighted-average grant date fair value per share $ 0.64 $ 0.50 The expected life is the number of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture. Expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin No. 107. In addition to the inputs referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based on the Company’s experience. F- 30 A summary of the status of the Company’s stock options as of December 31, 2020 and 2019, and changes during the two years then ended are presented below. Wtd. Avg. Exercise Options Price Balance, January 1, 2019 838,149 $ 3.08 Granted during the period 613,000 0.96 Exercised during the period (15,000 ) 0.88 Terminated/Expired during the period (66,500 ) 7.46 Balance, December 31, 2019 1,369,649 $ 2.01 Granted during the period 560,000 1.20 Exercised during the period - - Terminated/Expired during the period (70,649 ) 7.48 Balance, December 31, 2020 1,859,000 $ 1.56 Exercisable at December 31, 2020 1,488,997 $ 1.68 The following table summarizes information about stock options at December 31, 2020: Number Wtd. Avg, Wtd. Avg. Range of Exercise Price Outstanding Exercisable Life Exercise Price $0.00 - $5.00 1,784,000 1,414,000 3.69 years $ 1.25 $5.01 - $15.00 75,000 75,000 0.32 years $ 8.85 $0.00 - $15.00 1,859,000 1,489,000 3.55 years $ 1.56 As of December 31, 2020, there was $80,000 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average vesting period of 0.7 years. The aggregate intrinsic value at December 31, 2020 was based on the Company’s closing stock price of $1.23 was approximately $269,000. The aggregate intrinsic value was calculated based on the positive difference between the closing market price of the Company’s Common Stock and the exercise price of the underlying options. The total number of in-the-money options exercisable as of December 31, 2020 was 205,000. The weighted average fair value of options granted during the years ended December 31, 2020 and 2019 was $0.64 and $0.50 per share, respectively. The total intrinsic value of options exercised during both the years ended December 31, 2020 and 2019 was $0. The total fair value of shares vested during the years ended December 31, 2020 and 2019 was $237,000 and $1,210,000, respectively. Warrants During both the years ended December 31, 2020 and 2019, the Company did not issue warrants, in connection with convertible notes payable and common stock issuances. F- 31 The following tables summarize the Company’s outstanding warrants as of December 31, 2020 and changes during the two years then ended: Wtd. Avg. Wtd. Avg. Remaining Exercise Contractual Warrants Price Life (years) Balance, January 1, 2019 2,239,762 $ 3.10 3.35 Granted during the period - - - Terminated/Expired during the period (56,800 ) 10.80 - Balance, December 31, 2019 2,182,962 $ 2.90 2.43 Granted during the period - - - Terminated/Expired during the period - $ - - Balance, December 31, 2020 2,182,962 $ 2.90 1.43 Exercisable at December 31, 2020 2,182,962 $ 2.90 1.43 Note 17. SEGMENT REPORTING In accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company follows ASC 280, which establishes standards for reporting information about operating segments in annual and interim financial statements, and requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company currently divides its operations into two operating segments: Complex Machining which consists of AIM and NTW and Turbine Engine Components which consists of Sterling. Along with its operating subsidiaries, the Company reports the results of our corporate division as an independent segment. The accounting policies of each of the segments are the same as those described in Note 3 – Summary of Significant Accounting Policies. Intersegment transfers are recorded at the transferors cost, and there is no intercompany profit or loss on intersegment transfers. We evaluate performance based on revenue, gross profit contribution and assets employed. F- 32 Financial information about the Company’s reporting segments for the years ended December 31, 2020 and 2019 are as follows: 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 F-33