AIR INDUSTRIES GROUP 10-Q

Item 1. Financial statements Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020 2 Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited) 3 Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 7 1 AIR INDUSTRIES GROUP Condensed Consolidated Balance Sheets March 31, December 31, 2021 2020 (unaudited) ASSETS Current Assets Cash and Cash Equivalents $ 1,731,000 $ 2,505,000 Accounts Receivable, Net of Allowance for Doubtful Accounts of $886,000 and $964,000 9,692,000 8,798,000 Inventory 32,195,000 32,120,000 Prepaid Expenses and Other Current Assets 250,000 173,000 Prepaid Taxes 15,000 15,000 Total Current Assets 43,883,000 43,611,000 Property and Equipment, Net 9,141,000 9,581,000 Operating Lease Right-Of-Use-Asset 3,392,000 3,510,000 Deferred Financing Costs, Net, Deposits and Other Assets 781,000 912,000 Goodwill 163,000 163,000 TOTAL ASSETS $ 57,360,000 $ 57,777,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Notes Payable and Finance Lease Obligations - Current Portion $ 15,606,000 $ 16,475,000 Accounts Payable and Accrued Expenses 8,246,000 8,682,000 Operating Lease Liabilities - Current Portion 693,000 701,000 Deferred Gain on Sale - Current Portion 38,000 38,000 Deferred Revenue 1,802,000 917,000 Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - Current Portion 200,000 200,000 Deferred payroll tax liability - CARES Act - Current Portion 314,000 314,000 Total Current Liabilities 26,899,000 27,327,000 Long Term Liabilities Notes Payable and Finance Lease Obligations - Net of Current Portion 4,587,000 4,786,000 Notes Payable - Related Party - Net of Current Portion 6,412,000 6,012,000 Operating Lease Liabilities - Net of Current Portion 3,763,000 3,927,000 Deferred Gain on Sale - Net of Current Portion 171,000 181,000 Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - Net of Current Portion 49,000 122,000 Deferred payroll tax liability - CARES Act - Net of Current Portion 313,000 313,000 TOTAL LIABILITIES 42,194,000 42,668,000 Commitments and Contingencies Stockholders’ Equity Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both March 31, 2021 and December 31, 2020. - - Common Stock - Par Value $.001 - Authorized 60,000,000 Shares, 32,000,155 and 31,906,971 Shares Issued and Outstanding as of March 31, 2021 and December 31, 2020, respectively 32,000 32,000 Additional Paid-In Capital 81,447,000 81,238,000 Accumulated Deficit (66,313,000 ) (66,161,000 ) TOTAL STOCKHOLDERS’ EQUITY 15,166,000 15,109,000 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 57,360,000 $ 57,777,000 See Notes to Condensed Consolidated Financial Statements 2 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Operations For the Three Months Ended March 31, (Unaudited) 2021 2020 Net Sales $ 13,712,000 $ 13,447,000 Cost of Sales 11,915,000 11,266,000 Gross Profit 1,797,000 2,181,000 Operating Expenses 1,770,000 2,262,000 Income (loss) from Operations 27,000 (81,000 ) Interest and Financing Costs (172,000 ) (252,000 ) Interest Expense - Related Parties (125,000 ) (128,000 ) Other Income, Net 118,000 105,000 Loss before Benefit From Income Taxes (152,000 ) (356,000 ) Benefit from Income Taxes - (1,414,000 ) Net (Loss) Income $ (152,000 ) $ 1,058,000 Net (Loss) Income per share - Basic $ (0.00 ) $ 0.04 Net (Loss) Income per share - Diluted $ (0.00 ) $ 0.03 Weighted Average Shares Outstanding - basic 31,971,922 30,380,234 Weighted Average Shares Outstanding - diluted 31,971,922 36,521,454 See Notes to Condensed Consolidated Financial Statements 3 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Stockholders’ Equity For the Three Months Ended March 31, 2021 and 2020 (Unaudited) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance, January 1, 2021 31,906,971 $ 32,000 $ 81,238,000 $ (66,161,000 ) $ 15,109,000 Common stock issued for directors fees 41,960 - 52,000 - 52,000 Stock Compensation Expense - - 157,000 - 157,000 Stock Options exercised 51,224 - - - Net Loss - - - (152,000 ) (152,000 ) Balance, March 31, 2021 32,000,155 $ 32,000 $ 81,447,000 $ (66,313,000 ) $ 15,166,000 Balance, January 1, 2020 29,478,338 $ 29,000 $ 77,434,000 $ (67,257,000 ) $ 10,206,000 Common stock issued for directors fees 43,771 - 55,000 - 55,000 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 590,243 - 885,000 - 885,000 Stock Compensation Expense - - 140,000 - 140,000 Net Income - - - 1,058,000 1,058,000 Balance, March 31, 2020 30,531,949 $ 30,000 $ 79,352,000 $ (66,199,000 ) $ 13,183,000 See Notes to Condensed Consolidated Financial Statements 4 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, (Unaudited) 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) Income $ (152,000 ) $ 1,058,000 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation of property and equipment 713,000 656,000 Non-cash employee compensation expense 157,000 140,000 Non-cash directors compensation 52,000 55,000 Non-cash other income recognized (104,000 ) (92,000 ) Non-cash interest expense 31,000 28,000 Amortization of Right-of-Use Asset 118,000 122,000 Deferred gain on sale of real estate (10,000 ) (10,000 ) Loss on sale of equipment - 16,000 Amortization of debt discount on convertible notes payable - 78,000 Bad debt expense (recovery) (78,000 ) 268,000 Amortization of deferred financing costs 36,000 30,000 Changes in Assets and Liabilities (Increase) Decrease in Operating Assets: Accounts receivable (816,000 ) (1,033,000 ) Inventory (75,000 ) (1,162,000 ) Prepaid expenses and other current assets (77,000 ) (6,000 ) Deposits and other assets 95,000 (76,000 ) Income tax receivable - (1,416,000 ) Increase (Decrease) in Operating Liabilities: Accounts payable and accrued expenses (36,000 ) 1,216,000 Operating lease liabilities (172,000 ) (167,000 ) Deferred revenue 885,000 (7,000 ) Income taxes payable - (12,000 ) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 567,000 (314,000 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (273,000 ) (78,000 ) NET CASH USED IN INVESTING ACTIVITIES (273,000 ) (78,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Note payable - revolver - net - Sterling National Bank (868,000 ) 1,033,000 Payments of note payable - term notes - SNB (196,000 ) (90,000 ) Payments of finance lease obligations (2,000 ) (7,000 ) Proceeds from issuance of common stock - 984,000 Share issuance costs - (145,000 ) Payments of notes payable issuances- related party - (1,012,000 ) Payments of notes payable - third party - (100,000 ) Payments of loan payable - financed asset (2,000 ) (71,000 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,068,000 ) 592,000 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (774,000 ) 200,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,505,000 1,294,000 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,731,000 $ 1,494,000 See Notes to Condensed Consolidated Financial Statements 5 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, (Continued) (Unaudited) 2021 2020 Supplemental cash flow information Cash paid during the period for interest $ 307,000 $ 205,000 Supplemental disclosure of non-cash investing and financing activities Capitalization of accrued interest on related party notes payable $ 400,000 $ - Common Stock issued for conversion of notes payable and accrued interest $ - $ 885,000 See Notes to Condensed Consolidated Financial Statements 6 AIR INDUSTRIES GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. FORMATION AND BASIS OF PRESENTATION Organization Air Industries Group is a Nevada corporation (“AIRI”). As of and for the three months ending March 31, 2021, the accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”). Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated December 31, 2020 was derived. Reclassifications Reclassification occurred to certain 2020 amounts to conform to the 2021 classification. These reclassifications had no impact on the statement of operations. Liquidity At each reporting period, management evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if management concludes that substantial doubt exists about the Company’s ability to continue as a going concern and such doubt is not alleviated by the Company’s plans or when the Company’s plans alleviate substantial doubt about its ability to continue as a going concern. The evaluation entails analyzing prospective operating budgets and forecasts for expectations regarding cash needs and comparing those needs to the current cash and cash equivalent balance and expectations regarding cash to be generated over the following year. Although the global outbreak of COVID-19 had a significant adverse impact on the world economy and negatively impacted the Company’s revenues, earnings and operating cash flows in 2020, management believes the Company’s operations substantially returned to normal in fiscal 2021 and the Company generated net cash from operations of $567,000 in the quarter ended March 31, 2021. With the first quarter of fiscal 2021 now completed and the Company’s recent investments in new machinery and equipment paying off, management believes the Company will continue to improve its liquidity. As such, based on current best estimates of fiscal 2021 sales, confirmed and expected orders, the strength of existing backlog, overall market demand, expected timing of future cash receipts and expenditures and the Company’s ability to access additional liquidity, if needed, the Company believes it will have adequate cash to support operations through May 31, 2022. 7 Subsequent Events Management has evaluated subsequent events through the date of this filing. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Inventory Valuation For annual periods, the Company values inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods. For interim periods, substantially all of the inventory value has been estimated using a gross profit percentage based on annual gross profit percentages of the immediately preceding year as applied to the net sales of the current period. During the three months ended March 31, 2021, the Company determined that its gross profit for its Complex Machining segment was below its 2020 gross profit percentages, and accordingly has adjusted margins to less than those of 2020. Adjustments to reconcile the annual physical inventory to the Company’s books are recorded in the fourth quarter. Credit and Concentration Risks Net Sales and Accounts Receivable There were three customers that represented 77.9% and 79.9% of total net sales for the three months ended March 31, 2021 and 2020, respectively. This is set forth in the table below. Percentage of Sales Customer March 31, 2021 March 31, 2020 (unaudited) (unaudited) 1 33.8 % 36.2 % 2 26.6 % 31.5 % 3 17.5 % 12.2 % 8 There were three customers that represented 77.8% and 80.3% of gross accounts receivable at March 31, 2021 and December 31, 2020, respectively. This is set forth in the table below. Percentage of Receivables Customer March 31, 2021 December 31, 2020 (unaudited) 1 46.7 % 57.1 % 2 17.6 % * 3 13.5 % 12.0 % 4 ** 11.2 % * Customer was less than 10% of Gross Accounts Receivable at December 31, 2020. ** Customer was less than 10% of Gross Accounts Receivable at March 31, 2021. Cash and Cash Equivalents During the period, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts. Major Suppliers The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed. Leases The Company accounts for leases under ASC 842, “Leases.” All leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. See Note 4. Earnings (Loss) per share Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. For purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method. The following is the calculation of net income (loss) applicable to common stockholders utilized to calculate EPS: Three Months Ended March 31, 2021 March 31, 2020 (unaudited) (unaudited) Net (loss) income per statement of operations $ (152,000 ) $ 1,058,000 Add: Convertible Note Interest for Potential Note Conversion - 170,000 (Loss) income used to calculate diluted earnings per share $ (152,000 ) $ 1,228,000 9 The following is a reconciliation of the denominators of basic and diluted earnings per share computations: Three Months Ended March 31, 2021 March 31, 2020 (unaudited) (unaudited) Weighted average shares outstanding used to compute basic earnings per share 31,971,922 30,380,234 Effect of dilutive stock options and warrants - 1,137,769 Effect of dilutive convertible notes payable - 5,003,451 Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share 31,971,922 36,521,454 The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common stock: Three Months Ended March 31, 2021 March 31, 2020 (unaudited) (unaudited) Stock Options 191,000 234,000 Warrants 1,423,000 1,423,000 1,614,000 1,657,000 The following securities have been excluded from the calculation even though the exercise price was less than the average market price of the common shares because the effect of including these potential shares was anti-dilutive due to the net loss incurred during that period: Three Months Ended March 31, 2021 March 31, 2020 (unaudited) (unaudited) Stock Options 1,991,000 - Warrants 760,000 - Convertible notes payable 4,058,000 - 6,809,000 - Stock-Based Compensation The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation expense for employees amounted to $157,000 and $140,000 for the three months ended March 31, 2021 and 2020, respectively. Stock compensation expense for directors amounted to $52,000 and $55,000 for the three months ended March 31, 2021 and 2020, respectively. Stock compensation expenses for employees and directors were included in operating expenses on the accompanying Condensed Consolidated Statements of Operations. 10 Goodwill Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at both March 31, 2021 and December 31, 2020 relates to the acquisition of NTW. Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has determined that there has been no impairment of goodwill at March 31, 2021 and 2020. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016- 13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company will evaluate the impact of ASU 2016-13 on the Company’s consolidated financial statements in a future period closer to the date of adoption. In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users. ASU 2020-06 is effective for fiscal years, and interim periods in those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods with those fiscal years. The Company is evaluating the effect of adopting this new accounting guidance on its financial statements. On January 1, 2021, the Company adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements. 11 On January 1, 2021, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope: which clarified the scope of ASU 2020-04. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The adoption of these ASU’s did not have a material impact on the Company’s condensed consolidated financial statements. The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements. Note 3. PROPERTY AND EQUIPMENT The components of property and equipment at March 31, 2021 and December 31, 2020 consisted of the following: March 31, December 31, 2021 2020 (unaudited) Land $ 300,000 $ 300,000 Buildings and Improvements 1,720,000 1,683,000 31.50 years Machinery and Equipment 21,838,000 21,738,000 5 - 8 years Finance Lease Machinery and Equipment 78,000 78,000 5 - 8 years Tools and Instruments 12,246,000 12,116,000 1.50 - 7 years Automotive Equipment 148,000 148,000 5 years Furniture and Fixtures 290,000 290,000 5 - 8 years Leasehold Improvements 861,000 855,000 Term of Lease Computers and Software 436,000 436,000 4 - 6 years Total Property and Equipment 37,917,000 37,644,000 Less: Accumulated Depreciation (28,776,000 ) (28,063,000 ) Property and Equipment, net $ 9,141,000 $ 9,581,000 Depreciation expense for the three months ended March 31, 2021 and 2020 was approximately $713,000 and $656,000, 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 2021 and 2020. Accumulated depreciation on these assets was approximately $30,000 and $28,000 as of March 31, 2021 and December 31, 2020, respectively. Note 4. LEASES The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. The Company leases certain machinery and equipment under finance leases and leases its offices and manufacturing facilities under operating leases. The leases have remaining lease terms of one to five years, some of which include options to extend or terminate the leases. March 31, December 31, 2021 2020 (unaudited) Weighted Average Remaining Lease Term - in years 5.19 5.53 Weighted Average discount rate - % 8.31 % 8.90 % 12 The aggregate undiscounted cash flows of operating lease payments as of March 31, 2021, with remaining terms greater than one year are as follows: Amount December 31, 2021 (remainder of the year) $ 808,000 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 5,645,000 Less: discount (1,189,000 ) Total operating lease maturities 4,456,000 Less: current portion of operating lease liabilities (693,000 ) Total long term portion of operating lease maturities $ 3,763,000 On April 29, 2021 the Company entered into an agreement to surrender the possession of the premises of the former corporate office, located in Hauppauge, NY. The Company made a one-time payment of 40% of the remaining balance due to the landlord as of May 1, 2021, of approximately $37,000. The Company had previously recognized a lease impairment of $275,000 to its Operating Lease Right-of-Use-Asset for the year-ended December 31, 2019. Note 5. NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS Notes payable, related party notes payable and finance lease obligations consist of the following: March 31, December 31, 2021 2020 (unaudited) Revolving credit note payable to Sterling National Bank (“SNB”) $ 14,781,000 $ 15,649,000 Term loan, SNB 5,362,000 5,558,000 Finance lease obligations 4,000 6,000 Loans Payable - financed assets 46,000 48,000 Related party notes payable, net of debt discount 6,412,000 6,012,000 Subtotal 26,605,000 27,273,000 Less: Current portion of notes payable, related party notes payable and finance lease obligations (15,606,000 ) (16,475,000 ) Notes payable, related party notes payable and finance lease obligations, net of current portion $ 10,999,000 $ 10,798,000 Sterling National Bank (“SNB”) On December 31, 2019, the Company entered into a loan facility (“SNB Facility”) with SNB expiring on December 30, 2022. The new loan facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). In 2020, the Company entered into the First Amendment to Loan and Security Agreement (“First Amendment”). The terms of the amendment increase the Term Loan to $5,685,000. The repayment terms of the term loan were amended to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022. Additionally, the date by which certain subordinated third-party notes need to be extended by was changed from September 30, 2020 to November 30, 2020. The Company has paid an amendment fee of $20,000. The terms of the SNB Facility require that, among other things, the Company maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, the Company is limited in the amount of Capital Expenditures it can make. As of March 31, 2021, the Company was in compliance with all loan covenants. The SNB Facility also restricts the amount of dividends the Company may pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the SNB Facility. 13 As of March 31, 2021 the future minimum principal payments for the SNB term loan are as follows: For the twelve months ending Amount December 31, 2021 (remainder of the year) $ 609,000 December 31, 2022 4,805,000 SNB Term Loan payable 5,414,000 Less: debt issuance costs (52,000 ) Total SNB Term loan payable, net of debt issuance costs 5,362,000 Less: Current portion of SNB term loan payable (812,000 ) Total long-term portion of SNB term loan payable $ 4,550,000 Under the terms of the SNB Facility, both the SNB revolving line of credit and the SNB term loan will bear an interest rate equal to 30-day LIBOR (with a 1% floor) plus 2.5%. The average interest rate charged during the period ended March 31, 2021 was 3.5%. As of March 31, 2021, our debt to SNB in the amount of $20,143,000 consisted of the SNB revolving line of credit note in the amount of $14,781,000 and the SNB term loan in the amount of $5,362,000. As of December 31, 2020, our debt to SNB in the amount of $21,207,000 consisted of the SNB revolving line of credit note in the amount of $15,649,000 and the SNB term loan in the amount of $5,558,000. Interest expense related to the SNB Facility amounted to approximately $181,000 and $120,000 for the three months ended March 31, 2021 and 2020, respectively. Loan Payable – Financed Asset The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled $46,000 and $48,000 as of March 31, 2021 and December 31, 2020, respectively. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026. The future minimum loan payments, are as follows: For the twelve months ending Amount December 31, 2021 (remainder of the year) $ 7,000 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 46,000 Less: Current portion 9,000 Long-term portion $ 37,000 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. 14 From 2016 through 2020, the Company entered into various subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich. These notes included proceeds totaling $6,550,000. In connection with these notes, Michael and Robert were issued a total of 355,082 shares of common stock and Taglich Brothers Inc. were issued promissory notes totaling $554,000 for placement agency fees. On January 1, 2021, the related party subordinated notes due to Michael and Robert Taglich and Taglich Brothers, Inc., were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. Per the terms of the SNB Facility, these notes remain subordinate to the SNB Facility and are due on July 1, 2023. There are no principal payments due on these notes until such time. The Note Holders and the principal balance of the notes as amended on January 1, 2021 are shown below: Michael Taglich, Robert Taglich, Taglich Brothers, Chairman Director Inc. Total Convertible Subordinated Notes $ 2,666,000 $ 1,905,000 $ 241,000 $ 4,812,000 Subordinated Notes 1,250,000 350,000 - 1,600,000 Total $ 3,916,000 $ 2,255,000 $ 241,000 $ 6,412,000 For the three months ended March 31, 2021, no principal payments have been made on these notes and the principal balances remain unchanged from the table above. Interest expense for the three months ended March 31, 2021 and 2020 on all related party notes payable was $125,000 and $128,000, respectively. Convertible Notes Payable – Third Parties As of both March 31, 2021 and December 31, 2020 the notes payable to third parties totaled $0 as the notes were converted into shares of common stock in 2020. Interest incurred on these amounted to approximately $42,000 for the three months ended March 31, 2020. Amortization of debt discount on these notes amounted to approximately $4,000 for the three months ended March 31, 2020. These costs are included in interest and financing costs in the Condensed Consolidated Statement of Operations. NOTE 6. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY In connection with the sale of the Company’s wholly-owned subsidiary, AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., (“Meyer”) in 2017, Meyer was obligated to pay the Company within 30 days after the end of each calendar quarter, commencing April 1, 2017, an amount equal to five (5%) percent of the net sales of AMK for that quarter until the aggregate payments made to the Company (the “Meyer Agreement”) equals $1,500,000 (the “Maximum Amount”). In order to increase liquidity, on January 15, 2019, the Company entered into a “Purchase Agreement” with 15 accredited investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to which the Company assigned to the Purchasers all of 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. The Company recognized $104,000 and $92,000 of non-cash income reflected in “other income, net” on the condensed consolidated statement of operations and recorded $31,000 and $28,000 of related non-cash interest expense related to the Purchase Agreement, for the three months ended March 31, 2021 and 2020, respectively. 15 The table below shows the activity within the liability account for: March 31, 2021 December 31, 2020 (unaudited) Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance $ 322,000 $ 602,000 Non-Cash other income recognized (104,000 ) (402,000 ) Non-Cash interest expense recognized 31,000 122,000 Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance 249,000 322,000 Less: unamortized transaction costs (3,000 ) (3,000 ) Liability related to sale of future proceeds from disposition of subsidiary, net $ 246,000 $ 319,000 Note 7. STOCKHOLDERS’ EQUITY Common Stock – Sale of Securities The Company issued 41,960 and 43,771 shares of common stock in payment of director fees totaling $52,000 and $55,000 for the three months ended March 31, 2021 and 2020, respectively. Additionally, the Company issued 51,224 shares of common stock upon the cashless exercise of stock options during the three months ended March 31, 2021. In January 2020, we issued and sold 419,597 shares of our common stock for gross proceeds of $984,000 pursuant to our Form S-3 filed on October 10, 2019 as updated on January 15, 2020. Costs of the sale amounted to $145,000. During the three months ended March 31, 2020, the Company issued 590,243 shares of common stock to convert third party subordinated debt totaling $885,000 to equity. During the second quarter of 2021, the Company issued 37,392 shares of common stock in payment of directors’ fees totaling $52,000. Note 8. CONTINGENCIES A number of actions have been commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result of an injury suffered on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts included in accounts payable they are not specifically discussed herein. Contract Pharmacal Corp. (“Contact Pharmacal”) commenced an action on October 2, 2018, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with respect to the property at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal 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 and have recently submitted a motion in opposition to its motion for summary judgement. As of March 31, 2021, it is not possible to estimate if a loss will be incurred, as such there has been no accrual. From time to time we also may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or operating results. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material interest averse to our interest. 16 Note 9. INCOME TAXES The Company recorded no income tax expense for the three months ended March 31, 2021 and 2020 because the estimated annual effective tax rate was zero. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives. As a result of the passage of the CARES Act, the Company filed for a net operating loss carryback claim of $1,416,000 in March 2020. The refund was received in April 2020. As of March 31, 2021 and December 31, 2020, the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized. Note 10. SEGMENT REPORTING In accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company follows ASC 280, which establishes standards for reporting information about operating segments in annual and interim financial statements, and requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company currently divides its operations into two operating segments: Complex Machining, which consists of AIM and NTW; and Turbine Engine Components, which consists of Sterling. Along with its operating subsidiaries, the Company reports the results of its corporate division as an independent segment. The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. Intersegment transfers are recorded at the 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. 17 Financial information about the Company’s reporting segments for the three months ended March 31, 2021 and 2020 are as follows: For the Three Months Ended March 31, 2021 2020 (unaudited) (unaudited) COMPLEX MACHINING Net Sales $ 12,166,000 $ 12,064,000 Gross Profit 1,619,000 2,168,000 Income before benefit from income taxes 980,000 1,170,000 Assets 51,703,000 48,732,000 TURBINE ENGINE COMPONENTS Net Sales 1,546,000 1,383,000 Gross Profit 178,000 13,000 Loss before benefit from income taxes (15,000 ) (126,000 ) Assets 3,582,000 4,569,000 CORPORATE Net Sales - - Gross Profit - - Loss before benefit from income taxes (1,117,000 ) (1,400,000 ) Assets 2,075,000 750,000 CONSOLIDATED Net Sales 13,712,000 13,447,000 Gross Profit 1,797,000 2,181,000 Loss before benefit from income taxes (152,000 ) (356,000 ) Benefit from Income Taxes - (1,414,000 ) Net Income (loss) (152,000 ) 1,058,000 Assets $ 57,360,000 $ 54,051,000 18 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2020 (the “2020 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking statements. Business Overview The financial statements contained in this report as well as the discussion below principally reflect the status of our business and the results of our operations as of March 31, 2021. AIM became a public company in 2005 and we are an aerospace company operating primarily in the defense industry. Our Complex Machining segment manufactures structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. Our Turbine Engine Components segment makes components and provides services for jet engines and ground-power turbines. Our products are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter aircraft, Boeing 777 commercial airliners. Our Turbine Engine segment makes components for jet engines that are used on the USAF F-15 and F-16, the Airbus A-330 and the Boeing 777, in addition to a number of ground-power turbine applications. The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete assemblies for our customers. We are currently focused on positioning our business to obtain profitability, achieve positive cash flow and we remain resolute on meeting customers’ needs. We believe that an unyielding focus on our customers will allow us to execute on our existing backlog in a timely fashion. In 2018 and 2019, we consolidated the operations of our Complex Machining segment in our main campus located in Bay Shore, New York. In 2020, in order to take advantage of the long-term growth opportunities we see in our markets, we made significant capital investments in new equipment. Additionally, we expanded our operations and manufacturing cells located in our Connecticut facility where our Turbine Engine segment is located. We believe these investments will increase the volume and efficiency of production, increase the size of product we can make and allow us to offer additional services to our customers. We are pleased with the positive responses received from our customers to date. Our ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors. While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive. The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold. Our operations have a large percentage of fixed factory overhead. As a result, our profit margins are also highly variable with sales volumes as under-absorption of factory overhead decreases profits. 19 A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and decreased usage of aircraft reduces the demand for both new production and replacement spares. Recent increases in Defense Department spending have increased orders for our products. Reductions to the Defense Department budget or decreased usage of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business and our revenues. We are focusing greater efforts on the civilian aircraft market though we still remain dependent upon the military for an overwhelming portion of our revenues. Segment Data We follow Financial Accounting Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes standards for reporting information about operating segments in annual and interim financial statements, ASC 280 requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. We currently divide our operations into two operating segments: Complex Machining and Turbine Engine Components. Along with our operating subsidiaries, we report the results of our corporate office as an independent segment. The accounting policies of our segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance based on revenue, gross profit contribution and assets employed. RESULTS OF OPERATIONS Selected Financial Information: Three Months Ended March 31, March 31, 2021 2020 (unaudited) (unaudited) Net sales $ 13,712,000 $ 13,447,000 Cost of sales 11,915,000 11,266,000 Gross profit 1,797,000 2,181,000 Operating expenses and interest and financing costs 2,067,000 2,642,000 Other income, net 118,000 105,000 Benefit from income taxes - (1,414,000 ) Net Income (loss) $ (152,000 ) $ 1,058,000 20 Balance Sheet Data: March 31, December 31, 2021 2020 (unaudited) Cash and cash equivalents $ 1,731,000 $ 2,505,000 Working capital $ 16,984,000 $ 16,284,000 Total assets $ 57,360,000 $ 57,777,000 Total stockholders’ equity $ 15,166,000 $ 15,109,000 The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated: For the Three Months Ended March 31, 2021 2020 (unaudited) (unaudited) COMPLEX MACHINING Net Sales $ 12,166,000 $ 12,064,000 Gross Profit 1,619,000 2,168,000 Income before benefit from income taxes 980,000 1,170,000 Assets 51,703,000 48,732,000 TURBINE ENGINE COMPONENTS Net Sales 1,546,000 1,383,000 Gross Profit 178,000 13,000 Loss before benefit from income taxes (15,000 ) (126,000 ) Assets 3,582,000 4,569,000 CORPORATE Net Sales - - Gross Profit - - Loss before benefit from income taxes (1,117,000 ) (1,400,000 ) Assets 2,075,000 750,000 CONSOLIDATED Net Sales 13,712,000 13,447,000 Gross Profit 1,797,000 2,181,000 Loss before benefit from income taxes (152,000 ) (356,000 ) Benefit from Income Taxes - (1,414,000 ) Net Income (loss) (152,000 ) 1,058,000 Assets $ 57,360,000 $ 54,051,000 Net Sales: Consolidated net sales for the three months ended March 31, 2021 were $13,712,000, an increase of $265,000, or 2.0%, compared with $13,447,000 for the three months ended March 31, 2020. Net sales of our Complex Machining segment were $12,166,000, an increase of $102,000, or 0.8%, from $12,064,000 for the three months ended March 31, 2020. Net sales in our Turbine Engine Components segment were $1,546,000, an increase of $163,000, or 11.8% compared with $1,383,000 for the three months ended March 31, 2020. 21 As indicated in the table below, three customers represented 77.9% and 79.9% of total net sales for the three months ended March 31, 2021 and March 31, 2020, respectively. Percentage of Sales Customer 2021 2020 (unaudited) (unaudited) Sikorsky Aircraft 33.8 % 36.2 % Goodrich Landing Gear Systems 26.6 % 31.5 % United States Department of Defense 17.5 % 12.2 % Gross Profit: Consolidated gross profit from operations for the three months ended March 31, 2021 was $1,797,000, a decrease of $384,000, or 17.6%, as compared to gross profit of $2,181,000 for the three months ended March 31, 2020. Consolidated gross profit as a percentage of sales was 13.1% and 16.2% for the three months ended March 31, 2021 and 2020, respectively. This decrease was mainly attributable to an increase of approximately $518,000 in manufacturing overhead costs primarily related to employee benefit costs and depreciation of new equipment, and a loss of approximately $91,000 resulting from a termination of a contract by a customer. Interest and Financing Costs Interest and financing costs for the three months ended March 31, 2021 were $297,000 a decrease of $83,000 or 21.8% compared to $380,000 for the three months ended March 31, 2020. This decrease is attributable to the conversion of our third party Convertible Debt during fiscal 2020. Operating Expense Consolidated operating expenses for the three months ended March 31, 2021 totaled $1,770,000 and decreased by $492,000 or 21.8% compared to $2,262,000 for the three months ended March 31, 2020. Net (Loss) Income Net loss for the three months ended March 31, 2021 was $152,000, a reduction of $1,210,000, compared to net income of $1,058,000 for the three months ended March 31, 2020 due to the reasons stated above. In addition, the Company recorded a benefit from income taxes of $1,414,000 for the three months ended March 31, 2020 pursuant to the filing of a net operating loss claim (see below). LIQUIDITY AND CAPITAL RESOURCES During fiscal 2020, we took advantage of a number of U.S. government programs to improve our liquidity to offset the negative impact to our business from COVID-19. These steps included: 1) Received Low Interest Loans from the SBA – In May 2020, our three operating subsidiaries entered into government subsidized loans with Sterling National Bank (“SNB”) in an aggregate principal amount of $2.4 million (“SBA Loans”). 2) Applied for and Received Forgiveness of the SBA Loans – In accordance with U.S. government regulations we applied to SNB for forgiveness of each Loan in full and in December 2020 we received final approval from the SBA that the entire principal amount of our SBA Loans plus accrued interest had been forgiven. 3) Deferred Certain Tax Payments – In accordance with Section 2302 of the CARES Act, we elected to defer the deposit and payment of the employer’s portion of Social Security taxes. These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of December 31, 2020, we deferred $627,000, which is included in Deferred payroll tax liability – CARES Act on the accompanying Condensed Consolidated Balance Sheet. 4) Received a Net Operating Loss Refund – Pursuant to the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter 2020. 22 Also, the U.S. Department of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on certain contracts. In addition to taking advantage of the aforementioned U.S. government programs, we took additional significant steps to improve our liquidity, including: 1) Entered into a Lower Cost Financing Facility – On December 31, 2019, we entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) which expires on December 30, 2022. The SNB Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). Proceeds from the SNB Facility repaid our outstanding PNC Facility with PNC Bank N.A. (“PNC”). 2) Increased Term Loan to Modernize Equipment – On November 6, 2020, we entered into the First Amendment to the Loan and Security Agreement, increasing the Term Loan to $5,685,000. This allowed us to finance the acquisition of the new equipment at what we believe to be a reasonable interest rate. The repayment terms of the term loan were amended to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022. We have paid an amendment fee of $20,000. Additionally, the date by which certain subordinated third-party notes were to be extended by was changed from September 30, 2020 to November 30, 2020. We caused all of these notes to be converted into common stock prior to December 31, 2020. The formula to determine the amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible receivables and inventory (as defined in the SNB Facility). For so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year, beginning with the year ending December 31, 2020, we shall pay to SNB an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan. Such payment shall be made to SNB and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such Fiscal Year. The terms of the SNB Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, we are limited in the amount of Capital Expenditures we can make. As of March 31, 2021, we were in compliance with all loan covenants. The SNB Facility also restricts the amount of dividends we may pay to our stockholders. Substantially all of our assets are pledged as collateral under the SNB Facility. As of March 31, 2021, our debt to SNB in the amount of $20,143,000 consisted of the SNB revolving line of credit note in the amount of $14,781,000 and the SNB term loan in the amount of $5,362,000. 3) Conversion and Extension of Subordinated Notes – During 2020, third party holders of convertible subordinated notes of the remaining principal balance plus accrued interest, converted these notes into common stock. In addition, the maturity date of related party convertible subordinated notes and subordinated notes payable in the aggregate amount of $6,012,000 plus $400,000 of accrued interest was extended until July 1, 2023, and we were relieved of the obligation to make any principal payments on these notes prior to maturity. 23 Because we continue to believe our fiscal 2021 sales will be higher than the amount achieved in fiscal 2020, we believe our liquidity for the remainder of 2021 will continue to improve. Cash Flow The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated: Three Months Ended March 31, 2021 2020 (unaudited) (unaudited) Cash (used in) provided by  Operating activities $ 567,000 $ (314,000 ) Investing activities (273,000 ) (78,000 ) Financing activities (1,068,000 ) 592,000 Net (decrease) increase in cash and cash equivalents $ (774,000 ) $ 200,000 Cash Provided by (Used in) Operating Activities Cash provided by (used in) operating activities primarily consists of our net loss adjusted for certain non-cash items and changes to operating assets and liabilities. For the three months ended March 31, 2021 cash provided by operating activities was $567,000. This was a result of our net loss of $152,000, offset by $915,000 of non-cash items consisting primarily of depreciation of property and equipment of $713,000, non-cash employee stock compensation expense of $157,000, amortization of right-of-use assets of $118,000 and non-cash directors’ compensation expense of $52,000. The remaining non-cash items totaled $125,000. Operating assets and liabilities used cash in the net amount of $196,000 consisting primarily of the net increases in accounts receivable, inventory and prepaid expenses and other current assets in the amounts of $816,000, $75,000 and $77,000, respectively and decreases in accounts payable and operating lease liabilities of $36,000, and $172,000 respectively, partially offset by an increase in deferred revenue in the amount of $885,000 and a decrease in deposits in the amount of $95,000. Cash Used in Investing Activities Cash used in investing activities consists of capital expenditures for property and equipment. For the three months ended March 31, 2021, cash used in investing activities was $273,000. This was for the purchase of property and equipment. Cash Provided by (Used in) Financing Activities For the three months ended March 31, 2021, cash used in financing activities consisted of net payments on our SNB revolving loan and term note in the amounts of $868,000 and $196,000, respectively and payments of $2,000 and $2,000 on our financing lease obligations and loan payable – financed asset. 24 OFF-BALANCE SHEET ARRANGEMENTS We did not have any off-balance sheet arrangements as of March 31, 2021. Critical Accounting Policies and Estimates A critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our condensed consolidated financial statements are presented in accordance with U.S. GAAP, and all applicable U.S. GAAP accounting standards effective as of March 31, 2021 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation of condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our condensed consolidated financial statements: ● Liquidity; ● Inventory valuation ● Revenue recognition; ● Income taxes; ● Stock-based compensation; and ● Goodwill. We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our estimates. Recently Issued Accounting Pronouncements See Note 2 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. 25