What changed in this filing

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Item 1. Financial Statements

2021-08-05 compared with 2021-05-11 · 384 added, 572 removed, 359 unchanged (73% of the section changed)

Financial statements

Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020

Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)

Condensed Consolidated Statements of Stockholders’

Equity for the three months ended March 31, 2021 and 2020 (unaudited)

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Balance Sheets

Consolidated Financial Statements:

Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020

Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited)

Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (unaudited)

Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)

to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Consolidated Balance Sheets

Current Assets

7 unchanged sentences

Deferred Financing Costs, Net, Deposits and Other Assets

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

9 unchanged sentences

Notes Payable and Finance Lease Obligations - Net of Current Portion

Notes Payable - Related Party - Net of Current Portion

Notes Payable - Related Party

Operating Lease Liabilities - Net of Current Portion

Deferred Gain on Sale - Net of Current Portion

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

Liability Related to the Sale of Future Proceeds from

Disposition of Subsidiary - Net of Current Portion

Deferred payroll tax liability - CARES Act - Net of Current Portion

1 unchanged sentence

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

Stockholders’ Equity

Preferred Stock, par value $ .001 - Authorized 3,000,000 shares, 0 shares outstanding, at both June 30, 2021 and December 31, 2020.

Common Stock - Par Value $ .001 - Authorized 60,000,000 Shares, 32,037,547 and 31,906,971 Shares Issued and Outstanding as of June 30, 2021 and December 31, 2020, respectively

Additional Paid-In Capital

2 unchanged sentences

( 66,161,000 )

TOTAL STOCKHOLDERS’

TOTAL LIABILITIES AND STOCKHOLDERS’

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31,

Three Months Ended

Six Months Ended

Cost of Sales

1 unchanged sentence

Income (loss) from Operations

( 1,292,000 )

( 1,373,000 )

Interest and Financing Costs

1 unchanged sentence

Other Income, Net

Loss before Benefit From Income Taxes

Income (Loss) before Benefit From Income Taxes

( 1,584,000 )

( 1,940,000 )

Benefit from Income Taxes

Net (Loss) Income

Net (Loss) Income per share - Basic

Net (Loss) Income per share - Diluted

( 1,414,000 )

Net Income (Loss)

$ ( 1,584,000 )

$ ( 526,000 )

Net Income (Loss) per share - Basic

Net Income (Loss) per share - Diluted

Weighted Average Shares Outstanding - basic

Weighted Average Shares Outstanding - diluted

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of Stockholders’

For the Three Months Ended March 31, 2021 and

Stockholders’

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Consolidated Statements of Stockholders’ Equity

the Three and Six Months Ended June 30, 2021 and 2020

Stockholders’

Balance, January 1, 2021

5 unchanged sentences

$ ( 66,313,000 )

Common Stock issued for directors fees

Stock Compensation Expense

Balance, June 30, 2021

$ ( 66,074,000 )

Balance, January 1, 2020

7 unchanged sentences

$ ( 66,199,000 )

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

Common Stock issued for directors fees

Stock Compensation Expense

( 1,584,000 )

Balance, June 30, 2020

$ ( 67,783,000 )

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

Consolidated Statements of Cash Flows For the Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net (Loss) Income

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

Net Income (Loss)

$ ( 526,000 )

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

Depreciation of property and equipment

7 unchanged sentences

Amortization of debt discount on convertible notes payable

Bad debt expense (recovery)

Bad debt expense

Amortization of deferred financing costs

Changes in Assets and Liabilities (Increase) Decrease in Operating Assets:

Changes in Assets and Liabilities

(Increase) Decrease in Operating Assets:

Accounts receivable

( 3,435,000 )

( 5,213,000 )

Prepaid expenses and other current assets

Deposits and other assets

Income tax receivable

Increase (Decrease) in Operating Liabilities:

1 unchanged sentence

Operating lease liabilities

Deferred revenue

Income taxes payable

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Deferred revenue

Other Liability

NET CASH USED IN OPERATING ACTIVITIES

( 1,043,000 )

CASH FLOWS FROM INVESTING ACTIVITIES

3 unchanged sentences

Note payable - revolver - net – Sterling National Bank

Payments of note payable - term notes - SNB

Payments of note payable - term notes – Sterling National Bank

SBA Loan Proceeds – Sterling National Bank

Payments of finance lease obligations

2 unchanged sentences

Payments of notes payable issuances- related party

( 1,020,000 )

Payments of notes payable - third party

Payments of loan payable - financed asset

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

( 1,178,000 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

( 1,990,000 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

CASH AND CASH EQUIVALENTS AT END OF PERIOD

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, (Continued)

Notes to Condensed Consolidated Financial Statements

INDUSTRIES GROUP

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

Supplemental cash flow information

Cash paid during the period for interest

Supplemental disclosure of non-cash investing and financing activities

Capitalization of accrued interest on related party notes payable

Cash received for income taxes

Supplemental disclosure of non-cash

investing and financing activities

Right of Use Asset additions under ASC 842

Operating Lease Liabilities under ASC 842

Common Stock issued for conversion of notes payable and accrued interest

See Notes to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

1 unchanged sentence

FORMATION AND BASIS OF PRESENTATION

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

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 Group is a Nevada corporation (“AIRI”).

of and for the three and six months ended June 30, 2021 and 2020, 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”).

(“AIM”), Nassau Tool Works, Inc.

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

Basis of Presentation

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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.

Operating results for the three and six months ended

June 30, 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

2 unchanged sentences

These reclassifications had no impact on the statement of operations.

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.

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 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.

With the first half of fiscal 2021 now completed and the Company beginning to see the benefits from

its’ recent investments in new machinery and equipment, management believes the Company will continue to improve its liquidity.

As such, based on the Company generating operating income of $ 239,000 and $ 87,000 for the three and six months ended June 30, 2021, respectively,

its 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 at least August 31, 2022.

Subsequent Events

1 unchanged sentence

the date of this filing.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING

Inventory Valuation

5 unchanged sentences

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.

During the three and six months ended June 30, 2021, the Company increased its estimate of its gross profit percentage for its Complex

Machining segment based on increased sales and the better absorption of Manufacturing Overhead, and accordingly has adjusted margins to

reflect such change.

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 76.2 %

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.

and two customers that represented 71.9 % of total net sales for the three months ended June 30, 2021 and 2020, respectively.

forth in the table below.

Percentage of Sales

March 31, 2021

March 31, 2020

* Customer was less than 10 % of total

net sales for the three months ended June 30, 2020.

There were three customers that represented 77.0 %

77.8% and 80.3% of gross accounts receivable at March 31, 2021 and December 31, 2020, respectively.

and two customers that represented 69.3 % of total net sales for the six months ended June 30, 2021 and 2020, respectively.

forth in the table below.

Percentage of Sales

* Customer was less than 10 % of total

net sales for the six months ended June 30, 2020.

There were three customers that represented 85.0 % of gross accounts

receivable at June 30, 2021 and three customers that represented 80.3 % of gross accounts receivable at December 31, 2020, respectively.

This is set forth in the table below.

Percentage of Receivables

* 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.

* Customer was less than 10 % of Gross Accounts Receivable at December 31, 2020.

** Customer was less than 10 % of Gross

Accounts Receivable at June 30, 2021.

Cash and Cash Equivalents

8 unchanged sentences

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

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

4 unchanged sentences

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

9 unchanged sentences

Three Months Ended

Net (loss) income per statement of operations

Six Months Ended

Net income (Loss) per condensed consolidated statements of operations

$ ( 1,584,000 )

$ ( 526,000 )

Convertible Note Interest for Potential Note Conversion

(Loss) income used to calculate diluted earnings per share

Income (loss) used to calculate diluted earnings per share

$ ( 1,584,000 )

$ ( 526,000 )

The following is a reconciliation of the denominators

1 unchanged sentence

Three Months Ended

March 31, 2021

March 31, 2020

Weighted average shares outstanding used to compute basic earnings per share

Six Months Ended

Weighted average shares outstanding used to compute basic

earnings per share

Effect of dilutive stock options and warrants

Effect of dilutive convertible notes payable

Weighted average shares outstanding and dilutive securities used to compute

dilutive earnings per share

Weighted average shares outstanding and dilutive securities

used to compute dilutive earnings per share

The following securities have been excluded from

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

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

Three Months Ended

March 31, 2021

March 31, 2020

Six Months Ended

Stock options

The following securities have been excluded from

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

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

Three Months Ended

The following securities have been excluded

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

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

Three and Six Months Ended

Stock options

2 unchanged sentences

The Company accounts for stock-based compensation

in accordance with FASB ASC 718, “Compensation –

Stock Compensation.”

Under the fair value recognition provision of

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.

2 unchanged sentences

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.

for employees amounted to $ 57,000 and $ 74,000 for the three months ended June 30, 2021 and 2020, respectively, and $ 214,000 for both the

six months ended June 30, 2021 and 2020.

Stock compensation expense for directors amounted to $ 52,000 and $ 46,000 for the three months

ended June 30, 2021 and 2020, respectively and $ 104,000 and $ 101,000 for the six months ended June 30, 2021 and 2020, respectively.

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

of Operations.

Goodwill represents the excess of the acquisition

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

The goodwill amount of $163,000 at both March 31, 2021

The goodwill amount of $ 163,000 at both June 30, 2021

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

2 unchanged sentences

The Company has determined that there has been

no impairment of goodwill at March 31, 2021 and 2020.

no impairment of goodwill at June 30, 2021 and December 31, 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.

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.

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.

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.

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 –

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.

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

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.

of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.

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):

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.

The adoption of ASU 2019-12 did not have a material

impact on the Company’s condensed consolidated financial statements.

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):

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

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

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 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 adoption of these ASU’s did not have

a material impact on the Company’s condensed consolidated financial statements.

In March 2021, the FASB issued ASU No.

Intangibles—Goodwill and Other (Topic 350):

Accounting Alternative for Evaluating Triggering Events, an amendment of the FASB Accounting

Standards Codification.

The amendments in this ASU allow companies to elect not to monitor for goodwill impairment triggering events during

the reporting period and instead, to evaluate the facts and circumstances as of the end of the reporting period to determine whether it

is more likely than not that goodwill is impaired.

This aligns the triggering event evaluation date with the reporting date, whether that

date is an interim or annual reporting date.

This ASU is effective on a prospective basis for fiscal years beginning after December 15,

2019, with early adoption permitted for both interim and annual financial statements that have not yet been issued or made available for

issuance as of March 30, 2021.

The Company does not expect this guidance to have a material impact to its consolidated financial statements

or related disclosures.

In May 2021, the FASB issued ASU No.

Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation

(Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Issuer’s Accounting for

Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which will clarify

and reduce diversity in practice.

Specifically, the new standard includes a recognition model comprising four categories of transactions

and corresponding accounting treatment for each category.

The category that would apply to a modification or an exchange of an equity-classified

warrant would depend on the substance of the modification transaction (e.g.

a financing transaction to raise equity versus one to raise

This recognition model is premised on the idea that the accounting for the transaction should not differ from what it would have

been had the issuer of the warrants paid cash instead of modifying the warrants.

ASU 2021-04 will be effective for fiscal years beginning

after December 15, 2021 and interim periods within those fiscal years.

Early adoption is permitted.

This ASU will be applied prospectively

to modifications or exchanges occurring on or after the effective date of the ASU.

The Company is currently evaluating the impact this

new guidance will have on its condensed consolidated financial statements.

The Company does not believe that any other recently

2 unchanged sentences

PROPERTY AND EQUIPMENT

The components of property and equipment at March

31, 2021 and December 31, 2020 consisted of the following:

The components of property and equipment

at June 30, 2021 and December 31, 2020 consisted of the following:

Buildings and Improvements

14 unchanged sentences

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

June 30, 2021 and 2020 was $ 704,000 and $ 688,000 , respectively.

Depreciation expense for the six months ended June 30, 2021 and 2020 was

$ 1,417,000 and $ 1,344,000 , respectively.

Assets held under financed lease obligations are

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

2 unchanged sentences

Accumulated depreciation on these assets was approximately $ 31,000 and $ 28,000

as of March 31, 2021 and December 31, 2020, respectively.

as of June 30, 2021 and December 31, 2020, respectively.

The Company has operating and finance leases for

6 unchanged sentences

Weighted Average discount rate - %

The aggregate undiscounted cash flows of operating lease payments as

of March 31, 2021, with remaining terms greater than one year are as follows:

The aggregate undiscounted cash flows of operating lease payments for

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

December 31, 2021 (remainder of the year)

4 unchanged sentences

Total future minimum lease payments

( 1,091,000 )

Total operating lease maturities

1 unchanged sentence

Total long term portion of operating lease maturities

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.

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.

NOTES PAYABLE, RELATED PARTY NOTES

PAYABLE AND FINANCE LEASE OBLIGATIONS

Notes payable, related party notes payable and

finance lease obligations consist of the following:

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

Notes payable, related party notes payable

and finance lease obligations consist of the following:

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

Term loan, SNB

Finance lease obligations

Loans Payable - financed assets

Related party notes payable, net of debt discount

Loan Payable - financed asset

Related party notes payable

Current portion of notes payable, related party notes payable and finance lease obligations

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( 16,475,000 )

Notes payable, related party notes

payable and finance lease obligations, net of current portion

Sterling National Bank (“SNB”)

Notes payable, related party notes payable and finance lease obligations,

net of current portion

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”).

a loan facility (“SNB Facility”) with SNB expiring on December 30, 2022 .

The 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.

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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.

subordinated third-party notes need to be extended was changed from September 30, 2020 to November 30, 2020.

The Company paid an amendment

fee of $20,000.

On June 14, 2021, the Company entered into the Second Amendment to

the Loan and Security Agreement (“Second Amendment”).

The purpose of the Second Amendment was to clarify the definition and

calculation of Excess Cash Flow, and to confirm the extension of the due date for the payment of the Excess Cash Flow payment.

of the Excess Cash Flow payment for the year ended December 31, 2020 was calculated to be $558,750.

Per the terms of the Second Amendment,

the Excess Cash Flow is payable in three installments of $ 186,250 on each of June 15, 2021, June 30, 2021, and September 15, 2021.

of June 30, 2021, the Company paid the first two installments totaling $ 372,500 .

Additionally, the Company paid an amendment fee of $ 10,000 .

The terms of the SNB Facility require that, among

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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.

As of June 30, 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.

As of March 31, 2021 the future minimum principal

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

As of June 30, 2021 the future minimum principal

payments for the SNB term loan are as follows:

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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%.

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

average interest rate charged during the period ended June 30, 2021 was 3.5%.

As of June 30, 2021, our debt to SNB in the amount

of $ 20,049,000 consisted of the SNB revolving line of credit note in the amount of $ 15,256,000 and the SNB term loan in the amount of

$ 4,793,000 .

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

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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

to approximately $ 180,000 and $ 154,000 for the three months ended June 30, 2021 and 2020, respectively, and $ 361,000 and $ 274,000 for

the six months ended June 30, 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 obligation totaled $ 44,000 and $ 48,000 as of June 30, 2021 and December 31, 2020, respectively.

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

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December 31, 2025

Loans Payable - financed assets

Loan Payable - financed asset

Current portion

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

From 2016 through 2020, the Company entered into various

subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich.

These notes included proceeds totaling

In connection with these notes, Michael and Robert were issued a total of 355,082 shares of common stock and Taglich Brothers

were issued promissory notes totaling $554,000 for placement agency fees.

From 2016 through 2020, the Company entered into

various subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich.

These notes resulted in

proceeds to the Company totaling $6,550,000.

In connection with these notes, Michael and Robert were issued a total of 355,082 shares

of common stock and Taglich Brothers Inc.

was issued promissory notes totaling $554,000 for placement agency fees.

On January 1, 2021, the related party subordinated

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Subordinated Notes

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

For the three months and six months ended June

30, 2021, no principal payments have been made on these notes and the principal balances remain unchanged from the table above.

expense for the three months ended June 30, 2021 and 2020 on all related party notes payable was $ 125,000 and $ 125,000 , respectively,

and $ 250,000 and $ 253,000 for the six months ended June 30, 2021 and 2020, respectively.

Convertible Notes Payable – Third Parties

As of both June 30, 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.

notes amounted to approximately $ 38,000 and $ 80,000 for the three and six months ended June 30, 2020, respectively.

Amortization of debt

discount on these notes amounted to approximately $ 3,000 and $ 7,000 for the three and six months ended June 30, 2020, respectively.

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

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”).

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

2019, the Company entered into a “Purchase Agreement” with 15 accredited investors (the “Purchasers”), including

Michael and Robert Taglich, pursuant to which the Company assigned to the Purchasers all of its rights, title and interest to the remaining

$1,137,000 of the $1,500,000 in payments due from Meyer for the sale of AMK (the “Remaining Amount”) for an immediate payment

of $800,000, including $100,000 from each of Michael and Robert Taglich, and $75,000 for the benefit of the children of Michael Taglich.

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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”).

31, 2023, they have the right to demand payment of their pro rata portion of the unpaid Remaining Amount from the Company (“Put

To the extent the Purchasers exercise their Put Right, the remaining payments from Meyer will be retained by the Company.

The Company recognized $ 91,000 and $ 119,000 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.

non-cash income for the three months ended June 30, 2021 and 2020, respectively, and $ 195,000 and $ 211,000 of non-cash income for the

six months ended June 30, 2021 and 2020, respectively, reflected in “other income, net” on the condensed consolidated statements

of operations and recorded $ 27,000 and $ 36,000 of related non-cash interest expense related to the Purchase Agreement for the three months

ended June 30, 2021 and 2020, respectively, and $ 58,000 and $ 64,000 for the six months ended June 30, 2021 and 2020, respectively.

The table below shows the activity within the

liability account for:

Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance

Liabilities related to sale of future proceeds from disposition of

subsidiaries - beginning balance

Non-Cash other income recognized

Non-Cash interest expense recognized

Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance

Liabilities related to sale of future proceeds from disposition of

subsidiary - ending balance

unamortized transaction costs

Liability related to sale of future proceeds from disposition of subsidiary, net

STOCKHOLDERS’

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.

Liability related to sale of future proceeds from disposition of

subsidiary, net

STOCKHOLDERS’ EQUITY

Common Stock – Sale and Other Issuances

The Company issued 37,392 and 47,126 shares of

common stock in payment of director fees totaling $ 52,000 and $ 46,000 for the three months ended June 30, 2021 and 2020, respectively,

and 79,352 and 90,897 shares totaling $ 104,000 and $ 101,000 for the six months ended June 30, 2021 and 2020, respectively.

Additionally,

the Company issued 51,224 shares of common stock upon the cashless exercise of stock options during the six months ended June 30, 2021.

In January 2020, we issued and sold 419,597 shares

1 unchanged sentence

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.

During the six months ended June 30, 2020, the

Company issued 590,243 shares of common stock to convert third party subordinated debt totaling $ 885,000 to equity.

During the third quarter of 2021, the Company issued 39,983 shares

of common stock in payment of directors’ fees totaling $ 52,000 .

Issuance of Stock Options

On January 11, 2021, the Company granted to its directors,

stock options to purchase an aggregate of 70,000 shares of the Company’s common stock at a price of $ 1.32 per share.

expire on the seventh anniversary of the grant date and vest over a term of one year.

On March 24, 2021, the Company granted to certain

members of management and certain employees, stock options to purchase an aggregate of 327,500 shares of the Company’s common stock

at a price of $ 1.39 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of three years.

On July 30, 2021, the Company granted to certain members

of management and certain employees, stock options to purchase an aggregate of 415,000 shares of the Company’s common stock at a

price of $ 1.22 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of one to three years.

CONTINGENCIES

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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

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.

(“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 originally sought damages in excess

of $ 1,000,000 for the Company’s failure to make the entire premises available by the Sublease commencement date.

On July 8, 2021,

the Court denied Contract Pharmacal’s Motion for Summary Judgement.

In the Order, the Court granted Contract Pharmacal’s Motions

to drop its claim for specific performance and to amend its Complaint to reduce its claim for damages to $ 700,000 .

The Company continues

to dispute the validity of the claims asserted by Contract Pharmacal and believes it has meritorious defenses to those claims.

30, 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

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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.

the three and six months ended June 30, 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

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The refund was received in April 2020.

As of March 31, 2021 and December 31, 2020, the

As of June 30, 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

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SEGMENT REPORTING

In accordance with FASB ASC 280, “Segment

Reporting”

(“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments.

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

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are the same as those described in the Summary of Significant Accounting Policies.

Intersegment transfers are recorded at the transferors

Intersegment transfers are recorded at the transferor’s

cost, and there is no intercompany profit or loss on intersegment transfers.

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and assets employed.

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,

COMPLEX MACHINING

Income before benefit from income taxes

TURBINE ENGINE COMPONENTS

Loss before benefit from income taxes

Benefit from Income Taxes

Net Income (loss)

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

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

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’

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

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

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

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.

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.

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.

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.

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

Cost of sales

Operating expenses and interest and financing costs

Other income, net

Benefit from income taxes

Net Income (loss)

Balance Sheet Data:

Cash and cash equivalents

Working capital

Total stockholders’

The following sets forth

the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:

Financial information about the Company’s

reporting segments for the three and six months ended June 30, 2021 and 2020 are as follows:

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

COMPLEX MACHINING

Income before benefit from income taxes

Income (Loss) before benefit from income taxes

TURBINE ENGINE COMPONENTS

Loss before benefit from income taxes

Gross Profit (Loss)

Income (Loss) before benefit from income taxes

Loss before benefit from income taxes

( 1,448,000 )

( 1,357,000 )

( 2,565,000 )

( 2,757,000 )

Income (Loss) before benefit from income taxes

( 1,584,000 )

( 1,940,000 )

Benefit from Income Taxes

( 1,414,000 )

Net Income (loss)

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.

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

Sikorsky Aircraft

Goodrich Landing Gear Systems

United States Department of Defense

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:

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”).

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.

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.

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.

Also, the U.S.

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:

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”).

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.

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.

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.

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.

The following table summarizes

our net cash flow from operating, investing and financing activities for the periods indicated:

Three Months Ended

Cash (used in) provided by

Operating activities

Investing activities

Financing activities

Net (decrease) increase in cash and cash equivalents

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 –

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:

Inventory valuation

Revenue recognition;

Income taxes;

Stock-based compensation;

We base our estimates, to

the extent possible, on historical experience.

Historical information is modified as appropriate based on current business factors and

various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and 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.

( 1,584,000 )

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements