AIR INDUSTRIES GROUP 10-Q

Item 1. Financial statements Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 2 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (unaudited) 3 Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 7 1 AIR INDUSTRIES GROUP Condensed Consolidated Balance Sheets September 30, December 31, 2022 2021 (unaudited) ASSETS Current Assets Cash $ 192,000 $ 627,000 Accounts Receivable, Net of Allowance for Doubtful Accounts of $ 493,000 and $ 594,000 8,658,000 10,473,000 Inventory 33,408,000 29,532,000 Prepaid Expenses and Other Current Assets 250,000 226,000 Prepaid Taxes 25,000 22,000 Total Current Assets 42,533,000 40,880,000 Property and Equipment, Net 8,478,000 8,404,000 Operating Lease Right-Of-Use-Asset 2,615,000 3,018,000 Deferred Financing Costs, Net, Deposits and Other Assets 989,000 960,000 Goodwill 163,000 163,000 TOTAL ASSETS $ 54,778,000 $ 53,425,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Debt - Current Portion $ 14,820,000 $ 14,112,000 Accounts Payable and Accrued Expenses 6,979,000 6,723,000 Operating Lease Liabilities - Current Portion 754,000 686,000 Deferred Gain on Sale - Current Portion 38,000 38,000 Customer Deposits 1,291,000 1,470,000 Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - 59,000 Deferred payroll tax liability - CARES Act 314,000 314,000 Total Current Liabilities 24,196,000 23,402,000 Long Term Liabilities Debt - Net of Current Portion 4,001,000 2,838,000 Subordinated Notes Payable - Related Parties 6,162,000 6,412,000 Operating Lease Liabilities - Net of Current Portion 2,669,000 3,241,000 Deferred Gain on Sale - Net of Current Portion 114,000 143,000 TOTAL LIABILITIES 37,142,000 36,036,000 Commitments and Contingencies (Notes 4 and 8) Stockholders’ Equity Preferred Stock, par value $ .001 - Authorized 3,000,000 shares, 0 shares outstanding, at both September 30, 2022 and December 31, 2021. - - Common Stock - Par Value $ .001 - Authorized 6,000,000 Shares, 3,232,467 and 3,212,801 Shares Issued and Outstanding as of September 30, 2022 and December 31, 2021, respectively 3,000 3,000 Additional Paid-In Capital 82,344,000 81,920,000 Accumulated Deficit ( 64,711,000 ) ( 64,534,000 ) TOTAL STOCKHOLDERS’ EQUITY 17,636,000 17,389,000 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 54,778,000 $ 53,425,000 Share and per share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022. See Notes to Condensed Consolidated Financial Statements 2 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net Sales $ 13,278,000 $ 14,354,000 $ 39,348,000 $ 43,519,000 Cost of Sales 11,036,000 12,340,000 32,606,000 37,105,000 Gross Profit 2,242,000 2,014,000 6,742,000 6,414,000 Operating Expenses 2,073,000 1,837,000 6,116,000 5,770,000 Income from Operations 169,000 177,000 626,000 644,000 Interest and Financing Costs ( 205,000 ) ( 205,000 ) ( 566,000 ) ( 585,000 ) Interest Expense - Related Parties ( 118,000 ) ( 126,000 ) ( 369,000 ) ( 376,000 ) Other Income, Net 12,000 88,000 132,000 338,000 (Loss) Income before Provision for Income Taxes ( 142,000 ) ( 66,000 ) ( 177,000 ) 21,000 Provision for Income Taxes - - - - Net (Loss) Income $ ( 142,000 ) $ ( 66,000 ) $ ( 177,000 ) $ 21,000 (Loss) Income per share - Basic $ ( 0.04 ) $ ( 0.02 ) $ ( 0.05 ) $ 0.01 (Loss) Income per share - Diluted $ ( 0.04 ) $ ( 0.02 ) $ ( 0.05 ) $ 0.01 Weighted Average Shares Outstanding - basic 3,232,467 3,207,405 3,224,912 3,202,287 Weighted Average Shares Outstanding - diluted 3,232,467 3,207,405 3,224,912 3,874,377 Share and per share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022. See Notes to Condensed Consolidated Financial Statements 3 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Stockholders’ Equity For the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance, January 1, 2022 3,212,801 $ 3,000 $ 81,920,000 $ ( 64,534,000 ) $ 17,389,000 Common Stock issued for directors fees 5,522 - 54,000 - 54,000 Stock Compensation Expense - - 66,000 - 66,000 Net Loss - - - ( 28,000 ) ( 28,000 ) Balance, March 31, 2022 3,218,323 $ 3,000 $ 82,040,000 $ ( 64,562,000 ) $ 17,481,000 Common Stock issued for directors fees 6,429 - 54,000 - 54,000 Stock Compensation Expense - - 141,000 - 141,000 Net Loss - - - ( 7,000 ) ( 7,000 ) Balance, June 30, 2022 3,224,752 $ 3,000 $ 82,235,000 $ ( 64,569,000 ) $ 17,669,000 Common Stock issued for directors fees 7,715 - 54,000 - 54,000 Stock Compensation Expense - - 55,000 - 55,000 Net Loss - - - ( 142,000 ) ( 142,000 ) Balance, September 30, 2022 3,232,467 $ 3,000 $ 82,344,000 $ ( 64,711,000 ) $ 17,636,000 Balance January 1, 2021 3,190,698 $ 3,000 $ 81,267,000 $ ( 66,161,000 ) $ 15,109,000 Common Stock issued for directors fees 4,196 - 52,000 - 52,000 Stock Options exercised 5,122 - - - - Stock Compensation Expense - - 157,000 - 157,000 Net Loss - - - ( 152,000 ) ( 152,000 ) Balance, March 31, 2021 3,200,016 $ 3,000 $ 81,476,000 $ ( 66,313,000 ) $ 15,166,000 Common Stock issued for directors fees 3,739 - 52,000 - 52,000 Stock Compensation Expense - - 57,000 - 57,000 Net Income - - - 239,000 239,000 Balance, June 30, 2021 3,203,755 $ 3,000 $ 81,585,000 $ ( 66,074,000 ) $ 15,514,000 Common Stock issued for directors fees 3,998 - 52,000 - 52,000 Stock Compensation Expense - - 147,000 - 147,000 Net Loss - - - ( 66,000 ) ( 66,000 ) Balance, September 30, 2021 3,207,753 $ 3,000 $ 81,784,000 $ ( 66,140,000 ) $ 15,647,000 Share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022. See Notes to Condensed Consolidated Financial Statements 4 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, (Unaudited) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) Income $ ( 177,000 ) $ 21,000 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation of property and equipment 1,906,000 2,105,000 Non-cash employee compensation expense 262,000 361,000 Non-cash directors compensation 162,000 156,000 Non-cash other income recognized ( 59,000 ) ( 274,000 ) Non-cash interest expense - 82,000 Amortization of operating Right-of-Use assets 403,000 364,000 Deferred gain on sale of real estate ( 29,000 ) ( 29,000 ) Bad debt recovery ( 102,000 ) ( 54,000 ) Amortization of deferred financing costs 48,000 118,000 Changes in Operating Assets and Liabilities Decrease (Increase) in Operating Assets: Accounts receivable 1,917,000 ( 1,692,000 ) Inventory ( 3,876,000 ) 2,761,000 Prepaid expenses and other current assets ( 24,000 ) ( 159,000 ) Prepaid taxes ( 3,000 ) - Deposits and other assets ( 74,000 ) ( 15,000 ) Increase (Decrease) in Operating Liabilities: Accounts payable and accrued expenses 256,000 ( 1,261,000 ) Operating lease liabilities ( 504,000 ) ( 541,000 ) Customer deposits ( 179,000 ) 571,000 NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ( 73,000 ) 2,514,000 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 1,980,000 ) ( 983,000 ) NET CASH USED IN INVESTING ACTIVITIES ( 1,980,000 ) ( 983,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Note payable - revolver - net - Webster Bank 1,641,000 ( 2,187,000 ) Proceeds from term loan - Webster Bank 1,945,000 - Payments of term loan - Webster Bank ( 1,430,000 ) ( 1,147,000 ) Payments of deferred Financing Costs ( 20,000 ) - Payment of subordinated note payable - related party ( 250,000 ) - Payments of finance lease obligations ( 263,000 ) ( 3,000 ) Payments of loan payable - financed asset ( 5,000 ) ( 7,000 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,618,000 ( 3,344,000 ) NET DECREASE IN CASH ( 435,000 ) ( 1,813,000 ) CASH AT BEGINNING OF PERIOD 627,000 2,505,000 CASH AT END OF PERIOD $ 192,000 $ 692,000 See Notes to Condensed Consolidated Financial Statements 5 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, (Continued) (Unaudited) 2022 2021 Supplemental cash flow information Cash paid during the period for interest $ 895,000 $ 918,000 Supplemental disclosure of non-cash investing and financing activities Capitalization of related party note interest to principal $ - $ 400,000 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 September 30, 2022, and for the three and nine months ended September 30, 2022 and 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 and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated December 31, 2021 was derived. Effective with the Company’s first quarter ended March 31, 2022, the Company is presenting its operations as one reportable operating segment. Historically the Company operated its businesses and reported its results as two separate segments with AIM and NTW comprising the Complex Machining segment (“CMS”) and Sterling as the Turbine & Engine Component segment (“TEC”). The CMS segment specialized in flight critical components including flight controls and landing gear. The TEC segment focused on manufacturing components for jet engines. Along with its operating subsidiaries, the Company reported the results of its corporate division as an independent segment. In recent years the Company integrated and consolidated the business of AIM and NTW into one facility on Long Island and the operations of its CMS and TEC segments have become increasingly integrated. The Company also made significant capital expenditures and all of its operations now share the same manufacturing facilities and use most, if not all, of the same sales and marketing functions. The Company made these changes to take advantage of the long-term growth opportunities it sees in the aerospace and defense market. In early fiscal 2022, the Company further changed its management approach and is now making decisions about resources to be allocated and assesses performance based on one integrated business rather than two reporting segments. As such, effective with the first quarter ended March 31, 2022, the Company is presenting its operations as one reportable operating segment. Reverse Stock Split On October 4, 2022, the Company announced a reverse stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. All share and per share amounts of its common stock presented have been retroactively adjusted to reflect the 1-for-10 reverse stock split. As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the next whole share. See Note 7 for more information. 7 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 the annual gross profit percentage of the immediately preceding year as applied to the net sales of the current period. Adjustments to reconcile the annual physical inventory to the Company’s books are recorded in the fourth quarter. Inventories consist of the following at: September 30, December 31, 2022 2021 Raw Materials $ 4,163,000 $ 3,410,000 Work In Progress 22,329,000 20,926,000 Finished Goods 9,677,000 8,350,000 Reserve ( 2,761,000 ) ( 3,154,000 ) Total Inventory $ 33,408,000 $ 29,532,000 Credit and Concentration Risks There were two customers that represented 63.9 % and 67.7 % of total net sales for the three months ended September 30, 2022 and 2021, respectively. This is set forth in the table below. Customer Percentage of Sales September 30, 2022 September 30, 2021 1 40.7 % 41.6 % 2 23.2 % 26.1 % There were three customers that represented 68.9 % and 75.5 % of total sales for the nine months ended September 30, 2022 and 2021, respectively. This is set forth in the table below. Customer Percentage of Sales September 30, 2022 September 30, 2021 1 32.5 % 36.8 % 2 19.5 % 26.2 % 3 16.9 % 12.5 % 8 There were two customers that represented 70.2 % and three customers that represented 74.7 % of gross accounts receivable at September 30, 2022 and December 31, 2021, respectively. This is set forth in the table below. Customer Percentage of Receivables September 30, December 31, 2022 2021 1 58.1 % 50.3 % 2 12.1 % 12.7 % 3 * 11.7 % ● Customer was less than 10 % of accounts receivable at September 30, 2022. Disaggregation of Revenue The following table summarizes revenue from contracts with customers for the three and nine month periods ending September 30, 2022 and 2021: Three Months Ended Nine Months Ended Product September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Military $ 11,266,000 $ 12,380,000 $ 33,399,000 $ 38,750,000 Commercial 2,012,000 1,973,000 5,949,000 4,769,000 Total $ 13,278,000 $ 14,353,000 $ 39,348,000 $ 43,519,000 Concentration of Credit Risk During the period, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC insurance limit. The Company has not experienced any losses on these accounts. Major Suppliers The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed. Customer Deposits The Company receives advance payments on certain contracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves the product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s invoice. At September 30, 2022 and December 31, 2021, customer deposits were $ 1,291,000 and $ 1,470,000 respectively. The Company recognized revenue of $ 73,000 and $ 126,000 during the three and nine months ended September 30, 2022, respectively, that was included in the customer deposits balance as of December 31, 2021. The Company recognized revenue of $ 132,000 and $ 507,000 during the three and nine months ended September 30, 2021, respectively, that was included in the customer deposits balance as of December 31, 2020. Backlog Backlog represents executed non-cancellable contracts that represent firm orders that are deliverable over the next 18- month period. As of September 30, 2022, backlog relating to remaining performance obligations in contracts was approximately $65,000,000. We expect to recognize revenue amounts in future periods related to these remaining performance obligations as follows: approximately $13,000,000 to $15,000,000 of our backlog during the remainder of 2022, approximately $25,000,000 to $30,000,000 from January 1, 2023 - June 30, 2023, and approximately $11,000,000 to $15,000,000 from July 1, 2023 through December 31, 2023. This expectation assumes that raw material suppliers, and that outsourced processing is completed and delivered on-time and that its customers will accept delivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales pursuant to contracts that are not currently in backlog. 9 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 (loss) income applicable to common stockholders utilized to calculate the EPS: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (Loss) Income - Basic $ ( 142,000 ) $ ( 66,000 ) $ ( 177,000 ) $ 21,000 Add: Convertible Note Interest for Potential Note Conversion - - - 232,000 (Loss) Income used to calculate diluted earnings per share $ ( 142,000 ) $ ( 66,000 ) $ ( 177,000 ) $ 253,000 The following is a reconciliation of the denominators of basic and diluted earnings per share computations: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Weighted average shares outstanding used to compute basic earnings per share 3,232,467 3,207,405 3,224,912 3,202,287 Effect of dilutive stock options and warrants - - - 266,300 Effect of dilutive convertible notes payable - - - 405,789 Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share 3,232,467 3,207,405 3,224,912 3,874,376 The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Stock Options 305,350 118,000 305,350 16,000 Warrants 76,000 183,000 76,000 142,000 381,350 301,000 381,350 158,000 10 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 during the periods set forth below because the effect of including these potential shares was anti-dilutive due to the net loss incurred during these periods: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Stock Options - 133,000 - - Convertible notes payable 405,810 509,000 405,810 - 405,810 642,000 405,810 - 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 $ 55,000 and $ 147,000 for the three months ended September 30, 2022 and 2021, respectively, and $ 262,000 and $ 361,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense for directors amounted to $ 54,000 and $ 52,000 for the three months ended September 30, 2022 and 2021, respectively and $ 162,000 and $ 156,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense for employees and directors was included in operating expenses on the accompanying Condensed Consolidated Statements of Operations. Goodwill Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $ 163,000 at both September 30, 2022 and December 31, 2021 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. Recently Issued Accounting Pronouncements Effective January 1, 2022, the Company adopted 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 accounting principles generally accepted in the United States of America 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. The adoption of ASU 2020-06 did not have a material effect on the Company’s financial statements. 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. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements. 11 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 September 30, 2022 and December 31, 2021 consisted of the following: September 30, December 31, 2022 2021 Land $ 300,000 $ 300,000 Buildings and Improvements 1,945,000 1,723,000 Machinery and Equipment 23,055,000 22,013,000 Finance Lease Machinery and Equipment 375,000 375,000 Tools and Instruments 13,495,000 12,866,000 Automotive Equipment 266,000 200,000 Furniture and Fixtures 290,000 290,000 Leasehold Improvements 882,000 882,000 Computers and Software 604,000 583,000 Total Property and Equipment 41,212,000 39,232,000 Less: Accumulated Depreciation ( 32,734,000 ) ( 30,828,000 ) Property and Equipment, net $ 8,478,000 $ 8,404,000 Depreciation expense for the three months ended September 30, 2022 and 2021 was $ 598,000 and $ 688,000 , respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $ 1,906,000 and $ 2,105,000 , respectively. Assets held under financed lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under finance leases is included in depreciation expense for 2022 and 2021. Accumulated depreciation on these assets was approximately $ 12,000 and $ 32,000 as of September 30, 2022 and December 31, 2021, 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 six years, some of which include options to extend or terminate the leases. September 30, December 31, 2022 2021 Weighted Average Remaining Lease Term - in years 3.91 4.53 Weighted Average discount rate - % 8.97 % 8.89 % 12 The aggregate undiscounted cash flows of operating lease payments for leases with remaining terms greater than one year are as follows: Amount December 31, 2022 (remainder of year) $ 257,000 December 31, 2023 1,038,000 December 31, 2024 1,070,000 December 31, 2025 992,000 December 31, 2026 729,000 Total future minimum lease payments 4,086,000 Less: discount ( 663,000 ) Total operating lease maturities 3,423,000 Less: current portion of operating lease liabilities ( 754,000 ) Total long term portion of operating lease maturities $ 2,669,000 Note 5. DEBT Notes payable, related party notes payable and finance lease obligations consist of the following: September 30, December 31, 2022 2021 Revolving loan payable to Webster Bank (F/K/A Sterling National Bank) (“Webster”) $ 14,097,000 $ 12,456,000 Term loan, Webster 4,691,000 4,192,000 Finance lease obligations - 263,000 Loans Payable - financed assets 34,000 39,000 Related party subordinated notes payable 6,162,000 6,412,000 Subtotal 24,984,000 23,362,000 Less: Current portion ( 14,820,000 ) ( 14,112,000 ) Long Term Portion $ 10,164,000 $ 9,250,000 13 Webster Bank (F/K/A Sterling National Bank) (“Webster”) The Company has a loan facility (“Webster Facility”) with Webster Bank that expires on December 30, 2025 . The Webster Facility, which was first entered into on December 31, 2019, was amended several times, and now provides for a $ 20,000,000 revolving loan (“Revolving Line of Credit”), a $ 5,000,000 term loan (“Term Loan”) and a $ 2,000,000 Equipment Line of Credit, which as it is drawn upon will be added to the balance of the Term Loan. As of September 30, 2022, there is currently $ 14,097,000 outstanding under the Revolving Loan and $ 4,691,000 under the Term Loan. The below table shows the timing of payments due under the Term Loan: For the period ending Amount December 31, 2022 (remainder of the year) $ 178,000 December 31, 2023 714,000 December 31, 2024 714,000 December 31, 2025 3,156,000 Webster Term Loan payable 4,762,000 Less: debt issuance costs ( 71,000 ) Total Webster Term Loan payable, net of debt issuance costs 4,691,000 Less: Current portion of Webster Term Loan payable ( 714,000 ) Total long-term portion of Webster Term Loan payable $ 3,977,000 As of December 31, 2021, our debt to Webster in the amount of $16,648,000 consisted of the Webster Revolving Loan in the amount of $12,456,000 and the Webster term loan in the amount of $4,192,000. Interest expense related to the Webster Facility amounted to approximately $ 204,000 and $ 181,000 for the three months ended September 30, 2022 and 2021, respectively, and $ 506,000 and $ 542,000 for the nine months ended September 30, 2022 and 2021, respectively. The below summarizes historical amendments to the Webster Facility and various terms: In 2020, the Company entered into the First Amendment to the Webster Facility which increased the Term Loan to $ 5,685,000 and required the Company to make monthly principal installments in the amount of $ 67,679 beginning on December 1, 2020. Other minor modifications were made and the Company paid an amendment fee of $ 20,000 . In June 2021, the Company entered into the Second Amendment to the Webster Facility, which clarified the definition and calculation of Excess Cash Flow, and to confirm the due date of required payment of the Excess Cash Flow payment. For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay to Webster 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 Webster and applied to the outstanding principal balance of the term loan, on or prior to the close of the fiscal year immediately following such fiscal year. The Company made Excess Cash Flow payments of $ 558,750 in 2021 (for the fiscal year ended December 31, 2020) and $ 854,000 in April 2022 (for fiscal year ended December 31, 2021). In connection with these changes, the Company paid an amendment fee of $ 10,000 . On December 7, 2021, the Company entered into the Third Amendment to the Webster Facility (“Third Amendment”). The purpose of the amendment was to provide a maturity date for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022. Such amendment also increased the Revolving Line of Credit to its current limit of $20,000,000 (up from the original $16,000,000) and also provided for a similar increase in the inventory sublimit to $14,000,000 (up from the original $11,000,000). The Third Amendment, also allows the Company, subject to certain limitations, to begin amortizing $250,000 of its related party subordinated notes payable each quarter as long as certain conditions are met. In connection with these changes, the Company paid an amendment fee of $ 75,000 . 14 On May 17, 2022, the Company entered into the Fourth Amendment to the Webster Facility (“Fourth Amendment”). The purpose of the amendment was to increase the Term Loan to $ 5,000,000 , generating proceeds of $ 1,945,000 , reduced the monthly principal installments to be made in respect to the term loan, and establish a capital expenditure line of credit in the amount of $ 2,000,000 which the Company can draw upon from time to time to finance purchases of machinery and equipment, thereby increasing the amount of capital expenditures that the Company may make each year. The principle payments are $ 59,524 per month commencing in June 2022 with a balloon payment due on December 30, 2025. In connection with these changes, the Company paid an amendment fee of $ 20,000 . Under the terms of the Webster Facility, both the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal (or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum. The average interest rate charged was 4.70% and 3.50% for the three months ended September 30, 2022 and 2021, respectively and was 3.94% and 3.50% for the nine months ended September 30, 2022 and 2021, respectively. All amendment fees paid in connection with the Webster Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance Sheets and are amortized over the term of the loan. In connection with the Webster Facility, the Company is required to maintain a defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter. The Webster Facility limits the amount of Capital Expenditures and dividends the Company can pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the Webster Facility. As of September 30, 2022, the Company was in compliance with all financial loan covenants. Finance Lease Obligations The Company entered into a Finance lease in December of 2021 for the purchase of new manufacturing equipment. The obligation for the Finance lease totaled $ 0 and $ 263,000 as of September 30, 2022 and December 31, 2021, respectively. The lease had an imputed interest rate of 4.2 % per annum and was payable monthly with the final payment due on December 17, 2026. In connection with the Fourth Amendment to the Webster Facility, this Finance Lease was paid in full. 15 Loan Payable – Financed Asset The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled $ 33,000 and $ 39,000 as of September 30, 2022 and December 31, 2021, 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 period ending Amount December 31, 2022 (remainder of the year) $ 2,000 December 31, 2023 9,000 December 31, 2024 9,000 December 31, 2025 9,000 December 31, 2026 4,000 Loans Payable - financed assets 33,000 Less: Current portion ( 9,000 ) Long-term portion $ 24,000 Related Party Notes Payable Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich. 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. 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 35,508 shares of common stock and Taglich Brothers Inc. was issued promissory notes totaling $554,000 for placement agency fees. At December 31, 2020, related party notes payable totaled $6,012,000 and accrued interest totaled $400,000. 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 Webster Facility, these notes remain subordinate to the Webster Facility and are due on July 1, 2026. Approximately $ 2,732,000 of the related party convertible subordinated notes can be converted at the option of the holder into Common Stock of the Company at $ 15.00 per share, while the remaining $ 2,080,000 of the related party convertible subordinated notes can be converted at the option of the holder into common stock of the Company at $ 9.30 per share. There are no principal payments due on these notes. Under the terms of the Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations, to make principal payments of $ 250,000 per quarter of this subordinated debt. For the three and nine months ended September 30, 2022, a principal payment of $ 250,000 was made against the Subordinated Notes due to Michael Taglich. This payment was made pursuant to the conditions set forth in the Third Amendment to the Webster Facility. 16 The note holders and the principal balance of the notes of September 30, 2022 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 1,000,000 350,000 - 1,350,000 Total $ 3,666,000 $ 2,255,000 $ 241,000 $ 6,162,000 Interest expense for the three months ended September 30, 2022 and 2021 on all related party notes payable was $ 118,000 and $ 126,000 , respectively, and $ 369,000 and $ 376,000 for the nine months ended September 30, 2022 and 2021, respectively. 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 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. The timing of the payments is based upon the net sales of AMK . The Company recognized $ 0 and $ 79,000 of non-cash income for the three months ended September 30, 2022 and 2021, respectively, and $ 94,000 and $ 274,000 of non-cash income for the nine months ended September 30, 2022 and 2021, respectively, reflected in “other income, net” on the condensed consolidated statements of operations and recorded $ 0 and $ 24,000 of related non-cash interest expense related to the Purchase Agreement for the three months ended September 30, 2022 and 2021, respectively, and $ 35,000 and $ 82,000 for the nine months ended September 30, 2022 and 2021, respectively. The table below shows the activity within the liability account for: September 30, 2022 December 31, 2021 Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance $ 59,000 $ 322,000 Non-Cash other income recognized ( 94,000 ) ( 360,000 ) Non-Cash interest expense recognized 35,000 97,000 Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance - 59,000 Less: unamortized transaction costs - ( 3,000 ) Liability related to sale of future proceeds from disposition of subsidiary, net $ - $ 56,000 17 Note 7. STOCKHOLDERS’ EQUITY On October 4, 2022 the Company announced a reverse stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the next whole share. An additional 7,287 shares were issued to account for this. As such all references to shares and per share price has been adjusted to retrospectively account for this transaction. Common Stock – Sale of Securities The Company issued 7,715 and 3,998 shares of common stock in payment of director fees totaling $ 54,000 and $ 52,000 for the three months ended September 30, 2022 and 2021, respectively, and 19,667 and 11,934 shares totaling $ 162,000 and $ 156,000 for the nine months ended September 30, 2022 and 2021, respectively. Additionally, the Company issued 5,122 shares of common stock upon the cashless exercise of stock options during the nine months ended September 30, 2021. During the fourth quarter of 2022, the Company issued 8,183 shares of common stock in payment of directors’ fees totaling $ 54,000 . Issuance of Stock Options Issued in 2022 On January 31, 2022, the Company granted certain employees, stock options to purchase an aggregate of 3,000 shares of the Company’s common stock at a price of $ 8.50 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years . On April 6, 2022, the Company granted to its directors, stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $ 8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one year . On April 11, 2022, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of 53,000 shares of the Company’s common stock at a price of $ 8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years . Issued in 2021 On January 11, 2021, the Company granted to its directors, stock options to purchase an aggregate of 7,000 shares of the Company’s common stock at a price of $ 13.20 per share. The options expire on the seventh anniversary of the grant date and vested 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 32,750 shares of the Company’s common stock at a price of $ 13.90 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 41,500 shares of the Company’s common stock at a price of $ 12.20 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one to three years . 18 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. On October 2, 2018, Contract Pharmacal Corp. (“Contract Pharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with respect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal sought damages for an amount 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 Phamacal’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 . Contract Pharmacal filed a Motion to reargue which the Court denied on November 30, 2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company will oppose. The Company disputes the validity of the claims asserted by Contract Pharmacal and intends contest them vigorously. Note 9. INCOME TAXES The Company recorded no income tax expense for the three and nine months ended September 30, 2022 and 2021 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 of September 30, 2022, and December 31, 2021, 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. SUBSEQUENT EVENTS Management has evaluated subsequent events through the date of this filing. 19