AIR INDUSTRIES GROUP 10-Q

Item 1. Financial statements Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022 2 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited) 3 Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 7 1 AIR INDUSTRIES GROUP Condensed Consolidated Balance Sheets June 30, December 31, 2023 2022 (unaudited) ASSETS Current Assets Cash $ 837,000 $ 281,000 Accounts Receivable, Net of Allowance for Credit Loss of $ 319,000 and $ 281,000 8,142,000 9,483,000 Inventory 32,767,000 31,821,000 Prepaid Expenses and Other Current Assets 222,000 307,000 Contract Costs Receivable 296,000 296,000 Prepaid Taxes 29,000 28,000 Total Current Assets 42,293,000 42,216,000 Property and Equipment, Net 9,420,000 8,593,000 Operating Lease Right-Of-Use-Assets 2,178,000 2,473,000 Deferred Financing Costs, Net, Deposits and Other Assets 493,000 532,000 TOTAL ASSETS $ 54,384,000 $ 53,814,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Debt - Current Portion $ 14,951,000 $ 14,477,000 Accounts Payable and Accrued Expenses 8,269,000 7,542,000 Operating Lease Liabilities - Current Portion 828,000 778,000 Deferred Gain on Sale - Current Portion 38,000 38,000 Customer Deposits 467,000 781,000 Total Current Liabilities 24,553,000 23,616,000 Long Term Liabilities Debt - Net of Current Portion 5,381,000 4,629,000 Subordinated Notes Payable - Related Party 6,162,000 6,162,000 Operating Lease Liabilities - Net of Current Portion 2,036,000 2,463,000 Deferred Gain on Sale - Net of Current Portion 86,000 105,000 TOTAL LIABILITIES 38,218,000 36,975,000 Commitments and Contingencies (see Note 7) Stockholders’ Equity Preferred Stock, par value $ .001 - Authorized 3,000,000 shares, 0 shares outstanding, at both June 30, 2023 and December 31, 2022. - - Common Stock - Par Value $ .001 - Authorized 6,000,000 shares, 3,274,597 and 3,247,937 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 3,000 3,000 Additional Paid-In Capital 82,786,000 82,446,000 Accumulated Deficit ( 66,623,000 ) ( 65,610,000 ) TOTAL STOCKHOLDERS’ EQUITY 16,166,000 16,839,000 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 54,384,000 $ 53,814,000 See Notes to Condensed Consolidated Financial Statements 2 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Net Sales $ 13,205,000 $ 14,008,000 $ 25,754,000 $ 26,070,000 Cost of Sales 11,035,000 11,586,000 21,704,000 21,570,000 Gross Profit 2,170,000 2,422,000 4,050,000 4,500,000 Operating Expenses 2,098,000 2,172,000 4,136,000 4,043,000 Income (Loss) from Operations 72,000 250,000 ( 86,000 ) 457,000 Interest and Financing Costs ( 362,000 ) ( 163,000 ) ( 720,000 ) ( 361,000 ) Interest Expense - Related Parties ( 118,000 ) ( 126,000 ) ( 236,000 ) ( 251,000 ) Other Income, Net 13,000 32,000 29,000 120,000 Loss before Benefit From Income Taxes ( 395,000 ) ( 7,000 ) ( 1,013,000 ) ( 35,000 ) Provision for Income Taxes - - - - Net Loss $ ( 395,000 ) $ ( 7,000 ) $ ( 1,013,000 ) $ ( 35,000 ) (Loss) Income per share - Basic and diluted $ ( 0.12 ) $ ( 0.00 ) $ ( 0.31 ) $ ( 0.01 ) Weighted Average Shares Outstanding - Basic and diluted 3,265,727 3,221,377 3,262,122 3,221,285 See Notes to Condensed Consolidated Financial Statements 3 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Stockholders’ Equity For the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance, January 1, 2023 3,247,937 $ 3,000 $ 82,446,000 $ ( 65,610,000 ) $ 16,839,000 Common Stock issued for directors fees 11,430 - 54,000 - 54,000 Stock Compensation Expense - - 45,000 - 45,000 Net Loss - - - ( 618,000 ) ( 618,000 ) Balance, March 31, 2023 3,259,367 $ 3,000 $ 82,545,000 $ ( 66,228,000 ) $ 16,320,000 Common Stock issued for directors fees 15,230 - 54,000 - 54,000 Stock Compensation Expense - - 187,000 - 187,000 Net Loss - - - ( 395,000 ) ( 395,000 ) Balance, June 30, 2023 3,274,597 $ 3,000 $ 82,786,000 $ ( 66,623,000 ) $ 16,166,000 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 See Notes to Condensed Consolidated Financial Statements 4 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, (Unaudited) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ ( 1,013,000 ) $ ( 35,000 ) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation of property and equipment 1,239,000 1,308,000 Non-cash employee compensation expense 232,000 207,000 Non-cash directors compensation 108,000 108,000 Non-cash other income recognized - ( 94,000 ) Amortization of Operating Lease Right-of-Use Assets 295,000 265,000 Deferred gain on sale of real estate ( 19,000 ) ( 19,000 ) Bad debt expense (recovery) 38,000 ( 117,000 ) Amortization of deferred financing costs 17,000 31,000 Changes in Operating Assets and Liabilities (Increase) Decrease in Operating Assets: Accounts receivable 1,303,000 1,512,000 Inventory ( 946,000 ) ( 3,456,000 ) Prepaid expenses and other current assets 85,000 - Prepaid taxes ( 1,000 ) ( 5,000 ) Deposits and other assets 33,000 ( 99,000 ) Increase (Decrease) in Operating Liabilities: Accounts payable and accrued expenses 726,000 1,093,000 Operating lease liabilities ( 377,000 ) ( 331,000 ) Customer deposits ( 314,000 ) ( 53,000 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 1,406,000 315,000 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 1,383,000 ) ( 1,327,000 ) NET CASH USED IN INVESTING ACTIVITIES ( 1,383,000 ) ( 1,327,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Note payable - revolver - net - Webster Bank 486,000 888,000 Proceeds from term loan - Webster Bank 740,000 1,945,000 Payments of term loan - Webster Bank ( 640,000 ) ( 1,251,000 ) Payments of finance lease obligations ( 49,000 ) ( 263,000 ) Payments of loan payable - financed asset ( 4,000 ) ( 4,000 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 533,000 1,315,000 NET INCREASE IN CASH 556,000 303,000 CASH AT BEGINNING OF PERIOD 281,000 627,000 CASH AT END OF PERIOD $ 837,000 $ 930,000 See Notes to Condensed Consolidated Financial Statements 5 AIR INDUSTRIES GROUP Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, (Continued) (Unaudited) 2023 2022 Supplemental cash flow information Cash paid during the period for interest $ 955,000 $ 572,000 2023 2022 Supplemental disclosure of non-cash investing and financing activities Acquisition of financed lease asset $ 683,000 $ - See Notes to Condensed Consolidated Financial Statements 6 AIR INDUSTRIES GROUP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Air Industries Group is a Nevada corporation (“AIRI”). As of June 30,2023, and for the three and six months ended June 30, 2023 and 2022, 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 six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated December 31, 2022 was derived. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Inventory Valuation As of June 30, 2023, the Company values inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. Prior to 2023, for interim periods, substantially all of the inventory value was 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. The Company generally purchases raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable contracts for orders have been received for finished goods. It occasionally produces larger more complex products, such as landing gear, in excess of purchase order quantities in anticipation of future purchase order demand, when it is economically advantageous to do so, since historically this excess has been used in fulfilling future purchase orders. The Company purchases supplies and materials useful in a variety of products as deemed necessary even though orders have not been received. The Company periodically evaluates inventory items not secured by purchase orders and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods, obsolescence and for other impairments of value. 7 Inventories consist of the following at: June 30, December 31, 2023 2022 Raw Materials $ 5,286,000 $ 4,198,000 Work In Progress 18,289,000 20,488,000 Finished Goods 12,878,000 10,748,000 Reserve ( 3,686,000 ) ( 3,613,000 ) Total Inventory $ 32,767,000 $ 31,821,000 Credit and Concentration Risks There were three customers that represented 62.7 % and 66.2 % of total net sales for the three months ended June 30, 2023 and 2022, respectively. This is set forth in the table below. Percentage of Sales June 30, June 30, Customer 2023 2022 1 30.2 % 26.4 % 2 18.5 % 29.5 % 3 14.0 % 10.3 % There were three customers that represented 54.5 % and four customers that represented 77.9 % of total net sales for the six months ended June 30, 2023 and 2022, respectively. This is set forth in the table below. Percentage of Sales June 30, June 30, Customer 2023 2022 1 21.3 % 25.8 % 2 21.1 % 28.4 % 3 12.1 % ** 4 * 13.7 % 5 * 10.0 % * Customer was less than 10 % of sales for the six months ended June 30, 2023 ** Customer was less than 10 % of sales for the six months ended June 30, 2022 8 There were two customers that represented 60.8 % and three customers that represented 70.3 % of gross accounts receivable at June 30, 2023 and December 31, 2022, respectively. This is set forth in the table below. Percentage of Accounts Receivables June 30, December 31, Customer 2023 2022 1 45.9 % 33.1 % 2 14.9 % ** 3 * 23.6 % 4 * 13.6 % * Customer was less than 10 % of accounts receivable at June 30, 2023 ** Customer was less than 10 % of accounts receivable at June 30, 2022 Disaggregation of Revenue The following table summarizes revenue from contracts with customers for the three and six month periods ending June 30, 2023 and 2022: Three Months Ended Six Months Ended Product June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Military $ 11,337,000 $ 11,801,000 $ 21,369,000 $ 22,134,000 Commercial 1,868,000 2,207,000 4,385,000 3,936,000 Total $ 13,205,000 $ 14,008,000 $ 25,754,000 $ 26,070,000 Cash During the period, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts. Major Suppliers The Company has several key sole-source suppliers of various parts or services that are important for one or more of its products. These suppliers are its only source for such parts or services and, therefore, in the event any of them were to go out of business or be unable to provide parts or services 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 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 June 30, 2023 and December 31, 2022, customer deposits were $ 467,000 and $ 781,000 respectively. The Company recognized revenue of $ 42,000 and $ 314,000 during the three and six months ended June 30, 2023, respectively, that was included in the customer deposits balance as of December 31, 2022. The Company recognized revenue of $ 8,000 and $ 53,000 during the three and six months ended June 30, 2022, respectively, that was included in the customer deposits balance as of December 31, 2021. 9 Backlog Backlog represents executed non-cancellable contracts that represent firm orders that are deliverable over the next 18- month period. As of June 30, 2023, backlog relating to remaining performance obligations in contracts was approximately $ 73,000,000 . We expect to recognize revenue amounts in future periods related to these remaining performance obligations as follows: approximately $ 22,500,000 to $ 25,000,000 of our backlog during the remainder of 2023, approximately $ 25,000,000 to $ 27,000,000 from January 1, 2024 through June 30, 2024, and approximately $ 21,000,000 to $ 25,500,000 from July 1, 2024 through December 31, 2024. This expectation is based on the Company’s belief that raw material will be delivered on time from its suppliers, and that its customers will accept delivery as scheduled. Contract Costs Receivable Contract costs receivable represent costs to be reimbursed from a terminated contract. The Company expects to collect the receivable in the next twelve months. Contract costs receivable totals $ 296,000 at both June 30, 2023 and December 31, 2022. 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 expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, 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 (loss) 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 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 Six Months Ended June 30, June 30, June 30, June 30, 2023 2022 2023 2022 Stock Options 462,870 236,433 462,870 236,433 Warrants 28,000 76,000 28,000 76,000 490,870 312,433 490,870 312,433 10 The following securities have been excluded from the calculation 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 June 30, June 30, 2023 2022 Stock Options - - Convertible notes payable 405,800 405,800 405,800 405,800 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 $ 187,000 and $ 141,000 for the three months ended June 30, 2023 and 2022, respectively, and $ 232,000 and $ 207,000 for the six months ended June 30, 2023 and 2022, respectively. Stock compensation expense for directors amounted to $ 54,000 and $ 54,000 for the three months ended June 30, 2023 and 2022, respectively and $ 108,000 and $ 108,000 for the six months ended June 30, 2023 and 2022, respectively. Stock compensation expense for employees and directors was included in operating expenses on the accompanying Condensed Consolidated Statements of Operations. Recently Issued Accounting Pronouncements Effective January 1, 2023, the Company adopted 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. 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. The adoption of ASU 2016-13 did not have a material effect on the Company’s financial statements. The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements. 11 Note 3. PROPERTY AND EQUIPMENT The components of property and equipment at June 30, 2023 and December 31, 2022 consisted of the following: June 30, December 31, 2023 2022 Land $ 300,000 $ 300,000 Buildings and Improvements 1,895,000 1,789,000 Machinery and Equipment 25,308,000 23,566,000 Finance Lease ROU Assets - Machinery and Equipment 375,000 375,000 Tools and Instruments 13,894,000 13,744,000 Automotive Equipment 266,000 266,000 Furniture and Fixtures 300,000 290,000 Leasehold Improvements 998,000 941,000 Computers and Software 605,000 604,000 Total Property and Equipment 43,941,000 41,875,000 Less: Accumulated Depreciation ( 34,521,000 ) ( 33,282,000 ) Property and Equipment, net $ 9,420,000 $ 8,593,000 Depreciation expense for the three months ended June 30, 2023 and 2022 was $ 622,000 and $ 643,000 , respectively. Depreciation expense for the six months ended June 30, 2023 and 2022 was $ 1,239,000 and $ 1,308,000 , 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. Accumulated depreciation on these assets was approximately $ 25,000 and $ 0 as of June 30, 2023 and December 31, 2022, respectively. Note 4. LEASES The Company has operating leases for leased office and manufacturing facilities. The leases have remaining lease terms of one to five years , some of which include options to extend or terminate the leases. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2023 2022 2023 2022 Operating lease cost: $ 273,000 $ 292,000 $ 544,000 $ 563,000 Total lease cost $ 273,000 $ 292,000 $ 544,000 $ 563,000 Other Information Cash paid for amounts included in the measurement lease liability: 258,000 251,000 515,000 500,000 Operating cash flow from operating leases $ 258,000 $ 251,000 $ 515,000 $ 500,000 June 30, December 31, 2023 2022 Weighted Average Remaining Lease Term - in years 3.15 3.64 Weighted Average discount rate - % 9.03 % 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, 2023 (remainder of year) $ 523,000 December 31, 2024 1,070,000 December 31, 2025 992,000 December 31, 2026 730,000 Total future minimum lease payments 3,315,000 Less: discount ( 451,000 ) Total operating lease maturities 2,864,000 Less: current portion of operating lease liabilities ( 828,000 ) Total long term portion of operating lease maturities $ 2,036,000 Note 5. DEBT Notes payable, related party notes payable and finance lease obligations consist of the following: June 30, December 31, 2023 2022 Revolving loan to Webster Bank (“Webster”) $ 13,837,000 $ 13,352,000 Term loan, Webster 5,506,000 5,396,000 Finance lease obligations 962,000 328,000 Loans Payable - financed assets 27,000 30,000 Related party notes payable 6,162,000 6,162,000 Subtotal 26,494,000 25,268,000 Less: Current portion ( 14,951,000 ) ( 14,477,000 ) Long Term Portion $ 11,543,000 $ 10,791,000 Webster 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”) and a $ 5,000,000 term loan (“Term Loan”) and a $ 2,000,000 Equipment Line of Credit, which as it is drawn upon is added to the balance of the Term Loan. On December 15, 2022, the Company made a draw against the capital expenditure line of credit in the amount of $ 877,913 . The principal payments are $ 10,451 per month commencing in February 2023 with a balloon payment due on December 30, 2025 . On January 4, 2023, the Company made an additional draw against the capital expenditure line of credit in the amount of $ 739,500 . The principal payments are $ 8,804 per month commencing in March 2023 with a balloon payment due on December 30, 2025 . 13 As of June 30, 2023, there is currently $ 13,837,000 outstanding under the Webster Revolving Loan and $ 5,506,000 under the Webster term loan, inclusive of amounts drawn under the Equipment Line of Credit. Additionally, there is $ 382,000 remaining available under the equipment line of credit. The below table shows the timing of payments due under the Term Loan: For the year ending Amount December 31, 2023 (remainder of the year) $ 473,000 December 31, 2024 945,000 December 31, 2025 4,142,000 Webster Term Loan payable 5,560,000 Less: debt issuance costs ( 54,000 ) Total Webster Term Loan payable, net of debt issuance costs 5,506,000 Less: Current portion of Webster Term Loan payable ( 945,000 ) Total long-term portion of Webster Term Loan payable $ 4,561,000 As of December 31, 2022, our debt to Webster in the amount of $ 18,748,000 consisted of the Webster Revolving Loan in the amount of $ 13,352,000 and the Webster term loan in the amount of $ 5,396,000 which included $ 878,000 of what was drawn on the equipment line of credit. Interest expense related to the Webster Facility amounted to approximately $ 372,000 and $ 147,000 for the three months ended June 30, 2023 and 2022, respectively, and $ 704,000 and $ 302,000 for the six months ended June 30, 2023 and 2022. The below summarizes historical amendments to the Webster Facility and various terms: 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 April 15 immediately following such fiscal year. The Company made an Excess Cash Flow payments of $ 854,000 in April 2022 (for fiscal year ended December 31, 2021). As required, the Company provided the calculation for the Excess Cash Flow payment of $ 195,000 for fiscal year ended December 31, 2022 to Webster prior to the April 15, 2023 deadline for such payment and authorized such payment to be made from the Revolving Loan. On June 13, 2023, Webster applied this payment to the term loan. 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 , reduce 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 principal 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 7.51 % and 3.60 % the three months ended June 30, 2023 and 2022, respectively and was 7.27 % and 3.55 % for the six months ended June 30, 2023 and 2022, respectively. All amendment fees paid in connection with the Webster Facility that are for a future benefit of the Company 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. 14 On August 4, 2023, the Company entered into the Fifth Amendment to the Webster Facility (“Fifth Amendment”). The amendment waived the default caused by the failure to achieve the required Fixed Coverage Charge Ratio for the Fiscal Quarter ended March 31, 2023 and decreased the required Fixed Coverage Charge Ratio to 0.95 to 1.00 for the Fiscal Quarters ending June 30, 2023 and September 30, 2023. Additionally, the Fifth Amendment increased the amount of purchase money secured Debt (including Capital Leases) the Company is allowed to have outstanding at any time to $2,000,000. In connection with these changes, the Company paid an amendment fee of $10,000. As a result of the Company’s entry into the Fifth Amendment, the Company was in compliance with all financial covenants of the Webster Facility for the Fiscal Quarter ended June 30, 2023. Finance Lease Obligations The Company entered into a finance lease in November of 2022 for the purchase of new manufacturing equipment. Additionally, during May of 2023, the Company entered into an additional finance lease for the purchase of additional manufacturing equipment. The obligations for the finance leases totaled $ 962,000 and $ 328,000 as of June 30, 2023 and December 31, 2022, respectively. The leases have an average imputed interest rate of 7.32 % per annum and are payable monthly with the final payments due between September of 2026 and May of 2030. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2023 2022 2023 2022 Finance Lease cost: Amortization of ROU assets $ 26,000 $ - $ 45,000 $ - Interest on lease liabilities 10,000 - 16,000 - Total lease Costs $ 36,000 $ - $ 61,000 $ - Other Information: Cash Paid for amounts included in the measurement lease liabilities: Financing cash flow from finance lease obligations $ 26,000 $ 9,000 $ 45,000 $ 9,000 Supplemental disclosure of non-cash activity Acquisition of finance lease asset $ 683,000 $ - $ 683,000 $ - June 30, December 31, 2023 2022 Weighted Average Remaining Lease Term - in years 5.8 4 Weighted Average Discount rate - % 7.32 % 7.48 % 15 As of June 30, 2023, the aggregate future minimum finance lease payments, including imputed interest are as follows: For the year ending Amount December 31, 2023 (remainder of the year) $ 112,000 December 31, 2024 224,000 December 31, 2025 224,000 December 31, 2026 199,000 December 31, 2027 124,000 December 31, 2028 124,000 Thereafter 177,000 Total future minimum finance lease payments 1,184,000 Less: imputed interest ( 222,000 ) Less: Current portion ( 159,000 ) Long-term portion $ 803,000 Loan Payable – Financed Asset The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled $ 27,000 and $ 30,000 as of June 30, 2023 and December 31, 2023, 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 year ending Amount December 31, 2023 (remainder of the year) $ 6,000 December 31, 2024 9,000 December 31, 2025 9,000 December 31, 2026 3,000 Loans Payable - financed assets 27,000 Less: Current portion ( 9,000 ) Long-term portion $ 18,000 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 355,082 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 the outstanding principal amount and any accrued but unpaid interest 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 and bears interest at a rate of 6 % per annum, 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 and bears interest rate of 7 % per annum. The subordinated notes which are not convertible bear interest at the rate of 12 % per annum. There are no periodic principal payments due on the subordinated notes payable and convertible subordinated notes payable. 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 six months ended June 30, 2023 and 2022, no principal payments have been made on these notes. 16 The note holders and the principal balance of the notes of June 30, 2023 and December 31, 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 amounted to approximately $ 118,000 and $ 126,000 for the three months ended June 30, 2023 and 2022, respectively, and $ 236,000 and $ 251,000 for the six months ended June 30, 2023 and 2022. Note 6. STOCKHOLDERS’ EQUITY Common Stock – Issuance of Securities The Company issued 15,230 and 6,429 shares of common stock in payment of director fees totaling $ 54,000 and $ 54,000 for the three months ended June 30, 2023 and 2022, respectively, and 26,660 and 11,951 shares totaling $ 108,000 and $ 108,000 for the six months ended June 30, 2023 and 2022, respectively. During the third quarter of 2023, the Company issued 15,230 shares of common stock in payment of directors’ fees totaling $ 54,000 . Note 7. CONTINGENCIES 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 . Subsequently, Contact Pharmacal moved to amend its Complaint. The Company opposed and the Court denied the request to amend the Complaint. 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 has opposed. The date for argument of the appeal has not been set by the Appellate Division. The Company disputes the validity of the claims asserted by Contract Pharmacal and intends to contest them vigorously. Note 8. INCOME TAXES The Company recorded no income tax expense for the three and six months ended June 30, 2023 and 2022 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 June 30, 2023, and December 31, 2022, 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. 17