AIR INDUSTRIES GROUP

Note 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Air Industries Group is a Nevada corporation (“AIRI”). As of and for the years ended December 31, 2023 and 2022, the accompanying consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).

Principal Business Activity

The Company is a leading manufacturer of precision assemblies and components for large aerospace and defense prime contractors. Its products include landing gears, flight controls, engine mounts and components for aircraft jet engines, ground turbines and other complex machines. Most of its machined components and assemblies are integral to high-profile platforms and named programs including the F-18 Hornet, the E2D Hawkeye, the UH-60 Black Hawk Helicopter, the Geared Turbo-Fan Engine, the CH-53 Helicopter, the F-35 Lighting II (also known as the Joint Strike Fighter) and the F-15 Eagle Tactical Fighter.

Our direct customers are primarily large aerospace and defense prime contractors. The ultimate end-users for most of our products are the U.S. Government, international governments, and commercial global airlines.

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America and the rules and regulations of the Securities and Exchange Commission.

Since 2022, the Company makes decisions about resources to be allocated and assesses performance based on one integrated business and reports its results asone segment. All of its operations are integrated, share manufacturing facilities and use most, if not all, of the same sales and marketing functions.

Going Concern and Management’s Plan

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 consolidated financial statements are issued. The Company is required to make certain additional disclosures if management concludes substantial doubt exists about the Company’s ability to continue as a going concern provided that such doubt is not alleviated by the Company’s plans or when the Company’s plans do not alleviate substantial doubt about its ability to continue as a going concern. This evaluation entails analyzing prospective operating budgets and forecasts for expectations regarding cash needs and comparing those needs to the current cash balance and expectations regarding cash to be generated over the following year.

During 2023, the Company generated $4,862,000 of cash from operating activities as compared to only $448,000 in fiscal 2022. It also made $1,113,000 of required payments pursuant to its Current Credit Facility and reduced total debt in 2023 by $1,958,000.

As of December 31, 2023, the Company met all the financial and business covenants required under the terms of its Current Credit Facility including achieving a Fixed Charge Coverage Ratio of 1.31 x compared to the required ratio of 0.95 x. The terms of all outstanding indebtedness are discussed further in “Note 8. Debt”. For the period ending March 31, 2024 the Company was not in compliance with the required ratio of 1.10x.

Management’s plans are to increase net sales for fiscal 2024 as compared to fiscal 2023. The Company believes that these plans are supported by the Company’s backlog which, as of December 31, 2023, stood at $98.3 million. Further, it anticipates receiving additional funded orders in 2024 pursuant to Long-Term Agreements (“LTA”) agreements from its key customers as well as new customers. With this visibility, the Company is confident in its ability to generate sufficient cash flow to make required principal payments of $944,000 to its lender.

Although the Company has begun discussions to obtain a waiver of the failure to meet the Fixed Coverage Charge Ratio at March 31, 2024, it is reasonably possible that it will not be granted. Even if such waiver is granted, the Company may fail to achieve the Fixed Charge Coverage Ratio in the future or otherwise fail to meet covenants in the Current Credit Facility. Therefore, the Company has classified the term loan that expires on December 30, 2025 as current as of December 31, 2023, in accordance with the guidance in Accounting Standards Codification (“ASC”) 470-10-45, “Debt – Other Presentation Matters”, related to the classification of callable debt. The Company is required to maintain a collection account with its lender into which substantially all cash receipts are remitted. If we were to default under the Current Credit Facility, the Company’s lender could choose to increase the rate of interest or refuse to make loans under the revolving portion of the Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest, it would adversely impact the Company’s operating results. If the lender were to cease making new loans under the revolving facility, the Company would lack the funds to continue operations. The rights granted to the lender under the Current Credit Facility combined with the reasonable possibility that the Company might fail to meet covenants in the future raise substantial doubt about its ability to continue as a going concern for the one year commencing as of the date of issuance of this report.

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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 10 – Stockholders’ Equity for more information.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Accounts Receivable

Accounts receivable are carried at the original invoice amount less an estimate made for credit losses based on a review of all outstanding amounts on a quarterly basis. Management determines the allowance for credit losses by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, current economic conditions and other relevant factors, including specific reserves for certain accounts. Accounts receivable are written off when deemed uncollectible. Bad debt expenses are recorded in operating expenses on the consolidated statements of operations.

Inventory Valuation

The Company values inventory at the lower of cost on a or an estimated net realizable value. The Company periodically evaluates inventory items not secured by backlog and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods, obsolescence and for other impairments of value.

Property and Equipment

Property and equipment are carried at cost net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred. Property, equipment, and improvements are depreciated using the straight-line method over the estimated useful lives of the assets or the particular improvements. Expenditures for repairs and improvements in excess of $10,000 that add to the productive capacity or extend the useful life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in earnings.

Long-Lived Assets

Long-lived assets subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to fair value.

Deferred Financing Costs

Costs incurred with obtaining and executing revolving debt arrangements are capitalized and recorded in other current assets and amortized using the effective interest method over the term of the related debt. Costs incurred with obtaining and executing other debt arrangements are presented as a direct deduction from the carrying value of the associated debt and also amortized using the effective interest method over the term of the related debt. The amortization of financing costs is included in interest expense in the Consolidated Statements of Operations.

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 December 31, 2023 and 2022.

Revenue Recognition

The Company recognizes revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods.

Revenue is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). In evaluating our contracts with our customers, we have determined that there is no future performance obligation once delivery has occurred.

Our revenue is generated from fixed-price contracts. Under fixed-price contracts, we agree to perform the specified work for a pre-determined price, which we estimate during the bidding process before the contract is awarded. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss.

We evaluate the products promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. Our contracts are typically accounted for as one performance obligation. We classify net sales as products on our consolidated statements of operations based on the predominant attributes of the performance obligations.

We determine the transaction price for each contract based on the consideration we expect to receive for the products being provided under the contract.

At the inception of a contract, we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts can be subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.

We recognize revenue at the point in time in which the performance obligation is fully satisfied. This is fully satisfied when the product has shipped, which is the point in time the customer obtains control of the product and we no longer maintain control of the product.

Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 75 days.

Payments received in advance from customers are recorded as customer deposits until earned, at which time revenue is recognized. The Terms and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop work or contract termination order is issued prior to final delivery. While the products we manufacture are specific to the type of aircraft that they are used on, there are alternate customers that can acquire and utilize these products.

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 December 31, 2023 and 2022, customer deposits were $3,557,000 and $781,000, respectively. The Company recognized revenue of $461,000 during year ended December 31, 2023, that was included in the customer deposits balance as of December 31, 2022. The Company recognized revenue of $440,000 during the year ended December 31, 2022, that was included in the customer deposits balance of $1,470,000 as of December 31, 2021.

Backlog

Backlog represents the value of orders received pursuant to our Long-Term Agreements (“LTA”) or spot orders pursuant to a customer purchase order. As of December 31, 2023, backlog relating to remaining performance obligations on contracts was approximately $98.3 million. The Company estimates that a substantial portion of this backlog will be recognized as net sales during the next twenty-four-months, with the rest thereafter. This expectation assumes that raw material suppliers and outsourced processing is completed and delivered on time and that the Company’s customers will accept delivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales from expected new orders that are not in our backlog.

Use of Estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. The more significant management estimates are inventory valuation, useful lives and impairment of long-lived assets, income tax provision and the allowance for credit losses. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Credit and Concentration Risks

A large percentage of the Company’s revenues are derived directly from large aerospace and defense prime contractors for which the ultimate end-user is the U.S. Government, international governments or commercial airlines.

The composition of customers that exceeded 10% of net sales in either 2023 or 2022 are shown below:

The composition of customers that exceed 10% of accounts receivable in either 2023 or 2022 are shown below:

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the years ended December 31, 2023 and 2022:

Cash

For the years ended December 31, 2023 and 2022, 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 utilizes sole-source suppliers to supply raw materials or other parts that used in production. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance now codified as Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.

The Company accounts for uncertainties in income taxes under the provisions of ASC 740 which clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Earnings (Loss) per share

Basic earnings (loss) per share (“EPS”) is computed by dividing the net 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 (loss) 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:

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 these periods:

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing reported market value. Stock compensation expense for employees amounted to $283,000 and $310,000 for the years ended December 31, 2023 and 2022, respectively. Stock compensation expense for directors amounted to $200,000 and $216,000 for the years ended December 31, 2023 and 2022, respectively. Stock compensation expenses for employees and directors were included in operating expenses in the accompanying consolidated statements of operations.

Goodwill

Goodwill represented the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. In accordance with the provisions of Accounting Standards Update (“ASU”) 2017-04 (“ASU 2017-04”), “Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, the Company determined that the goodwill was fully impaired at December 31, 2022 and recorded an impairment charge of $163,000 is which included in operating expenses in the consolidated statements of operations.

Freight Out

Freight out is included in operating expenses and amounted to $87,000 and $162,000 for the years ended December 31, 2023 and 2022, respectively.

Leases

In accordance with FASB ASC 842, “Leases” (“ASC 842”), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and classifies them as either operating or finance leases. The lease classification affects the expense recognition in the consolidated statement of operations. 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.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether the Company obtains the right to substantially all of the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under the practical expedient. For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives.

An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.

Reclassification

Certain amounts in the consolidated notes to the financial statements have been reclassified to conform to the current year presentation. The Right of use asset - finance lease has been reclassified from the classification of Fixed Assets at December 31, 2022.

Such reclassifications do not impact the Company’s previously reported financial position or results of operations.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No 2016-13, “Financial Instruments - Credit Losses: (“ASU No. 2016-13”) to improve information on credit losses for financial assets and investment in leases that are not accounted for at fair value through net income (loss). ASU 2016-13 replaces the previous incurred loss impairment methodology with a methodology that reflects expected credit losses. Effective January 1, 2023, the Company adopted ASU 2016-13 which did not have a material effect on the Company’s consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" related to improvements to income tax disclosures. The amendments in this update require enhanced jurisdictional and other disaggregated disclosures for the effective tax rate reconciliation and income taxes paid. The amendments in this update are effective for fiscal years beginning after December 15, 2024. The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

Note 3. ACCOUNTS RECEIVABLE

The components of accounts receivable at December 31, are detailed as follows:

The allowance for credit losses for the years ended December 31, 2023 and 2022 is as follows:

Note 4. INVENTORY

The components of inventory at December 31, consisted of the following:

Note 5. PROPERTY AND EQUIPMENT

The components of property and equipment at December 31, consisted of the following:

Depreciation expense for the years ended December 31, 2023 and 2022 was approximately $2,268,000 and $2,522,000, respectively. Assets held under finance lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives.

Note 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The components of accounts payable and accrued expenses at December 31, are detailed as follows:

During the year ended December 31, 2022, the Company reviewed all old outstanding payables that were not paid and based on the statute of limitations concluded that certain claims would no longer be enforceable. The Company determined that approximately $317,000 of aged payables fell into this category. This adjustment is recorded as write-off of accounts payable in the accompanying consolidated statement of operations.

Note 7. SALE-LEASEBACK TRANSACTION

On October 24, 2006, the Company consummated a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New York (the “Bay Shore Property”) for a purchase price of $6,200,000. The Company realized a gain on the sale of $1,051,000 of which $300,000 was recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized ratably over the remaining term of thetwenty - year lease at approximately $38,000 per year. The gain is included in Other Income in the accompanying Consolidated Statements of Operations. The unrecognized portion of the gain in the amount of $105,000 and $143,000 as of December 31, 2023 and 2022, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets.

The Company accounted for these transactions under the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions.”

Simultaneous with the closing of the sale of the Bay Shore Property, the Company entered into a 20-year lease (the “Lease”) expiring in September 2026 with the purchaser for the property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year, and thereafter increases 3% per year. The Lease grants the Company an option to renew the Lease for an additional period offive years. The Company has on deposit with the landlord $89,000 as security for the performance of its obligations under the Lease. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also contains customary representations, warranties, obligations, conditions and indemnification provisions and grants the landlord customary remedies upon a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency in future rent. See Note 9 – Operating Lease Liabilities.

Note 8. Debt

Indebtedness to third parties consists of the following:

Current Credit Facility

The Company has a credit facility (“Current Credit Facility”) with Webster Bank that expires on December 30, 2025. This facility, which was 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 is added to the balance of the Term Loan. The loan is secured by a lien on substantially all of the assets of the Company.

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 of $512,000 required 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 of $440,000 required on December 30, 2025.

As of December 31, 2023, there is $10,804,000 outstanding under the Revolving Line of Credit and $5,045,000 under the Term Loan, inclusive of amounts drawn under the Equipment Line of Credit. Additionally, there was $382,000 remaining available under the Equipment Line of Credit.

As discussed in Note 1, the Company was not in compliance with a required covenant as of March 31, 2024. There is no assurance that the Company will be able obtain a waiver of its failure to meet this covenant or will be able to meet its financial covenants in one of the upcoming fiscal quarters over the next twelve months, therefore, in accordance with the guidance in ASC 470-10-45, related to the classification of callable debt, the entire term loan has been classified as short term as of December 31, 2023.

The below table shows the timing of payments due under the Term Loan:

Interest expense related to the Current Credit Facility amounted to approximately $1,391,000 and $780,000 for the years ended December 31, 2023 and 2022, respectively. Interest expense includes the amortization of deferred finance costs of $68,000 and $65,000 in 2023 and 2022, respectively.

As of December 31, 2023, the Company was in full compliance with all financial covenants. The below summarizes various terms of the Current Credit Facility (all of which are described in full in various SEC filings):

The below summarizes historical amendments to the Current Credit Facility

All amendment fees paid in connection with the Current Credit Facility that are for a future benefit of the Company are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying consolidated balance sheets and are amortized over the term of the loan.

As of December 31, 2023, the Company has borrowing capacity of approximately $9,830,000 under the Revolving Loan (including $383,000 pursuant to the Capital Expenditure Line.

Solar Credit Facility

On August 16, 2023, the Company entered into a financing agreement (“Solar Credit Facility”) with Green Bank, a quasi-public agency of the State of Connecticut, for the installation of solar energy systems including replacing the existing roof (“Project”) at its Sterling facility. Advances are made by Green Bank upon its approval of costs incurred on the Project up to $934,553. As of December 31, 2023, an advance of $393,233 had been made including the payment of Green Bank’s closing costs of $25,233. Interest accrues at the rate of 5% on advances and is capitalized and added to the outstanding principal of the loan. Upon project completion, the cumulative total of the advances and capitalized interest will convert to a 20-year level payment term loan with interest accruing at the rate of 5.75%. Semi-annual payments are projected to be approximately $41,000 inclusive of interest over the 20-year term.

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 $884,000 and $328,000 as of December 31, 2023 and 2022, respectively. The leases have an average imputed interest rate of 7.31% per annum and are payable monthly with the final payments due between September of 2026 and May of 2030.

As of December 31, 2023, the aggregate future minimum finance lease payment, including imputed interest are as follows:

Loans Payable – Financed Assets

The Company financed the purchase a delivery vehicle in July 2020. The loan obligation totaled $22,000 and $30,000 as of December 31, 2023 and 2022, respectively. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.

Annual maturities of this loan are as follows:

Related Party Indebtedness

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 (together referred to as “Related Party Notes”) with Michael and Robert Taglich which generated proceeds to the Company totaling $6,550,000. In connection with issuance, 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.

The Related Party Notes outstanding as of December 31, 2023 consists of:

Of the $6,162,000, approximately $2,732,000 bears an annual rate of interest of 6%, $2,080,000 bears an annual rate of 7% and $1,350,000 bears an annual interest rate of 12%. Interest expense for the years ended December 31, 2023 and 2022 was $472,000 and $487,000, respectively.

Approximately $2,732,000 of the 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 convertible subordinated notes can be converted at the option of the holder into common stock of the Company at $9.30 per share. The remaining $1,350,000 is not convertible. There are no principal payments due on these notes prior to July 1, 2026.

The Related Party Notes are subordinate to outstanding debt pursuant to the Current Credit Facility and mature on July 1, 2026.

The Company is allowed, subject to certain limitations, to make principal payments of $250,000 to reduce the value of outstanding Related Party Notes payable. During the year ended December 31, 2022, a principal payment of $250,000 was made against the Related Party Notes due to Michael Taglich. No payments were made in fiscal 2023.

Note 9. OPERATING LEASE LIABILITIES

The Company has operating leases for leased office and manufacturing facilities. The leases have remaining lease terms ofone tofive years, some of which include options to extend or terminate the leases.

The aggregate undiscounted cash flows of operating lease payments, with remaining terms greater than one year are as follows:

Note 10. 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 – Issuances of Securities

The Company issued 55,108 and 27,849 shares of common stock totaling $200,000 and $216,000 in payment of Director’s fees for the years ended December 31, 2023 and 2022, respectively. Such expense is included in Operating Expenses in the consolidated statements of operations.

During the first quarter of 2024, the Company issued 12,323 shares of common stock in payment of Director’s fees totaling $38,000.

Note 11. EMPLOYEE BENEFITS PLANS

The Company employs both union and non-union employees and maintains several benefit plans.

Union

Our AIM subsidiary has a collective bargaining agreement with the United Service Workers, IUJAT, Local 355 (the “Union”). This agreement is effective until December 31, 2024 and covers the majority of AIM’s 125 personnel. The Company is not required to make a monthly contribution to Union’s United Welfare Fund and the United Services Worker’s Security Fund, the sole pension benefit for covered employees. The Company is not obligated to provide any future defined benefits. The Company is obligated to make contributions for union dues and a security fund (defined contribution plan) for the benefit of each union employee. Contributions to the security fund amounted to $147,000 and $155,000 for the years ended December 31, 2023 and 2022, respectively. The Union’s retirement plan is a defined contribution plan. As such, the Company is not responsible for the obligations of other companies in the Union’s retirement plan.** **

Medical benefits for union employees are provided through a policy with Insperity Services, Inc. (“Insperity”), a professional employer organization that provides out-sourced human resource services. The cost of such benefits are substantially borne by the Company.

The collective bargaining agreement contains a “no-strike” clause and a “no-lock-out” clause. The Company believes it maintains good relationships with the Union and expects to renew the collective bargaining agreement before it expires.

Others

All of the Company’s employees are covered under a co-employment agreement with Insperity, a professional employer organization that provides out-sourced human resource services.

The Company has defined contribution plans under Section 401(k) of the Internal Revenue Code (the “Plans”). Pursuant to the Plans, qualified employees may contribute a percentage of their pre-tax eligible compensation to the Plan. The Company does not match any contributions that employees may make to the Plans.

Note 12. COMMITMENTS AND 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. The Appellate Division upheld the denial of Contract Pharmacal’s motion for summary judgement and upheld the denial of its motion to amend its Complaint. The Company disputes the validity of the claims asserted by Contract Pharmacal and intends to contest them vigorously.

From time to time the Company may be engaged in various lawsuits and legal proceedings in the ordinary course of business. The Company is currently not aware of any legal proceedings the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its business, financial condition or operating results. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse to our interest.

Note 13. INCOME TAXES

The provision for income taxes for the years ended December 31, 2023 and 2022, is set forth below:

The following is a reconciliation of our income tax rate computed using the federal statutory rate to our actual income tax rate for the years ended December 31, 2023 and 2022 is set forth below:

The components of net deferred tax assets at December 31, are set forth below:

During the years ended December 31, 2023 and 2022, the Company recorded a valuation allowance equal to its net deferred tax assets. The Company determined that due to a recent history of net losses, at this time sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reduced or eliminated. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December 31, 2023 and 2022, the Company provided a valuation allowance on its net deferred tax assets of $7,903,000 and $7,701,000, respectively. The Company’s valuation allowance increased by $202,000 and $198,000 for the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, the Company had a Federal net operating loss carry forward of approximately $22,363,000, of which approximately $14,719,000 expires from 2024 through 2037 and $7,643,000 does not expire. In addition, the Company has net operating loss carryforwards from various states of approximately $4,7783,000 which expire starting in 2035.

The utilization of the Company’s net operating losses may be subject to a U.S. federal limitation due to the “change in ownership provisions” under Section 382 of the Internal Revenue Code and other similar limitations in various state jurisdictions. Such limitations may result in a reduction of the amount of net operating loss carryforwards in future years and possibly the expiration of certain net operating loss carryforwards before their utilization.

At December 31, 2023 and 2022, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2023, and 2022, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.

In certain cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The Company files federal and state income tax returns in jurisdictions with varying statutes of limitations. The 2020 through 2023 tax years generally remain subject to examination by federal and state tax authorities.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law which includes a stock buyback excise tax of 1% on share repurchases, which will apply to net stock buybacks after December 31, 2022. We do not expect this to have a material impact if and when share repurchases occur.

Note 14. STOCK OPTIONS AND WARRANTS

Stock-Based Compensation

Stock Options

In September 2023, the shareholders of the Company approved the amendment to the 2022 Equity Incentive Plan (“2022 Plan”) to increase the number of shares authorized to be issued under the plan by 250,000 shares, from 100,000 shares to 350,000 shares. Additionally, this amendment to the 2022 Plan specified that the Company may grant Restricted Stock Units under the 2022 Plan.

During the years ended December 31, 2023 and 2022, the Company granted options to purchase 190,000 and 62,000 shares of common stock, respectively, to certain of its employees and directors.

The Company recorded stock-based compensation expense for certain employees and members of the Company’s Board of Directors of $482,000 and $526,000 in its consolidated statements of operations for the years ended December 31, 2023 and 2022, respectively, and such amounts were included as a component of operating expenses.

The fair values of stock options granted were estimated using the Black-Sholes option-pricing model with the following assumptions for the years ended December 31:

The expected life is the number of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture. Expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin No. 107. In addition to the inputs referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based on the Company’s experience.

A summary of the status of the Company’s stock options as of December 31, 2023 and 2022, and changes during the two years then ended are presented below.

Issuance of Stock Options

Issued in 2023

On May 23, 2023, the Company granted options to its directors and certain members of management and employees, stock options to purchase an aggregate of 108,620 shares of the Company’s common stock at a price of $3.43 per share. The options expire on the June 30, 2028 and vested immediately.

On June 2, 2023, 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 $3.50 per share. The options expire on the fifth anniversary of the grant date and vest over a term ofone year.

On June 2, 2023, the Company granted to certain members of management and employees, stock options to purchase an aggregate of 75,000 shares of the Company’s common stock at a price of $3.50 per share. The options expire on the fifth anniversary of the grant date and vest over a term ofthree year.

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 ofthree 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 ofone 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 ofthree years.

The following table summarizes information about outstanding stock options at December 31, 2023:

The following table summarizes information about exercisable stock options at December 31, 2022:

As of December 31, 2023, there was $95,000 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average vesting period of 1.3 years.

The aggregate intrinsic value at December 31, 2023 was based on the Company’s closing stock price of $3.25 was $0. The aggregate intrinsic value at December 31, 2022 was based on the Company’s closing stock price of 4.25 was approximately $0. The aggregate intrinsic value was calculated based on the positive difference between the closing market price of the Company’s Common Stock and the exercise prices of the underlying options.

The weighted average fair value of options granted during the years ended December 31, 2023 and 2022 was $8.40 and $8.40 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2023 and 2022 was $0. The total fair value of shares vested during the years ended December 31, 2023 and 2022 was $417,000 and $316,000, respectively.

Warrants

During both the years ended December 31, 2023 and 2022, the Company did not issue any warrants.

The following tables summarize the Company’s outstanding warrants as of December 31, 2023 and changes during the two years then ended:

The aggregate intrinsic value at both December 31, 2023 and 2022 was $0 based on the Company’s closing stock price of $3.25 and $4.25, respectively.