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”). 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, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. 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, 2023, as filed with the Securities and Exchange Commission on April 15, 2024, from which the accompanying condensed consolidated balance sheet dated December 31, 2023 was derived.

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 condensed 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.

For the nine months ended September 30, 2024, the Company generated $508,000 of cash from operating activities, compared to $7,093,000 for the same period in 2023. The debt under the Current Credit Facility as of September 30, 2024, amounted to approximately $16,838,000, reflecting an increase of $989,000 since December 31, 2023. The Company received a Waiver and entered into the Seventh Amendment to the Loan and Security Agreement under the Current Credit Facility on May 31, 2024. As of September 30, 2024, the Company is in compliance with the terms of the Current Credit Facility. See Note 5. Debt for the terms of the Seventh Amendment. As of September 30, 2024, total outstanding debt was $24,976,000, with the nature and terms of such debt further discussed in Note 5. Debt.

Management’s plans expect net sales to increase in fiscal 2024 as compared to fiscal 2023 with increasing amounts into fiscal 2025 and thereafter. The Company believes that these plans are supported by the Company’s existing backlog, which increased from $98.1 million as of December 31, 2023 to $105.2 million at September 30, 2024. Further, it anticipates receiving additional funded orders during 2024 and 2025 pursuant to Long-Term Agreements (“LTA”) agreements from its key customers as well as from new customers. With this visibility, the Company expects that it will generate sufficient cash flow to make required principal payments (exclusive of any potential debt payment acceleration should the lender under the Current Credit Facility choose to accelerate it) pursuant to the Current Credit Facility of approximately $814,000 over the next twelve months.

The Company obtained a waiver of the requirement to meet the Fixed Coverage Charge Ratio at March 31, 2024, and met its covenants as of both June 30 and September 30, 2024. Nevertheless, the Company may fail to achieve the required covenants in the future. Therefore, the Company classified the term loan that expires on December 30, 2025 in the amount of $5,401,000 and $5,045,000 as current as of September 30, 2024 and December 31, 2023, respectively, 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 it 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 Current Credit 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 filing these interim condensed consolidated financial statements.

The accompanying condensed 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.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 condensed consolidated statements of operations.

The activity for the allowance for credit losses during the nine months ended September 30, 2024 and 2023 is set forth in the table below

Inventory Valuation

The Company values inventory at the lower of cost 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.

Inventories consist of the following at:

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, other governments, or commercial airlines.

The composition of customers that exceeded 10% of net sales for the three months ended September 30, 2024 and 2023 are shown below:

The composition of customers that exceeded 10% of net sales for the nine months ended September 30, 2024 and 2023 are shown below:

The composition of customers that exceed 10% of accounts receivable at September 30, 2024 and December 31, 2023 are shown below:

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three and nine month periods ending September 30, 2024 and 2023:

Cash

During the period ended September 30, 2024, 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 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, the Company’s business would 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 September 30, 2024 and December 31, 2023, customer deposits were $1,717,000 and $3,557,000 respectively. The Company recognized revenue of $544,000 and $1,840,000 during the three and nine months ended September 30, 2024, respectively, that was included in the customer deposits balance as of December 31, 2023. The Company recognized revenue of $147,000 and $461,000 during the three and nine months ended September 30, 2023, respectively, that was included in the customer deposits balance as of December 31, 2022.

Backlog

Backlog represents the value of orders received pursuant to our Long-Term Agreements (“LTA”) or spot orders pursuant to a purchase order. As of September 30, 2024, backlog relating to remaining performance obligations on contracts was approximately $105.2 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 supplies 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 included in backlog.

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 September 30, 2024 and December 31, 2023.

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 (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, restricted units 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-based compensation expense for employees amounted to $150,000 and $28,000 for the three months ended September 30, 2024 and 2023, respectively, and $186,000 and $260,000 for the nine months ended September 30, 2024 and 2023, respectively. Stock compensation expense for directors amounted to $40,000 and $54,000 for the three months ended September 30, 2024 and 2023, respectively, and $116,000 and $162,000 for the nine months ended September 30, 2024 and 2023, respectively. Stock compensation expenses for employees and directors were included in operating expenses in the accompanying condensed consolidated statements of operations.

Recently Issued Accounting Pronouncements

In November 2023, Financial Accounting Standards Board (“FASB) issued Accounting Standards Updated (“ASU”) 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within the reported measure(s) of a segment’s profit or loss, the amount and composition of any other segment items, the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment’s profit or loss to assess performance and decide how to allocate resources. The amendments in this update are effective for fiscal years beginning after December 15, 2023. The adoption of this pronouncement is not expected to have a material impact on the Company’s condensed 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 condensed consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures” to require more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation, amortization, and depletion) included in certain expense captions presented on the face of the income statement. This ASU is effective for fiscal years beginning after December 15, 2026 and for interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments may be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of this ASU or (2) retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements and related disclosures. The adoption of this pronouncement is not expected to have a material impact on the Company’s condensed consolidated financial statements.

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

Note 3. PROPERTY AND EQUIPMENT

The components of property and equipment at September 30, 2024 and December 31, 2023 consisted of the following:

Depreciation expense for the three months ended September 30, 2024 and 2023 was $511,000 and $614,000, respectively. Depreciation expense for the nine months ended September 30, 2024 and 2023 was $1,533,000 and $1,807,000, respectively. Assets held under financed lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives.

Note 4. OPERATING LEASE LIABILITIES

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

The aggregate undiscounted cash flows of operating lease payments as of September 30, 2024, with remaining terms greater than one year are as follows:

Note 5. DEBT

Total debt outstanding as of September 30, 2024 is $24,976,000 and was $23,310,000 at December 31, 2023.

Current credit facilities and finance lease obligations consist 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 (see summary of amendments below), and now provides for a $20,000,000 revolving loan (“Revolving Line of Credit”) and a $5,700,000 term loan (“Term Loan”). The loan is secured by a lien on substantially all of the assets of the Company.

As discussed in Note 1, the Company was in compliance with a required covenant as of September 30, 2024. However, there is no assurance that the Company 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 September 30, 2024.

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

Interest expense related to the Current Credit Facility amounted to approximately $332,000 and $380,000 for the three months ended September 30, 2024 and 2023, respectively, and $980,000 and $1,084,000 for the nine months ended September 30, 2024 and 2023, respectively. Interest expense includes the amortization of deferred finance costs of $17,000 and $17,000 for the three months ending September 30, 2024 and 2023, respectively, and $51,000 and $51,000 for the nine months ending September 30, 2024 and 2023, respectively.

The below summarizes various terms of the Current Credit Facility (all of which are described in full in various SEC filings):

The below summarizes certain 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 September 30, 2024, the amount outstanding under the Company’s Revolving Line of Credit was $11,437,000, leaving $8,563,000 of availability to support the Company’s growth, subject to having the requisite collateral and maintaining compliance with the terms of the Credit Facility.

Solar Credit Facility

On August 16, 2023, the Company entered into a financing agreement (“Solar Credit Facility”) with CT 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 CT Green Bank upon its approval of costs incurred on the Project up to $934,000. As of September 30, 2024, cumulative advances totaling $899,000 had been made including the payment of CT Green Bank’s closing costs of $25,000. Interest accrues at the rate of 5% on advances and is added to the loan upon conversion to a term loan.

On October 1, 2024, final disbursements were made on the financing arrangement in the amount of $35,000, bringing the cumulative advances to $934,000. The total cumulative advances along with the total accrued interest in the amount of $36,000 as of October 1, 2024 was converted by CT Green Bank, in accordance with the financing agreement, to a 20-year level payment term loan in the amount of $970,000 with interest accruing at the rate of 5.75%. Semi-annual payments in the amount of $42,000 are due commencing on July 1, 2025. The first semi-annual payment will be for interest only, subsequent semi-annual payments beginning with the payment due on January 1, 2026 will include both principal and interest. As of September 30, 2024, the amount classified as long term is $899,000 and the amount classified as current is $0.

Interest expense related to the Solar Credit Facility amounted to approximately $11,000 and $1,000 for the three months ended September 30, 2024 and 2023, respectively, and $30,000 and $1,000 for the nine months ended September 30, 2024 and 2023, respectively.

Finance Lease Obligations

The Company has entered into finance leases for the purchase of additional manufacturing equipment. The obligations for the finance leases totaled $1,061,000 and $884,000 as of September 30, 2024 and December 31, 2023, respectively. The leases have an average imputed interest rate of 7.44% per annum and are payable monthly with the final payments due between September of 2026 and May of 2030.

As of September 30, 2024, the aggregate future minimum finance lease payments, including imputed interest are as follows:

Loan Payable – Financed Asset

The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled $16,000 and $22,000 as of September 30, 2024 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:

Related Party Subordinated 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 (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 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.

The Related Party Notes outstanding as of the notes of September 30, 2024 and December 31, 2023 consist 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 three months ended September 30, 2024 and 2023 on all related party subordinated notes payable was $118,000 and $118,000, respectively, and $354,000 and $354,000 for the nine months ended September 30, 2024 and 2023, 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 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 limitation, to make principal payments of $250,000 to reduce the principal of the outstanding Related Party Subordinated Notes.

For the three and nine months ended September 30, 2024 and 2023, no principal payments have been made on these notes.

Note 6. STOCKHOLDERS’ EQUITY

Common Stock – Issuance of Securities

The Company issued 12,252 and 15,230 shares of common stock in payment of director fees totaling $40,000 and $54,000 for the three months ended September 30, 2024 and 2023, respectively, and 32,517 and 41,890 shares totaling $116,000 and $162,000 for the nine months ended September 30, 2024 and 2023, respectively.

The Company issued 13,754 and 15,229 shares, of common stock to net settle the exercise of stock options for three and nine months ended September 30, 2024, respectively. There were no issuances of common stock due to the exercise of stock options for the three and nine months ended September 30, 2023.

During the fourth quarter of 2024, the Company issued 7,328 shares of common stock in payment of directors’ fees totaling $39,000.

Note 7. STOCK OPTIONS AND RESTRICTED STOCK UNITS

Stock-Based Compensation

Stock Options

In September 2024, 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 used under the plan by 300,000 shares, from 350,000 shares to 650,000 shares.

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 three and nine months ended September 30, 2024, the Company granted options to purchase 80,000 shares of common stock to its directors. During the three and nine months ended September 30, 2023, the Company granted options to purchase 0 and 190,000 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 $87,000 and $28,000 for the three months ended September 30, 2024 and 2023, respectively and $122,000 and $260,000 for the nine months ended September 30, 2024 and 2023, respectively in its condensed consolidated statements of operations, 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 nine months ended September 30:

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 September 30, 2024 and December 31, 2023, and changes during the periods then ended are presented below.

Issuance of Stock Options

Issued in 2024

On August 13, 2024, the Company granted to its directors, stock options to purchase an aggregate of 80,000 shares of the Company’s common stock at a price of $3.75 per share. The options expire on the fifth anniversary of the grant date and vest over a term ofone year.

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.

The following table summarizes information about outstanding stock options at September 30, 2024:

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

As of September 30, 2024, there was $60,000 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average vesting period of 0.75 years.

The aggregate intrinsic value at September 30, 2024 was based on the Company’s closing stock price of $5.50 was $478,000. The aggregate intrinsic value at December 31, 2023 was based on the Company’s closing stock price of $3.25 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 periods ending September 30, 2024 and 2023 was $3.75 and $3.46 per share, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2024 and 2023 was $87,500 and $0, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2024 and 2023 was $98,000 and $0, respectively. The total fair value of shares vested during the three months ended September 30, 2024 and 2023 was $63,000 and $70,000, respectively. The total fair value of shares vested during the nine months ended September 30, 2024 and 2023 was $181,000 and $415,000, respectively.

Restricted Stock Units (“RSUs”)

During the three and nine months ended September 30, 2024 and 2023, the Company granted 282,628 and 0 RSUs to certain employees. These Restricted Stock Units vest solely on the passage of times and continued service through the vesting dates.

A summary of the status of the Company’s RSUs as of September 30, 2024 is presented below.

The Company recorded stock-based compensation expense of $63,000 and $0 for the three and nine months ended September 30, 2024 and 2023, respectively, in its condensed consolidated statements of operations, and such amounts were included as a component of operating expenses.

As of September 30, 2024, there was $1,649,000 of unrecognized compensation cost related to non-vested RSUs, which is to be recognized over the remaining weighted average vesting period of 2.5 years.

Note 8. 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 alleged violation of the terms of the subject sublease, specifically the failure to make the entire premises available by the Sublease commencement date. The validity of the action is extremely suspect in that the subject sublease had no specific commencement date and Contract Pharmacal ultimately received all the space. Discovery was conducted and the Plaintiff moved for summary judgement and to amend its complaint to add a new cause of action all of which the company opposed. On July 8, 2021, the Court denied Contract Phamacal’s motion for summary judgement and to add an additional cause of action. 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 both of which benefit the Company. Following the Court’s decision, Contract Pharmacal filed a Motion to reargue its original motion which the Company again opposed. The Court denied that motion on November 30, 2021 and then on March 10, 2022, Contract Pharmacal filed an appeal of the Court’s decision with the Appellate Division of the State of New York. Once again, the Company opposed that action. The Company was again successful as the Appellate Division upheld the lower court’s denial of Contract Pharmacal’s motion for summary judgement and its motion to amend its Complaint. Contract Pharmacal has now submitted a motion to the Appellate Division requesting leave to reargue the court’s denial of its original appeal. The Company will oppose that motion to reargue. The Company continues to dispute the validity of the claims asserted by Contract Pharmacal and intends to contest them vigorously. We anticipate that due to this newest action by Contract Pharmacal nothing of consequence will happen over the next twelve months.

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 9. INCOME TAXES

The Company recordedno income tax expense for the three and nine months ended September 30, 2024 and 2023 because the estimated annual effective tax rate waszero. 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, 2024, and December 31, 2023, 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.