Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
As of June 30, 2017, the aggregate market value of our common
stock held by non-affiliates was $ 11,879,537, based on 6,636,613 shares of outstanding common stock held by non-affiliates, and
a price of $1.79 per share, which was the last reported sale price of our common stock on the NYSE American on that date.
There were a total of 25,213,805 shares of the registrant’s
common stock outstanding as of March 28, 2018.
Portions of the registrant’s definitive Proxy Statement
relating to its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K
where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the
end of the fiscal year to which this report relates.
This amendment is being filed to include
the XBRL presentation and to correct certain numbers in Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations and certain Notes to the Consolidated Financial Statements, specifically, Note 2. – Discontinued Operations,
and Note 3. Summary of Significant Accounting Policies – Credit and Concentration Risks.
Except for the corrections to the foregoing
items, amendment speaks as of the original date of the original filing, does not reflect events that may have occurred subsequent
to the date of the original filing and does not modify or update in any way any other disclosures made in the original filing.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. FORMATION AND BASIS
OF PRESENTATION
Organization
On August 30, 2013, Air Industries
Group, Inc. (“Air Industries Delaware”) changed its state of incorporation from Delaware to Nevada as a result of a
merger with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation (“Air Industries
Nevada” or “AIRI”) and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation
was approved by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is
deemed to be the successor.
The accompanying consolidated
financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”),
Welding Metallurgy, Inc. ("WMI" or “Welding”), Miller Stuart, Inc. (“Miller Stuart”), Nassau
Tool Works, Inc. (“NTW”), Woodbine Products, Inc. (“Woodbine” or “WPI”), Decimal Industries,
Inc. ("Decimal"), Eur-Pac Corporation (“Eur-Pac” or “EPC”), Electronic Connection Corporation
(“ECC”), AMK Welding, Inc. (“AMK”), Air Realty Group, LLC ("Air Realty") The Sterling Engineering
Corporation ("Sterling"), and Compac Development Corporation (“Compac”), (together, the “Company”).
Going Concern
The Company suffered a
net loss from operations of $12,758,000 for the year ended December 31, 2017, and net losses of
$22,551,000 and and $15,623,000 for the years ended December 31, 2017 and 2016, respectively. The Company also had negative
cash flows from operations for the years ended December 31, 2017 and 2016. In 2015 the Company ceased paying dividends on its
common stock and in 2016 disposed of the real estate on which an operating subsidiary was located through a sale
leaseback transaction. In January 2017, the Company sold one of its operating subsidiaries. The Company has entered in a
Stock Purchase Agreement to sell a majority of its Aerostructures & Electronics segment. During the year ended December
31, 2016 and subsequent thereto, the Company sold in excess of $29,856,000 in debt and equity securities to secure funds to
operate its business. Furthermore, as of December 31, 2017, the Company was not in compliance with financial covenants under
its Amended and Restated Revolving Credit, Term Loan and Security Agreement with PNC Bank (the “Loan
Facility”).
The continuation of the Company’s
business is dependent upon its ability to achieve profitability and positive cash flow and, pending such achievement, future issuances
of equity or other financing to fund ongoing operations. The consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Sale of AMK
On January 27, 2017, the Company
sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017 for
a purchase price of $4,500,000, net of a working capital adjustment of ($163,000), plus additional quarterly payments, not to exceed
$ 1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. The Company recorded a $200,000 gain on
the sale of AMK. The gain on sale was the difference between the non-contingent payments and the carrying value of the disposed
business. The Company has made an accounting policy decision to record the contingent consideration as it is determined to be realizable.
At December 31, 2016, AMK’s
assets and liabilities have been reclassified as Assets Held for Sale and Liabilities Directly Associated with Assets Held for
Sale, respectively. The carrying value of the assets, net of liabilities, held for sale was less than the contract sales price
and accordingly no loss or impairment was recorded for the year ended December 31, 2016.
In connection with the sale of
AMK to Meyer Tool, Inc., on January 27, 2017, the Company, together with its wholly-owned subsidiaries, entered into the Fourteenth
Amendment to the Amended and Restated Revolving Credit, Term Loan And Security Agreement with PNC Bank, N. A. (the “PNC Loan
Agreement”) which amends certain terms and conditions of the PNC Loan Agreement and releases AMK from its obligations under
the PNC Loan Agreement.
The proceeds of the sale of AMK
were applied as follows: $1,700,000 to the payment of the Term Loan (as defined in the PNC Loan Agreement), $1,800,000 to the payment
of outstanding Revolving Advances (as defined in the PNC Loan Agreement), and $500,000 to the payment of existing accounts payable.
The remaining $500,000 will be applied to outstanding accounts payable on a future date to be determined by PNC or used to reduce
the amount of the Revolving Advance. The amendment also waives the noncompliance at September 30, 2016 with the Fixed Charge Coverage
Ratio and the Minimum EBITDA covenants for the period then ended, and requires that the Company maintain a Fixed Charge Coverage
Ratio of not less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis; however, for the quarter
ending June 30, 2017, which shall be tested based upon the prior six (6) months, the Fixed Charge Coverage Ratio shall not be less
than 1.00 to 1.00 and for the quarter ending September 30, 2017, which shall be tested based upon the prior nine (9) months, the
Fixed Charge Coverage Ratio shall not be less than 1.10 to 1.00. The amendment also reduces the amount to be paid weekly in repayment
of excess advances in the amount of $5,294,071 under the revolving credit facility from $100,000 to $50,000 for each Monday during
the months of January, February and March of 2017. Thereafter, the weekly payments will return to $100,000 until such excess advances
have been repaid in full.
Subsequent Events
Management has evaluated subsequent
events through the date of this filing.
Sale of Welding Metallurgy
Inc.
On March 21, 2018, the Company
signed an agreement to sell all of the outstanding shares of WMI including its wholly owned subsidiaries Miller Stuart, Woodbine,
Decimal and Compac Development Corp to CPI Aerostructures, Inc., pursuant to a Stock Purchase Agreement (SPA) for a purchase price
of $9,000,000, subject to a customary working capital adjustment. The SPA also provides for contingent payments of up to an aggregate
of $1,000,000 if WMI enters into specified agreements, long-term agreements with certain customers, by May 31, 2018 and July 31,
2018, respectively (the “Specified Dates”), which contingent payments are subject to reduction if subsequent to the
Specified Dates WMI enters into those specified agreements by $100,000 for each calendar month after the Specified Date. The sale
is subject to certain conditions, including CPI obtaining financing for the amount of the purchase price, and requires an escrow
deposit of $2,000,000 to cover the working capital adjustment and our obligation to indemnify CPI against damages arising out of
the breach of our representations and warranties and obligations under the SPA. It is anticipated that the sale will occur in May
or June of 2018.
Sale of Unregistered Equity
Securities
On January 9, 2018 the Company issued and sold to 35 accredited investors an aggregate of 852,000 shares of its common stock
(the “Shares”) and warrants to purchase an additional 255,600 shares of common stock (the “Warrants”),
for gross proceeds of $1,065,000 pursuant to a private placement (the “Offering”). The purchase price for the Shares
and Warrants was $1.25 per Share. The Company had previously sold a total of 725,390 shares of common stock and warrants to purchase
an additional 224,400 shares of common stock for gross proceeds of $935,000 on November 29, 2017, December 5, 2017 and December
29, 2017 pursuant to the Offering.
The Warrants have an exercise
price of $1.50 per share, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser
number of shares depending upon prevailing market prices at the time of exercise. The Warrants may be exercised until November
30, 2022.
If prior to July 1, 2018, the
Company should complete a placement of shares of its common stock or securities convertible into or exercisable for shares of its
common stock at an effective price or conversion rate (the “Subsequent Price”) less than $1.25 per share of common
stock, there shall be issued to the purchasers in the Offering, such additional number of shares of common stock as would have
been received had the Purchase Price thereunder been equal to the greater of the Subsequent Price and $1.00 per share, provided
further that no adjustment shall be made for those subscribers who are officers, directors or otherwise deemed to be affiliates
of the Company under the rules of the NYSE American. If the Company shall complete more than one placements of shares of its common
stock or securities convertible into or exercisable for shares of its common stock prior to July 1, 2018, the Subsequent Price
will be the lowest of the prices at which such offerings are completed.
Taglich Brothers, Inc., a related
party (see related party footnote for definition), which acted as placement agent for the sale of the Shares and Warrants, is entitled
to a placement agent fee equal to $85,200 (8% of the amounts invested), payable at the Company’s option, in cash or additional
shares of common stock and warrants having the same terms and conditions as the Shares and Warrants. Michael Taglich and
Robert Taglich, directors of the Company, are principals of Taglich Brothers, Inc.
Related Party Transactions
In April 2018, Michael and
Robert Taglich advanced an aggregate of $1,150,000 to be applied to a private placement on terms to be determined.
Note 2. — DISCONTINUED OPERATIONS
In March 2018, the Company entered into
an agreement to sell WMI and related operations to CPI Aerostructures, Inc. pursuant to a Stock Purchase Agreement (SPA) for a
purchase price of $9,000,000, subject to a working capital adjustment. The SPA also provides for contingent payments of up to an
aggregate of $1,000,000 if WMI enters into specified agreements by May 31, 2018 and July 31, 2018, respectively (the “Specified
Dates”), which contingent payments are subject to reduction by $100,000 for each calendar month which pause often after the
Specified Date WMI enters into the specified agreements. The sale is subject to certain conditions, including CPI obtaining financing
for the amount of the purchase price, and requires an escrow deposit of $2,000,000 to cover the working capital adjustment and
our obligation to indemnify CPI against damages arising out of the breach of our representations and warranties and obligations
under the SPA. It is anticipated that the sale will occur in May or June of 2018. At December 31, 2017, the Company has recorded
a loss on impairment on intangible assets of $1,085,000 and a loss on assets held for sale of $1,563,000.
The following table presents a reconciliation
of the major financial lines constituting the results of operations for discontinued operations to the net income (loss) from discontinued
operations presented separately in the consolidated statement of operations:
|
|
December 31,
|
|
|
2017
|
|
2016
|
Net revenue
|
|
$
|
13,129,000
|
|
|
$
|
15,954,000
|
|
Cost of goods sold
|
|
|
11,245,000
|
|
|
|
13,143,000
|
|
Gross profit
|
|
|
1,884,000
|
|
|
|
2,451,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,488,000
|
|
|
|
3,105,000
|
|
Loss on impairment of assets
|
|
|
1,085,000
|
|
|
|
---
|
|
Loss on assets held for sale
|
|
|
1,053,000
|
|
|
|
—
|
|
Impairment of Goodwill
|
|
|
3,417,000
|
|
|
|
—
|
|
Total operating expenses
|
|
|
8,553,000
|
|
|
|
3,105,000
|
|
Interest expense
|
|
|
12,000
|
|
|
|
96,000
|
|
Other income (expense)
|
|
|
3,000
|
|
|
|
5,000
|
|
Loss from discontinued operations before income taxes
|
|
|
(6,678,000
|
)
|
|
|
(745,000
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
11,000
|
|
Net income (loss) from discontinued operations
|
|
$
|
(6,678,000
|
)
|
|
$
|
(756,000
|
)
|
The following table presents a reconciliation of the WMI and subsidiaries net cash flow from operating, investing and financing
activities for the periods indicated below:
|
|
2017
|
|
2016
|
Net cash used in operating activities - discontinued operation
|
|
$
|
(2,765,055
|
)
|
|
$
|
(749,757
|
)
|
Net cash used in investing activities - discontinued operation
|
|
$
|
(33,244
|
)
|
|
$
|
(172,906
|
)
|
Net cash provided by financing activities - discontinued operations
|
|
$
|
2,664,689
|
|
|
$
|
859,856
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
374,871
|
|
|
$
|
448,215
|
|
Capital expenditures
|
|
$
|
(33,244
|
)
|
|
$
|
(172,906
|
)
|
See Note 8 for a reconciliation
of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the total assets and liabilities
of the disposal group classified as held for sale that are presented separately in the consolidated balance sheets.
Note 3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principal Business Activity
The Company through its AIM subsidiary
is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace
industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter
aircraft. Welding Metallurgy is a specialty welding and products provider whose significant customers include the world's largest
aircraft manufacturers, subcontractors, and original equipment manufacturers. Miller Stuart is a manufacturer of aerospace components
whose customers include major aircraft manufacturers and the US Military. Miller Stuart specializes in electromechanical systems,
harness and cable assemblies, electronic equipment and printed circuit boards. Woodbine is a manufacturer of aerospace components
whose customers include major aircraft component suppliers. Eur-Pac specializes in military packaging and supplies. Eur- Pac s
primary business is “kitting” of supplies for all branches of the United States Defense Department including ordnance
parts, hose assemblies, hydraulic, mechanical and electrical assemblies. Compac specializes in the manufacture of RFI/EMI (Radio
Frequency Interference Electro-Magnetic Interference) shielded enclosures for electronic components. The Company’s customers
consist mainly of publicly traded companies in the aerospace industry.
If the sale of WMI closes,
the Company will be more focused on complex machined products for aircraft landing gear and jet turbines.
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.
Discontinued Operations
In March 2018, the Company entered into an agreement
to sell WMI. WMI is classified as a discontinued operation (see "Note 2 - Discontinued Operations"). As required, the
Company has retrospectively recast its consolidated statements of operations and balance sheets for all periods presented to reflect
these businesses as discontinued operations. The Company has not segregated the cash flows of these businesses in the consolidated
statements of cash flows. Management was also required to make certain assumptions and apply judgment to determine historical expenses
related to the discontinued operations presented in prior periods. Unless noted otherwise, discussion in the Notes to Consolidated
Financial Statements refers to the Company’s continuing operations.
Cash and Cash Equivalents
Cash and cash equivalents include
all highly liquid instruments with an original maturity of three months or less.
Accounts Receivable
Accounts receivable are reported
at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances
for uncollectible receivables based on management's estimate of uncollectible amounts considering age, collection history, and
any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible.
Inventory Valuation
The Company values inventory
at the lower of cost on a first - in -first-out basis or market.
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.
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 that are not secured by purchase orders and establishes reserves for obsolescence accordingly. The Company also reserves
for excess quantities, slow-moving goods, and for other impairments of value.
Assets Held for Sale and Liabilities
Directly Associated
Assets held for sale are reported
at the lower of their carrying amount or fair value less cost to sell and included in current assets. Liabilities associated to
business units held for sale are classified as a current liability.
Capitalized Engineering Costs
The Company has contractual agreements
with customers to produce parts, which the customers design. Even though the Company has not designed and thus has no proprietary
ownership of the parts, the manufacturing of these parts requires pre- production engineering and programming of the Company’s
machines. The pre-production costs associated with a particular contract are capitalized and then amortized beginning with the
first shipment of product pursuant to such contract. These costs are amortized on a straight-line basis over the estimated length
of the contract, or if shorter, three years.
If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as deferred revenues until the appropriate revenue recognition criteria have been met. The Terms and Conditions contained in customer
purchase orders may provide for liquidated damages in the event that a stop-work order is issued prior to the final delivery of
the product.
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 $1,000 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 and Intangible
Assets
Identifiable intangible assets
are amortized using the straight-line method over the period of expected benefit.
Long-lived assets and intangible
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. There has been no impairment as of December 31, 2017 and 2016.
Deferred Financing Costs
Costs incurred with obtaining
and executing revolving debt arrangements are capitalized and amortized using the effective interest method over the term of the
related debt. The amortization of such costs are included in interest and financing costs. Costs incurred with obtaining and executing
other debt arrangements are presented as a direct deduction from the carrying value of the associated debt.
Derivative Liabilities
In connection with the issuances
of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these
options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain
embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required
to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company
accounts for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging.
Revenue Recognition
For 2017 and 2016 the
Company recognized revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." The
Company recognizes revenue when products are shipped and/or the customer takes ownership and assumes risk of loss, collection
of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed
or determinable.
The Company recognizes certain
revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement, the Company
makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition as follows:
|
·
|
The customer requests that the
transaction be on a bill and hold basis. A customer must initiate the request for any bill and hold arrangement. Upon request for
a bill and hold, the Company requires a signed letter from the customer upon which the customer specifically requests the bill
and hold arrangement. Upon receipt of the letter, the Company begins its evaluation process to determine whether a bill and hold
arrangement can be granted.
|
|
·
|
The customer has made fixed commitment
to purchase in written documentation. All customers’ orders are through firm written purchase orders.
|
|
·
|
The goods are segregated from
other inventory and are not available to fill any other customers’ orders. The Company’s goods are made to customers’
or their customer’s specifications and could not be sold to others.
|
|
·
|
The risk of ownership has passed
to the customer. The product is complete and ready for shipment. The earnings process is complete. An internal evaluation is made
as to whether the product is complete and ready for shipment. This involves a review of the purchase order and a completed inspection
process by the Company’s quality control department.
|
|
·
|
The date is determined by which
the Company expects payment and the Company has not modified its normal billing and credit terms for this buyer. Payment is expected
as if the goods had been shipped.
|
|
·
|
The customer has the expected risk of loss in the event of a decline in the market value of goods. All goods are made to firm purchase orders with fixed prices. Any decline in value would not affect the pricing of the goods. The Company has not at any point, agreed to a price reduction on a bill and hold arrangement.
|
The Company had approximately
$619,000 and $2,914,000 of net sales that were billed but not shipped under such bill and hold arrangements as of December 31,
2017 and 2016, respectively.
Payments received in advance
from customers for products delivered are recorded as deferred revenue 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 order
is issued prior to the final delivery.
The Company utilizes a Returned
Merchandise Authorization or RMA process for determining whether to accept returned products. Customer requests to return products
are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt of the product. Net sales
represent gross sales less returns and allowances.
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 the allowance for doubtful accounts, useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and whether to accrue for various contingencies. 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
There were three customers that
represented 62.0% of total sales, and three customers that represented 52.3% of total sales for the years ended December 31, 2017
and 2016, respectively. This is set forth in the table below.
Customer
|
|
Percentage of Sales
|
|
|
2017
|
|
2016
|
|
|
|
|
|
1
|
|
25.5
|
|
21.3
|
2
|
|
20.5
|
|
14.6
|
3
|
|
16.0
|
|
16.4
|
There were three customers that
represented 68.7% of gross accounts receivable and two customers that represented 35.3% of gross accounts receivable at December
31, 2017 and 2016, respectively. This is set forth in the table below.
Customer
|
|
Percentage of Receivables
|
|
|
December
|
|
December
|
|
|
2017
|
|
2016
|
1
|
|
41.9
|
|
24.1
|
2
|
|
14.6
|
|
11.2
|
3
|
|
12.2
|
|
*
|
*Customer was less than 10% of gross accounts
receivable at December 31, 2016.
During the year, 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.
The Company has several key sole-source
suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts
and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business
could be severely harmed.
Income Taxes
The Company accounts for income
taxes in accordance with accounting guidance now codified as FASB 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, “Income Taxes,” 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 FASB ASC 740-10-05, "Accounting for Uncertainty in Income Taxes." The ASC clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC 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 ASC provides guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
Effective July 1, 2016, the Company
adopted FASB Accounting Standards Update 2015 - 17, Balance Sheet Classification of Deferred Taxes. The ASU is part of the Board's
simplification initiative aimed at reducing complexity in accounting standards. To simplify presentation, the new guidance requires
that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. Importantly, the guidance
does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still prohibited
from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The amendments
in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period
of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively
adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period
of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the
accounting change on prior periods. The Company has applied this guidance prospectively and has not restated prior period balances.
Earnings per share
Basic earnings per share is computed
by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding
for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share calculations
for all periods when the effect of their inclusion is dilutive.
The following is a reconciliation
of the denominators of basic and diluted earnings per share computations:
|
|
2017
|
|
2016
|
|
|
|
|
|
Weighted average shares outstanding used to compute basic earnings per share
|
|
|
13,230,775
|
|
|
|
7,579,419
|
|
Effect of dilutive stock options and warrants
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share
|
|
|
13,230,775
|
|
|
|
7,579,419
|
|
The following securities have
been excluded from the calculation as the exercise price was greater than the average market price of the common shares:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Stock Options
|
|
|
354,000
|
|
|
|
633,000
|
|
Warrants
|
|
|
1,480,000
|
|
|
|
520,000
|
|
|
|
|
1,834,000
|
|
|
|
1,153,000
|
|
The following securities have
been excluded from the calculation even though the exercise price was less than the average market price of the common shares because
the effect of including these potential shares was anti-dilutive due to the net loss incurred during the years:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Stock Options
|
|
|
146,000
|
|
|
|
3,000
|
|
Warrants
|
|
|
41,000
|
|
|
|
321,000
|
|
|
|
|
187,000
|
|
|
|
324,000
|
|
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.
Goodwill
Goodwill represents the excess
of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $272,000
at December 31, 2017 relates to the acquisitions of NTW $163,000 and ECC $109,000. The goodwill amount of $9,884,000 at December
31, 2016 relates to the acquisitions of Welding $292,000, NTW $163,000, Woodbine $2,565,000, Eur-Pac $1,655,000, ECC $109,000,
Sterling $4,540,000 and Compac $560,000.
The Company accounts for the
impairment of goodwill under the provisions of ASU 2011-08 (“ASU 2011-08”), “Intangibles Goodwill and Other (Topic
350): Testing Goodwill for Impairment.” ASU 2011-08 updated the guidance on the periodic testing of goodwill for impairment.
The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying amount.
The Company performs impairment
testing for goodwill annually, or more frequently when indicators of impairment exist. As discussed above, the Company adopted
ASU 2011-08 and performs a qualitative assessment in the fourth quarter of each year to determine whether it was more likely than
not that the fair value of each of Welding, including Woodbine, NTW, Eur-Pac, ECC, AMK, Sterling, Eur-Pac and Compac was less than
its carrying amount.
During 2017 the Company determined
that goodwill for Welding, Woodbine, Compac, Eur-Pac and Sterling in the amounts of $291,000, $2,565,000, $560,000, $1,656,000 and
$4,540,000, respectively, had been impaired. Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances
occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.
Goodwill is not
amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the
fair value of the reporting unit below its carrying amount.
During 2017, the
Company determined that goodwill for Eur-Pac and Sterling in the amounts of $1,655,000 and $4,540,000, respectively, had been
impaired. The total of $6,195,000 is included loss from continuing operations.
During 2017, the
Company determined that goodwill for Welding, Woodbine and Compac in the amounts of $292,000, $2,565,000, $560,000,
respectively, had been impaired. The total of $3,417,000 is included in loss from discontinued operations.
Freight Out
Freight out is included in operating
expenses and amounted to $196,000 and $180,000 for the years ended December 31, 2017 and 2016, respectively.
JOBS Act
On April 5, 2012, the JOBS Act
was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying
public companies. As an “emerging growth company,” the Company may, under Section 7(a)(2)(B) of the Securities Act,
delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply
to private companies. An “emerging growth company” is one with less than $1.0 billion in annual sales, has less than
$700 million in market value of its shares of common stock held by non-affiliates and issues less than $1.0 billion of non-convertible
debt over a three year period. The Company may take advantage of this extended transition period until the first to occur of the
date that it (i) is no longer an "emerging growth company" or (ii) affirmatively and irrevocably opts out of this extended
transition period. The Company has elected to take advantage of the benefits of this extended transition period. Until the date
that it is no longer an "emerging growth company" or affirmatively and irrevocably opts out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to its consolidated financial
statements and that has a different effective date for public and private companies, the Company will disclose the date on which
adoption is required for non-emerging growth companies and the date on which the Company will adopt the recently issued accounting
standard.
Recently Issued Accounting
Pronouncements
In January 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-01, Recognition
and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) (“ASU 2016-01”). The main objective
of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company does not expect the adoption of this amendment to have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued
ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The main objective of ASU 2016-02 is to increase transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification
and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company does not expect the adoption of this amendment to have a significant impact on its
consolidated financial statements.
In April 2016, the FASB issued
ASU 2016-10 Revenue from Contracts with Customers (Topic 606) (“ASU 2016-10”). The core principle of the guidance in
Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments
in ASU 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective. The effective
date and transition requirements of ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09.
They are effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The
Company is currently assessing the impact of the adoption of these amendments on its consolidated financial statements.
In May 2016, the FASB issued
Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow -Scope Improvements and Practical
Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying
guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same date that Topic
606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including
interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for nonpublic entities
one year later. The Company is currently assessing the impact of the adoption of the amendments to Topic 606 and these amendments
on its consolidated financial statements.
In August 2016, the FASB issued
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard provides
guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including beneficial
interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables. The
standard is intended to reduce current diversity in practice. Early adoption is permitted, including adoption in an interim period.
The Company does not expect the adoption of these amendments to have a significant impact on its consolidated financial statements.
In November 2016, the FASB issued
ASU 2016-18, Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted cash within
the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included
in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents,
restricted cash or restricted cash equivalents are presented in more than one-line item within the statement of financial position,
an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement
of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal
years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company
is currently in the process of evaluating the impact of the adoption of this standard on our financial statements.
In January 2017, the FASB issued
ASU 2017-01 (“ASU 2017-01”), Business Combinations, which clarifies the definition of a business, particularly when
evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first part
of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.
In January 2017, FASB issued
ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step 2 of
the goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit with
its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities having one
or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting units, (2) the amount
of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU No. 2017-04 is effective
as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard
on our financial statements.
In July 2017, the FASB issued
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. The ASU allows companies to exclude a down round feature when determining whether a financial
instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments
(or embedded conversion features) with down round features may no longer be required to be accounted classified as liabilities.
A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward.
For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the
down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings
per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize
the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11is effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted,
and the guidance is to be applied using a full or modified retrospective approach. The Company adopted this guidance in the current
quarter, effective April 1, 2017. As a result, the warrants issued on May 12, 2017, in connection with the bridge financing, were
equity-classified.
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.
Reclassifications
Reclassifications
occurred to certain 2016 amounts to conform to the 2017 classification.
Note 4. ACCOUNTS RECEIVABLE
The components of accounts receivable
at December 31, are detailed as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Accounts Receivable Gross
|
|
$
|
5,958,000
|
|
|
$
|
6,476,000
|
|
Allowance for Doubtful Accounts
|
|
|
(494,000
|
)
|
|
|
(403,000
|
)
|
Accounts Receivable Net
|
|
$
|
5,464,000
|
|
|
$
|
6,073,000
|
|
The allowance for doubtful accounts
for the years ended December 31, 2017 and 2016 is as follows:
|
|
Balance at Beginning of Year
|
|
Charged to Costs and Expenses
|
|
Deductions from Reserves
|
|
Balance at End of Year
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
403,000
|
|
|
$
|
91,000
|
|
|
$
|
—
|
|
|
$
|
494,000
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
196,000
|
|
|
$
|
274,000
|
|
|
$
|
67,000
|
|
|
$
|
403,000
|
|
Note 5. INVENTORY
The
components of inventory at December 31, consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Raw Materials
|
|
$
|
5,346,000
|
|
|
$
|
5,513,000
|
|
Work In Progress
|
|
|
19,947,000
|
|
|
|
21,903,000
|
|
Finished Goods
|
|
|
10,122,000
|
|
|
|
8,928,000
|
|
Inventory Reserve
|
|
|
(4,274,000
|
)
|
|
|
(3,776,000
|
)
|
Total Inventory
|
|
$
|
31,141,000
|
|
|
$
|
32,568,000
|
|
The Company periodically evaluates
inventory and establishes reserves for obsolescence, excess quantities, slow-moving goods, and for other impairment of value.
|
|
Balance at Beginning of Year
|
|
Additions to Reserve
|
|
Deductions from Reserves
|
|
Balance at End of Year
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Reserve for Inventory
|
|
$
|
(3,776,000
|
)
|
|
$
|
(503,000
|
)
|
|
$
|
5,000
|
|
|
$
|
(4,274,000
|
)
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Inventory
|
|
$
|
(3,181,000
|
)
|
|
$
|
(681,000
|
)
|
|
$
|
86,000
|
|
|
$
|
(3,776,000
|
)
|
Note 6. PROPERTY AND EQUIPMENT
The components of property and
equipment at December 31, consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
Buildings and Improvements
|
|
|
1,650,000
|
|
|
|
1,650,000
|
|
|
31.5 years
|
Machinery and Equipment
|
|
|
11,554,000
|
|
|
|
12,172,000
|
|
|
5 - 8 years
|
Capital Lease Machinery and Equipment
|
|
|
6,534,000
|
|
|
|
5,573,000
|
|
|
5 - 8 years
|
Tools and Instruments
|
|
|
8,538,000
|
|
|
|
7,520,000
|
|
|
1.5 - 7 years
|
Automotive Equipment
|
|
|
172,000
|
|
|
|
195,000
|
|
|
5 years
|
Furniture and Fixtures
|
|
|
311,000
|
|
|
|
312,000
|
|
|
5 - 8 years
|
Leasehold Improvements
|
|
|
528,000
|
|
|
|
525,000
|
|
|
Term of Lease
|
Computers and Software
|
|
|
406,000
|
|
|
|
406,000
|
|
|
4 - 6 years
|
Total Property and Equipment
|
|
|
29,993,000
|
|
|
|
28,653,000
|
|
|
|
Less: Accumulated Depreciation
|
|
|
(19,943,000
|
)
|
|
|
(17,456,000
|
)
|
|
|
Property and Equipment, net
|
|
$
|
10,050,000
|
|
|
$
|
11,197,000
|
|
|
|
Depreciation expense for the
years ended December 31, 2017 and 2016 was approximately $1,868,000 and $3,175,000, respectively. Assets held under capitalized
lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation
of assets under capital leases is included in depreciation expense for 2017 and 2016. Accumulated depreciation on these assets
was approximately $3,595,000 and $2,320,000 as of December 31, 2017 and 2016, respectively.
Note 7. INTANGIBLE ASSETS
The components of the intangibles
assets at December 31, consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
$
|
4,925,000
|
|
|
$
|
4,925,000
|
|
|
5 to 14 years
|
Trade Names
|
|
|
—
|
|
|
|
—
|
|
|
15-20 years
|
Technical Know-how
|
|
|
—
|
|
|
|
—
|
|
|
10 years
|
Non-Compete
|
|
|
50,000
|
|
|
|
50,000
|
|
|
5 years
|
Professional Certifications
|
|
|
—
|
|
|
|
—
|
|
|
.25 to 2 years
|
Total Intangible Assets
|
|
|
4,975,000
|
|
|
|
4,975,000
|
|
|
|
Less: Accumulated Amortization
|
|
|
(4,975,000
|
)
|
|
|
(4,504,000
|
)
|
|
|
Intangible Assets, net
|
|
$
|
—
|
|
|
$
|
471,000
|
|
|
|
The expense for amortization
of the intangibles for the years ended December 31, 2017 and 2016 was approximately $471,000 and $995,000, respectively. As of
December 31, 2017 Intangible Assets have been fully amortized.
Note 8. ASSETS HELD FOR SALE
AND LIABILITES DIRECTLY ASSOCIATED
AMK
As discussed in Note 1, on January 27,
2017, the Company sold all of the outstanding shares of AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., pursuant to
a Stock Purchase Agreement dated January 27, 2017 (“the Stock Purchase Agreement”) for a purchase price of $4,500,000,
subject to a working capital adjustment, plus additional quarterly payments, not to exceed $1,500,000, equal to five percent (5%)
of Net Revenues of AMK commencing April 1, 2017. At December 31, 2016, the Company had reclassified its assets held for sale and
the liabilities directly associated to these assets. The components of these assets and liabilities are as follows:
Components of Assets Held for Sale and Liabilities Directly Associated
|
|
|
|
Assets Held for Sale
|
|
December
31, 2016
|
Cash
|
|
$
|
40,000
|
|
Accounts Receivable, net of allowance for doubtful accounts
|
|
|
722,000
|
|
Inventory, net of reserves
|
|
|
260,000
|
|
Prepaid and other assets
|
|
|
96,000
|
|
Property and equipment, net of accumulated depreciation
|
|
|
3,478,000
|
|
Intangible Assets, net of accumulated amortization
|
|
|
819,000
|
|
Goodwill
|
|
|
635,000
|
|
|
|
|
|
|
Assets Held for Sale
|
|
$
|
6,050,000
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
379,000
|
|
Capital lease obligations
|
|
|
1,680,000
|
|
Deferred revenues
|
|
|
96,000
|
|
|
|
|
|
|
Liabilities directly associated to Assets Held for Sale
|
|
$
|
2,155,000
|
|
Additionally, AMK's operations were previously reported in the Company's Turbine Engine Components segment. The amounts below
represent AMK's operations that have been excluded from this segment for the year ended December 31, 2016:
Segment Data
|
|
|
Turbine Engine Components
|
|
2016
|
Net Sales
|
|
$
|
4,511,000
|
|
Gross Profit
|
|
|
169,000
|
|
Pre Tax (Loss) Income
|
|
|
(1,595,000
|
)
|
Assets
|
|
|
6,050,000
|
|
WMI
As discussed in Note 1, on March 21, 2018, the Company
signed a Stock Purchase Agreement to sell all of the outstanding shares of WMI to CPI for a purchase price of $9,000,000, subject
to a working capital adjustment, and a contingent payment of $1,000,000. At December 31, 2017 and 2016, the Company reclassified
its assets held for sale and the liabilities directly associated to these assets. The components of these assets and liabilities
are as follows:
Components
of Assets Held for Sale and Liabilities Directly Associated
Assets Held for Sale
|
|
December
31, 2017
|
|
December
31, 2016
|
Accounts Receivable, net of allowance for doubtful accounts
|
|
$
|
2,217,000
|
|
|
$
|
1,976,000
|
|
Inventory, net of reserves
|
|
|
8,065,000
|
|
|
|
7,283,000
|
|
Prepaid and other assets
|
|
|
485,000
|
|
|
|
266,000
|
|
Property and equipment, net of accumulated depreciation
|
|
|
878,000
|
|
|
|
1,022,000
|
|
Intangible Assets, net of accumulated amortization
|
|
|
—
|
|
|
|
1,283,000
|
|
Impairment of Assets Held for Sale
|
|
|
(1,563,000
|
)
|
|
|
—
|
|
Goodwill
|
|
|
—
|
|
|
|
3,417,000
|
|
|
|
|
|
|
|
|
|
|
Assets Held for Sale
|
|
$
|
10,082,000
|
|
|
$
|
15,247,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
2,138,000
|
|
|
|
2,010,000
|
|
Deferred Revenue
|
|
|
521,000
|
|
|
|
—
|
|
Notes Payable & Capital lease obligations
|
|
|
11,000
|
|
|
|
—
|
|
Deferred rent
|
|
|
125,000
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities directly associated to Assets Held for Sale
|
|
$
|
2,795,000
|
|
|
$
|
2,080,000
|
|
Additionally, WMI's operations were previously reported in the Company's Aerostructures & Electronics segment. The amounts
below represent WMI's operations that have been excluded from this segment for the years ended December 31, 2017 and 2016,
respectively:
Segment Data
|
|
|
|
|
|
|
|
|
Aerostructures & Electronics
|
|
|
2017
|
|
|
|
2016
|
|
Net Sales
|
|
$
|
13,129,000
|
|
|
$
|
15,594,000
|
|
Gross Profit
|
|
|
1,884,000
|
|
|
|
2,451,000
|
|
Pre Tax (Loss) Income
|
|
|
(6,678,000
|
)
|
|
|
(756,000
|
)
|
Assets
|
|
|
10,082,000
|
|
|
|
15,247,000
|
|
Note 9. ACCOUNTS PAYABLE AND
ACCRUED EXPENSES
The components of accounts payable
at December 31, are detailed as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Accounts Payable
|
|
$
|
8,634,000
|
|
|
$
|
11,994,000
|
|
Accrued Expenses
|
|
|
2,238,000
|
|
|
|
2,156,000
|
|
|
|
$
|
10,872,000
|
|
|
$
|
14,150,000
|
|
Note 10. SALE AND LEASEBACK
TRANSACTION
On April 11, 2016, the Company
executed a Sale - Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor, Connecticut
(the “South Windsor Property”) for a purchase price of $1,700,000. The net proceeds from the sale of the property were
applied to the amounts owed to PNC Bank.
Simultaneous with the closing
of the sale of the South Windsor Property, the Company entered into a 15-year lease (the “Lease”) with the purchaser
for the property. Base annual rent is approximately $155,000 for the first year and increases approximately 3% per year, each year
thereafter. The Lease grants the Company an option to renew the Lease for an additional period of five years. 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 representations, warranties, obligations, conditions and
indemnification provisions in favor of the purchaser and grants the purchaser 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.
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 the twenty - 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 $333,000 and $371,000 as of December
31, 2017 and 2016, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets.
Simultaneous with the closing
of the sale of the Bay Shore Property, the Company entered into a 20-year triple- net lease (the “Lease”) 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 of five years.
The Company has on deposit with the purchaser $89,000 as security for the performance of its obligations under the Lease. In addition,
the Company has on deposit $150,000 with the landlord as security for the completion of certain repairs and upgrades to the Bay
Shore Property. This amount is included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the accompanying
Consolidated Balance Sheets. 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 purchaser 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 14 Commitments and Contingencies.
The Company accounted for these
transactions under the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions”.
On January 27, 2017, the Company
entered into an agreement to sell the stock of AMK. Included in this agreement was the transfer of the capital lease obligation
on the South Windsor Property transferred to the purchaser of AMK. At December 31, 2016, the Company reclassified the capital asset
of $1,700,000 and lease obligation of $1,680,000 to Assets Held for Sale and Liabilities Held for Sale, respectively. See Note
1 for additional discussion regarding the sale of AMK.
Note 11. NOTES PAYABLE AND
CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease
obligations consist of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Revolving credit note payable to PNC Bank N.A. ("PNC")
|
|
$
|
16,455,000
|
|
|
$
|
24,393,000
|
|
Term loans, PNC
|
|
|
3,471,000
|
|
|
|
6,649,000
|
|
Capital lease obligations
|
|
|
3,073,000
|
|
|
|
4,215,000
|
|
Related party notes payable, net of debt discount
|
|
|
1,912,000
|
|
|
|
1,086,000
|
|
Other note payable
|
|
|
1,930,000
|
|
|
|
627,000
|
|
Subtotal
|
|
|
26,841,000
|
|
|
|
36,970,000
|
|
Less: Current portion of notes and capital obligations
|
|
|
(23,393,000
|
)
|
|
|
(33,999,000
|
)
|
Notes payable and capital lease obligations, net of current portion
|
|
$
|
3,448,000
|
|
|
$
|
2,971,000
|
|
PNC Bank N.A. ("PNC")
The Company has a Loan Facility
with PNC secured by substantially all of its assets. The Loan Facility has been amended many times during its term. The Loan Facility
was amended in June 2016 (the “Twelfth Amendment”) and September 2016 (the “Thirteenth Amendment”). In
connection with the Twelfth Amendment, the Company paid PNC a fee of $100,000 and reimbursed it for the fees and expenses of its
counsel. The Twelfth Amendment provides for a $33,000,000 revolving loan. In addition, in the Twelfth Amendment the four term loans
(Term Loan A, Term Loan B, Term Loan C and Term Loan D) then outstanding were consolidated into a single term loan with the initial
principal amount of $7,387,854. Further, in the Twelfth Amendment the Company acknowledged that there were then outstanding excess
advances under the revolving loan in the amount of $12,500,000.
Under the terms of the Loan Facility,
as amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three- quarters of one
percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent (4.50%)
with respect to LIBOR Rate Loans. The amount outstanding under the revolving loan, inclusive of the excess advance, was $16,455,000
and $24,393,000, as of December 31, 2017 and December 31, 2016, respectively. Because the revolving loans contain a subjective
acceleration clause which could permit PNC to require repayment prior to maturity, all of the loans outstanding with PNC are classified
with the current portion of notes and capital lease obligations.
The Loan Facility
was further amended pursuant to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be
the lesser of (i) 75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the
eligible inventory, an increase from 85%, subject to the inventory sublimit of $12,500,000 and such reserves as PNC may deem
proper. In addition, in the Thirteenth Amendment the lender waived any default resulting from the Company’s obligation
to comply with the minimum EBITDA (as defined in the Loan Facility) covenant for the period ended June 30, 2016, consented to
the issuance of the Company’s 12% Subordinated Convertible Notes and the amendment to the Company’s Articles
of Incorporation to increase the authorized number of shares of Preferred Stock and Series A Preferred Stock.
The repayment terms of the Term
Loan provided for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first fifty-nine
(59) of which shall be in the amount of $123,133 commencing on the first business day of July, 2016, and continuing on the first
business day of each month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal and interest
payable on the last business day of June, 2021.
At the closing of the Twelfth
Amendment, the Company paid $1,500,000 to reduce the outstanding excess under the revolving loan from $12,500,000 to $11,000,000.
It also agreed that the excess advances will be paid down by $100,000 each week commencing the second week after the closing of
the Twelfth Amendment.
To the extent that the Company
disposes of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws on the
credit facility in the amount equal to the net proceeds of such sale.
The terms of the Loan Facility
require that among other things, the Company maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA. In
addition, the Company is limited in the amount of capital expenditures it can make. The Company also is limited as to the amount
of dividends it can pay its shareholders, as defined in the Loan Facility.
On June 19, 2017, we entered
into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant for the
periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December 31, 2016.
The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated basis
beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the prior
three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months and (iii)
1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine months and that we maintain EBITDA of not
less than $345,000 for the period ending September 30, 2017. The amendment also provided that we were not required to maintain
a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending December
31, 2016 and June 30, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing will be required
of the Fixed Charge Coverage Ratio for the period ending June 30, 2017. As of December 31, 2017, the Company was not in compliance
with our Fixed Charge Coverage Ratio covenant. The failure to satisfy the foregoing covenants would constitute a default under
the Loan Facility and PNC at its option could give notice to the Company that all amounts under the Loan Facility are immediately
due and payable, and accordingly all amounts due under the loan facility have been classified as current, as of December 31, 2017.
In addition, the amendment reduced the weekly payments we are required to make to reduce our $2,244,071 over-advance under the
revolving credit facility as of June 19, 2017 from $100,000 to $25,000 per week during the period commencing May 22, 2017 through
and including July 10, 2017. At December 31, 2017, the over-advance had been paid in full. We paid $50,000 to PNC in connection
with the amendment and reimbursed PNC’s counsel fees.
As of December 31, 2017, our
debt to PNC in the amount of $19,926,000 consisted of the revolving credit loan in the amount of $16,455,000 and the term loan
in the amount of $3,471,000. As of December 31, 2016, our debt to PNC in the amount of $31,042,000 consisted of the revolving credit
note due to PNC in the amount of $24,393,000 and the term loan due to PNC in the amount of $6,649,000.
Each day, the Company’s
cash collections are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing
base formula. The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan
Facility). PNC may use some elements of subjective business judgment in determining whether a material adverse change has occurred
in the Company's condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of
the Loan Facility.
As of December 31, 2017 the future
minimum principal payments for the term loans are as follows:
For the year ending
|
|
Amount
|
December 31, 2018
|
|
$
|
1,478,000
|
|
December 31, 2019
|
|
|
1,478,000
|
|
December 31, 2020
|
|
|
515,000
|
|
December 31, 2021
|
|
|
—
|
|
December 31, 2022
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
PNC Term Loans payable
|
|
|
3,471,000
|
|
Less: Current portion
|
|
|
3,471,000
|
|
Long-term portion
|
|
$
|
—
|
|
Interest expense related to these
credit facilities amounted to approximately $2,122,000 and $1,908,000 for the years ended December 31, 2017 and 2016, respectively.
During the year ended
December 31, 2017, the Company discovered that PNC Bank had been improperly calculating interest expense on a monthly basis
since 2007. The result was a net overcharge of approximately $1,500,000 through December 31, 2017. On a monthly basis, PNC
Bank had allocated the Company’s line of credit balances between each of the Company’s subsidiaries, based on
their individual entity balance. Some of these accounts held debit balances, while others carried credit balances. PNC
charged interest to the Company for its entities with debit balances without offsetting credit balances. This method of segregating
the Company’s debt balances by entity by PNC Bank has ceased. As of the date of this filing, the Company has recovered
all of its identified overcharged interest and has not noted any further discrepancies.
Capital Leases Payable –
Equipment
The Company is committed under
several capital leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at the termination
of each lease. Capital lease obligations totaled $3,073,000 and $4,215,000 as of December 31, 2017 and 2016, respectively, with
various interest rates ranging from approximately 4% to 14%.
As of December 31, 2017, the
aggregate future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:
For the year ending
|
|
Amount
|
December 31, 2018
|
|
$
|
1,428,000
|
|
December 31, 2019
|
|
|
1,264,000
|
|
December 31, 2020
|
|
|
542,000
|
|
December 31, 2021
|
|
|
52,000
|
|
December 31, 2022
|
|
|
15,000
|
|
Thereafter
|
|
|
—
|
|
Total future minimum lease payments
|
|
|
3,301,000
|
|
Less: imputed interest
|
|
|
(228,000
|
)
|
Less: current portion
|
|
|
(1,293,000
|
)
|
Total Long Term Portion
|
|
$
|
1,780,000
|
|
Related Party Notes Payable
Taglich Brothers, Inc. is a corporation
co-founded by two directors of the Company, Michael and Robert Taglich. In addition, a third director of the Company is a vice
president of Taglich Brothers, Inc.
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. In addition,
Michael and Robert Taglich have also invested in the Company through various debt and equity financings.
Related party notes payable to Michael
and Robert Taglich, and their affiliated entities, totaled $2,126,000 and $1,086,000, as of December 31, 2017 and December 31,
2016, respectively.
On April 8, 2016, the Company
issued a promissory note (“the Taglich Note B”) to Michael Taglich in the principal amount of $350,000. The
Taglich Note B bore interest at the rate of 7% per annum. The Company’s obligation under the Taglich Note B was
subordinated to its indebtedness to PNC. This note has been repaid in full.
On April 8, 2016, the Company issued a
promissory note (“the Taglich Note C”) to Robert Taglich in the principal amount of $350,000. The Taglich Note C bore
interest at the rate of 7% per annum. The Company’s obligation under the Taglich Note C was subordinated to its indebtedness
to PNC. This note has been repaid in full.
On May 6, 2016, the Company issued a promissory
note (“the Taglich Note D”) to Michael Taglich in the principal amount of $400,000. The Taglich Note D bore interest
at the rate of 7% per annum. The Company’s obligation under the Taglich Note D was subordinated to its indebtedness to PNC.
This note has been repaid in full.
On May 6, 2016, the Company issued a promissory
note (“the Taglich Note E”) to Robert Taglich in the principal amount of $300,000. The Taglich Note E bore interest
at the rate of 7% per annum. The Company’s obligation under the Taglich Note E was subordinated to its indebtedness to PNC.
This note has been repaid in full.
On May 25, 2016, the Company issued 110,000
and 65,000 shares of Series A Preferred Stock to Michael Taglich and Robert Taglich, respectively upon surrender of Taglich Notes
D and E, in the aggregate principal of $1,100,000 and $650,000, respectively.
On August 1, 2016, the Company issued a
promissory note (the “Taglich Note F”) to Michael Taglich, in the principal amount of $1,000,000. The Taglich Note
F bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note F was subordinated to its indebtedness
to PNC.
On August 4, 2016, the Company issued a
promissory note (the “Taglich Note G”) to Michael Taglich, in the principal amount of $500,000. The Taglich Note G
bore interest at the rate of 7% per annum. The Company’s obligation under the Taglich Note G was subordinated to its indebtedness
to PNC.
On August 19, 2016, the Company issued
to Michael Taglich its 12% Subordinated Convertible Notes due December 31, 2017 (the “12% Notes”) in the principal
amount of $1,520,703, together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of Taglich
Notes F & G in the aggregate principal amount of $1,500,000, together with accrued interest thereon and on notes previously
exchanged for Series A Preferred Stock of $20,703. In addition, the Company issued to Robert Taglich a 12% Note in the principal
amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness of interest
of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.
On March 17, 2017, the Company borrowed
$200,000 and $300,000 from each of Michael Taglich and Robert Taglich, respectively, directors and principal stockholders of our
company, and issued promissory notes in the principal amounts of $200,000 and $300,000 to Michael Taglich and Robert Taglich, respectively,
to evidence our obligation to repay that indebtedness. The notes bore interest at the rate of 7% per annum. The notes have been
converted into 346,992 shares of common stock as of December 31, 2017.
On May 2, and May 10, 2017, the
Company borrowed an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. This indebtedness, together with accrued
interest, were converted into May 2018 Notes on May 12, 2017.
In April 2018, Michael and Robert
Taglich advanced an aggregate of $1,150,000 to be applied to a private placement on terms yet to be determined.
Taglich Brothers acted as a placement
agent in connection with the sale of the May 2018 Notes and warrants discussed below for which they are to be paid commissions
in the aggregate amount of $176,000.
As compensation for its services as placement
agent for the offering of the 12% Notes discussed below, the Company paid Taglich Brothers a fee of $295,400 and issued to Taglich
Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15, subject to certain
anti-dilution and other adjustments.
12% Subordinated Convertible Notes
On August 19, 2016, the Company entered
into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the “Placement Agent”), pursuant
to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $4,250,000 of the Company’s
12% Subordinated Convertible Notes due December 31, 2017 (the “12% Notes”) to accredited investors (“the Offering”),
together with five-year warrants to purchase 4,065 shares of common stock (the “Warrants”) for each $100,000 principal
amount of 12% Notes purchased, in a private placement exempt from the registration requirements of the Securities Act of 1933,
as amended (the Securities Act ) .
The 12% Notes were convertible, at the
option of the holders, into shares of the Company’s common stock at an initial conversion price of $4.92 per share, subject
to adjustment for certain events. The 12% Notes were automatically convertible into shares of the Company’s Series A Convertible
Preferred Stock (“Series A Preferred Stock”) at a price of $10.00 per share, the stated value of the Series A Preferred
Stock, upon the filing of a certificate of amendment to the Company’s Articles of Incorporation increasing the number of
shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon conversion of the 12%
Notes and for issuance in lieu of payment of cash dividends (the “Certificate of Amendment”) in accordance with the
provisions of the certificate of designation authorizing the issuance of the Series A Preferred Stock. The amendment was subject
to the approval of the Company’s stockholders.
Under the terms of the Placement Agency
Agreement, the Placement Agent is entitled to a placement agent fee equal to 7% of the gross proceeds of the offering, five year
warrants to purchase 8% of the number of shares of the Company’s common stock issuable upon conversion of the 12% Notes at
an exercise price of $6.15 per share, equal to 125% of the initial conversion price per share of the 12% Notes, and reimbursement
for its actual out-of-pocket expenses not to exceed in the aggregate $25,000.
In August 2016, the Company issued and
sold a total of $2,720,000 principal amount of the 12% Notes, together with Warrants to purchase an aggregate of 110,556 shares
of common stock, yielding net proceeds to the Company of approximately $2,320,000, pursuant to a Securities Purchase Agreements
with accredited investors. The Company also issued to Michael Taglich a 12% Note in the principal amount of $1,520,703, together
with Warrants to purchase 61,817 shares of common stock at an initial exercise price of $6.15, subject to anti-dilution and other
adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations,
upon surrender for cancellation of Taglich Notes F and G in the aggregate principal amount of $1,500,000, together with accrued
interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,703. In addition, the Company issued to
Robert Taglich a 12% Note in the principal amount of $4,373, together with Warrants to purchase 177 shares of common stock, in
consideration of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.
The Warrants including those issued to
the placement agent are classified within stockholders equity, pursuant to ASC 480, Distinguishing Liabilities from Equity and
ASC 815-40, Derivatives and Hedging: Contracts in Own Equity. The 12% Notes contained a contingent put that results in early settlement
of the 12% Notes upon the filing of a certificate of amendment to the Company’s Articles of Incorporation, increasing the
number of shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon conversion of
the 12% Notes. The embedded put feature is required to be separately measured at fair value with changes in value recognized in
the statement of operations, pursuant to ASC 815-15, Derivatives and Hedging: Embedded Derivatives, as the put feature is not clearly
and closely related to the convertible promissory note.
The proceeds received upon issuing the
12% Notes and Warrants was allocated to each instrument on a relative fair value basis. The initial fair value of the Warrants
was determined using the Black Scholes Merton valuation model with the following assumptions: expected term of 5 years; risk free
interest rate of 1.2%; and volatility of 90%. The allocated value of the 12% Notes was further reduced for the initial fair value
of the embedded put of approximately $755,000. The resulting discount to the 12% Notes, including the allocated transactions costs,
is amortized to interest expense using the effective interest method over the term of the Notes.
As compensation for its services as placement
agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400.
On November 30, 2016, the Company’s
stockholders approved the amendment to the Company’s Articles of Incorporation, and consequently the Company issued a total
of 438,770 shares of its Series A Preferred Stock to holders of its 12% Notes upon the automatic conversion of the principal amount
of, and accrued interest on, the 12% Notes at the rate of $10.00 per share.
Private Placements of 8% Subordinated
Convertible Notes
From November 23, 2016
through March 21, 2017, the Company received gross proceeds of $4,775,000, of which $1,950,000 were received from Robert and
Michael Taglich, from the sale of an equal principal amount of our 8% Subordinated Convertible Notes (the “8%
Notes”), together with warrants to purchase a total of 383,080 shares of our common stock, in private placement
transactions with accredited investors (the “8% Note Offerings”). In connection with the offering of the 8%
Notes, the Company issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc., placement agent
for the 8% Note Offerings, in lieu of payment of cash compensation for sales commissions, together with warrants to purchase
a total of 180,977 shares of our common stock. Payment of the principal and accrued interest on the 8% Notes are junior and subordinate in right
of payment to our indebtedness under the Loan Facility.
Interest on the 2018 Notes is
payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in
cash, or at our option, in additional 2018 Notes, provided that if accrued interest payable on $1,269,000 principal amount of the
2018 Notes issued in December 2016 is paid in additional 2018 Notes, interest for that quarterly interest payment shall be calculated
at the rate of 12% per annum. Upon the occurrence and continuation of an event of default, interest shall accrue at the rate of
12% per annum.
During the year ended December 31, 2017, we issued $354,238 principal amount of 8% Notes in lieu of cash payment of accrued
interest. As of December 31, 2017, we had outstanding $5,525,000 principal amount of 8% Notes, of
which $3,003,000 principal amount is due on November 30, 2018 and $2,522,000 principal amount is due on February 28, 2019.
The outstanding principal amount
plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock conversion prices
ranging from $2.25 to $4.45 per share, subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations.
An event of default under the
8% Notes will occur (i) if the Company fails to make any payment under the 8% Notes within ten days after the date first due, or
(ii) if the Company files a petition in bankruptcy or under any similar insolvency law, makes an assignment for the benefit of
its creditors, or if any voluntary petition in bankruptcy or under any similar insolvency law is filed against the Company and
such petition is not dismissed within sixty (60) days after the filing thereof. Upon the occurrence and continuation of an event
of default, holders of a majority of the outstanding principal amount of the 8% Notes then outstanding, upon notice to the Company
and the holders of the Senior Indebtedness (as defined in the 8% Notes), may demand immediate payment of the unpaid principal amount
of the 8% Notes, together with accrued interest thereon and all other amounts payable under the 8% Notes, subject to the subordination
provisions of the 8% Notes.
The exercise price of the warrants
issued in connection with the 8% Note Offerings ranges from $3.00 to $4.53 per share, subject to certain anti-dilution and other
adjustments, including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions
such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending
upon prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November 30,
2021 and 243,307 warrants may be exercised until January 31, 2022.
May Note Financing
On May 12 and May 19, 2017, the
Company issued and sold to 17 accredited investors (including Michael N. Taglich and Robert F. Taglich individually and a partnership
of which they are partners), its “May 2018 Notes” in the aggregate principal amount of $4,158,624, together with warrants
to purchase an aggregate of 501,039 shares of common stock, for gross proceeds (net of the exchange of indebtedness totaling $1,503,288
due to Michael N. Taglich and Robert F. Taglich for working capital advances made on May 2 and 10, 2017) of $2,534,196. Roth Capital
LLC and Taglich Brothers acted as placement agents in connection with the sale of the May 2018 Notes and warrants for which they
are to be paid commissions in the aggregate amount of $191,155.
The May 2018 Notes and warrants
were issued for a purchase price equal to 97% of the principal amount of the May 2018 Notes purchased. The principal amount of
each May 2018 Note will be increased by 2% for each 30 days it remains outstanding commencing August 1, 2017. Upon the occurrence
of, and during the continuance of an Event of Default (as defined in the May 2018 Notes), the May 2018 Notes will accrue late interest
at the rate of 10% per annum. Payment of the principal and accrued interest, if any, on the May 2018 Notes is junior and subordinate
in right of payment to the Company’s indebtedness under the Loan Facility.
The
principal amount, together with accrued interest, if any, of the May 2018 Notes, when issued, were convertible into shares of common
stock at a conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock splits and certain fundamental
transactions, including recapitalizations, mergers and other business combination transactions (the “Fixed Conversion Price”),
and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5) Weighted Average Prices (as defined in the May
2018 Notes) of the common stock during the five consecutive trading day period ending on the trading day immediately preceding
the day of a request by the holder for conversion of the May 2018 Note. The Company has the right to redeem all, or a portion of
(on a pro rata basis), of the May 2018 Notes upon written notice to the holders not less than three trading days prior to the applicable
redemption date. In connection with the Company’s July 2017 public offering of its common stock, approximately $1,754,215
principal amount of the May 2018 Notes were converted into 1,240,605 shares of common stock at $1.50 per share, the public offering
price of the shares sold in the Public Offering
,
and $463,501 principal
amount of May 2018 Notes were redeemed. The balance of the May 2018 Notes were converted into 1,222,809 shares of common stock
at $1.50 per share, the public offering price of the shares sold in the Public Offering
,
pursuant
to the restructuring approved by the Company’s stockholders at the Company’s Annual Meeting on October 3, 2017. Consequently,
no May 2018 Notes remain outstanding.
The Company issued warrants to purchase
501,039 shares of common stock as part of the private placement of the May 2018 Notes. The warrants, when issued, were exercisable
at an initial exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a lesser number
of shares based upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution and
other adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations, mergers
and other business combination transactions. In accordance with the terms of the warrants, the exercise price was reduced to $1.50
per share, the public offering price of the shares of common stock sold in the Public Offering.
The Company early adopted the
provisions of ASU 2017-11 in recognizing the warrants. As a result, the exercise price reset provisions were excluded from the
assessment of whether the warrants are considered indexed to the Company’s own stock. The warrants otherwise meet the requirements
for equity classification, as such were initially classified in Stockholders’ Equity. The Company will recognize the value
of the exercise price reset provision if and when it becomes triggered, by recognizing the value of the effect of the exercise
price reset as a deemed dividend and a reduction of income available to common shareholders in computing basic earnings per share.
The proceeds received upon issuing
the May 2018 Notes and warrants was allocated to each instrument on a relative fair value basis. The allocation resulted in an
effective conversion price for the May 2018 Notes that was below the quoted market price of the Company’s common stock. As
such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion feature on each issuance
date, resulting in an additional discount to the initial carrying value of the May 2018 Notes with a corresponding credit to additional
paid-in capital.
On October 3, 2017, holders of $1,834,214
aggregate principal amount of the Company’s May 2018 Notes agreed to convert their 2018 Notes into 1,222,809 shares of common
stock. The May 2018 Notes, when issued, were convertible at a conversion price per share of $2.49. The conversion that occurred
on October 3, 2017 was at a lower conversion price of $1.50 per share (the offering price of the shares of common stock in the
Public Offering).
Note 12. STOCKHOLDERS' EQUITY
Issuance of Series A Preferred
Stock and Related Financings
On May 25, 2016, and June 1,
2016, the Company completed a private placement of 700,000 shares of our Series A Preferred Stock for $10.00 per share and received
gross cash proceeds of $5,250,000, net of $1,750,000 principal amount of our promissory notes exchanged by Michael Taglich and
Robert Taglich, two of our principal stockholders, for shares of Series A Preferred Stock. The Company had issued the promissory
notes to Michael Taglich and Robert Taglich for amounts borrowed from September 2015 through May 2016. The September 2015 loan
bore interest at the rate of 4% per annum and was to be paid on September 7, 2016. The other loans bore interest at the rate of
7% per annum and were to be repaid on June 30, 2016, or, if earlier, upon the sale of the Company’s equity from which it
derived proceeds of $1,800,000 or $2,000,000 depending upon the promissory notes issued.
Preferred Stock
The shares of Series A Preferred
Stock have a stated value of $10.00 per share and are initially convertible into shares of common stock at a price of $4.92 per
share (subject to adjustment upon the occurrence of certain events). When issued, the dividend rate on the Series A Preferred Stock
was 12% per annum, payable quarterly and was to increase to 15% per annum if we were to issue PIK Shares in lieu of payment of
cash dividends payable until June 15, 2018. The dividend rate on the Series A Preferred Stock was originally to increase to 16%
per annum after June 2018, 19% per annum to the extent dividends were paid in PIK Shares. In July 2017, the Company amended the
Certificate of Designation authorizing the issuance of the Series A Preferred Stock to provide for the automatic conversion of
the outstanding shares of Series A Preferred Stock into common stock at a conversion price of $1.50 per share, the offering price
of the shares of common stock in the Public Offering, subject to stockholder approval in accordance with the applicable rules of
the NYSE MKT. In addition, the amendment to the Certificate of Designation eliminated the liquidation preference and quarterly
dividend payable to holders of the Series A Preferred Stock. Under the terms of the amendment, holders of the Series A Preferred
Stock were to share ratably with the holders of the common stock on an as-converted basis (2.0325 shares of common stock for each
share of Series A Preferred Stock held of record) with respect to dividends declared, paid or set aside for payment, assets available
for distribution to stockholders upon the liquidation, dissolution or winding up of the Company’s affairs, in addition to
voting upon the election of directors and other matters submitted to stockholders for approval, except for matters requiring a
class vote of the holders of the Series A Preferred Stock specified in the Certificate of Designation or under applicable law.
The Company has the right to
redeem the Series A Preferred Stock after May 26, 2018 for a redemption price of $10.00, plus accrued and unpaid dividends; however,
the Company may not have sufficient cash available to effect such redemption.
In connection with the placement
we incurred approximately $606,000 of direct offering costs and $57,000 in legal expenses and granted to the placement agents warrants
to purchase 8% of the number of shares of our common stock (113,820 shares) issuable upon conversion of the Series A Preferred
Stock sold in the offering. The warrants are exercisable in whole or in part, at an initial exercise price per share of $6.15,
and are exercisable for cash or on a cashless basis commencing on November 26, 2016 and expiring on May 26, 2021. The exercise
price and number of shares of common stock issuable under the warrants are subject to adjustments for stock dividends, splits,
combinations and similar events.
Of the proceeds generated by
the sale of our shares of Series A Preferred Stock, $1,500,000 was paid to PNC to reduce the amount outstanding under our Loan
Facility.
In August 2016, the Company completed
the private placement of $2,720,000 principal amount of our 12% Subordinated Convertible Notes due December 31, 2017 (the “12%
Notes”), together with warrants to purchase an aggregate of 110,658 shares of common stock, for a total purchase price of
$2,720,000, from which we derived net proceeds of approximately $2,319,800, which was used to pay down the Company’s indebtedness
under the Loan Facility and for working capital. The Company also issued to Michael Taglich a 12% Note in the principal amount
of $1,520,713, together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of promissory
notes in the aggregate principal amount of $1,500,000, together with accrued interest thereon and on notes previously exchanged
for Series A Preferred Stock of $20,713. The Company had issued the promissory notes to Michael Taglich for amounts borrowed in
August 2016. The promissory notes bore interest at the rate of 7% per annum and were to be repaid on December 31, 2016, or, if
earlier, upon the sale of our equity securities from which we derived proceeds of $2,000,000. In addition, the Company issued to
Robert Taglich a 12% Note in the principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in
consideration of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.
The 12% Notes provided for the
automatic conversion of the principal and accrued interest of the 12% Notes into shares of Series A Preferred Stock at a price
of $10.00 per share, the stated value of the Series A Preferred Stock, upon the filing of an amendment to the Company’s Articles
of Incorporation increasing the number of shares of preferred stock we are authorized to issue from 1,000,000 shares to 3,000,000
shares, including 2,000,000 shares of Series A Preferred Stock (the “Charter Amendment”). The Company issued 438,770
shares of Series A Preferred Stock to the holders of the 12% Notes on November 30, 2016, the date the Company’s stockholders
approved the Charter Amendment and the Company filed the certificate of amendment effecting the Charter Amendment with the Office
of the Secretary of State of Nevada. As a result of the automatic conversion of the 12% Notes into shares of Series A Preferred
Stock, no 12% Notes are outstanding.
As compensation for its services
as placement agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400 and issued to Taglich
Brothers, Inc. five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15, subject to certain
anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers
and other business combinations.
On July 12, 2017, the Company
filed an amendment to the certificate of designation authorizing the issuance of its Series A Convertible Preferred Stock (“Series
A Preferred Stock”). The Amendment provides for the automatic conversion of shares of Series A Preferred Stock into shares
of common stock upon the consummation of the Offering at a conversion price of $1.50 per share, subject to receiving stockholder
approval of such conversion in accordance with the applicable rules of the NYSE MKT. In addition, the amendment changes the liquidation
preference and dividend rights of the holders of Series A Preferred Stock to be on a pari passu basis with the Company’s
common stock on an as converted basis based upon a conversion price of $4.92 per share. As a result of the consummation of the
Offering, once stockholder approval has been obtained, the conversion price of the Series A Preferred Stock will automatically
be reduced from $4.92 per share to $1.50 per share, which was the offering price of the shares of common stock in the Offering,
and the conversion rate for each share of Series A Preferred Stock converted will be increased from 2.0325 shares of common stock
to 6.6667 share of common stock. On October 3, 2017, holders of 1,294,441 outstanding shares of the Company’s Series A Preferred
Stock automatically converted into 8,629,606 shares of common stock.
As of December 31, 2017 and 2016,
the Company had outstanding 0 and 1,202,548 shares of Series A Preferred Stock outstanding.
Common Stock
On July 12, 2017, the Company
sold 5,175,000 shares of common stock at a price of $1.50 per for gross proceeds of $7,762,500 in an underwritten public offering
(“Public Offering”) from which it derived net proceeds of $6,819,125, of which approximately $4,000,000 was used to
pay outstanding trade payables, $463,501 was used to redeem an equal principal amount of the $4,158,624 principal amount of the
May 2018 Notes and $2,355,624 was added to the Company’s working capital.
On November 29, 2017, Air Industries
Group (the “Company”) entered into a Placement Agency Agreement with Taglich Brothers, Inc. as placement agent
(the “Placement Agent”), pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best
efforts basis, up to 1,600,000 shares of the Company’s common stock (the “Shares”) to accredited investors (the
“Offering”), together with five-year warrants to purchase 24,000 shares of common stock for each $100,000 of shares
purchased (the Warrants”), in a private placement exempt from the registration requirements of the Securities Act. The Offering
commenced November 29, 2017 and was completed in four closings for gross proceeds of $2,000,000 as follows:
|
Shares
|
Warrants
|
Date
|
Total Investment
|
# of shares
|
Price
|
# of warrants
|
Ex Price
|
11/29/2017
|
$300,000
|
217,390
|
$1.38
|
72,000
|
$1.50
|
12/5/2017
|
400,000
|
320,000
|
$1.25
|
96,000
|
$1.50
|
12/29/2017
|
235,000
|
188,000
|
$1.25
|
56,400
|
$1.50
|
Subtotal- 2017
|
935,000
|
725,390
|
|
224,400
|
|
1/9/2018
|
1,065,000
|
852,000
|
$1.25
|
255,600
|
$1.50
|
Total Offering
|
$2,000,000
|
1,577,390
|
|
480,000
|
|
During the year ended December
31, 2017, the Company issued 246,463 shares of common stock in lieu of cash payment for various services provided to the Company.
Note 13. EMPLOYEE BENEFITS
PLANS
The Company employs both union
and non-union employees and maintains several benefit plans.
Union
Substantially the entire workforce
at AIM is subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the "Union").
The contract expires on December 31, 2018.
Medical benefits for union employees
are provided through a policy with Extensis, the costs of which are substantially borne by the Company. In addition, 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 $136,000 and $263,000 for the years ended December 31, 2017 and 2016,
respectively.
The Company adopted ASU No. 2011-09,
"Compensation - Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in
a Multiemployer Plan" ("ASU 2011-09"). ASU 2011-09 requires additional disclosures about an employer's participation
in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans.
ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. 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 and no further disclosures are required.
Others
All other Company employees,
are covered under a co-employment agreement with Extensis.
The Company has two 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 14. COMMITMENTS AND CONTINGENCIES
Real Estate Leases
The
Company leases its facilities under various operating lease agreements, which contain renewal options and escalation provisions.
Rent expense was $1,305,000 and $2,429,000 for the years ended December 31, 2017 and 2016, respectively. The Company is responsible
for paying all operating costs under the terms of the leases. As of December 31, 2017, the aggregate future minimum lease payments
are as follows:
|
|
Fifth Avenue
|
|
Lamar Street
|
|
Motor Parkway
|
|
Porter Street
|
|
|
For the year ending
|
|
Annual Rent
|
|
Annual Rent
|
|
Annual Rent
|
|
Annual Rent
|
|
Total Rents
|
December 31, 2018
|
|
$
|
769,000
|
|
|
$
|
300,000
|
|
|
$
|
110,000
|
|
|
$
|
115,000
|
|
|
$
|
1,294,000
|
|
December 31, 2019
|
|
|
792,000
|
|
|
|
—
|
|
|
|
113,000
|
|
|
|
48,000
|
|
|
|
953,000
|
|
December 31, 2020
|
|
|
817,000
|
|
|
|
—
|
|
|
|
116,000
|
|
|
|
—
|
|
|
|
933,000
|
|
December 31, 2021
|
|
|
842,000
|
|
|
|
—
|
|
|
|
103,000
|
|
|
|
—
|
|
|
|
945,000
|
|
December 31, 2022
|
|
|
866,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
866,000
|
|
Thereafter
|
|
|
3,501,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,501,000
|
|
Total Rents
|
|
$
|
7,587,000
|
|
|
$
|
300,000
|
|
|
$
|
442,000
|
|
|
$
|
163,000
|
|
|
$
|
8,492,000
|
|
The leases provide for scheduled
increases in base rent. Rent expense is charged to operations using the straight-line method over the term of the lease which results
in rent expense being charged to operations at inception of the lease in excess of required lease payments. This excess is shown
as deferred rent in the accompanying consolidated balance sheets.
On April 11, 2016, the Company
executed a Sale-Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor, Connecticut
(the “Property”) for a purchase price of $1,700,000. The net proceeds from the sale of the property were applied to
the amounts owed to PNC Bank.
Simultaneous with the closing
of the sale of the Property, the Company entered into a 15- year lease (the “Lease”) with the purchaser for the property.
Base annual rent was approximately $155,000 for the first year and increases approximately 3% per year each year thereafter. The
Lease granted the Company an option to renew the Lease for an additional period of five years. Pursuant to the terms of the Lease,
the Company was required to pay all of the costs associated with the operation of the facilities, including, without limitation,
insurance, taxes and maintenance. The Lease also contained representations, warranties, obligations, conditions and indemnification
provisions in favor of the purchaser and grants the purchaser remedied 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.
On March 21, 2018, the Company entered
into an agreement to sell the stock of WMI. Included in this agreement, the operating lease obligation for the Plant Ave. facility
would transfer to the purchaser of WMI upon the sale of WMI. See Note 1 Subsequent Events for additional discussion regarding the
sale of WMI. At December 31, 2017, the Company has excluded this lease commitment from the table above.
Loss Contingencies
During 2016, a number of actions
were commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result of an
injury suffered on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts included
in accounts payable they are not specifically discussed herein.
Westbury Park Associates, LLC
commenced an action on or about January 11, 2017 against Air Industries Group in the NYS Supreme Court, County of Suffolk, seeking
the recovery of approximately $31,000 for past rent arrears, and for an unidentified sum representing all additional rent due under
an alleged commercial lease through the end of its term, plus attorney’s fees. The Company believes that it has a meritorious defense,
and there was no lease on the property and that its subsidiary Compac Development Corp was a hold-over tenant occupying the space
on month-to-month tenancy.
On January 18, 2018, REP B-2,
LLC filed a petition for a warrant of eviction and a money judgement of approximately $56,000 against Air Industries Group arising
from rent arrears on commercial space. On January 18, 2018, 360 Motor Parkway, LLC filed a petition for a warrant of eviction and
a money judgement of approximately $12,000 against Air Industries Group arising from rent arrears on commercial space. Each proceeding
has resulted in a stipulation of settlement providing monthly repayment schedules to bring those rent arrears current, the last
of which are due on May 1, 2018, at which time the proceedings may be dismissed.
An employee of the Company commenced
an action against, among others, Rechler Equity B-2, LLC and Air Industries Group, in the Supreme Court State of New York, Suffolk
County, seeking compensation in an undetermined amount for injuries suffered while leaving the premises occupied by Welding Metallurgy,
Inc. Rechler Equity B-2, LLC, has served a Third Party Complaint in this action against Air Industries Group, Inc. and Welding
Metallurgy, Inc. The action remains in the early pleading stage. The Company believes it is not liable to the employee and any
amount it might have to pay would be covered by insurance.
An employee of the Company commenced
an action against, among others, Sterling Engineering and Air Industries Group, in Connecticut Commission on Human Rights and Opportunities,
seeking lost wages in an undetermined amount for the employee’s termination. The action remains in the early pleading stage.
The Company believes it is not liable to the employee and any amount it might have to pay would be covered by insurance.
Note 15. INCOME TAXES
The provision for (benefit from)
income taxes as of December 31, is set forth below:
|
|
2017
|
|
2016
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal tax refund
|
|
$
|
(178,000
|
)
|
|
$
|
—
|
|
State
|
|
|
8,000
|
|
|
|
38,000
|
|
Prior Year overaccruals
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
(27,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total (Benefit) Expense
|
|
|
(197,000
|
)
|
|
|
38,000
|
|
Deferred Tax Benefit
|
|
|
—
|
|
|
|
(4,962,000
|
)
|
Valuation Allowance
|
|
|
—
|
|
|
|
7,025,000
|
|
Net Provision for (Benefit from) Income Taxes
|
|
$
|
(197,000
|
)
|
|
$
|
2,101,000
|
|
The following is a reconciliation
of our income tax rate computed using the federal statutory rate to our actual income tax rate as of December 31,
|
|
2017
|
|
2016
|
U.S. statutory income tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes
|
|
|
0.09
|
%
|
|
|
1.50
|
%
|
Permanent differences, overaccruals and non-deductible items
|
|
|
-0.22
|
%
|
|
|
0.08
|
%
|
Rate change and provision to return true-up
|
|
|
-22.60
|
%
|
|
|
0.85
|
%
|
Expired stock options
|
|
|
-0.19
|
%
|
|
|
-0.15
|
%
|
Deferred tax valuation allowance
|
|
|
-10.09
|
%
|
|
|
-51.64
|
%
|
Total
|
|
|
0.99
|
%
|
|
|
-15.36
|
%
|
The components of net deferred
tax assets at December 31, 2017 and December 31, 2016 are set forth below:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
7,730,000
|
|
|
$
|
4,754,000
|
|
Bad debts
|
|
|
135,000
|
|
|
|
413,000
|
|
Inventory - 263A adjustment
|
|
|
591,000
|
|
|
|
—
|
|
Accounts payable, accrued expenses and reserves
|
|
|
—
|
|
|
|
930,000
|
|
Total current deferred tax assets before valuation allowance
|
|
|
8,456,000
|
|
|
|
6,097,000
|
|
Valuation allowance
|
|
|
(8,456,000
|
)
|
|
|
(6,097,000
|
)
|
Total current deferred tax assets after valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Section 1231 loss carry forward
|
|
|
—
|
|
|
|
4,000
|
|
Stock based compensation - options and restricted stock
|
|
|
124,000
|
|
|
|
164,000
|
|
Capitalized engineering costs
|
|
|
281,000
|
|
|
|
431,000
|
|
Deferred rent
|
|
|
299,000
|
|
|
|
468,000
|
|
Amortization - NTW Transaction
|
|
|
519,000
|
|
|
|
1,324,000
|
|
Inventory reserves
|
|
|
960,000
|
|
|
|
1,157,000
|
|
Deferred gain on sale of real estate
|
|
|
80,000
|
|
|
|
121,000
|
|
Other
|
|
|
114,000
|
|
|
|
160,000
|
|
Total non-current deferred tax assets before valuation allowance
|
|
|
2,377,000
|
|
|
|
3,829,000
|
|
Valuation allowance
|
|
|
(758,000
|
)
|
|
|
(928,000
|
)
|
Total non-current deferred tax assets after valuation allowance
|
|
|
1,619,000
|
|
|
|
2,901,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,619,000
|
)
|
|
|
(2,595,000
|
)
|
Amortization – NTW Goodwill
|
|
|
—
|
|
|
|
(33,000
|
)
|
Amortization – Welding Transaction
|
|
|
—
|
|
|
|
(273,000
|
)
|
Total non-current deferred tax liabilities
|
|
|
(1,619,000
|
)
|
|
|
(2,901,000
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
During the years ended December
31, 2017 and December 31, 2016, 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, that 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, 2017 and 2016, the Company provided a valuation allowance on its deferred tax assets of $9,214,000 and $7,025,000,
respectively.
At December 31, 2017 and 2016,
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, 2017 and 2016, 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 2014 through 2017 tax years
generally remain subject to examination by federal and state tax authorities.
Note 16. STOCK OPTIONS AND
WARRANTS
Stock-Based Compensation
Stock Options
On March 30, 2015, the Board
of Directors adopted the Company’s 2015 Equity Incentive Plan (“2015 Plan”) which was approved by affirmative
vote of the Company’s stockholders on June 25, 2015. The Plan authorized the grant of rights with respect to up to 350,000
shares.
In June 2016, the Board of Directors
adopted the Company’s 2016 Equity Incentive Plan (“2016 Plan”) which authorized the grant of rights with respect
to up to 350,000 shares. The 2016 Plan was approved by affirmative vote of the Company’s stockholders on November 30, 2016.
In July 2017, the Board of Directors
adopted the Company’s 2017 Equity Incentive Plan (“2017 Plan”) which authorized the grant of rights with respect
to up to 1,200,000 shares. The 2017 Plan was approved by affirmative vote of the Company’s stockholders on October 3, 2017.
During the year ended December
31, 2017, the Company granted options to purchase 695,000 shares of common stock to certain of its employees and directors. The
weighted average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 1.72% to 1.81%; expected volatility factors of 82% to 85%; expected dividend yield of 0%;
and estimated option term of 5 years.
During the year ended December
31, 2016, the Company granted options to purchase 100,000 shares of common stock to certain of its employees. The weighted average
fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions: risk
free interest rate of 0.73% to 2.04%; expected volatility factors of 31% to 59%; expected dividend yield of 0%; and estimated option
term of 5 years.
During the year ended December
31, 2016, the Board of Directors approved the issuance of 18,000 options, to non-employee members of the Company’s Board
of Directors. These options vested quarterly as to 25% of the shares subject to the options, commencing June 2, 2016.
The Company recorded stock based
compensation expense of $323,000 and $167,000 in its consolidated statement of operations for the years ended December
31, 2017 and 2016, respectively, and such amounts were included as a component of general and administrative expense.
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:
|
2017
|
|
|
2016
|
|
Risk-free interest rates
|
1.72 – 1.81
|
%
|
|
0.73% - 2.04
|
%
|
Expected life (in years)
|
4.9
|
|
|
5
|
.0
|
Expected volatility
|
82%-85
|
%
|
|
31%-59
|
%
|
Dividend yield
|
0.0
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
Weighted-average grant date fair value per share
|
$0.90
|
|
|
$1.88
|
|
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, 2017 and 2016, and changes during the two years then ended are presented below.
|
|
Options
|
|
Wtd. Avg. Exercise Price
|
Balance, December 31, 2015
|
|
|
564,342
|
|
|
$
|
7.35
|
|
Granted during the period
|
|
|
128,000
|
|
|
|
5.28
|
|
Exercised during the period
|
|
|
(24,905
|
)
|
|
|
2.95
|
|
Terminated/Expired during the period
|
|
|
(31,095
|
)
|
|
|
8.47
|
|
Balance, December 31, 2016
|
|
|
636,342
|
|
|
|
7.01
|
|
Granted during the period
|
|
|
695,000
|
|
|
|
1.45
|
|
Exercised during the period
|
|
|
(0
|
)
|
|
|
—
|
|
Terminated/Expired during the period
|
|
|
(282,715
|
)
|
|
|
7.66
|
|
Balance, December 31, 2017
|
|
|
1,048,627
|
|
|
$
|
3.20
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
416,125
|
|
|
$
|
5.43
|
|
The following table summarizes
information about stock options at December 31, 2017:
Range
of Exercise
Prices
|
|
Number
Outstanding
|
|
Wtd. Avg.
Life
|
|
Wtd. Avg.
Exercise Price
|
$0.00 - $5.00
|
|
842,978
|
|
5.6 years
|
|
$1.99
|
$5.01 - $20.00
|
|
205,655
|
|
2.7 years
|
|
8.14
|
$0.00 - $20.00
|
|
1,048,633
|
|
5.1 years
|
|
$3.20
|
As of December 31, 2017, there
was $470,233 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining
weighted average vesting period of three years.
The aggregate intrinsic value
at December 31, 2017 was based on the Company's closing stock price of $1.69 was $166,050. 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 price of
the underlying options. The total number of in-the-money options exercisable as of December 31, 2017 was 695,000.
The weighted average fair value
of options granted during the years ended December 31, 2017 and 2016 was $0.90 and $1.88 per share, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2017 and 2016 was $0 and $34,050, respectively. The total fair value
of shares vested during the years ended December 31, 2017 and 2016 was $235,550 and $63,830, respectively.
Warrants
During the year ended December
31, 2017 and 2016, the Company issued 971,611 and 571,871 warrants, respectively, in connection with convertible notes payable
and common stock issuances.
The following tables summarize
the Company's outstanding warrants as of December 31, 2017 and changes during the two years then ended:
|
|
Warrants
|
|
Wtd. Avg.
Exercise Price
|
|
Wtd. Ave. Remaining Contractual Life (years)
|
Balance, December 31, 2015
|
|
|
164,585
|
|
|
$
|
7.85
|
|
|
|
1.15
|
|
Issued
|
|
|
675,691
|
|
|
|
1.07
|
|
|
|
2.36
|
|
Exercised during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Terminated/Expired during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2016
|
|
|
840,276
|
|
|
|
5.13
|
|
|
|
4.01
|
|
Granted during the period
|
|
|
971,611
|
|
|
|
2.61
|
|
|
|
4.42
|
|
Terminated/Expired during the period
|
|
|
(107,785
|
)
|
|
|
6.30
|
|
|
|
—
|
|
Balance, December 31, 2017
|
|
|
1,704,102
|
|
|
$
|
3.62
|
|
|
|
4.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
1,704,102
|
|
|
$
|
3.62
|
|
|
|
4.04
|
|
The fair values of warrants granted
were estimated using the Black-Sholes option-pricing model with the following assumption for the years ended December 31:
|
2017
|
|
2016
|
Risk-free interest rates
|
1.85%-2.20%
|
|
1.40% - 2.04%
|
Expected life (in years)
|
5
|
|
5
|
Expected volatility
|
63%-115%
|
|
33%-59%
|
Dividend yield
|
0
|
|
0
|
Weighted-average grant date fair value per share
|
$1.10-$2.89
|
|
$0.81-$1.40
|
Note 17. SEGMENT REPORTING
In accordance with FASB ASC 280,
“Segment Reporting” ("ASC 280"), the Company discloses financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about which separate financial information is available
and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company follows ASC 280,
which establishes standards for reporting information about operating segments in annual and interim financial statements, and
requires that companies report financial and descriptive information about their reportable segments based on a management approach.
ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
The Company currently divides
its operations into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures and Electronics which
consists of WMI, WPI, MSI, Eur-Pac, ECC, and Compac; and Turbine Engine Components which consists of AMK and Sterling. Along with
our operating subsidiaries, we report the results of our corporate division as an independent segment.
The accounting policies of each
of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance
based on revenue, gross profit contribution and assets employed. Corporate level operating costs are allocated to segments. These
costs include corporate costs such as legal, audit, tax and other professional fees including those related to being a public company.
Given the pending sale of WMI,
in the future, the Company may change its reportable operating segments.
Financial information about the
Company’s reporting segments for the years ended December 30, 2017 and December 31, 2016 are as follows:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
38,489,000
|
|
|
$
|
37,124,000
|
|
Gross Profit
|
|
|
4,906,000
|
|
|
|
4,382,000
|
|
Pre Tax Loss
|
|
|
(2,839,000
|
)
|
|
|
(5,432,000
|
)
|
Assets
|
|
|
43,207,000
|
|
|
|
45,073,000
|
|
|
|
|
|
|
|
|
|
|
AEROSTRUCTURES & ELECTRONICS
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
4,574,000
|
|
|
|
3,224,000
|
|
Gross Profit
|
|
|
507,000
|
|
|
|
38,000
|
|
Pre Tax Loss
|
|
|
(4,233,000
|
)
|
|
|
(3,240,000
|
)
|
Assets
|
|
|
1,021,000
|
|
|
|
4,596,000
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
6,806,000
|
|
|
|
10,973,000
|
|
Gross Loss
|
|
|
(546,000
|
)
|
|
|
(151,000
|
)
|
Pre Tax Loss
|
|
|
(7,599,000
|
)
|
|
|
(4,084,000
|
)
|
Assets
|
|
|
6,157,000
|
|
|
|
17,235,000
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
—
|
|
|
|
—
|
|
Gross Profit
|
|
|
—
|
|
|
|
—
|
|
Pre Tax Loss
|
|
|
(1,399,000
|
)
|
|
|
(10,000
|
)
|
Assets
|
|
|
288,000
|
|
|
|
649,000
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
49,869,000
|
|
|
|
51,321,000
|
|
Gross Profit
|
|
|
4,867,000
|
|
|
|
4,269,000
|
|
Pre Tax Loss
|
|
|
(16,070,000
|
)
|
|
|
(12,766,000
|
)
|
(Benefit from) provision for Income Taxes
|
|
|
(197,000
|
)
|
|
|
2,101,000
|
|
Loss from Discontinued Operations
|
|
|
(6,678,000
|
)
|
|
|
(756,000
|
)
|
Assets Held for Sale
|
|
|
10,082,000
|
|
|
|
15,247,000
|
|
Net (Loss) Income
|
|
|
(22,551,000
|
)
|
|
|
(15,623,000
|
)
|
Assets
|
|
$
|
60,755,000
|
|
|
$
|
82,800,000
|
|
F-37