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Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2022
Disclosure of Summary of Significant Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Inventory Valuation For annual periods, the Company values inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods. For interim periods, substantially all of the inventory value has been estimated using a gross profit percentage based on the annual gross profit percentage of the immediately preceding year as applied to the net sales of the current period. Adjustments to reconcile the annual physical inventory to the Company’s books are recorded in the fourth quarter. Inventories consist of the following at:
|  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
Raw Materials |  | $ | 4,163,000 |  |  | $ | 3,410,000 |
Work In Progress |  |  | 22,329,000 |  |  |  | 20,926,000 |
Finished Goods |  |  | 9,677,000 |  |  |  | 8,350,000 |
Reserve |  |  | (2,761,000 | ) |  |  | (3,154,000 | )
Total Inventory |  | $ | 33,408,000 |  |  | $ | 29,532,000 |
Credit and Concentration Risks There were two customers that represented 63.9% and 67.7% of total net sales for the three months ended September 30, 2022 and 2021, respectively. This is set forth in the table below.
Customer |  | Percentage of Sales |
|  | September 30, 2022 |  |  | September 30, 2021 |
1 |  |  | 40.7 | % |  |  | 41.6 | %
2 |  |  | 23.2 | % |  |  | 26.1 | %
There were three customers that represented 68.9% and 75.5% of total sales for the nine months ended September 30, 2022 and 2021, respectively. This is set forth in the table below.
Customer |  | Percentage of Sales |
|  | September 30, 2022 |  |  | September 30, 2021 |
1 |  |  | 32.5 | % |  |  | 36.8 | %
2 |  |  | 19.5 | % |  |  | 26.2 | %
3 |  |  | 16.9 | % |  |  | 12.5 | %
There were two customers that represented 70.2% and three customers that represented 74.7% of gross accounts receivable at September 30, 2022 and December 31, 2021, respectively. This is set forth in the table below.
Customer |  | Percentage of Receivables |
|  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
1 |  |  | 58.1 | % |  |  | 50.3 | %
2 |  |  | 12.1 | % |  |  | 12.7 | %
3 |  |  | * |  |  |  | 11.7 | %
| ● | Customer was less than 10% of accounts receivable at September 30, 2022.
Disaggregation of Revenue The following table summarizes revenue from contracts with customers for the three and nine month periods ending September 30, 2022 and 2021:
|  | Three Months Ended |  |  | Nine Months Ended |
Product |  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Military |  | $ | 11,266,000 |  |  | $ | 12,380,000 |  |  | $ | 33,399,000 |  |  | $ | 38,750,000 |
Commercial |  |  | 2,012,000 |  |  |  | 1,973,000 |  |  |  | 5,949,000 |  |  |  | 4,769,000 |
Total |  | $ | 13,278,000 |  |  | $ | 14,353,000 |  |  | $ | 39,348,000 |  |  | $ | 43,519,000 |
Concentration of Credit Risk During the period, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC insurance limit. The Company has not experienced any losses on these accounts. Major Suppliers The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed. Customer Deposits The Company receives advance payments on certain contracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves the product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s invoice. At September 30, 2022 and December 31, 2021, customer deposits were $1,291,000 and $1,470,000 respectively. The Company recognized revenue of $73,000 and $126,000 during the three and nine months ended September 30, 2022, respectively, that was included in the customer deposits balance as of December 31, 2021. The Company recognized revenue of $132,000 and $507,000 during the three and nine months ended September 30, 2021, respectively, that was included in the customer deposits balance as of December 31, 2020. Backlog Backlog represents executed non-cancellable contracts that represent firm orders that are deliverable over the next 18- month period. As of September 30, 2022, backlog relating to remaining performance obligations in contracts was approximately $65,000,000. We expect to recognize revenue amounts in future periods related to these remaining performance obligations as follows: approximately $13,000,000 to $15,000,000 of our backlog during the remainder of 2022, approximately $25,000,000 to $30,000,000 from January 1, 2023 - June 30, 2023, and approximately $11,000,000 to $15,000,000 from July 1, 2023 through December 31, 2023. This expectation assumes that raw material suppliers, and that outsourced processing is completed and delivered on-time and that its customers will accept delivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales pursuant to contracts that are not currently in backlog. Leases The Company accounts for leases under ASC 842, “Leases.” All leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. See Note 4. Earnings (Loss) per share Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. For purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method. The following is the calculation of net (loss) income applicable to common stockholders utilized to calculate the EPS:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
(Loss) Income - Basic |  | $ | (142,000 | ) |  | $ | (66,000 | ) |  | $ | (177,000 | ) |  | $ | 21,000 |
Add: Convertible Note Interest for Potential Note Conversion |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 232,000 |
(Loss) Income used to calculate diluted earnings per share |  | $ | (142,000 | ) |  | $ | (66,000 | ) |  | $ | (177,000 | ) |  | $ | 253,000 |
The following is a reconciliation of the denominators of basic and diluted earnings per share computations:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Weighted average shares outstanding used to compute basic earnings per share |  |  | 3,232,467 |  |  |  | 3,207,405 |  |  |  | 3,224,912 |  |  |  | 3,202,287 |
Effect of dilutive stock options and warrants |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 266,300 |
Effect of dilutive convertible notes payable |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 405,789 |
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share |  |  | 3,232,467 |  |  |  | 3,207,405 |  |  |  | 3,224,912 |  |  |  | 3,874,376 |
The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Stock Options |  |  | 305,350 |  |  |  | 118,000 |  |  |  | 305,350 |  |  |  | 16,000 |
Warrants |  |  | 76,000 |  |  |  | 183,000 |  |  |  | 76,000 |  |  |  | 142,000 |
|  |  | 381,350 |  |  |  | 301,000 |  |  |  | 381,350 |  |  |  | 158,000 |
The following securities have been excluded from the calculation even though the exercise price was less than the average market price of the common shares during the periods set forth below because the effect of including these potential shares was anti-dilutive due to the net loss incurred during these periods:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Stock Options |  |  | - |  |  |  | 133,000 |  |  |  | - |  |  |  | - |
Convertible notes payable |  |  | 405,810 |  |  |  | 509,000 |  |  |  | 405,810 |  |  |  | - |
|  |  | 405,810 |  |  |  | 642,000 |  |  |  | 405,810 |  |  |  | - |
Stock-Based Compensation The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation expense for employees amounted to $55,000 and $147,000 for the three months ended September 30, 2022 and 2021, respectively, and $262,000 and $361,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense for directors amounted to $54,000 and $52,000 for the three months ended September 30, 2022 and 2021, respectively and $162,000 and $156,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense for employees and directors was included in operating expenses on the accompanying Condensed Consolidated Statements of Operations. Goodwill Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at both September 30, 2022 and December 31, 2021 relates to the acquisition of NTW. Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount. Recently Issued Accounting Pronouncements Effective January 1, 2022, the Company adopted ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated with applying accounting principles generally accepted in the United States of America for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users. The adoption of ASU 2020-06 did not have a material effect on the Company’s financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements. The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.

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