SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

New Accounting Standards Adopted

February 2016,

the FASB issued ASU

2016

“Leases (Topic

842

),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does

not

require transition accounting for leases that expire prior to the date of initial application. The new standard was effective for fiscal years and interim periods within those years, beginning on or after

December 15, 2018.

The adoption of this new standard on

January 1, 2019

resulted in assets of

$9.7

million recorded as Operating Right of Use Assets, net, and additional lease liabilities of

$9.8

million. The Company also recorded an adjustment to retained earnings resulting from the cumulative effect of the change in accounting of (

$0.1

) million. See Note

for further information.

New Accounting Standards

Not

Yet Adopted

January 2017,

FASB issued ASU

2017

04,

"Intangibles-Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment." ASU

2017

eliminates the

second

step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value,

not

to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for fiscal years beginning after

December 15, 2019.

Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU

2017

on our consolidated financial statements. We do

not

expect the adoption of this guidance to have a material impact on our consolidated financial statements.

June 2016,

the FASB issued ASU

2016

13,

Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard will be effective for fiscal years beginning after

December 15, 2019.

The Company is currently in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements. We do

not

expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Concentration of Credit Risk

The Company sells its products and services primarily to customers in the United States of America and to a lesser extent overseas. All sales are made in U.S. dollars. The Company extends normal credit terms to its customers. For the year ended

December 31, 2019,

sales to

three

customers in the Commercial Air Handling segment were

12%

of consolidated sales of the Company, while

one

customer in the Aerospace Components segment accounted for

29%

of consolidated sales. For the year ended

December 31, 2018,

there were sales to

one

customer in the Aerospace segment that were greater than

18%

of the consolidated sales of the company.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that

may

affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Accounting for "Financial Instruments" requires the Company to disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable, and convertible notes payable. The carrying amounts reported in the consolidated balance sheet for assets and liabilities qualifying as financial instruments is a reasonable estimate of fair value.

Revenue Recognition

The Company recognizes revenue under ASC

606,

“Revenue from Contracts with Customers”. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company applies the following standards and recognizes revenue when (

) it has a firm contract and the parties are committed to perform their respective obligations, (

) the product has been shipped to and accepted by the customer or the service has been provided, (

) the sales price is fixed or determinable and (

) amounts are reasonably assured of collection, including the consideration of the customer’s ability and intention to pay when the amount is due. The Company primarily receives fixed consideration for sales of product. The Company does

not

have any significant financing components as payment is received at or shortly after the point of sale. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year. Shipping and handling amounts paid by customers are included in revenue. Sales tax and other similar taxes are excluded from revenue.

Construction Contracts

The Company recognizes revenue on construction contracts over time; as performance obligations are satisfied, due to the continuous transfer of control to the customer. The customer typically controls the work in process, as evidenced by the contract. The Company’s construction contracts are generally accounted for as a single performance obligation, since the Company is providing a significant service of integrating components into a single project. The Company recognizes revenue using a cost-based input method, by which actual costs incurred relative to total estimated contract costs determine, as a percentage, progress toward contract completion. This percentage is applied to the transaction price to determine the amount of revenue to recognize. The Company believes the cost-based input method is the best depiction of performance, because it directly measures the value of the services transferred to the customer. Revenues on uninstalled materials are recognized when control is transferred to the customer, which does

not

necessarily equate to when the cost is incurred.

The payment terms of the Company’s construction contracts from time to time require the customer to make advance payments as well as interim payments as work progresses. The advance payment generally is

not

considered a significant financing component as the Company expect to recognize those amounts in revenue within a year of receipt as work progresses on the related performance obligation.

Contract Estimates

Due to the nature of the Company’s performance obligations, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Since a significant change in

one

or more of these variables could affect the profitability of contracts, the Company reviews and updates contract-related estimates regularly through a review process in which the Company reviews the progress and execution of performance obligations and the estimated cost at completion.

The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, a provision for the entire loss is recognized in the period it is identified.

Contract Modifications

Contract modifications are routine in the performance of the Company’s contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are

not

distinct, and, therefore, are accounted for as part of the existing contract.

Variable Consideration

The nature of the Company’s contracts can give rise to several types of variable consideration, including claims, unpriced change orders, and liquidated damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will

not

occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount.

Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessment of legal enforceability, past performance, and all information (historical, current, and forecasted) that is reasonably available to the Company.

Cost and Expense Recognition

Contract costs include all direct labor, materials, subcontractor, and equipment costs, and those indirect costs related to contract performance, such as indirect labor, tools and supplies. For construction contracts, costs are generally recognized as incurred.

Unearned Revenue

Unearned revenue consists of customer deposits and contract liabilities related to the Commercial Air Handling segment.

Disaggregation of Revenue

Revenue earned over time was

$51.6

million and

$41.8

million for the years ended

December 31, 2019

and

2018.

Revenue earned at a point in time was

$38.1

million and

$24.6

million for the years ended

December 31, 2019

and

2018.

Deferred Commissions

Commissions are earned based on the status of the contract. Commissions are paid upon receipt of payment for units shipped.

Product Warranties

The Company provides a warranty for its custom air handling business covering parts for

months from startup or

months from shipment, whichever comes first. The warranty reserve is maintained at a level which, in management’s judgment, is adequate to absorb potential warranties incurred. The amount of the reserve is based on management’s knowledge of the contracts and historical trends. Because of the uncertainties involved in the contracts, it is reasonably possible that management’s estimates

may

change in the near term. However, the amount of change that is reasonably possible cannot be precisely estimated at this time.

Product Development Costs

Product development costs, which include engineering production support for the test and measurement business segment, are expensed as incurred.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of

three

months or less to be cash equivalents. From time to time the Company maintains cash balances in excess of the FDIC limits.

Accounts Receivable

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Inventory

Inventory is valued at the lower of cost (

first

-in,

first

-out) or net realizable value. The Company establishes reserves for excess and obsolete inventory based upon historical inventory usage trends and other information.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Maintenance and repair costs are expensed as incurred. Additions and betterments are capitalized. The depreciation policy of the Company is generally as follows:

Class	Method	Estimated Useful Lives (years)

Buildings & Improvements	Straight-line	10	to	40
Machinery and equipment	Straight-line	3	to	20
Tools and dies	Straight-line		3

Valuation of Long-Lived Assets

Long-lived assets such as property, plant and equipment and software are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount

may

not

be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset.

Shipping and Handling Costs

Shipping and handling costs are classified as cost of product sold.

Income Taxes

The provision for income taxes is computed on domestic financial statement income. Where transactions are included in the determination of taxable income in a different year, deferred income tax accounting is used.

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus any change in deferred taxes during the year. Deferred taxes result from differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than

not

that a tax benefit will

not

be realized.

Income per Common Share

Income per common share information is computed on the weighted average number of shares outstanding during each period.