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RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 2021

Accounting Changes and Error Corrections [Abstract]

RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

14.	RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

As previously reported, on June 4, 2021, the Audit and Finance Committee determined, based on the recommendation of management and in consultation with CohnReznick that the Company’s financial statements which were included in its Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC should no longer be relied upon due to the Inventory Costing Errors and that management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing the Company’s financial statements for such periods should no longer be relied upon. The Company’s management identified the Inventory Costing Errors during its inventory testing procedures for the preparation of the Company’s financial statements for the quarterly period ended March 31, 2021. At the time of the June 2021 disclosure, the Company estimated and disclosed that the Inventory Costing Errors were expected to increase 2020 net loss reported on the Annual Report on Form 10-K for the year ended December 31, 2020 by $1.9 million to $2.3 million. The Company has determined that the Inventory Costing Errors increased 2020 net loss by $2,010,084.

The correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain inventory items required additional reserves. The Company re-evaluated the sufficiency of its provisions for loss contracts and inventory reserves that it had previously recorded and concluded that increases to these reserves were required. It was further determined by management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.

On November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly, management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Original Forms 10-Q by filing a Comprehensive Form 10-K/A.

The Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined that net loss for the years ended December 31, 2020 and 2019 was $324,231 and $2,189,728, respectively, greater than the net loss reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Considering both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended December 31, 2020 and 2019 was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and net loss for the quarters ended March 31, 2020 and June 30, 2020 is $544,836 and $763,730, respectively, greater than the net loss reported in the respective Quarterly Reports on Form 10-Q for such periods and the net income for the quarter ended September 30, 2020 was $24,556 more than the net income reported in the Quarterly Report for such period.

The Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods. The Inventory Costing Errors affected the income reported with respect to the Company’s Non-POC Contracts. The Inventory Costing Errors did not affect income reported with respect to the Company’s POC Contracts. The Loss Contract Reserve and the Additional Inventory Reserves also only affected the income reported with respect to the Company’s Non-POC Contracts, and did not affect the income reported with respect to the Company’s POC Contracts. The Inventory Costing Errors and the Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.

Management has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each of the applicable periods. As a result of the Inventory Costing Errors and the Insufficient Reserves, management has determined that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019. See Part II Item 9A – Controls and Procedures within the Comprehensive Form 10-K/A for a description of these matters.

As a result of the restatement included caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net loss for the years ended December 31, 2020 and December 31, 2019 which was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Original Form 10-K and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, net loss for the quarters ended March 31, 2020 and June 30, 2020 which was $544,836 and $763,730, respectively, greater than the net loss reported in the respective Original Forms 10-Q, and net income for the quarter ended September 30, 2020 which is $24,556 greater than the net income reported in the Original Form 10-Q. The Inventory Costing Errors and the Insufficient Reserves did not affect reported revenue or cash flows for the years ended December 31, 2020 or December 31, 2019, or for the quarters ended March 31, June 30 and September 30, 2020.

2020 and 2019 Restatement

The following is a discussion of the restatement adjustments that were made to the Company’s previously issued December 31, 2020 and December 31, 2019 consolidated financial statements due to the Inventory Costing Errors, Loss Contract Reserve and Additional Inventory Reserves.

(a) Inventory Costing Errors

The Company determined that the Inventory Costing Errors resulted in incorrectly reported inventory values and reported income for the annual periods ended December 31, 2020 and December 31, 2019, and the quarterly periods ended March 31, 2020, June 30, 2020 and September 30, 2020. The Inventory Costing Errors were comprised of the following:

1) Labor costs for work in process were overstated in the detailed inventory records due to an automated reversing entry not processing correctly;

2) A customized IT program to calculate weighted average cost was not tested thoroughly enough, which allowed errors in average cost calculations to occur in certain situations;

3) Units of measure were not consistent between quantities ordered and quantities received for certain classes of purchased parts, which resulted in overstatements of inventory values due to units of measure not being consistent with unit prices on purchase orders to suppliers;

4) The cost of goods received which had not yet processed through the Company’s quality inspection process at the time of the period-end accounting closes were not properly accrued to the period financial statements;

5) The Company did not have a process to address over-absorbed or under-absorbed overhead costs at the end of each accounting period.

(b) Loss Contract Reserve

After correcting its financial statements for the Inventory Costing Errors, the Company determined that is was a party to some contracts to deliver product upon which the Company would lose money, and thus the Company’s Loss Contract Reserve was increased accordingly for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020 and September 30, 2020.

After correcting its financial statements for the Inventory Costing Errors, the Company determined that its inventory required additional reserves to reflect current market value and demand, and thus the Company’s Inventory Reserves were increased accordingly for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020 and September 30, 2020.

(d) Income taxes

There were no material tax adjustments to the Company’s provision for/(benefit from) income taxes or net deferred tax assets (liabilities) related to the impact of the 2020 and 2019 restatement.

The following tables present the impact of the restatement on the Company’s previously reported financial statements as of December 31, 2020 and September 30, 2020:

Impact on Consolidated Balance Sheets

The effect of the Restatement described above on the accompanying consolidated balance sheet as of December 31, 2020 is as follows:

Consolidated Balance Sheet as at December 31, 2020

As Previously
Reported Inventory Costing
Errors Loss Contract
Reserve Additional
Inventory Reserve As Restated

ASSETS

Current Assets:

Cash $ 6,033,537 $ — $ — $ — $ 6,033,537

Accounts receivable, net 4,962,906 4,962,906

Contract assets 19,729,638 19,729,638

Inventory 9,567,921 (1,875,950 ) (1,305,683 ) 6,386,288

Refundable income taxes 40,000 40,000

Prepaid expenses and other current assets 534,857 534,857

Total Current Assets 40,868,859 (1,875,950 ) — (1,305,683 ) 37,687,226

Operating lease right-of-use assets 4,075,048 4,075,048

Property and equipment, net 2,521,742 2,521,742

Intangibles, net 250,000 250,000

Goodwill 1,784,254 1,784,254

Other assets 191,179 191,179

Total Assets $ 49,691,082 $ (1,875,950 ) $ — $ (1,305,683 ) $ 46,509,449

Liabilities and Shareholders’ Deficit

Current Liabilities:

Accounts payable $ 12,092,684 $ — $ — $ — $ 12,092,684

Accrued expenses 5,693,518 244,403 5,937,921

Contract liabilities 1,650,549 1,650,549

Loss reserve 800,971 1,208,276 2,009,247

Current portion of long-term debt 6,501,666 6,501,666

Operating lease liabilities 1,819,237 1,819,237

Income taxes payable 862 86 948

Total Current Liabilities 28,559,487 244,489 1,208,276 — 30,012,252

Line of credit 20,738,685 20,738,685

Long-term operating lease liabilities 2,537,149 2,537,149

Long-term debt, net of current portion 6,205,095 6,205,095

Total Liabilities 58,040,416 244,489 1,208,276 — 59,493,181

Shareholders’ Deficit:

Common stock 11,951 11,951

Additional paid-in capital 72,005,841 72,005,841

Accumulated deficit (80,367,126 ) (2,120,439 ) (1,208,276 ) (1,305,683 ) (85,001,524 )

Total Shareholders’ Deficit (8,349,334 ) (2,120,439 ) (1,208,276 ) (1,305,683 ) (12,983,732 )

Total Liabilities and Shareholders’ Deficit $ 49,691,082 $ (1,875,950 ) $ — $ (1,305,683 ) $ 46,509,449

The effect of the Restatement described above on the accompanying consolidated statement of operations for the three and nine months ended September 30, 2020 is as follows:

Consolidated Statement of Operation For the three months ended September 30, 2020 (Unaudited)

As Previously
Reported Inventory
Costing Errors Loss Contract
Reserve Inventory Reserve As Restated

Revenue $ 25,576,718 $ — $ — $ — $ 25,576,718

Cost of sales 21,394,243 112,446 (206,159 ) 69,157 21,369,687

Gross profit 4,182,475 (112,446 ) 206,159 (69,157 ) 4,207,031

Selling, general and administrative expenses 3,050,644 3,050,644

Profit from operations 1,131,831 (112,446 ) 206,159 (69,157 ) 1,156,387

Other expense:

Interest expense (309,008 ) (309,008 )

Income before provision for income taxes 822,823 (112,446 ) 206,159 (69,157 ) 847,379

Provision for income taxes 7,614 — — — 7,614

Net Income $ 815,209 $ (112,446 ) $ 206,159 $ (69,157 ) $ 839,765

Income per common share - basic $ 0.07 $ (0.01 ) $ 0.02 $ (0.01 ) $ 0.07

Income per common share - diluted $ 0.07 $ (0.01 ) $ 0.02 $ (0.01 ) $ 0.07

Basic 11,894,469 — — — 11,894,469

Diluted 11,894,469 — — — 11,917,149

Consolidated Statement of Operation For the nine months ended September 30, 2020 (Unaudited)

As Previously Reported Inventory
Costing Errors Loss Contract
Reserve Inventory Reserve As Restated

Revenue $ 62,175,872 $ — $ — $ — $ 62,175,872

Cost of sales 54,715,508 938,689 (6,753 ) 352,074 55,999,518

Gross profit 7,460,364 (938,689 ) 6,753 (352,074 ) 6,176,354

Selling, general and administrative expenses 8,958,986 8,958,986

Loss from operations (1,498,622 ) (938,689 ) 6,753 (352,074 ) (2,782,632 )

Other expense:

Interest expense (1,085,805 ) (1,085,805 )

Loss before provision for income taxes (2,584,427 ) (938,689 ) 6,753 (352,074 ) (3,868,437 )

Provision for income taxes 9,714 — — — 9,714

Net loss $ (2,594,141 ) $ (938,689 ) $ 6,753 $ (352,074 ) $ (3,878,151 )

Loss per common share - basic $ (0.22 ) $ (0.08 ) $ 0.00 $ (0.03 ) $ (0.33 )

Loss per common share - diluted $ (0.22 ) $ (0.08 ) $ 0.00 $ (0.03 ) (0.33 )

Basic 11,862,506 — — — 11,862,506

Diluted 11,862,506 — — — 11,862,506

Cumulative Effect of Prior Period Adjustments

The following table presents the impact of the Restatement on the Company’s shareholders’ deficit as of December 31, 2019 (as restated), March 31, 2020 (as restated), June 30, 2020 (as restated), September 30, 2020 (as restated) and December 31, 2020 (as restated):

Common Stock Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Deficit

Balance, December 31, 2019
(As Restated) 11,818,830 $ 11,819 $ 71,294,629 $ (81,346,771 ) $ (10,040,323 )

Net Loss (as previously reported) $ (2,812,519 ) $ (2,812,519 )

Inventory Costing Errors — — — (315,999 ) (315,999 )

Loss Contract Reserve — — — (9,371 ) (9,371 )

Inventory Reserve — — — (219,466 ) (219,466 )

Cumulative restatement adjustments — — — (544,836 ) (544,836 )

Net Loss (as restated) (3,357,355 ) (3,357,355 )

Stock-based compensation 18,388 18 347,167 — 347,185

Balance, March 31, 2020
(As Restated) 11,837,218 $ 11,837 $ 71,641,796 $ (84,704,126 ) $ (13,050,493 )

Net Loss (as previously reported) $ (596,831 ) $ (596,831 )

Inventory Costing Errors — — — (510,244 ) (510,244 )

Loss Contract Reserve — — — (190,035 ) (190,035 )

Inventory Reserve — — — (63,451 ) (63,451 )

Cumulative restatement adjustments — — — (763,730 ) (763,730 )

Net Loss (as restated) (1,360,561 ) (1,360,561 )

Stock-based compensation 18,388 19 189,184 — 189,203

Balance, June 30, 2020
(As Restated) 11,855,606 $ 11,856 $ 71,830,980 $ (86,064,687 ) $ (14,221,851 )

Net Income (as previously reported) $ 815,209 $ 815,209

Inventory Costing Errors — — — (112,446 ) (112,446 )

Loss Contract Reserve — — — 206,159 206,159

Inventory Reserve — — — (69,157 ) (69,157 )

Cumulative restatement adjustments — — — 24,556 24,556

Net Income (as restated) 839,765 839,765

Stock-based compensation 70,571 70 141,031 — 141,101

Balance, September 30, 2020
(As Restated) 11,926,177 $ 11,926 $ 71,972,011 $ (85,224,922 ) $ (13,240,985 )

Net Income $ 1,273,703 $ 1,273,703

Inventory Costing Errors — — — (1,071,395 ) (1,071,395 )

Loss Contract Reserve — — — 99,921 99,921

Inventory Reserve — — — (78,831 ) (78,831 )

Cumulative restatement adjustments — — — (1,050,305 ) (1,050,305 )

Net Income (as restated) 223,398 223,398

Stock-based compensation 25,094 25 33,830 — 33,855

Balance, December 31, 2020
(As Restated) 11,951,271 $ 11,951 $ 72,005,841 $ (85,001,524 ) $ (12,983,732 )

Impact on Consolidated Statement of Cash Flows

The effect of the Restatement described above on the accompanying consolidated statement of cash flows for the nine months ended September 30, 2020 is as follows:

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (Unaudited)

As Previously Reported Inventory Costing Errors Loss Contract Reserve Inventory Reserve As Restated

Cash flows from operating activities:

Net Loss $ (2,594,141 ) $ (938,689 ) $ 6,753 $ (352,074 ) $ (3,878,151 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 769,690 769,690

Amortization of debt issuance cost 80,764 80,764

Cash expended in excess of rent expense (115,932 ) (115,932 )

Stock-based compensation expense 677,489 677,489

Bad debt expense (47,410 ) — — — (47,410 )

Changes in operating assets and liabilities:

Increase in accounts receivable (232,310 ) (232,310 )

Increase in contract assets (3,128,460 ) (3,128,460 )

Increase in inventory (2,850,707 ) 852,222 352,074 (1,646,411 )

Decrease in prepaid expenses and other current assets 121,075 121,075

Decrease in refundable income taxes 439,445 — — — 439,445

Increase in accounts payable and accrued expenses 5,770,902 86,467 5,857,369

Decrease in contract liabilities (1,092,266 ) (1,092,266 )

Decrease in loss reserve (1,081,516 ) (6,753 ) (1,088,269 )

Net cash used in operating activities (3,283,377 ) — — — (3,283,377 )

Cash flows from investing activities:

Purchase of property and equipment (11,888 ) — — — (11,888 )

Net cash used in investing activities (11,888 ) — — — (11,888 )

Cash flows from financing activities:

Proceeds from PPP loan 4,795,000 4,795,000

Payments on long-term debt (1,855,209 ) (1,855,209 )

Debt issuance costs (107,540 ) — — — (107,540 )

Net cash provided by financing activities 2,832,251 — — — 2,832,251

Net decrease in cash and restricted cash (463,014 ) (463,014 )

Cash and restricted cash at beginning of year 5,432,793 — — — 5,432,793

Cash and restricted cash at end of year $ 4,969,779 $ — $ — $ — $ 4,969,779

Supplemental schedule of cash flow information:

Cash paid during the year for interest $ 1,156,126 $ — $ — $ — $ 1,156,126

Cash (received) from income taxes $ (449,749 ) $ — $ — $ — $ (449,749 )