RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

3 Months Ended

Mar. 31, 2021

Commitments and Contingencies Disclosure [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 is $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 is $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 is $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 affect the income reported with respect to the Company’s Non-POC Contracts, and do 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 is $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 is $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.

(c) Additional Inventory Reserves

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 March 31, 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 months ended March 31, 2020 is as follows:

	Consolidated Statement of Operation For the three months ended March 31, 2020 (Unaudited)
	As Previously Reported			Inventory Costing Errors			Loss Contract Reserve			Inventory Reserve			As Restated
Revenue	$	16,858,386		$	—		$	—		$	—		$	16,858,386
Cost of sales		16,160,567			315,999			9,371			219,466			16,705,403
Gross profit		697,819			(315,999	)		(9,371	)		(219,466	)		152,983
Selling, general and administrative expenses		3,093,090												3,093,090
Loss from operations		(2,395,271	)		(315,999	)		(9,371	)		(219,466	)		(2,940,107	)
Other expense:
Interest expense		(416,670	)											(416,670	)
Loss before provision for income taxes		(2,811,941	)		(315,999	)		(9,371	)		(219,466	)		(3,356,777	)
Provision for income taxes		578			—			—			—			578
Net loss	$	(2,812,519	)	$	(315,999	)	$	(9,371	)	$	(219,466	)	$	(3,357,355	)
Loss per common share - basic	$	(0.24	)	$	(0.03	)	$	(0.00	)	$	(0.02	)	$	(0.29	)
Loss per common share - diluted	$	(0.24	)	$	(0.03	)	$	(0.00	)	$	(0.02	)	$	(0.29	)
Basic		11,837,014			—			—			—			11,837,014
Diluted		11,837,014			—			—			—			11,837,014

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 three months ended March 31, 2020 is as follows:

	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 (Unaudited)
	As Previously Reported			Inventory Costing Errors			Loss Contract Reserve			Inventory Reserve			As Restated
Cash flows from operating activities:
Net Loss	$	(2,812,519	)	$	(315,999	)	$	(9,371	)	$	(219,466	)	$	(3,357,355	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		256,284												256,284
Amortization of debt issuance cost		35,437												35,437
Cash expended in excess of rent expense		(38,644	)											(38,644	)
Stock-based compensation expense		347,185												347,185
Bad debt expense		(51,369	)											(51,369	)
Changes in operating assets and liabilities:
Decrease in accounts receivable		973,002												973,002
Increase in contract assets		(533,743	)											(533,743	)
Increase in inventory		(1,048,752	)		242,857			—			219,466			(586,429	)
Decrease in prepaid expenses and other current assets		26,549												26,549
Decrease in refundable income taxes		1,506												1,506
Increase in accounts payable and accrued expenses		735,282			73,142									808,424
Increase in contract liabilities		1,187,667												1,187,667
Decrease in loss reserve		(505,407	)		—			9,371			—			(496,036	)
Net cash used in operating activities		(1,427,522	)		—			—			—			(1,427,522	)
Cash flows from investing activities:
Purchase of property and equipment		(3,200	)		—			—			—			(3,200	)
Net cash used in investing activities		(3,200	)		—			—			—			(3,200	)
Cash flows from financing activities:
Payments on long-term debt		(622,690	)		—			—			—			(622,690	)
Net cash used in financing activities		(622,690	)		—			—			—			(622,690	)
Net decrease in cash and restricted cash		(2,053,412	)		—			—			—			(2,053,412	)
Cash and restricted cash at beginning of year		5,432,793			—			—			—			5,432,793
Cash and restricted cash at end of period	$	3,379,381		$	—		$	—		$	—		$	3,379,381
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	450,191		$	—		$	—		$	—		$	450,191
Cash (received) from income taxes	$	(928	)	$	—		$	—		$	—		$	(928	)