UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


x☒  Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: December 31, 2015


2018

o☐ Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to_______ 


Commission File No. 001-35927


AIR INDUSTRIES GROUP

(Name of small business issuer in its charter)


Nevada80-0948413
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)

360 Motor Parkway, Suite 100, Hauppauge,1460 Fifth Avenue, Bay Shore, New York 1178811706
(Address of Principal Executive Offices)Offices
 
(631) 881-4920968-5000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each ClassName of Exchange on which Registered
NYSE AMERICAN
Title of Each Class
Common Stock, par value $0.001NYSE MKT

Securities registered pursuant to Section 12(g) of the Act:None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o☐  No x


☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o☐   No  x


☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o


☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒ No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o


☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):   


Large Accelerated Filer  o☐ Non-Accelerated Filer  o☐   Accelerated Filer  o☐  Smaller Reporting Company x


☒ Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐   No  x


☒

As of June 30, 2015,2018, the aggregate market value of our common stock held by non-affiliates was $68,233,558,$30,045,613, based on 6,722,51816,692,007 shares of outstanding common stock held by non-affiliates, and a price of $10.15$1.80 per share, which was the last reported sale price of our common stock on the NYSE MKTAmerican on that date.


There were a total of 7,560,04028,655,572 shares of the registrant’s common stock outstanding as of March 1, 2016.

27, 2019.

DOCUMENTS INCORPORATED BY REFERENCE


REFERENCE:

Portions of the registrant’s definitive Proxy Statement relating to its 20162019 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.


AIR INDUSTRIES GROUP

FORM 10-K

For the Fiscal Year Ended December 31, 2015


2018

  Page No.
PART I 
  
Item 1.
Business
1
Item 1A.
Risk Factors
65
Item 2.
Properties
12
Item 3.
Legal Proceedings
13
Item 3
Legal Proceedings13
Item 4.
Mine Safety Disclosures
13
   
PART II 
  
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
14
Item 6.
Selected Financial Data
1514
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
1514
Item 8.
Financial Statements and Supplementary Data
29
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
29
Item 9A.
Controls and Procedures
29
Item 9B.
Other Information
30
   
PART IVIII 
  
Item 10.
Directors, Executive Officers, and Corporate Governance31
Item 11.Executive Compensation33
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters33
Item 13Certain Relationships and Related Transactions and Director Independence33
Item 14Principal Accountant Fees and Services33
PART IV
Item 15.
Exhibits and Financial Statements ScheduleStatement Schedules
3234
Consolidated Financial StatementsF-1

i


We are an Emerging Growth Company

We qualify as an "emerging growth company" as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

• a requirement to have only two years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial Condition and Results of Operations disclosure; and

• an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

We may take advantage of these provisions until the end of the fiscal year ending after the fifth anniversary of our initial public offering, December 31, 2018, or such earlier time that we are no longer an emerging growth company and if we do, the information that we provide stockholders may be different than you might get from other public companies in which you hold equity. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

The JOBS Act permits an "emerging growth company" like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements. Certain of the matters discussed herein concerning, among other items, our operations, cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and the effect of economic conditions, include forward-looking statements.


Forward-looking statements are predictive in nature and can be identified by the fact that they do not relate strictly to historical or current facts and generally include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates"“expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations, and general economic conditions, these statements and other projections contained herein expressing opinions about future outcomes and non-historical information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved.


Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the expectations expressed in forward-looking statements contained herein.  Given these uncertainties, you should not place any reliance on these forward-looking statements which speak only as of the date hereof. See “Risk factors” for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.


We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.  You are advised, however, to consult any additional disclosures we make in our reports filed with the Securities and Exchange Commission (“SEC”).

ii

PART I

ITEM 1.  BUSINESS


Introduction


As used in this report, unless otherwise stated or the context requires otherwise, the "Company"“Company” and terms such as "we," "us" "our,"“we,” “us” “our,” and "AIRI"“AIRI” refer to Air Industries Group, a Nevada corporation, and its directly and indirectly wholly-owned subsidiaries.


We are an aerospace and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, components for jet engines and other components. We also provide sheet metal fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile military and commercial aircraft including Sikorsky'sSikorsky’s UH-60 Black Hawk, and CH-47 Chinook helicopters, Lockheed Martin'sMartin’s F-35 Joint Strike Fighter, Northrop Grumman'sGrumman’s E2 Hawkeye, Boeing'sBoeing’s 777, Airbus'Airbus’ 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.


We became a public company in 2005 when our net sales were approximately $30 million.  At that time we had been manufacturingAir Industries Machining, Corp. (“AIM”), our principal subsidiary, has manufactured components and subassemblies for the defense and commercial aerospace industry for over 4550 years and hadhas established long termlong-term relationships with leading defense and aerospace manufacturers. On August 30, 2013, we reincorporated as a Nevada corporationmanufacturers

In response to recent operating losses and changedtheir impact on our name to Air industries Group.  Since becoming publicworking capital, we have repositioned our business through the sale and liquidation of certain businesses we acquired since becoming a public company. We also consolidated our headquarters and the operations of our subsidiaries, Air Industries Machining and Nassau Tool Works, at our corporate campus in Bay Shore, New York, allowing us to re-focus our operations on our core competencies.

On December 20, 2018, we completed the sale of all of the outstanding shares of our subsidiary, Welding Metallurgy, Inc., which included our subsidiaries Miller Stuart, Woodbine, Decimal and Compac Development Corp. (collectively, the “WMI Group”), to CPI Aerostructures, Inc. (“CPI”) for a seriespurchase price of acquisitions$9,000,000, net of defense related businesses.  Since January 1, 2014,a working capital adjustment of $(1,093,000), pursuant to a Stock Purchase Agreement dated as of March 21, 2018. On March 19, 2019, we have madereceived a notice from CPI claiming that the working capital deficit used to compute the purchase price was understated which we intend to contest.

We now conduct our operations through the following acquisitions:


-
In April 2014, we acquired Woodbine Products, Inc. (“WPI”). WPI was founded in 1954 and is a fabricator of precision sheet metal assemblies for aerospace applications;
-In June 2014, we acquired Eur-Pac Corporation (“Eur-Pac” or “EPC”). EPC was founded in 1947 and specializes in military packaging and supplies all branches of the United States Defense Department with ordnance parts and kits, hose assemblies, hydraulic, mechanical and electrical assemblies;

-
In September 2014, we acquired Electronic Connection Corporation (“ECC”). ECC was founded in 1989 and specializes in wire harnesses and leads for the aerospace and other industries;
-In October 2014, we acquired AMK Welding, Inc. (“AMK"). AMK has been a provider of welding services to the aerospace industry since 1964. For more than ten years it was owned by Dynamic Materials Corporation and was part of what once was a group of aerospace companies owned by DMC;

-In March 2015, we acquired Sterling Engineering Corporation (“Sterling”). Founded in 1941, Sterling provides complex machining services and its business is concentrated with aircraft jet engine and ground turbine manufacturers; and

-In September 2015, we acquired Compac Development Corporation (“Compac”). Founded in 1976, Compac specializes in the manufacture of RFI/EMI (Radio Frequency Interference – Electro-Magnetic Interference) shielded enclosures for electronic components. 

As a result ofwholly-owned subsidiaries: Air Industries Machining (“AIM”); Nassau Tool Works (“NTW”); and The Sterling Engineering Corporation (“Sterling”). AIM and NTW comprise our acquisition program, including those noted above,Complex Machining segment and Sterling represents our revenues in 2015, with a contribution of only $7,362,000 from Sterling and Compac, were $80,442,000.

We currently divide our operations into three operating segments: Complex Machining; Aerostructures and Electronics; and Turbine Engine Components. AsComponents segment.

In addition to repositioning our businessesbusiness to obtain profitability and positive cash flow, we remain resolute on meeting customers’ needs and have and continue to developalign production schedules to meet the needs of customers. We believe that an unyielding focus on our customers will allow us to execute on our existing backlog in a timely fashion and evolve,take on additional commitments. We are pleased with our progress and we acquire additional companies, we may deem it appropriate to reallocatethe positive responses received from our companies into different operating segments and, once we achieve sufficient integration among our businesses, report as a unified company.

customers.


Our Market


We operate primarily in both the military and, to a lesser degree, commercial aviation industries. Defense revenues represent a preponderance of our sales. Our principal customers include Sikorsky Aircraft, Goodrich Landing Gear Systems, Northrop Grumman, the United States Department of Defense, GKN Aerospace, Lockheed, Boeing, Raytheon, Piper Aircraft, M7 Aerospace, Vought Aerospace, Ametek/Hughes-Treitler and Airbus.


Our products are incorporated into many aircraft platforms, the majority of which remain in production, and of which there are a substantial number of operating aircraft.aircraft in fleets maintained by the military and commercial airlines. We believe that we are the largest supplier of flight critical parts to Sikorsky’s Black Hawk helicopter. We alsohave made, or currently make, or have been awarded, products for the CH-47 Chinook helicopter, Lockheed Martin'sMartin’s F-35 Joint Strike Fighter, Northrop Grumman'sGrumman’s E2 Hawkeye, Boeing'sBoeing’s 777, Airbus'Airbus’ 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine Components segment makes components for jet engines that are used on the USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of non-military ground turbine applications.


Many of our products are "flight critical" and“flight critical,” essential to aircraft performance and safety on takeoff, during flight and when landing. These products require advanced certifications as a condition to being a supplier. For many of our products we are the sole or one of a limited number of sources of supply. Many of the parts we supply are subject to wear and tear or fatigue and are routinely replaced on aircraft on a time ofin service or flight cycle basis. Replacement demand for these products will continue, albeit at perhaps a lower rate, so long as an aircraft remains in service, which is usually many years after production has stopped. In addition, as more fuel efficient engines are developed they will be substituted for engines currently in use.


The Department of Defense announced plans to significantly reduce spending beginning in Fiscal 2013.   In addition, on March 1, 2013, as a result of the continuing budget impasse, automatic government spending cuts termed the Sequester were implemented.  It appears that our revenues, particularly those of our Complex Machining segment, have been impacted by a slowing of orders in anticipation of a reduction or shift in the mix of defense spending and there can be no assurance that our financial condition and results of operations will not be materially adversely impacted by future reductions in defense spending or a change in the mix of products purchased by defense departments in the United States or other countries, or the perception on the part of our customers that such changes are about to occur.  The President’s proposed budget for Fiscal 2016, which went into effect October 1, 2015, provides for an increase in defense spending.  Nevertheless, there can be no assurance that any such increase will increase demand for the products we supply or otherwise redound to our benefit.

Sales and Marketing


Our approach to sales and marketing can be best understood through the concept of customer alignment. The aerospace industry is dominated by a small number of large prime contractors and equipment manufacturers. These customers rely heavily upon subcontractors to supply quality parts meeting specifications on a timely and cost effective basis. These customers and other customers we supply routinely rate their suppliers based on a variety of performance factors. One of our principal goals is to be highly rated and thus relied upon by all of our customers.

The large prime contractors are increasingly seeking subcontractors who can supply and are qualified to integrate the fabrication of larger, more complex and more complete subassemblies. We seek to position ourselves within the supply chain of these contractors and manufacturers to be selected for subcontracted projects. Successful positioning requires that we qualify to be a preferred supplier by achieving and maintaining independent third party quality approval certifications, specific customer quality system approvals and top supplier ratings through strong performance on existing contracts.  We believe that the various capabilities we have acquired through

During our acquisition program increase the likelihood we will qualify forsales and be awarded larger, more complex projects. As an example of our successful efforts to move up the supplier chain, our Aerostructures and Electronics segment  has grown from being a supplier of welding services to being a supplier of welding subassemblies and is now a product integrator, providing customers with complete structural assemblies.


As part of our effort to become a product integrator and increase our value to our customers, we have recruited personnel to fabricate complete, fully-assembled products, and, more recently, design products.  In our marketing efforts we let customers know that we now have employees with the talent and experience to manage the manufacture of sections of aircraft structures to be delivered to the final assembly phase of the aircraft manufacturing cycle, and customers have now engaged us for these services.
As we acquire new businesses, we often gain new or enhanced technical capabilities. We seek to exploit these new capabilities by introducing to our customer newly acquired products and capabilities we previously lacked.  Businesses we acquire often bring to us customers we have not previously supplied and we market to these customers the products and services they need which we historically provided.  This marketing effort has enabled us to grow some of the businesses we acquired and increased our value to our customers.  For example, the acquisition of the business of Nassau Tool Works in 2012 expanded our capabilities in the “turning” of metal components. This enhanced capability was important in our Complex Machining segment winning a large multi-year commercial aerospace contract to supply Thrust Struts to a unit of UTAS for use in the Pratt & Whitney Geared Turbo Fan jet engine.

Initial contracts are usually obtained through competitive bidding against other qualified subcontractors, while follow-on contracts are usually retained by successfully performing initial contracts. TheOur long term business of each of our current operating segments generally benefits from barriers to entry resulting from investments, certifications, familiarization with the needs and systems of customers, and manufacturing techniques developed during the initial manufacturing phase. As our business base grows with targeted customers, weWe endeavor to develop each of our relationships to one of a “partnership” where we participate in the resolution of pre-production design and build issues, and initial contracts are obtained as single source awards and follow-on pricing is determined through negotiations.  Despite these efforts we estimate that a minority of our sales are based on negotiated prices.


Our Backlog


Our backlog is best understood by looking at our operating segments independently.

Within our Complex Machining and Turbine Engine Components segments, the

The production cycle of products we manufacture can extend from several months to a year or longer. This gives rise to significant backlogs as customers must order product with sufficient lead time to ensure timely delivery. In contrast, the production cycle for a significant majority of the products produced in our Aerospace and Electronics segment is much shorter, a matter of several weeks or a few months. This shorter cycle allows customers to delay orders resulting in a much smaller backlog.


We have a number of long-term multi-year General Purchase Agreements or GPA’s with several of our customers. These agreements specify part numbers, specifications and prices of the covered products for a specifiedan agreed upon period, but do not authorize immediate production and shipment. Shipments are authorized periodically by the customer to fit theirits production schedule.


In late 2017, we received a renewal of our multi-year contract with Sikorsky, MY9, for the years 2018 to 2023. This contract is for $47 million worth of product during this period. This is the third multi-year contract award we have received from Sikorsky.

Our "firm backlog"“firm backlog” includes only fully authorized orders received for products to be delivered within the forward 18-month period. As of February 29, 2016,28, 2019, our 18-month "firm backlog"“firm funded backlog” was approximately $81$92.4 million.


Competition


Winning a new contract is highly competitive. For the most part weWe manufacture to customer designsdesign specifications, and specifications, andwe compete against companies that have similar manufacturing capabilities in a global marketplace. Consequently, the ability to obtain contracts requires providing quality products at competitive prices. To accomplish this requires that we strive for continuous improvement in our capabilities to assure our competitiveness and provide value to our customers. Our marketing strategy involves developing long-term ongoing working relationships with customers. These relationships enable us to develop entry barriers to would-be competitors by establishing and maintaining advanced quality approvals, certifications and tooling investments that are difficult and expensive to duplicate. Despite these barriers to entry, manyMany of our competitors are well-established subcontractors engaged in the supply of aircraft parts and components to prime military contractors and commercial aviation manufacturers. Among our competitors are;are: Monitor Aerospace, a division of Stellex Aerospace; Hydromil, a division of Triumph Aerospace Group; Heroux Aerospace and Ellanef Manufacturing, a division of Magellan Corporation.


Many of our competitors are larger enterprises or divisions of significantly larger companies having greater financial, physical and technical resources, and the capabilities to timelier respond under much larger contracts.


Raw Materials and Replacement Parts


The manufacturing process for certain products, particularly those for which we serve as product integrator, requires significant purchases of raw materials, hardware and subcontracted details. As a result, much of our success in profitably meeting customer demand for these products requires efficient and effective subcontract management. Price and availability of many raw materials utilized in the aerospace industry are subject to volatile global markets.markets and political conditions. Most suppliers of raw materials are unwilling to commit to long-term contracts at fixed prices. This is a substantial risk as our strategy often involves long term fixed price commitments to our customers.

Future Expansion Strategy

Since the 1990s, the aerospaceraw materials and defense industries have undergone radical consolidation and realignment. The largest prime contractors have merged or been acquired resulting in fewer, and much larger, entities. Some examples are Boeing which acquired McDonnell Douglas; Lockheed Martin, formed by Lockheed's acquisition of Martin Marietta, together with the aerospace divisions of General Dynamics; Northrop Grumman, which fused together Northrop, Grumman, Westinghouse and Litton Industries into one entity. Where once there were nine companies there are now just three. In November 2015, Lockheed Martin acquired Sikorskycomponents from United Technologies.
The consolidation of the prime contractors has caused a similar consolidation of suppliers. Major contractors seekcertain vendors due to streamline and reduce the cost of managing supply chains by buying both larger quantities and more complete sub-assemblies from fewer suppliers. This has led to increased competitive pressure on many smaller firms. To survive in this environment, suppliers must invest in systems and infrastructures capable of interfacing with and meeting the needs of prime contractors. We have made the effort to do so since becoming a public company in 2005. Suppliers with $15-$100 million in annual sales, referred to as the “Tier III and IV Manufacturing Sector,” must become fully capable of working interactively in a computer aided three dimensional automated engineering environment and must have independent third party quality system certifications. We believe this industry trend will increase pressure on smaller aerospace/defense critical component manufacturers, the Tier III and IV suppliers, as the cost of upgrading their systems to achieve the level of connectivity necessary to work interactively with prime contractors, to the extent they have not already done so, will adversely impact their profit margins. Our acquisitions are part of our strategy to react to and benefit from this market environment.

We intend to increase our business through internal growth and accretive acquisitions.  Our ability to make acquisitions is dependent, in part, on our available cash and upon our ability to raise debt or equity as necessary to complete any acquisition.

liquidity problems. 

Employees


As of March 1, 2016,22, 2019 we employed approximately 366209 people. Of these, approximately 4232 were in administration, 293 were in sales and procurement, and 295174 were in manufacturing.


Air Industries Machining one of the components of our Complex Machining segment, is a party to a collective bargaining agreement (the “Agreement”) with the United Service Workers, IUJAT, Local 355 (the "Union"“Union”) with which we believe we maintain good relations. The Agreement dated January 1, 2016, expireswas renewed as of December 31, 2018 and expires on December 31, 2021 and covers all of AIM'sAIM’s production personnel, of which there are approximately 104107 people. In light of the continuing consolidation and integration of NTW business with AIM, we intend to add more employees to the Union during 2019. AIM is required to make a monthly contribution to each of the Union'sUnion’s United Welfare Fund and the United Services Worker'sWorker’s Security Fund. This is the only pension benefit required by the Agreement and the Company is not obligated for any future defined benefit to retirees. The Agreement contains a "no-strike"“no-strike” clause, whereby, during the term of the Agreement, the Union will not strike and AIM will not lockout its employees.


All of our employees are covered under a co-employment agreement with Insperity,Extensis, Inc.


, a professional employer organization that provides out-sourced human resource services.

Regulations


Environmental Regulation; Employee Safety


We are subject to regulations administered by the United States Environmental Protection Agency, the Occupational Safety and Health Administration, various state agencies and county and local authorities acting in cooperation with federal and state authorities. Among other things, these regulatory bodies impose restrictions that require us to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and financial and operating risks on us. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil and criminal fines in the case of violations.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"(“CERCLA”) imposes strict, joint and several liability on the present and former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation and Recovery Act of 1976 ("RCRA"(“RCRA”) regulates the generation, transportation, treatment, storage and disposal of hazardous waste. New York and Connecticut, the states where all of our production facilities are located, also have stringent laws and regulations governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the Occupational Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances.


Federal Aviation Administration


We are subject to regulation by the Federal Aviation Administration ("FAA"(“FAA”) under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations. We have never been subject to such fines or disqualifications.


Government Contract Compliance


Our government contracts and those of many of our customers are subject to the procurement rules and regulations of the United States government, including the Federal Acquisition Regulations. Many of the contract terms are dictated by these rules and regulations. During and after the fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed to the project. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquiries and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.

We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses and permits required for the operation of our business.


ITEM 1A.  RISK FACTORS


The purchase of our common stock involves a very high degree of risk.


In evaluating usour common stock and our business, you should carefully consider the risks and uncertainties described below and the other information and our consolidated financial statements and related notes included herein.  If any of the events described in the risks below actually occurs, our financial condition or operating results may be materially and adversely affected, the price of our common stock may decline, perhaps significantly, and you could lose all or a part of your investment.


The risks below can be characterized into three groups:


1)Risks related to our business, including risks specific to the defense and aerospace industry:

2)Risks arising from our indebtedness; and

3)Risks related to our common stock and our status as a public company.stock.

Risks Related to Our Business

We incurred substantial net losses in 2018 and 2017 and may not be able to continue to operate as a going concern.

We suffered net losses from operations of $5,963,000 and $12,758,000 and net losses of $10,992,000 and $22,551,000 for the years ended December 31, 2018 and 2017, respectively. We also had negative cash flows from operations for the year ended December 31, 2017. In 2018 we sold our subsidiary WMI for $9,000,000, net of a working capital adjustment of $(1,093,000). Of the net purchase price for WMI, $2,000,000 is held in escrow to secure any obligation we may have under the Purchase Agreement as a result of the working capital adjustment and as a result of our breach of the representations and warranties we made in the Purchase Agreement. During the years ended December 31, 2017 and 2018, and subsequent thereto, we sold in excess of $29,000,000 in debt and equity securities to fund our business. The report of our independent registered public accountants on our financial statements for the year ended December 31, 2018 states that these factors raise uncertainty about our ability to continue as a going concern.

Unless we are able to generate positive cash flows from operations, we will continue to depend upon further issuances of debt, equity or other financings to fund ongoing operations. We may continue to incur additional operating losses and we cannot assure you that we will continue as a going concern.

We may need additional financing.

In the past, we have funded a portion of our operating losses through borrowings from two of our principal stockholders who are also directors. As of December 31, 2018, related party notes payable to Michael and Robert Taglich (and their affiliated entities), totaled $4,835,000. Additional funding may not be available to us on reasonable terms, if at all, from third parties or our two principal stockholders. If we are unable to fund such losses from third parties or our principal stockholders, we may become insolvent.

The Seventeenth Amendment to our Amended and Restated Loan Agreement (the “Loan Facility”) with PNC Bank, our principal lender, increased the interest rate we pay for amounts borrowed thereunder to an Alternative Base Rate plus 4% per annum. The Seventeenth Amendment extended the Termination Date of the Loan Facility to December 31, 2019, provided that we pay an extension fee of (i) $250,000 on the earlier of (a) the date that all obligations under the loan agreement (“Obligations”) are indefeasibly paid in full or (b) June 30, 2019, (ii) $125,000 on the earlier of (a) the date that the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of July 1, 2019, (iii) $125,000 on the earlier of (a) the date that the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amounts is deemed earned in full if the Obligations have not been satisfied as of October 1, 2019, and (iv) $500,000 on December 31, 2019, which amounts is deemed earned in full if the Obligations have not been satisfied as of December 31, 2019.

There can be no assurance that PNC will renew the Loan Facility on December 31, 2019, or that the terms of any renewal will be acceptable to us.

We may need to raise additional capital in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition and may result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.


Sales and liquidations of our subsidiaries completed during 2017 and 2018 likely will lead to reduced revenues.

During 2017 and 2018 we sold or otherwise liquidated certain of our subsidiaries to enable us to focus on our capabilities in our Complex Machining (AIM and NTW), and Turbine Engine Components (Sterling) segments. The absence of the subsidiaries we sold or liquidated may reduce the range of services we can provide to our customers and likely will lead to a reduction in our revenues for the immediate future.

We have identified deficiencies and material weaknesses in our internal controls and we may not be successful in remediating these deficiencies and weakness in the near future.

In connection with our review of our disclosure controls and internal controls over financial reporting for the fiscal year ended December 31, 2018, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and internal controls over financial reporting were not effective as of such dates. In particular, certain portions of our inventory control system and the enterprise reporting system used to track employee hours have not been integrated into the system used by the balance of our company which could result in a failure to properly account for the costs associated with work in process, slow moving inventory and the value of inventory on hand. Accordingly, costs to be included in work in process, may not be sufficiently automated to ensure compliance at all times. In addition, our Chief Executive Officer and Chief Financial Officer concluded that our quarterly closing process was deficient at our subsidiaries and that our consolidating process and period end reporting and disclosure procedures were materially weak. They also concluded that our system for administering and disclosing stock compensation was deficient and that we lacked the accounting personnel necessary to account for complex accounting matters and unusual and nonstandard transactions. We intend to remediate these conditions. In the event we do not remediate these deficiencies and material weaknesses in our internal controls, our operations may be adversely affected and the market price of our common stock could decline. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to maintain our listing on the NYSE American.

A reduction in government spending on defense could materially adversely impact our revenues, results of operations and financial conditioncondition..


While we have increased our commercial aerospace and industrial business, a

A large percentage of our revenue is derived from products for US military aviation. There are risks associated with programs that are subject to appropriation by Congress, which could be potential targets for reductions in funding. The Department of Defense announced plans to significantly reduce spending beginning in Fiscal 2014 and beyond. Reductions in United States Government spending on defense or future changes in the mix of defense products required by United States Government agencies could limit demand for our products, and may have a materially adverse effect on our operating results and financial condition.

On March 1, 2013, For the US Government imposed across the boardpast several years, our operations have been impacted by volatility in government procurement cycles and spending reductions commonly referred to as “the Sequester”. These included reductions in spending by the Department of Defense. During 2014 and 2015, we experienced a reduction in sales in our Complex Machining segment that we believe was the result of a slowing of orders as a result of the Sequester. In December 2015, the US Government agreed upon a spending budget for the Department of Defense for the 2016 and 2017 Fiscal Years and eliminated the Sequester. While we expect that spending will increase pursuant to these budgets, therepatterns. There can be no assurance that this increaseour financial condition and results of operations will materializenot be materially adversely impacted by future volatility in defense spending or a change in the mix of products purchased by defense departments in the United States or other countries, or the perception on the part of our customers that it will leadsuch changes are about to an increase in orders for our products.occur.


We depend on revenues from a few significant relationships, in particular with United Technology Corporation.relationships. Any loss, cancellation, reduction, or interruption in these relationships could harm our business.


We expect that our customer concentration will not change significantly in the near future. 

We derive most of our revenues from a small number of customers. TwoThree customers represented approximately 35.9%70% and two customers represented approximately 47.3%62% of total sales for the years ended December 31, 20152018 and 2014,2017, respectively. The markets in which we sell our products are dominated by a relatively small number of customers which have contracts with United States governmental agencies, thereby limiting the number of potential customers. Our success depends on our ability to develop and manage relationships with significant customers. We cannot be sure that we will be able to retain our largest customers or that we will be able to attract additional customers, or that our customers will continue to buy our products in the same amounts as in prior years. The loss of one or more of our largest customers, any reduction or interruption in sales to these customers, our inability to successfully develop relationships with additional customers or future price concessions that we may have to make, could significantly harm our business.

We depend on revenues from components for a few aircraft platforms and the cancellation or reduction of either production or use of these aircraft platforms could harm our business.

Our Complex Machining segment derives most

We derive a significant portion of itsour revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter, the Northrop Grumman E-2 Hawkeye naval aircraft, the McDonnell Douglas (Boeing) C-17 Globemaster, the F-16 Falcon and the F-18 Hornet. Boeing closed its C-17 production line in 2015..2015. A reduction in demand for our products as a result of either a reduction in the production of new aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market demand) would have a material adverse effect on our operating results and financial condition.


Intense competition in our markets may lead to a reduction in our revenues and market share.


The defense and aerospace component manufacturing market is highly competitive and we expect that competition will increase and perhaps intensify as the overall market remains static or declines.intensify. Many competitors have significantly greater technical, manufacturing, financial and marketing resources than we do. We expect that more companies will enter the defense and aerospace component manufacturing market. We may not be able to compete successfully against either current or future competitors. Increased competition could result in reduced revenue, lower margins or loss of market share, any of which could significantly harm our business, our operating results and financial condition.


We may lose sales if our suppliers fail to meet our needs.


needs or shipments of raw materials are not timely made.

Although we procure most of our parts and components from multiple sources or believe that these components are readily available from numerous sources, certain components are available only from a sole or limited number orof sources. While we believe that substitute components or assemblies could be obtained, use of substitutes would require development of new suppliers or would require us to re-engineer our products, or both, which could delay shipment of our products and could have a materially adverse effect on our operating results and financial condition.


Recently, due to our liquidity problems, we have had difficulties in securing timely shipments of raw materials from certain vendors which has negatively impacted our results of operations. Any delays in the shipment of raw materials could significantly harm our business, our operating results and our financial condition.

There are risks associated with the bidding processes in which we competecompete..


We obtain many contracts through a competitive bidding process. We must devote substantial time and resources to prepare bids and proposals and may not have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have bid will be sufficient to allow us to generate a profit from any particular contract. There are significant costs involved with producing a small number of initial units of any new product and it may not be possible to recoup such costs on later production runs.


Due to fixed contract pricing, increasing contract costs expose us to reduced profitability and the potential loss of future business.


The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material effect on our consolidated financial position or results of operations.


The prices of raw materials we use are volatile.


The prices of raw materials used in our manufacturing processes are volatile. If the prices of raw materials rise we may not be able to pass along such increases to our customers and this could have an adverse impact on our consolidated financial position and results of operations. It is possible that some of the raw materials we use might become subject to new or increased tariffs. Significant increases in the prices of raw materials could adversely impact our customers’ demand for certain products which could lead to a reduction in our revenues and have a material adverse impact on our revenues and on our consolidated financial position and results of operations.


Some of the products we produce have long lead times.


Some of the products we produce particularly those of our Complex Machining segment, require months to produce and we sometimes produce products in excess of the number ordered intending to sell the excess as spares when orders arise. As a result, our inventory turns slowly and often represents more than 40%ties up our working capital. Our inventory represented approximately 61% of our assets.assets as of December 31, 2018. Any requirement to write down the value of our inventory due to obsolescence or a drop in the price of materials could have a material adverse effect on our consolidated financial position, or results of operations.

the financial covenants in our Loan Facility.

We do not own the intellectual property rights to products we produce.


Nearly all the parts and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any, related to the product. Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would be free to do so.


so, which could have a material adverse effect on our business, our operating results and financial condition.

There are risks associated with new programs.programs.


New programs typically carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or changing specifications, timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program may experience delays for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs to the customers’ satisfaction or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays or other problems, then our business, financial condition and results of operations could be materially adversely affected. This could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings in excess of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.


To perform on new programs we may be required to incur material up-front costs which may not have been separately negotiated. Additionally, wenegotiated and may have made assumptions related to the costs of any program which maynot be material and which may be incorrect, resulting in costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.


Our inability to successfully manage the growth of our business may have a material adverse effect on our business, results of operations and financial condition.

We expect to experience growth in the number of employees and the scope of our operations as a result of internal growth and through acquisitions. This will result in increased responsibilities for management and could strain our financial and other resources.  There can be no assurance that we will successfully integrate any future business acquired through acquisition.
Our ability to manage and support our growth effectively is substantially dependent on our ability to implement adequate improvements to financial, inventory, management controls, reporting, union relationships, order entry systems and other procedures, and hire sufficient numbers of financial, accounting, administrative, and management personnel. We may not succeed in our efforts to identify, attract and retain experienced personnel.
There can be no assurance that we have the management expertise to successfully integrate the operations of any company that we might acquire in the future.

Our future success also depends on our ability to address potential market opportunities and to manage expenses to match our ability to finance operations.

The need to control our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses effectively, our business, results of operations and financial condition may be adversely affected.


Attracting and retaining executive talent and other key personnel is an essential element of our future successsuccess..


Our future success depends to a significant extent upon our ability to attract executive talent, as well as the continued service of our existing executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate executive and other key employees.personnel. Experienced management and technical, marketing and support personnel in the defense and aerospace industries are in demand and competition for their talents is intense. The loss of the services of one or more of our key employees or ourOur failure to attract executive talent, or retain our existing executive officers and motivate qualifiedkey personnel, could have a material adverse effect on our business, financial condition and results of operations.

We are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense in the event of non-compliance.

We are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our operations require the use of chemicals and other materials for painting and cleaning that are classified under applicable laws as hazardous chemicals and substances. If we are found not to be in compliance withviolation of any of these rules, regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any of which could result in substantial costs that would adversely impact our business operations and financial condition.


We may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.


We are subject to regulation by the Federal Aviation AdministrationFAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations. We have never been subject to such fines or disqualification.

Cyber security attacks, internal system or service failures may adversely impact our business and operations.

Any system or service disruptions, including those caused by projects to improve our information technology systems, if not anticipated and appropriately mitigated, could disrupt our business and impair our ability to effectively provide products and related services to our customers and could have a material adverse effect on our business. We could also be subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products, customers or suppliers, or other acts that could lead to disruptions in our business. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs or require us to pay to ransom to a hacker which takes over our systems, or subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Although we utilize various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results of operations and financial condition. Moreover, expenditures incurred in implementing cyber security and other procedures and controls could adversely affect our results of operations and financial condition.

Terrorist acts and acts of war may seriously harm our business, results of operations and financial condition.

United States and global responses to the Middle East conflict,actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats and other global political crises increase uncertainties with respect to U.S. and other business and financial markets. Several factors associated, directly or indirectly, with the Middle East conflict,actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats, and other global political crises and responses thereto, may adversely affect the Company.

mix of products purchased by defense departments in the United States or other countries to platforms not serviced by us. A shift in defense budgets to product lines we do not produce could have a material adverse effect on our business, financial condition and results of operations.


Risks Related to Our Indebtedness


Our indebtedness may materially adversely affecthave a material adverse effect on our operations.


We have substantial indebtedness under our Loan Facility. As is more fully describedof December 31, 2018, we had approximately $15,615,000 of indebtedness outstanding under the caption "Management's Discussion and AnalysisLoan Facility. All of Financial Condition and Results of Operations - Liquidity and Capital Resources", we have significant indebtedness. Our loan facilityour indebtedness under the Loan Facility is secured by substantially all of our assets. In

We also have outstanding a significant amount of indebtedness in the caseform of a continuing default under our loan facility,subordinated convertible notes which are payable on December 31, 2020. If we are unable to pay the lender will have the right to foreclose on our assets, which would have a material adverse effect on our business. Future payments ofoutstanding principal and accrued interest or a change in policy byon these notes when due, our lenderoperations may limit our ability to pay cash dividends to our stockholders.


be materially and adversely affected.

Our leverage may adversely affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may make our results of operations more susceptible to adverse economic conditions.


Our Indebtednessprincipal commercial lender recently increased the interest rate and fees we pay under our Loan Facility.

We recently amended our Loan Facility with PNC Bank, our principal lender. In the amendment, the termination date of the Loan Facility was extended until December 31, 2019, In addition, the interest rate we pay for amounts borrowed thereunder was increased and are required to we pay periodic fixed fees so long as we remain indebted under the Loan Facility.

There can be no assurance that PNC will renew the Loan Facility when it matures on December 31, 2019, or that the terms of any renewal will be acceptable to us. Further, there can be no assurance that we will be able to find a lender to succeed to the position of PNC or that the terms of any loan we may be offered will be acceptable to us.

Our indebtedness may limit our ability to pay dividends.


Thedividends in the future.

We currently do not pay dividends and the terms of our Loan Facility with PNC requiresrequire that we maintain certain financial covenants and thatcovenants. Unless we are in compliance with our Loan Facility in the future, we would need to seek covenant changes under our Loan Facility to pay dividends in the future. There can be no assurance our lenders would agree to covenant changes acceptable to us or at all. In addition, we may in the future incur indebtedness or otherwise become subject to agreements whose terms restrict our ability to pay a dividend only if after taking such dividend into effect we satisfy certain prescribed financial conditions. It is likely that any loan facility we might enter intodividends in replacement of, or in addition to, the PNC Facility would contain similar provisions.

future.


Risks Related to our Common Stockcommon stock

The ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our Statusexisting stockholders.

Two of our directors, Michael N. Taglich and Robert F. Taglich, and their affiliates own a significant number of shares of our outstanding common stock, which together with their position as directors of our company, give them significant influence over the outcome of corporate actions requiring stockholder approval and the terms on which we complete transactions with their affiliates. The interests of these directors may be different from the interests of other stockholders on these matters. This concentration of ownership could also have the effect of delaying or preventing a Public Companychange in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

We can provide no assurance that our common stock will continue to meet NYSE American listing requirements. If we fail to comply with the continuing listing standards of the NYSE American, our common stock could be delisted.


If we fail to satisfy the continued listing requirements of the NYSE American, the NYSE American may take steps to delist our common stock. The delisting of our common stock would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase common stock when you wish to do so.

There is only a limited public market for our common stock.


The

Our common stock is listed on the NYSE American. However, trading volume has been limited and a more active public market for our common stock – as measured by the volume of trading - is limited.may not develop or be sustained over time. The lack of a robust market may impair a stockholder'sstockholder’s ability to sell shares of our common stock. We cannot assure you that a more active trading market in our common stock will ever develop or if one does develop, that it will be sustained. In the absence of a more active trading market, any attempt to sell a substantial number of our shares could result in a decrease in the price of our stock. Specifically, you may not be able to resell your shares of common stock at or above the price you paid for such shares or at all.


Future

Moreover, sales of our common stock in the public market, or the perception that such sales could occur, could have an adverse effectnegatively impact the price of our common stock. As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly at all, and the price per share of our common stock may fluctuate significantly.

If we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

Our quarterly and annual operating results are likely to fluctuate significantly due to a variety of factors, some of which are outside our control. Accordingly, we believe period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause quarterly or annual operating results to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense recognition for contracts, the United States Government contracting and budget cycles, introduction of new government regulations and standards, contract closeouts, variations in manufacturing efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers, general economic conditions and economic conditions specific to the defense market. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business.

Fluctuations in quarterly results or announcements of extraordinary events such as acquisitions or litigation may cause earnings to fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of our common stock, as well as our overall operating results. Consequently, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance.

We are currently unable to pay cash dividends on our common stock and are not likely to do so for the foreseeable future

Our ability to pay cash dividends on our common stock is limited by the terms of our Loan Facility (and the terms of any future indebtedness or other agreements), under applicable law, and our status as a holding company. Given our current cash needs, it is not likely we will pay cash dividends in the foreseeable future.

Future financings or acquisitions may adversely affect the market price of our common stockstock..


The number of shares

Future sales or issuances of our common stock, eligible for resale is enormous relativeincluding upon conversion of the 6% Notes, upon exercise of our outstanding warrants or as part of future financings or acquisitions, would be substantially dilutive to the trading volume of our common stock. Any attempt to sell a substantial number of our shares will severely depress the market price of our common stock. In addition, we may use our capital stock in the future to finance acquisitions and to compensate employees and management, which will further dilute the interests of our existing shareholders and could eventually significantly depress the trading price of our common stock. Furthermore, we may sell additional shares of common stock if the Board deems it in our best interest.


The issuance of shares of our common stock, or the possible issuance of shares, under our stock option plan may limit the price that investors are willing to pay in the future for shares of our common stock and have the effect of delaying or preventing a change in control of our company, and the issuance of shares under the plan will decrease the amount of earnings and assets available for distribution to existing holders of our common stock and dilute their voting power.

Our 2015 Equity Incentive Plan allows for the issuance of up to 350,000 shares of common stock, either as stock grants or options, to employees, officers, directors, advisors and consultants of the company. Our 2013 Equity Incentive Plan allows for the issuance of up to 600,000 shares of common stock, either as stock grants or options, to employees, officers, directors, advisors and consultants of the company. As of December 31, 2015, we had outstanding under the 2013 Plan options to purchase 564,342 shares. The committee administering the Plan, which has sole authority and discretion to grant options under the Plan, may grant options which become immediately exercisable in the event of a change in control of our company and in the event of certain mergers and reorganizations. We also had outstanding as of December 31, 2015, warrants to purchase 164,585 shares of common stock. The issuance ofAny dilution or potential dilution may cause our stockholders to sell their shares, of our common stock upon exercise of outstanding stock options and warrants, or the possible issuance of shares upon exercise of further stock options granted under our stock option plans, may limitwhich would contribute to a downward movement in the price that investors are willing to pay in the future for shares of our common stock and have the effect of delaying or preventing a change in control of our company, and the issuance of shares under the plan will decrease the amount of earnings and assets available for distribution to existing holders of our common stock and dilute their voting power.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

The JOBS Act permits "emerging growth companies" like us to rely on some of the reduced disclosure requirements that are already available to companies having a public float of less than $75 million, for as long as we qualify as an emerging growth company. During that period, we are permitted to omit the auditor's attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act. Companies with a public float of $75 million or more must otherwise procure such an attestation beginning with their second annual report after their initial public offering. For as long as we qualify as an emerging growth company, we are also excluded from the requirement to submit "say-on-pay", "say-on-pay frequency" and "say-on-parachute" votes to our stockholders and may avail ourselves of reduced executive compensation disclosure compared to larger companies. In addition, as described in the following risk factor, as an emerging growth company we can take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

Until such time as we cease to qualify as an emerging growth company, investors may find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

As an "emerging growth company" we may take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

Section 107 of the JOBS Act also provides that, as an emerging growth company, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates" for further discussion of the extended transition period for complying with new or revised accounting standards.

At such time as we cease to qualify as an "emerging growth company" under the JOBS Act, the costs and demands placed upon management will increase.

We will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual gross revenues of $1,000,000,000 (as indexed for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under a registration statement under the Securities Act, December 31, 2018, (iii) the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer’ as defined by the SEC, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon management to increase, as we would have to comply with additional disclosure and accounting requirements, particularly if our public float should exceed $75 million.

stock.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance requirements, including establishing and maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable to comply with these requirements.


As a public company, we will incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.


The Sarbanes-Oxley Act, requires, among other things, requires that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose confidence in the reliability of our financial statements and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.


Our future revenues are inherently unpredictable; our operating results are likely to fluctuate from period to period and if we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

Our quarterly and annual operating results are likely to fluctuate significantly due to a variety of factors, some of which are outside our control. Accordingly, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of performance. Some of the factors that could cause quarterly or annual operating results to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense recognition for contracts, the United States Government contracting and budget cycles, introduction of new government regulations and standards, contract closeouts, variations in manufacturing efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers, general economic conditions and economic conditions specific to the defense market. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business.

Fluctuations in quarterly results, competition or announcements of extraordinary events such as acquisitions or litigation may cause earnings to fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly decline. In addition, we cannot assure you that an active trading market will develop or be sustained for our common stock. These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of our common stock, as well as our overall operating results.

ITEM 2.  PROPERTIES


Our executive offices are located at 360 Motor Parkway, Suite 100, Hauppauge, New York 11788. We occupy

As part of the effort to focus on our core businesses, our executive offices have been moved to our 5.4 acre corporate campus in Bay Shore, New York. We remain liable under a the lease with approximately six years remainingfor our previous office in theHauppauge, New York. This lease has a term which ends January 2022. The annual rent was $117,000 for the first lease year, decreased to $103,278approximately $113,000 for the lease year which began in January 2016,2019, and increases by approximately 3% per annum each year thereafter until the seventh lease year when the rent will be approximately $103,000.


thereafter.

The operations of a portion of our Complex Machining segmentAIM and NTW are conducted on aour 5.4-acre corporate campus in Bay Shore, New York. We occupy three buildings on the campus, consisting of 76,000 square feet.


On October 24, 2006, we entered into a “sale/leaseback” transaction whereby we sold the buildings and real property located at the corporate campus and entered into a 20-year triple-net lease for the property. Base annual rent for 20152018 was approximately $684,000$621,000 and increases by 3% each subsequent year. The lease grants us an option to renew the lease for an additional five years. Under the terms of the lease, we are required to pay all of the costs associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance.

The remaining portion of the operations of our Complex Machining segment are conducted in a 60,000 square foot facility in West Babylon, New York. The space is occupied under a lease which provides for an annual base rent of approximately $360,000 through October 30, 2018.

The operations of our Aerostructures and Electronics segment are principally conducted in an 81,035 square foot facility located in Hauppauge, New York. This space is occupied under a sublease which had an annual base rent of approximately $614,000 for 2015 and increases by an agreed upon amount each anniversary of the commencement of the lease through December 31, 2026.


The balance of our Aerostructures and Electronics segment are located in a 16,000 square foot facility in Waterbury, Connecticut. The space is occupied under a lease which has an annual base rent of approximately $115,000 and expires May 31, 2019; and a 9,200 square foot space in Bay Shore, New York. The space is occupied under a lease which has an annual base rent of approximately $70,000 and expires April 30, 2018

The operations of our Turbine Engine Components segmentSterling are conducted in a 33,850 square foot facility on a four acre parcel in South Windsor, Connecticut, which we own and a 74,923 square foot facility on a 24 acre parcel in Barkhamsted, Connecticut, which we own.

In March 2015, the property in South Windsor and the property in Barkhamsted were transferred to Air Realty Group, LLC, which is wholly owned by Air Industries Group.
On December 7, 2015, we entered into a contract with an unaffiliated third party pursuant to which the purchaser will acquire our South Windsor, Connecticut property for $1,700,000, subject to routine closing adjustments. The closing of the transaction is anticipated to occur in the first week of April 2016. Upon closing of the transaction, we will enter into a lease for the property with an initial term of 15 years, with an option to renew the lease for an additional five years.  In addition to rent, initially $155,000 per annum, subject to annual increase, we also will be responsible for real estate taxes and the maintenance of the buildings and the property.
Connecticut.

ITEM 3.  LEGAL PROCEEDINGS


A number of actions have been commenced against us 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 us. 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, which we estimate to be $104,584, plus attorney’s fees. We believe that we have a meritorious defense, and there was no lease on the property and that our subsidiary Compac Development Corp was a hold-over tenant occupying the space on month-to-month tenancy. We recently submitted our response to plaintiff’s motion for summary judgement.

An employee of our 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. We believe we are not liable to the employee and any amount we might have to pay in excess of our deductible would be covered by insurance.

An employee of our 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. We believe we are not liable to the employee and any amount we might have to pay would be covered by insurance.

Contract Pharmacal Corp. commenced an action on October 2, 2018, relating to a Sublease entered into between us and Contract Pharmacal in May 2018 with respect to the property that was formerly occupied by Welding Metallury, Inc., at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal seeks damages for an amount in excess of $1,000,000 for our failure to make the entire premises available by the Sublease commencement date. We dispute the validity of the claims asserted by Contract Pharmacal and believe we have meritorious defenses to those claims and have recently submitted a motion in opposition to its motion for summary judgement.

On October 15, 2018, a complaint was filed by a stockholder of our company in the United States District Court for the Eastern District of New York (Michael Kishmoianvs.Air Industries et al Case No. 18cv5757) naming our company and certain of our directors and a former director. The Complaint alleges that the proxy statement for our 2017 Annual Meeting contained false and misleading misstatements relating to whether brokers had discretionary authority to vote the shares of their customers in connection with the proposal to increase the number of shares we are authorized to issue (the “2017 Charter Amendment”). In the Complaint the plaintiff seeks to void the amendment and rescind any shares issued using the shares authorized by the amendment. Our Board of Directors has adopted an amendment to further increase the number of shares of Common Stock we are authorized to issue (the “2019 Charter Amendment”), subject to stockholder approval at our 2019 Annual Meeting of Stockholders, which we anticipate will be held in May or June of 2019. Counsel to our insurance carrier has advised counsel to the plaintiff of the proposed amendment. We believe that approval of the 2019 Charter Amendment will remove any issues concerning our ability to issue shares of Common Stock, or the validity of shares issued in excess of the 25,000,000 authorized pursuant to the adoption of the 2017 Charter Amendment and that any amount we may pay to resolve this action will not be material.

From time to time we also may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or operating results. We, however, have had claims brought against us by a number of vendors due to our liquidity constraints.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material interest adverse to our interest.


ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.


Not applicable.
PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.


Market for Our Common Stock


Our common stock is listed on the NYSE MKTAmerican under the symbol “AIRI.”  The prices set forth below reflect the quarterly high and low closing prices of a share of our common stock for the periods indicated as reported by Yahoo Finance.


  High  Low 
Quarter Ended March 31, 2014 $9.64  $7.97 
Quarter Ended June 30, 2014 $12.48  $9.50 
Quarter Ended September 30, 2014 $11.00  $9.00 
Quarter Ended December 31, 2014 $12.12  $9.80 
Quarter Ended March 31, 2015 $10.52  $9.70 
Quarter Ended June 30, 2015 $10.74  $9.91 
Quarter Ended September 30, 2015 $10.13  $8.06 
Quarter Ended December 31, 2015 $9.17  $6.98 

Holders


On March 1, 2016,27, 2019 there were approximately 230257 stockholders of record of our common stock. The number of record holders does not include persons who held our common stockCommon Stock in nominee or “street name” accounts through brokers.


Dividends

We have paid quarterly dividends to our shareholders each quarter commencing with the first quarter of 2013 through the third quarter of 2015. It has been our practice to pay cash dividends to our shareholders when our Board of Directors deemed appropriate. All determinations relating to our dividend policy are made at the discretion of our Board of Directors and depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant. Further, the payment of any cash dividends requires compliance with financial covenants of the loan agreement with our principal lender and, even if such financial covenants are met, since we are highly leveraged, our Board of Directors would consider any opinion our senior lender might express with regards to the payment of any cash dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes shares of our Common Stock to be issued upon exercise of options and warrants, the weighted-average exercise price of outstanding options and warrants and options available for future issuance pursuant to our equity compensation plans as of December 31, 2015:


 
Plan Category
 
Number of
Securities to
Be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
  
Weighted
Average
Exercise Price
Of Outstanding
Options,
Warrants and
Rights
  
Number of
Securities Remaining
Available for Future
Issuance Under Equity
Compensation Plans
 
Equity compensation plans approved by security
holders
  564,342  $7.35   385,658 
Equity compensation plans not approved by security
holders
  164,585  $7.85   None 
             
Tot  Total  728,927       385,658 

2018:

Plan Category 

Number of

Securities to

Be Issued Upon

Exercise of

Outstanding

Options, Warrants

and Rights

  

Weighted

Average

Exercise Price

Of Outstanding

Options,

Warrants and

Rights

  

 Number of

Remaining Shares

Available for Future

Securities Issuance Under Equity

Compensation Plans

 
Equity compensation plans approved by security holders  838,149   3.08   730,658 
Equity compensation plans not approved by security holders  2,239,702   3.10         None 
             
Total  3,077,851       730,658 

Recent Sales of Unregistered Equity Securities


Except as previously reported in our periodic reports filed under the Exchange Act, we did not issue any unregistered equity securities during the fiscal year ended December 31, 2015.


2018.

Purchases of Our Equity Securities


No repurchases of our common stock were made during the fiscal year ended December 31, 2015.


2018.

ITEM 6.  SELECTED FINANCIAL DATA


Not required.


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION


The following discussion of our financial condition and results of operations should be read in conjunction with theour audited consolidated financial statements for the years ended December 31, 2018 and 2017 and the notes to those statements included elsewhere in this Report.report. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this Reportreport that could cause actual results to differ materially from those anticipated in these forward-looking statements.


Business Overview


We are an aerospace company operating primarily in the defense industry, though the proportion of our business represented by the commercial and industrial sector is increasing. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal fabrication of aerostructures, tube bending and welding services. Our Turbine Engine Components sectorsegment makes components and provides services for jet engines and groundground-power turbines. Our products are currently deployed on a wide range of high profile military and commercial aircraft.

ground-power turbine applications.


We

AIM became a public company in 2005 when ourits net sales were approximately $30 million. At that time we had been manufacturingAIM has manufactured components and subassemblies for the defense and commercial aerospace industry for over 4550 years and hadhas established long-term relationships with leading defense and aerospace manufacturers. Since becoming public,In response to recent operating losses and their impact on our working capital, we have completed a seriesrepositioned our business through the sale and liquidation of acquisitions of defense relatedcertain businesses which have enabled us to broaden the range of products and services beyond those which we provide at the time we becameacquired since becoming a public company. Although prior to becoming a public comany, we were primarily a machining shop, as a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding and tube bending; the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment and printed circuit boards; the machining of turbine engine components,We also consolidated our headquarters and the assemblyoperations of packages or “kits” containing supplies for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanicalour subsidiaries, AIM and electrical assemblies.


Since January 1, 2014 we have acquired the following businesses:

NTW, at our corporate campus in Bay Shore, New York, allowing us to re-focus our operations on our core competencies. In addition:

 -1)In April 2014January 2017 we acquired WPI. WPI issold AMK Welding, Inc., for $4,500,000, net of a fabricatorworking capital adjustment of precision sheet metal assemblies($163,000) plus additional payments based on net revenue not to exceed $1,500,000 million (the “AMK Revenue Stream Payments”). In January 2019 we assigned our right to $1,136,710 of these payments to a group of accredited investors for aerospace applications;gross proceeds of $800,000.
 -In June 2014 we acquired Eur-Pac. EPC specializes in military packaging and supplies all branches of the United States Defense Department with ordnance parts and kits, hose assemblies, hydraulic, mechanical and electrical assemblies;
 -2)In September 2014On December 20, 2018, we acquired ECC. ECC specializes in wire harnesses and leadscompleted the sale of all of the outstanding shares of our WMI Group to CPI for a purchase price of $9,000,000, net of a working capital adjustment of $(1,093,000), pursuant to a Stock Purchase Agreement dated as of March 21, 2018.The amount of the aerospace and other industries;
-In October 2014 we acquired AMK. AMKworking capital deficit has been a providercontested by CPI and the discrepancy will likely be resolved through arbitration in accordance with the terms of welding services to the aerospace industry since 1964;
-In March 2015, we acquired Sterling. Sterling provides complex machining services and its business is concentrated with aircraft jet engine and ground turbine manufacturers; andStock Purchase Agreement.
-In September 2015, we acquired Compac. Compac specializes

In addition to repositioning our business to obtain profitability and positive cash flow, we remain resolute on meeting customers’ needs and continue to align production schedules to meet the needs of customers. We believe that an unyielding focus on our customers will allow us to execute on our existing backlog in the manufacture of RFI/EMI (Radio Frequency Interference – Electro-Magnetic Interference) shielded enclosures for electronic components.


As a result oftimely fashion and take on additional commitments. We are pleased with our progress and the foregoing acquisitions,positive responses received from our revenues in 2015, with a contribution of $7,362,000 from Sterling and Compac, were $80,442,000.

customers. 

The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete assemblies for our customers.


Our ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.


While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive. The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold.


Many of our operations have a large percentage of fixed factory overhead. As a result our profit margins are also highly variable with sales volumes as under-absorption of factory overhead can decrease profits. 

A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and decreased usage of aircraft in recent years have reduced the demand for both new production and replacement spares. This has reduced our sales, particularly in our complex machining segment. In response to the reductionRecent increases in military sales, weDefense Department spending has increased orders for our products. We are focusing greater efforts on the civilian aircraft market though we still remain dependent upon the military for an overwhelming portion of our revenues.

16

Segment Data

We follow Financial Accounting Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes standards for reporting information about operating segments in annual and interim financial statements, andASC 280 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.


We currently divide our operations into three into three operating segments: Complex Machining; Aerostructures and Electronics; and Turbine Engine Components. AsWe separately report our businesses continuecorporate overhead, (which was comprised of certain operating costs that were not directly attributable to developa particular segment). All operating costs are allocated to the Company’s three segments. 

In  March 2018, we announced our intention to divest WMI and evolve,related operation which divestiture was completed in December 2018. These operations are part of our Aerostructures & Electronics operating segment. Although WMI and we acquire additional companies, we may deem it appropriate to reallocate our companies into different operating segments and, once we achieve sufficient integration among our businesses, reportthe related operations have been classified as a unified company. Along withdiscontinued operation, we continued to operate these businesses until the sale closed on December 20, 2018. In November 2018, our operating subsidiaries, we reportEur-Pac (“EPC”) subsidiary received a notice of debarment from bidding on or fulfilling future government contracts. The existing contracts that had already been awarded have been completed and the resultsoperations of our corporate division as an independent segment.


the entity were effectively closed on March 31, 2019.

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance based on revenue, gross profit contribution and assets employed. Operating costs that are not directly attributable to a particular segment are included in Corporate. These costs include corporate costs such as legal, audit, tax and other professional fees including those related to being a public company.


Results of Operations

The results of operations of the businesses we have acquired are included in our financial results from their respective dates of acquisition. Acquisitions completed since January 1, 2014, are shown below:

AcquisitionsDate of Acquisition
Woodbine Products, Inc.April 1, 2014
Eur-Pac CorporationJune 1, 2014
Electronic Connection CorporationSeptember 1, 2014
AMK Welding, Inc.October 1, 2014
The Sterling Engineering CorporationMarch 1, 2015
Compac Development CorporationSeptember 1, 2015
17

RESULTS OF OPERATIONS-CONTINUING OPERATIONS

Years ended December 31, 20152018 and 2014:


2017:

In March 2018, we announced our intent to divest WMI and related operations which divestiture was completed in December 2018 enabling us to focus on complex, machined products for aircraft landing gear, flight critical / flight safety equipment and jet turbine applications. Although WMI and the related operations had been classified as a discontinued operation, we continued to operate these businesses until the sale closed on December 20, 2018. In November 2018 our Eur-Pac subsidiary received a notice of debarment from bidding on or fulfilling future government contracts. The operations of EPC and our subsidiary Electronic Connections (“ECC”) were effectively closed on March 31, 2019. From January 2018 through the closing date of the sale of WMI and the completion of the wind down of Eur-Pac, respectively, both operations generated a net loss. For purposes of the following discussion of our selected financial information and operating results, we have presented our financial information based on our continuing operations unless otherwise noted.

Selected Financial Information:


  2015  2014 
Net sales $80,442,000  $64,331,000 
Cost of sales  63,161,000   50,233,000 
Gross profit  17,281,000   14,098,000 
Operating expenses, acquisition costs and interest costs  (18,513,000)  (13,658,000) 
Other income (expense) net  114,000   (141,000)
Income tax benefit  286,000   368,000 
Net (loss) income $(832,000) $667,000 

  2018  2017 
Net sales $46,309,000  $49,869,000 
Cost of sales  40,895,000   45,002,000 
Gross profit  5,414,000   4,867,000 
Operating expenses and interest and financing costs  12,760,000   14,808,000 
Other income (expense) net  (278,000)  (22,000)
Provision for (Benefit from) income taxes  3,000   (197,000)
Net loss from continuing operations $(9,609,000) $(16,073,000)

Balance Sheet Data:

  December 31,
2018		  December 31,
2017		 
Cash and cash equivalents $2,012,000  $630,000 
Working capital  6,008,000   9,531,000 
Total assets  47,756,000   60,755,000 
Total stockholders’ equity $11,606,000  $17,766,000 

  December 31, 2015  December 31, 2014 
Cash and cash equivalents $529,000  $1,418,000 
Working capital  2,166,000   16,132,000 
Total assets  88,250,000   66,180,000 
Total stockholders' equity $28,805,000  $28,272,000 
18
The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:
  Year Ended December 31, 
  2015  2014 
       
COMPLEX MACHINING      
Net Sales $42,356,000  $44,220,000 
Gross Profit  10,412,000   8,691,000 
Pre Tax Income (Loss)  1,825,000   711,000 
Assets  48,353,000   40,611,000 
         
AEROSTRUCTURES & ELECTRONICS        
Net Sales  27,134,000   18,273,000 
Gross Profit  6,553,000   4,812,000 
Pre Tax Income (Loss)  386,000   (554,000)
Assets  20,229,000   16,788,000 
         
TURBINE ENGINE COMPONENTS        
Net Sales  10,952,000   1,838,000 
Gross Profit  316,000   595,000 
Pre Tax Income (Loss)  (3,329,000)  142,000 
Assets  19,076,000   8,150,000 
         
CORPORATE        
Net Sales  -   - 
Gross Profit  -   - 
Pre Tax Income (Loss)  -   - 
Assets  592,000   631,000 
         
CONSOLIDATED        
Net Sales  80,442,000   64,331,000 
Gross Profit  17,281,000   14,098,000 
Pre Tax Income (Loss)  (1,118,000)  299,000 
Benefit from Income Taxes  286,000   368,000 
Net (Loss) Income  (832,000)  667,000 
Assets $88,250,000  $66,180,000 
The following discussion of our results of operations constitutes management's review of the factors that affected our financial and operating performance for the years ended December 31, 2015 and 2014. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report.

For 2015, we had three operating segments: Complex Machining comprised of AIM and NTW; Aerostructures and Electronics comprised of WMI (including Decimal and Woodbine), Eur-Pac (including ECC), MSI and beginning in October 2015, Compac; and Turbine Engine Components comprised of AMK and beginning in March 2015, Sterling.
19

  Year Ended December 31, 
  2018  2017 
       
COMPLEX MACHINING      
Net Sales $39,745,000  $38,489,000 
Gross Profit  5,871,000   4,906,000 
Pre Tax Loss  (75,000)  (2,839,000)
Assets  41,947,000   43,207,000 
         
AEROSTRUCTURES & ELECTRONICS        
Net Sales  1,779,000   4,574,000 
Gross (Loss) Profit  (31,000)  507,000 
Pre Tax Loss  (1,380,000)  (4,233,000)
Assets  110,000   1,021,000 
         
TURBINE ENGINE COMPONENTS        
Net Sales  4,785,000   6,806,000 
Gross Loss  (426,000)  (546,000)
Pre Tax Loss  (1,385,000)  (7,599,000)
Assets  5,243,000   6,157,000 
         
CORPORATE        
Net Sales  -   - 
Gross Profit  -   - 
Pre Tax Loss  (6,766,000)  (1,599,000)
Assets  456,000   288,000 
         
CONSOLIDATED        
Net Sales  46,309,000   49,869,000 
Gross Profit  5,414,000   4,867,000 
Pre Tax Loss  (9,606,000)  (16,270,000)
 (Benefit from) provision for Income Taxes  (3,000)  197,000 
Loss from Discontinued Operations  (1,383,000)  (6,478,000)
Assets Held for Sale  -   10,082,000 
Net Loss  (10,992,000)  (22,551,000)
Assets $47,756,000  $50,673,000 

Table of Contents

Net Sales:

Consolidated net sales for the year ended December 31, 20152018 were approximately $80,442,000, an increase$46,309,000, a decrease of $16,111,000,$3,560,000, or 25.0%7.1%, compared with $64,331,000$49,869,000 for the year ended December 31, 2014.2017. Net sales of our Complex Machining segment were approximately $42,356,000, a decrease$39,745,000, an increase of $1,864,000,$1,256,000, or 4.2%3.3%, from $44,220,000$38,489,000 in the prior year. The nature of the parts manufactured by our Complex Machining segment are such that they tend to be larger, more complex and higher priced than many of the parts supplied by our other segments.  For example, the landing gear for an F-18 fight aircraft can cost approximately $2,200,000; consequently, even a slight decline in the number of parts sold can lead to a significant decline in revenues and gross profit. The decline in sales at our Complex Machining segment was due to delays and reductions in government procurement orders due to Sequestration. Net sales of our Aerostructures and Electronics segment were approximately $27,134,000 and increased by $8,861,000, or 48.5%, from $18,273,000 in the prior year. This can be attributed to greater volume from Miller Stuart as well as acquisitions that took place during 2015 and 2014. Compac was acquired in September 2015 while full year contributions from Eur-Pac (June 2014) and ECC (September 2014) were experienced. Net sales in our Turbine Engine Components segment were approximately $10,952,000$4,785,000, a decrease of $2,021,000 or 29.7%, compared with $6,806,000 for the year ended December 31, 2017. This decrease was due primarily to a change in product mix and increased $9,114,000, or 495.9%, from $1,838,000poor decisions by prior management that was replaced in early 2018. We believe that under new management this segment of our operations will realize sales in 2019 over those of 2018. The decrease was also due to the prior year. The increase during 2015 reflects the acquisition of Sterling Engineering and a full-yearsale of AMK Weldingin January 2017 which was acquiredhad sales of $417,000 in October2017. Net sales in our Aerostructures segment were $1,779,000, a decrease of 2014.


$2,795,000 or 61.1%, compared with $4,574,000 for the year ended December 31, 2017. Our Aerostructures segment consists solely of EPC which has been closed effective March 31, 2019.

As indicated in the table below, fourthree customers represented 59.3%70.0% and twothree customers represented 47.3%62.0% of total sales for the years ended December 31, 20152018 and 2014,2017, respectively.

Customer Percentage of Sales 
  2018  2017 
Goodrich Landing Gear Systems  30.7%  20.5%
Sikorsky Aircraft  27.4%  25.5%
Rohr  11.9%  * 
United States Department of Defense  *   16.0%

*Customer was less than 10% of sales at December 31, 2018 and 2017, respectively.


Customer Percentage of Sales 
  2015  2014 
       
Sikorsky Aircraft  20.5%   26.8 
Goodrich Landing Gear Systems  15.4%   20.5 
United States Department of Defense  12.0%   * 
Northrup Grumman Corporation  11.4%   * 
 
* Customer was less than 10% of sales for the year ended December 31, 2014.
Sikorsky Aircraft and Goodrich Landing Gear Systems are units of United Technologies Corporation.

As indicated in the table below, fourtwo customers represented 61.1%64.5% and three customers represented 50.4%68.7% of gross accounts receivable at December 31, 20152018 and 2014,2017, respectively.


Customer Percentage of Receivables 
  December  December 
  2015  2014 
Goodrich Landing Gear Systems  26.6%   29.0 
Northrop Grumman Corporation  13.6%   11.4 
Sikorsky Aircraft  10.5%   * 
GKN Aerospace  10.4%   10.0 
 
* Customer was less than 10% of Gross Accounts Receivable at December 31, 2014.
Sikorsky Aircraft and Goodrich Landing Gear Systems are units of United Technologies Corporation.
20

Customer Percentage of Receivables 
  2018  2017 
Goodrich Landing Gear Systems  38.3%  41.9%
Rohr  26.2%  14.6%
Sikorsky Aircraft  *   12.2%

*Customer was less than 10% of Gross Accounts Receivable at December 31, 2018.

Table of Contents

Gross Profit:

Consolidated gross profit from operations for the year ended December 31, 20152018 was $17,281,000 and$5,414,000, an increase of approximately $3,183,000,$547,000, or 22.6%11.2%, as compared to gross profit of $14,098,000$4,867,000 for the year ended December 31, 2014.2017. Consolidated gross profit as a percentage of sales was 21.5%11.7% and 21.9%9.8% for the years ended December 31, 20152018 and 2014,2017, respectively. The increase in gross profit resulted largely from improvements in our Complex Machining and Aerostructures and Electronics segments. The improvement in our Complex Machining segment was due primarily to the resultimplementation of cost reductions. Thereduction and productivity improvement initiatives.

Interest and Financing Costs

Our interest and financing costs increased from $3,378,000 in our Aerostructures2017 to $3,921,000 in 2018.

Impairment Charges

In connection with the closing of Eur-Pac we recorded impairment charges to goodwill and Electronics segment can be attributed to greater volume from Miller Stuart as well as acquisitions that took place during 2015 and 2014.  Compac was acquired in September 2015 while full year contributions from Eur-Pac (June 2014) and ECC (September 2014) were experienced. The slight decreaseassets in the overall gross margin percentage results primarilyamounts of $109,000 and $386,000, respectively, in fiscal year 2018. In fiscal 2017, we recorded a goodwill impairment charge of $6,195,000 and a loss on assets held for sale of $1,563,000, which amounts are included in the loss from low marginscontinuing operations. In addition, in our Turbine Engine Components sector. The sector began its operations in 2014connection with the acquisitionsale of AMKWMI, we recorded a goodwill impairment charge of $3,417,000 and expandedan impairment of intangible asset write-down of $1,085,000, which amounts are included in 2015 when Sterling was acquired. AMK and Sterling have yet to reach their anticipated potential.


Selling, General & Administrative (“SG&A”):

the loss from discontinued operations.

Operating Expense

Consolidated SG&A costsoperating expenses for the year ended December 31, 20152018 totaled approximately $16,655,000$8,839,000 and increaseddecreased by $4,292,000$2,591,000 or 34.7%22.7% compared to $12,363,000$11,430,000 for the year ended December 31, 2014. Approximately $2,424,000 or 56.5% of the increase2017. The decrease in SG&A costs relates to the acquisitions during the 2015 and 2014 fiscal years. The acquisitions in 2015 consisted of Sterling in March and Compac in September while the acquisitions in 2014, Eur-Pac (June 2014), ECC (September 2014) and AMK (October 2014), contributed a full year of costs.


Interest and financing costs of approximately $1,858,000 for the year ended December 31, 2015 increased $563,000 or 43.5% as compared to $1,295,000 for the year ended December 31, 2014. This increase can be attributed to additional amounts of debt incurred from term loansoperating expenses is primarily due to the AMKstaff reduction measures and Sterling acquisitions, the purchase of inventory from Circor Aerospace and cash usage for operations.

cost reduction initiatives.

The Company recognized an income tax benefit of approximately $286,000 for year ended December 31, 2015 compared to an income tax benefit of $368,000 for the year ended December 31, 2014. The tax benefit for 2015 was primarily the result of a change in deferred tax positions at December 31, 2015 for expired options, state tax rate changes and a true-up of deferred tax assets related to inventory. Net LossIn 2014, the tax benefit was the result of the Company's determination that it no longer needed to provide a valuation allowance on certain deferred tax assets. This was based upon the fact that management believes that due to the sustained profitability of the Company and the probability that such profitability will continue, the net deferred tax assets is more likely than not to be realized.


Net loss for the year ended December 31, 20152018 was $(832,000), a decrease$10,992,000, an improvement of $1,499,000, or 224.7%,$11,559,000, compared to a net income of $667,000loss $22,551,000 for the year ended December 31, 2014,2017, for the reasons discussed above.


Our net losses for 2018 and 2017 included net losses from the discontinued operations of WMI of $1,042,000 and $6,678,000, respectively. In addition, our net losses for 2018 and 2017 included impairment charge related to ongoing operations of approximately $495,000 and $6,195,000, respectively.

Impact of Inflation


Inflation has not had a material effect on our results of operations.

21


LIQUIDITY AND CAPITAL RESOURCES


We are highly leveraged and rely upon our ability to continue to borrow under our Loan Facility with PNC or to raise debt and equity from PNC Bank N.A. ("PNC")our principal stockholders and third parties to support operations and acquisitions.operations. Substantially all of our assets are pledged as collateral under our existing loan agreements with PNC.Loan Facility. We are required to maintain a lockbox account with PNC, into which substantially all of itsour cash receipts are paid. If PNC were to cease lending,providing revolving loans to us under the Loan Facility, we would lack funds to continue our operations.


Over the past two years we have also relied upon our ability to borrow money from certain stockholders and raise debt and equity capital to support our operations. Should we continue to need to borrow funds from our principal stockholders or raise debt or equity, there is no assurance that we will be able to do so or that the terms on which we borrow funds or raise equity will be favorable to us or our existing stockholders.

The Loan Facility provides for a $15,000,000 revolving loan and a term loan with a balance of $1,572,000 at December 31, 2018 (the “Term Loan”). The repayment terms of the Term Loan provide for monthly principal installments in the amount of $123,133, payable on the first business day of each month, with a final payment of any unpaid balance of principal and interest payable on the scheduled maturity date.

The terms of the Loan Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA (as defined in the Loan Facility) for specified periods. In addition, we are limited in the amount of Capital Expenditures we can make. The Loan Facility also restricts the amount of dividends we may pay to our stockholders.

The Loan Facility has been amended many times during its term. term, most recently on May 30, 2018 (the “Sixteenth Amendment”), January 2, 2019 (the “Seventeenth Amendment”), and February 8, 2019 (the “Eighteenth Amendment”).

The Company entered into an amendment toSixteenth Amendment waived Fixed Charge Coverage Ratio covenant violations for the periods ending September 30, 2017, December 31, 2017 and March 31, 2018. The Sixteenth Amendment imposes minimum EBITDA (as defined in the Loan FacilityAgreement) covenants of not less than (i) $75,000 for the three-month period ending March 31, 2018, (ii) $485,000 for the six month period ending June 30, 2018, and (iii) $1,200,000 for the nine-month period ending September 30, 2018. We were in November 2015compliance with these new covenants for the three-months ended March 31, 2018, the six-month period ended June 30, 2018 and paid anthe nine-month period ended September 30, 2018. In addition, the amendment fee of $40,000. At December 31, 2015, the Loan Facility consisted of a $33,000,000 revolving loan (which includes an inventory sub-limit of $15,000,000)prohibits us from paying dividends to our stockholders and four term loans (Term Loan A, Term Loan B, Term Loan C, and Term Loan D), described below.


limits capital expenditures.

Under the terms of the Loan FacilitySeventeenth Amendment, the revolving credit note boreloan and the Term Loan bear interest at a rate equal to the sum of the Alternate Base Rate (as defined in the Loan Agreement) plus three quartersfour percent (4%). In addition to the amounts available as revolving loans secured by inventory and receivables pursuant to the formula set forth in the Loan Agreement, PNC has agreed to permit the revolving advances to exceed the formula amount by $1,000,000 as of one percent (0.75%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and three quarters of one percent (2.75%) with respect to Eurodollar Rate Loans. The revolving credit note had an interest rate of 4.00% per annum at December 31, 2015 and 2014, and an outstanding2018, provided that we reduce the “Out-of-Formula Loan” by $25,000 per week commencing April 1, 2019, with the unpaid balance of $29,604,000 and $17,672,000, respectively.payable in full on December 31, 2019. The maturity date ofindebtedness under the revolving credit note is November 30, 2016.


As a requirement of ourloan and the Term Loan Facility substantially all of our cash receipts from operations are deposited into our lockbox account at PNC. Each day, the Company's cash collections are swept directly by the bank and these cash receipts are used to reduce our indebtedness under our revolving credit note and are then borrowed according to a borrowing base to support our operations.Because the revolving loans contain a subjective acceleration clause which could permit PNC to require repayment prior to maturity, the loans are classified with the current portion of notes and capital lease obligations.
The repayment terms

Both the revolving loan, inclusive of the Out-of Formula Loan, and the Term Loan Amature on December 31, 2019. As a condition to its agreement to extend the maturity of the obligations due under the Loan Agreement (the “Obligations”), we are obligated to pay PNC an extension fee of (i) $250,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) June 30, 2019, (ii) $125,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of July 1, 2019, (iii) $125,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of October 1, 2019 (iv) $500,000 on December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of December 31, 2019. As a further condition to PNC’s agreement to extend the maturity of the Obligations, Michael and Robert Taglich purchased $2,000,000 principal amount of our Senior Subordinated Convertible Notes and arranged a financing giving purchasers a right to receive a pro rata portion of the AMK Revenue Stream Payments resulting in gross proceeds of $800,000, including $275,000 from Michael and Robert Taglich.

The Eighteenth Amendment requires us to maintain a minimum EBITDA of not less than (i) $1,500,000 for the twelve-month period ending December 31, 2018, (ii) $655,000 for the three-month period ending March 31, 2019, (iii) $1,860,000 for the six-month period ending June 30, 2019 and (iv) $3,110,000 for the nine-month period ending September 30, 2019. At December 31, 2018 we were amended in 2014. On April 1, 2014,compliance with the Company borrowed $2,676,000, representing an additional $1,328,000,minimum EBIDA covenant.

As of December 31, 2018, our debt to partially fund the acquisition of Woodbine. The repayment terms of Term Loan A consists of thirty-two consecutive monthly principal installments, the first thirty-onePNC in the amount of $31,859 which commenced on the first business day of May 2014, and continued on the first business day of each month thereafter, with a thirty-second and final payment of any unpaid balance of principal and interest on the last business day of November 2016. Term Loans A and B bear interest at (a) the sum$15,615,000 consisted 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 three percent (3.00%) with respect to LIBOR Rate Loans. At December 31, 2015 and 2014, the balance due under Term Loan A was $2,039,000 and $2,421,000, respectively.


On October 1, 2014, the Company borrowed $3,500,000 under Term Loan B for the acquisition of AMK. The repayment of Term Loan B consists of sixty consecutive monthly principal installments, the first fifty-ninerevolving credit loan in the amount of $58,333 which commenced on$14,043,000 and the first business day of December 2014, and continued on the first business day of each month thereafter, with a sixtieth and final payment of any unpaid balance of principal and interest on the last business day of November 2019. At December 31, 2015 and 2014, the balance due under Term Loan B was $2,742,000 and $3,442,000, respectively.

On December 31, 2014, the Company borrowed $2,500,000 under Term Loan C to refinance the Seller Note and Mortgage of $2,500,000 issued as part of the acquisition of AMK. The maturity date of Term Loan C is the first business day of January 2021, and it is to be paid in seventy two consecutive monthly principal installments, which commenced on the first business day of February 2015, and continue on the first business day of each month thereafter. The first seventy-one of the installments shall beterm loan in the amount of $34,722 with a seventy second and final payment$1,572,000. The revolver balance included the Company’s negative general ledger balances in its controlled disbursement cash accounts. As of any unpaid principal and interest on the first business day of January 2021. Term Loan C bears interest at (a) the sum of the Alternate Base Rate plus two percent (2.00%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three and one-quarter percent (3.25%) with respect to LIBOR Rate Loans. At December 31, 2015 and 2014, the balance due under Term Loan C was $2,118,000 and $2,500,000, respectively.
On March 9, 2015, the Company borrowed $3,500,000 under Term Loan D for the acquisition of Sterling. The repayment of Term Loan D consists of twenty consecutive monthly principal installments, the first nineteen2017, our debt to PNC in the amount of $62,847 which commenced on the first business day of April 2015, and continued on the first business day of each month thereafter, with a twentieth and final payment of any unpaid balance of principal and interest on the last business day of November 2016. Term Loan D bears interest at (a) the sum of the Alternate Base Rate plus two and one quarter percent (2.25%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three and one-half percent (3.50%) with respect to LIBOR Rate Loans. At December 31, 2015, the balance due under Term Loan D was $2,934,000.

The Loan Facility was amended in February 2016 to increase the revolving loan to $37,500,000, including an overdraft facility of $4,500,000. 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 three quarters of one percent (0.75%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one half of one percent (2.50%) with respect to LIBOR Rate Loans. We paid a fee of $75,000 in connection with the 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. In addition, the Company is limited in the amount of Capital Expenditures it can make. The Company is also limited to the amount of Dividends it can pay its shareholders as defined in the Loan Facility. As of December 31, 2015, the Company was not in compliance with the Fixed Charge Coverage Ratio covenant. Because the Loan Facility contains a subjective acceleration clause which could permit PNC to require repayment prior to maturity, the revolving loan is classified as current in the accompanying condensed consolidated balance sheet. The failure to maintain the requisite Fixed Charge Coverage Ratio constitutes a default under the Loan Facility and, PNC, at its option, may give notice to the Company that all amounts under the Loan Facility are immediately due and payable. Consequently, all amounts due under the Term Loans are also classified as current. As of the date of issuance of the accompanying financial statements, PNC has not given such notice. In addition, the Company has requested a waiver from PNC for the failure to meet the Fixed Charge Coverage Ratio covenant. At December 31, 2015, the Company was in compliance with all other terms of the Loan Facility. At December 31, 2014, the Company was in compliance with all terms of the Loan Facility.
22
As of December 31, 2015, our debt for borrowed monies in the amount of $44,805,000$19,926,000 consisted of the revolving credit note due to PNC in the amount of $29,604,000,$16,455,000 and the term loansloan due to PNC in the amount of $9,833,000, a note in the amount$3,471,000. In addition, as of $350,000, andDecember 31, 2018 we had capitalized lease obligations to third parties of $5,018,000. This represents an increase of $17,084,000 in our debt for borrowed monies at December 31, 2014 of $27,721,000, when the revolving note due$1,787,000, as compared to PNC was $17,672,000, the term loans due to PNC were $8,363,000, we had a note due to the sellers of WMI with a balance of $41,000, and capitalized lease obligations were $1,645,000. The increase into third parties of $3,073,000 as of December 31, 2017.


Significant Transactions Since January 1, 2018 Which Have Impacted Our Liquidity

Dispositions

On December 20, 2018, we completed the amount outstanding under the revolving credit note principally reflects amounts borrowedsale of our WMI Group to support our acquisitions and the increase in our inventory.


On April 1, 2014, we acquired allCPI for a purchase price of the common stock$9,000,000, net of WPI for $2.4 million and 30,000 shares of the common stock of AIRI, valued at $9.68 per share, which was the closing share price on April 1, 2014. Additionally, a working capital adjustment of $(1,093,000), pursuant to a Stock Purchase Agreement dated as of March 21, 2018. Of the net purchase price for WMI, $2,000,000 is held in escrow to secure any obligation we may have under the amount of approximately $165,000 was paid in September of 2014.

On June 1, 2014, we acquired allPurchase Agreement as a result of the common stock of EPC for $1.6 million and 20,000 shares of the common stock of AIRI, valued at $9.78 per share, which was the closing price on that date. Additionally, a working capital adjustment was due toand as a result of our breach of the former stockholders of EPCrepresentations and warranties we made in the Purchase Agreement. The amount of approximately $78,000the working capital deficit has been contested by CPI and was paidthe discrepancy will likely be resolved through arbitration in August 2014.

On September 1, 2014, we acquired allaccordance with the terms of the common stock of ECC for $209,000. WeStock Purchase Agreement.

Financings–Related Parties

Due to net losses and negative cash flow in recent years, we have financed the acquisition of ECC outour operations in part through private placements of our debt and equity securities. Each of Michael and Robert Taglich, two of our directors, have invested substantial amounts in our company in various debt and equity financings, including the financings in 2018 described below and in other financings discussed in Note 11 to our consolidated financial statements for the years ended December 31, 2018 and 2017 appearing elsewhere in this report.

Taglich Brothers, Inc. (“Taglich Brothers”), a corporation founded by Michael and Robert Taglich, and in which a third director of our company is a vice president of Investment Banking, has acted as placement agent for our debt and equity financing transactions and has received cash and equity compensation for its services. For additional information, see Note 11 to our consolidated financial statements for the years ended December 31, 2018 and 2017 appearing elsewhere in this report.

Debt Financings

On March 29, 2018 and April 4, 2018 Michael Taglich and Robert Taglich, advanced $1,000,000 and $100,000, respectively, to our company for use as working capital.


On June 3, 2014, in connection We subsequently issued our Subordinated Notes due May 31, 2019 to Michael and Robert Taglich, together with our Registered Direct Offering (“the Offering”), we issued 1,170,000 shares of our common stock, pursuant to a “shelf” registration statement on Form S-3 (File NO. 333-191748), declared effective by the Securities and Exchange Commission on December 11, 2013. Taglich Brothers, Inc. ("Taglich Brothers") acted as the exclusive placement agent for the Offering. The gross proceeds of the offering were $10,530,000, comprised of $9,530,000 in cash and $1,000,000 in the conversion of our Junior Subordinated Notes. We paid Taglich Brothers a commission of approximately $842,000 and issued to it warrants to purchase up to 46,800 shares of common stock at a per share price of $11.25. Additionally, the Company paid legal fees on behalf of Taglich Brothers in the amount of $75,000 and paid a qualified independent underwriter approximately $50,000 for its services. We netted cash of approximately $8,562,000 from the Offering. The proceeds were used to acquire EPC, pay down debt, and applied to working capital.
On October 1, 2014, we acquired all of the common stock of AMK Technical Services, (“AMK”) for $6.9 million. The acquisition was financed with the proceeds from the issuance of Term Loan B from PNC in the amount of $3,500,000, a mortgage on the property of AMK in the amount of $2,500,000 in favor of the sellers of AMK, which was subsequently refianced by PNC, with the remainder coming from our working capital.

On March 1, 2015, we acquired all of the common stock of Sterling for $5.4 million in cash and 425,005 shares of the common stock of AIRI. The common stock was valued at $9.89 per share, which was the closing share price on February 27, 2015. The acquisition was financed with the proceeds from the issuance of Term Loan D in the amount of $3,500,000.

On September 1, 2015, the Company, through its wholly-owned subsidiary WMI, acquired certain assets, including production equipment, inventory and intangible assets, of Compac in an asset acquisition for $1.2 million in cash plus a working capital adjustment of $271,000. We financed the acquisition of Compac out of our working capital.
On December 7, 2015, we entered into a contract with an unaffiliated third party (the "purchaser") , whereby the purchaser will acquire our South Windsor, Connecticut property for $1,700,000, subject to routine closing adjustments. The closing of the transaction is anticipated to occur in the first week of April 2016. Upon closing of the transaction, we will enter into a lease for the property with an initial term of 15 years, with an option to renew the lease for an additional five years.  In addition to rent, initially $155,000 per annum, subject to annual increase, we also will be responsible for real estate taxes and the maintenance of the buildings and the property. The net proceeds from the sale of the property will be applied to the amounts owed to PNC.
On September 8, 2015, we borrowed $350,000 from Michael N. Taglich, Chairman of our Board of Directors, and issued to him our promissory note in the principal amount of $350,000financing described below, to evidence our obligation to repay the loan.foregoing advances.

In May 2018, we issued $1,200,000 principal amount of subordinated notes due May 31, 2019 (the “2019 Notes”), together with a total of 214,762 shares of common stock (the “Shares”), to Michael Taglich, Robert Taglich and another accredited investor. As part of the financing, we issued to Michael Taglich $1,000,000 principal amount of 2019 Notes and 178,571 shares of common stock for a purchase price of $1,000,000 and we issued to Robert Taglich $100,000 principal amount of 2019 Notes and 17,857 shares of common stock. We issued and sold a 2019 Note in the principal amount of $100,000, plus 18,334 shares of common stock, to the other accredited investor for a purchase price of $100,000. Seventy percent (70%) of the total purchase price for the 2019 Notes and Shares purchased by each investor has been allocated to the 2019 Notes with the remaining thirty percent (30%) allocated to the Shares purchased with the 2019 Notes. The notenumber of Shares purchased by Michael Taglich and Robert Taglich was calculated based upon $1.68, the closing price of the common stock on May 18, 2018, the trading day immediately preceding the date they purchased the 2019 Notes and shares of common stock. 

Interest on the 2019 Notes is payable on the outstanding principal amount thereof at the rate of one percent (1%) per month, payable monthly commencing June 30, 2018. Upon the occurrence and continuation of a failure to pay accrued interest, interest shall accrue and be payable on such amount at the rate of 1.25% per month; provided that upon the occurrence and continuation of a failure to timely pay the principal amount of the 2019 Note, interest shall accrue and be payable on such principal amount at the rate of 1.25% per month and shall no longer be payable on interest accrued but unpaid. The 2019 Notes are subordinate to our obligations to PNC under the Loan Facility.

Taglich Brothers acted as placement agent for the offering and received a commission in the aggregate amount of 4% of the amount invested which was paid in kind.


Related party notes payable, net of debt discount to Michael and Robert Taglich, and their affiliated entities, totaled $4,835,000 and $1,912,000, as of December 31, 2018 and December 31, 2017, respectively.

On January 15, 2019, we issued our 7% senior subordinated convertible promissory notes due December 31, 2020, each in the principal amount of $1,000,000 (together, the “7% Notes” and each a “7% Note”), to Michael Taglich and Robert Taglich, each for a purchase price of $1,000,000. Each 7% Note bears interest at the rate of 4%7% per annum, and is payable on September 7, 2016. Our obligationconvertible into shares of our common stock at a conversion price of $0.93 per share, subject to pay the noteanti-dilution adjustments set forth in the 7% Note, is subordinated to our indebtedness under the Credit Facility, and matures at December 31, 2020, or earlier upon an Event of Default (as defined in the7% Note).

We paid Taglich Brothers, Inc. a fee of $80,000 (4% of the purchase price of the 7% Notes), in the form of a promissory note having terms similar to PNC.

We have paid quarterly dividends to our shareholders each quarter commencingthe 7% Notes, in connection with the first quarterpurchase of 2013the 7% Notes.

Amendments to 8% Notes

In September 2018, holders of a majority of the outstanding principal amount of our 8% subordinated convertible notes (the “8% Notes) consented to an amendment to the terms of the 8% Notes to extend the maturity date to December 31, 2020 and to reduce the interest rate from and after September 30, 2018, to 6% per annum, if paid in cash, or at the rate of 8% per annum if converted into common stock. In addition, accrued interest on the 8% Notes, as so amended (the “6% Notes”), was payable at maturity, rather than quarterly.

At September 30, 2018, Michael Taglich, Robert Taglich and Taglich Brothers (collectively, the “Taglich Parties”) owned $1,300,000, $650,000 and $382,000, respectively, principal amount of 8% Notes, with accrued interest thereon from the date of issuance through September 30, 2018 of $203,613, $120,097 and $68,294, respectively. In consideration for waiving all defaults in payment of principal and accrued interest on the 8% Notes through the third quarterdate of 2015. On January 24, 2014,the amendment, the conversion price of the 6% Notes was reduced to $1.50 per share, subject to the anti-dilution adjustments set forth in the 6% Notes, and we paidissued to the holders of the 8% Notes such number of shares of common stock calculated based upon a dividendvalue of $1.39 per share, the closing market price of common stock on the NYSE American on September 28, 2018, the date immediately prior to the date the holders of a majority of the outstanding principal amount of the 8% Notes approved the amendment as is equal to $0.125the interest accrued on their 8% Notes from the date of issuance through September 30, 2018. As a result, we issued to Michael Taglich, Robert Taglich and Taglich Brothers 146,484 shares, 86,401 shares and 49,132 shares, respectively, of common Stock. From and after September 30, 2018, interest on the unpaid principal amount of the Amended Notes shall accrue and be paid at the rate of six (6%) percent per annum, if paid in cash or at the rate of eight (8%) percent if converted into common stock.

For soliciting noteholders in connection with the adoption of the amendments, we agreed to pay Taglich Brothers $95,550, representing a fee equal to 2% of the outstanding principal amount of 8% Notes whose registered holders (other than Taglich Brothers) received shares of common stock in lieu of cash payment of accrued interest on the 8% Notes as of September 30, 2018.

Equity Financings

On July 19, 2018, we issued and sold a total of 322,000 shares of our common stock for gross proceeds of $460,460, or a $1.43 per share, or $733,000 to all shareholdersfour accredited investors pursuant to subscription agreements.

For acting as placement agent of record as of January 9, 2014. On April 22, 2014, we paidthe offering, Taglich Brothers, Inc. is entitled to a dividendplacement agent fee equal to $0.15 per share$27,627.60 (6% of the gross proceeds of the offering), payable at our option, in cash or $885,000shares of Common Stock on the terms sold to all shareholdersthe purchasers.

On October 1, 2018, we sold 800,000 shares of recordcommon stock and warrants to purchase 280,000 additional shares of common stock for gross proceeds of $1,000,000 to RBI Private Investment III, LLC, an accredited investor within the meaning of Rule 501(a) of Regulation D under the Securities Act (“Regulation D”), in a private offering exempt from the registration requirements of the Securities Act under Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act. We agreed to pay Taglich Brothers $70,000 (7% of the gross proceeds of the offering) for acting as of April 15, 2014. On July 10, 2014, we paid a dividend equal to $0.15 per share or $1,064,000 to all shareholders of record as of June 30, 2014. On November 3, 2014, we paid a dividend equal to $0.15 per share or $1,065,000 to all shareholders of record as of October 20, 2014. placement agent for the offering.


AMK Revenue Stream Payments Financing

On January 15, 20152019, we paidentered into a dividend equalPurchase Agreement with 15 accredited investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to $0.15 per common share or $1,066,000which we assigned to the Purchasers all shareholders of record asour right, title and interest to the remaining $1,136,710 of the $1,500,000 in payments due from Meyer Tool, Inc. for the sale of AMK Welding, Inc. (the “Remaining Amount”) for an aggregate purchase price of $800,000, including $100,000 from each of Michael and Robert Taglich, and $75,000 for the benefit of the children of Michael Taglich. The timing of the payments is based upon the net sales of AMK Welding, Inc., which we sold to Meyer Tool in January 2, 2015. On April 24, 2015 we paid a dividend equal2017. If the Purchasers have not received the entire Remaining Amount by March 31, 2023, they have the right to $0.15 per common share or $1,134,000 to all shareholdersdemand payment of record astheir pro rata portion of April 13, 2015. On August 12, 2015, we paid a dividend equal to $0.15 per common share or $1,134,000 to all shareholders of record as of August 3, 2015. On December 1, 2015, we paid a dividend equal to $0.15 per common share or $1,133,000 to all shareholders of record as of November 23, 2015. It has been our practice to pay cash dividends to our shareholders when our Board of Directors deemed appropriate. All determinations relating to our dividend policythe unpaid Remaining Amount from us (“Put Right”). To the extent the Purchasers exercise their Put Right, the remaining payments from Meyer will be made atto us.

The Purchasers agreed to pay Taglich Brothers a fee equal to 2% per annum of the discretionpurchase price paid by such Purchasers, payable quarterly, to be deducted from the payments of the Remaining Amount, for acting as paying agent in connection with the assignment of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant. Further, the payment of any cash dividends requires compliance with financial covenants of the loan agreement with our principal lender and, even if such financial covenants are met, since we are highly leveraged, our Board of Directors would consider any opinion our senior lender might express with regardsrights to the payment of any cash dividends.

payments from Meyer Tool.

Cash Flow


The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):


  Year ended  Year ended 
  December 31, 2015  December 31, 2014 
       
Cash (used in) provided by      
Operating activities $(894)  $(2,799) 
Investing activities  (8,560)   (9,663) 
Financing activities  8,565   13,319 
Net increase in cash and cash equivalents $(889)  $857 
23

  Year Ended
December 31,		 
  2018  2017 
Cash provided by (used in)      
Operating activities $(2,336)  (3,986)
Investing activities  3,685   1,761 
Financing activities  33   1,551 
Net increase (decrease) in cash and cash equivalents $1,382   (674)

Table of Contents


Cash Provided By (Used In) Provided By Operating Activities

Cash (used in) provided byused in operating activities primarily consists of our net incomeloss adjusted for certain non-cash items and changes to working capital.


capital items.

For the year ended December 31, 2015, our2018, net cash used in operating activities of $894,000 was comprised ofimpacted by a net loss of $832,000 less $4,982,000$10,992,000, offset by $7,943,000 of cash used by changes in operating assets and liabilities plus adjustments for non-cash items, of $4,920,000. Adjustments for non-cash items consistedconsisting primarily of goodwill impairment of $109,000, depreciation of property and equipment of $3,090,000,$2,877,000, amortization of debt discount on convertible notes payable of $941,000, amortization and change in useful life of capitalized engineering costs of $2,711,000. Operating assets and liabilities further used cash in the net amount of $713,000, consisting primarily of the net increases in deposits and other long term assets and accounts receivable amounts of $1,112,000 and $561,000, and a decrease in inventory and accounts payable and accrued expenses in the amounts of $1,395,000 and $1,127,000, partially offset primarily by an increase in deferred revenue of $2,076,000.

For the year ended December 31, 2017, net cash was impacted by a net loss of $22,551,000, offset by $19,172,000 of non-cash items consisting primarily of goodwill impairment of $9,612,000, depreciation of property and equipment of $2,723,000, amortization of debt discount on convertible notes payable of $2,301,000, amortization of capitalized engineering costs and intangibles and other items of $1,807,000, bad debt expense of $176,000, representing amounts reserved for as potentially uncollectible, and non-cash compensation of $100,000, and deferred income taxes of $484,000. These non-cash items were offset by $38,000 of deferred gain on the sale of real estate. The increase in operating$1,096,000. Operating assets and liabilities consistedfurther used cash in the net amount of a$607,000, consisting primarily of the net increasedecrease of accounts payable and accrued expenses in Operating Assetsthe amount $3,527,000 and decreases in accounts receivable, prepaid taxes and inventory of $9,087,000$1,004,000, $360,000 and a net increase in Operating Liabilities of $4,105,000. The increase in Operating Assets was comprised of$905,000, respectively, partially offset primarily by an increase in inventory of $8,412,000, and a net increase in prepaid expenses and other current assets,deferred revenue and deposits and other assets of $766,000, partially offset by a decrease in accounts receivable of $91,000 due to the timing of shipments to$410,000 and cash receipts from customers. The net increase in Operating Liabilities was comprised of increases in accounts payable and accrued expenses of $3,593,000 due to the timing of the receipt and payment of invoices, an increase in deferred rent of $29,000, and an increase in deferred revenue of $540,000, partially offset by, a decrease in income taxes payable of $57,000.


$113,000, respectively.

Cash Used inProvided By (Used in) Investing Activities


Cash used inprovided by investing activities consists of the cash received from the businesses we sold, reduced by capital expenditures for property and equipment and capitalized engineering costs and the cash payments for the businesses we acquire.costs. A description of capitalized engineering costs can be found below and in footnoteNote 3 Summary of Significant Accounting Policies in our Consolidated Financial Statements for the year ended December 31, 2015.

2018.


For the year ended December 31, 20152018, cash used inprovided by investing activities was $8,560,000.$3,685,000. This was comprised of $6,340,000 for the acquisitionsnet proceeds from the sale of Sterling and Compac, netWMI of cash acquired, $656,000$5,452,000, offset by $523,000 for capitalized engineering costs and $1,564,000$1,264,000 for the purchase of property and equipment.


For the year ended December 31, 2017, cash provided by investing activities was $1,761,000. This was comprised of the proceeds from the sale of the AMK subsidiary of $4,260,000, offset by $985,000 for capitalized engineering costs and $1,514,000 for the purchase of property and equipment.

Cash Provided By (Used in) Financing Activities


Cash provided by (used in) financing activities consists of dividend payments, the borrowings and repayments under our credit facilities with our senior lender, and increases in and repaymentrepayments of capital lease obligations and other notes payable.


payable, and the proceeds from the sale of our equity.

For the year ended December 31, 2015,2018, cash provided by financing activities was $8,565,000.$33,000. This was comprised of additional borrowingsrepayments of $3,500,000 under our term loans and $11,933,000 under our revolving credit facility, partially offset by repayments$1,899,000 on our term loan, $2,412,000 on our revolving loans, of $2,030,000,$1,286,000 on our capital lease obligations, $125,000 on our deferred financing costs, offset by proceeds from notes payable issuances of $2,803,000 to related parties and $70,000 to third parties and proceeds from the issuance of common stock of $2,885,000.

For the year ended December 31, 2017, cash provided by financing activities was $1,551,000. This was comprised of repayments of $3,178,000 on our term loan, $7,938,000 on our revolving loans, $1,397,000 on our capital lease refinanceobligations, payments of $500,000, proceeds from notenotes payable issuances of $350,000, partially offset by, repayments under our capital leases of $717,000, $41,000 paid to the former shareholders of WMI, $4,468,000 used for dividends,$463,000, and deferred financing costs of $402,000$50,000, offset by proceeds from notes payable issuances of $2,660,000 to related parties and $60,000 related$4,184,000 to lease impairment.


third parties and proceeds from the issuance of common stock of $7,733,000.

CONTRACTUAL OBLIGATIONS


The following table sets forth our future contractual obligations as of December 31, 2015:


  
Payment due by period   (in thousands)
     Less than  1-3 3-5 More than
  Total  1 year*  years years 5 years
Debt and capital leases  
$45,395
   $41,135  $2,666 $1,594 $-
Operating leases  17,179   1,973  3,784 3,007 8,415
Total  $62,574   $43,108  $6,450 $4,601 $8,415
 
* The revolving line of credit and term loans with our senior lender are classified as due in less than 1 year, see Note 9 to our Consolidated Financial Statements.
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  Payment due by period (in thousands) 
  Total  Less than
1 year*		  1-3
years		  3-5
years		  More than
5 years		 
Debt and capital leases $25,153   24,544   594   15   - 
Operating leases  7,550   1,149   2,034   1,763   2,604 
Total $32,703   25,693   2,628   1,778   2,604 

*The revolving loans and term loans with our senior lender are classified as due in less than 1 year, see Note 11 to our Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS


We did not have any off-balance sheet arrangements as of December 31, 2015.

2018.


Going Concern

We suffered losses from operations of $5,963,000 and $12,758,000 and net losses of $10,992,000 and $22,551,000, respectively, for the years ended December 31, 2018 and 2017, respectively. We also had negative cash flows from operations for the year ended December 31, 2017. In addition, in each of January 2017 and December 2018 we sold an operating subsidiary. We also have had to sell debt and equity securities to secure funds to operate our business and may have to continue to do so until we are able to achieve profitability and positive cash flow.

In late fiscal 2017, we initiated a repositioning of our business to obtain profitability and improve our liquidity position. The continuation of our business is dependent upon our 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 we are unable to continue as a going concern.

Critical Accounting Policies


We have identified the policies below as critical to our business operations and the understanding of our financial results.


Assets Held for Sale

We classify assets as held for sale and suspend depreciation and amortization when approval at the appropriate level has been provided, the assets can be immediately removed from operations, an active program has begun to locate a buyer, the assets are being actively marketed for sale at or near their current fair value, significant changes to the plan of sale are not likely and the sale is probable within one year. Upon classification as held for sale, long-lived assets are no longer depreciated, and an assessment of impairment is performed to identify and expense any excess of carrying value over fair value less costs to sell. Subsequent changes to the estimated fair value less costs to sell will impact the measurement of assets held for sale. To the extent fair value increases, any impairment previously recorded is reversed. If the carrying value of the assets held for sale exceeds the fair value less costs to sell, we will record a loss for the amount of the excess.

If we decide not to sell previously classified assets held for sale, the assets are reclassified back to their original asset group in the period that it’s determined to no longer be held for sale. The assets are recorded at the lower of the carrying value before being classified as held for sale adjusted for depreciation that would have been recognized during the time they were classified as held for sale or fair value at the date we decided not to sell.

As of December 31, 2018, we sold WMI Group.

Inventory Valuation


We do not take physical inventories at interim quarterly reporting periods. The Company valuesvalue of the majority of the items in inventory has been estimated using a gross profit percentage based on sales of previous periods as compared to the net sales of the current period, as management believes that the gross profit percentage on these items are materially consistent from period to period.

The remainder of the inventory value is estimated based on our standard cost perpetual inventory system, as management believes the perpetual system computed value for these items provides a better estimate of value for that inventory.

For annual reporting, we value inventory at the lower of cost on a first-in-first-out basis or market.


estimated net realizable value.

We generally purchase 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. We occasionally produce larger more complex products, such as landing gear, finished goods in excess of purchase order quantities in anticipation of future purchase order demand. Historically this excess has been used in fulfilling future purchase orders. We purchase 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.

We present inventory net of progress billings in accordance with the specified contractual arrangements with the United States Government, which results in the transfer of title of the related inventory from the Company to the United States Government, when such progress payments are received.


Capitalized Engineering Costs


The Company has

We have contractual agreements with customers to produce parts, which the customers design. Though the Company hashave not designed and thus hashave no proprietary ownership of the parts, the manufacturing of these parts requires pre-production engineering and programming of our 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 arewere amortized on a straight line basis over the shorter of the estimated length of the contract, or three years.


If the Company iswe were reimbursed for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would be capitalized. The CompanyWe also may also progress bill customers for certain engineering costs being incurred. Such billings are recorded as progress billings (a reduction of the associated inventory) 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.


Based on various technological advances by our customer’s and the rapid pace of innovation including change in future production methodologies and systems, it has become more complicated to estimate the future life and recoverability of the assets we are currently capitalizing. It is the belief of the Company that it would be preferable and therefore justifiable to expense these costs as incurred through cost of goods sold, rather than continue to capitalize these costs and amortize them through operating expense.

As of December 31, 2018 we changed our policy to no longer capitalize engineering costs and to write-off the capitalized engineering balance of $2,043,000.

Revenue Recognition


On January 1, 2018, the Company adopted ASC 606 “Revenue from Contracts with Customers”, as amended regarding revenue from contracts with customers using the modified retrospective approach, which was applied to all contracts with Customers. Under the new standard an entity is required to recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods.

There was no cumulative financial statement effect of initially applying the new revenue standard because an analysis of our contracts supported the recognition of revenue consistent with our historical approach. In accordance with the modified retrospective approach, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recognizesdoes not expect the adoption of the new revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition."standard to have a material impact on the Company’s revenues or net income on an ongoing basis.

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company recognizesanalyzes its different goods by segment to determine the appropriate basis for revenue when productsrecognition, as described below. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are shipped and/orsubsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.

Our rights to payments for goods transferred to customers are conditional only on the customer takes ownershippassage of time and assumes risknot on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. payment within 30 to 75 days.

Payments received in advance from customers for products delivered are recorded as customer deposits until earned, at which time revenue is recognized. The Terms and Conditions contained in our customer Purchasepurchase orders often provide for liquidated damages in the event that a stop work order is issued prior to the final delivery. The Company utilizesWe utilize 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. Freight out is included in operating expenses.


The Company recognizes

Under ASC 606, revenue is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). In evaluating our contracts with our customers under ASC 606, we have determined that there is no future performance obligation once delivery has occurred. Accordingly, we have determined that there is no impact on the timing of recording sales and operating profit.

We recognize certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement, the Company makeswe make an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition. The customer must initiate the request for the bill and hold arrangement. The customer must have made this request in writing in addition to their fixed commitment to purchase the item. The risk of ownership has passed to the customer, payment terms are not modified and payment will be made as if the goods had shipped.


Income Taxes

The Company accounts

We account for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income“Income Taxes,"” which requires that the Companywe 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. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.


The Company accounts

We account for uncertainties in income taxes under the provisions of FASB ASC 740-10-05, "Accounting“Accounting for Uncertainty in Income Taxes."” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise'senterprise’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.


Stock-Based Compensation


The Company accounts

We account for stock-based compensation expense in accordance with FASB ASC 718, "Compensation“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 estimatesWe estimate 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. Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances change that will more likely than not reduce the fair value of the reporting unit below its carrying amount.


The Company accounts

We account 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

We perform impairment testing for goodwill annually, or more frequently when indicators of impairment exist, using a three-step approach. Step “zero” is 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. Step one“one” compares the fair value of the net assets of the relevant reporting unit (calculated using a discounted cash flow method) to its carrying value, a second stepvalue. Step “two” is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.


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 recordsWe record 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. ThereAs of December 31, 2018, the intangible assets have been fully amortized and there has been no impairment as of December 31, 2015 and 2014.

impairment. 


Recently Issued Accounting Pronouncements


In January 2015,February 2016, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (“ASU 2015-01”)No. 2016-02, “Leases (Topic 842). ASU 2015-01 eliminates the concept of an extraordinary item from accounting principles generally accepted” Among other things, in the United States of America. As a result, an entityamendments in ASU 2016-02, lessees will no longer be required to segregate extraordinary itemsrecognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the resultslessee’s right to use, or control the use of, ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the effects of Adopting ASU 2015-01 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.


In February 2015, the FASB issued amended guidance to the consolidation standard which updates the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendment modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, among other provisions. This amended guidance will be effectivespecified asset for the Company beginning fiscal year 2016. Early adoption is permitted. The Company is currently assessing the impact the adoption of the amended guidance will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued amended guidance which requires debt issuance costs to be presented as a direct deduction from the carrying value of the associated debt liability rather than as separate assets on the balance sheet. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. This amended guidance will be effective for the Company beginning fiscal year 2016. Early adoption is permitted, andlease term. Under the new guidance, will be applied on a retrospective basis. The Company does not expectlessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the adoption of this amended guidance to have a significant impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenuelessee accounting model and Topic 606, Revenue from Contracts with Customers” (“ASU 2014-09”). The amendments in ASU 2014-09 affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC 605, “Revenue Recognition” and most industry-specific guidance and creates ASC 606, “Revenue from Contracts with Customers.” On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year and the amendments are now effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently assessing the impact on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value when the FIFO or average cost method is used. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively. Earlier adoption is permitted. The Company is currently assessing the impact the adoption of the amended guidance will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments”. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this update eliminate the requirement to retrospectively account for those adjustments. The amendments in this updateASU are effective for fiscal years beginning after December 15, 2015,2018, including interim periods within those fiscal years,years. Early application is permitted upon issuance. Lessees (for capital and should be applied prospectivelyoperating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently assessing the impact that ASU 2016-02 will have on our consolidated financial statements. We have been gathering the lease agreement data and has begun to adjustmentsanalyze the financial impact to provisional amountsour consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that occur afterpermits lessors to not separate non-lease components from the associated lease component if certain conditions are present. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of this update, with earlier applicationthe remaining minimum rental payments that were tracked and disclosed under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for our fiscal year beginning April 1, 2019 and subsequent interim periods. Our current lease arrangements expire through 2021 and we are currently evaluating the impact the adoption of these ASUs will have on our consolidated 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 financial statementstransactions that have not been issued. The Company doesreported in issued financial statements. We do not expectbelieve that the adoption of this amended guidance to have a significantpronouncement has an impact on the presentation of its consolidated financial statements.

In November 2015,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. We are 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 2015-17, "Income Taxes2017-11, Earnings Per Share (Topic 740), Balance Sheet Classification260); 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 Deferred Taxes", which requiresthe 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 classify all deferred tax assetsexclude 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 liablilitiesthe strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as non-current onwarrants, an entity will treat the balance sheet insteadvalue of separating deferred taxes into currentthe effect of the down round, when triggered, as a dividend and non-current amounts.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 isin ASU 2017-11is effective for fiscal years beginning after December 15, 2016, including2018, and interim periods thereafter, with earlywithin those fiscal years. Early adoption is permitted, and eitherthe guidance is to be applied using a full or modified retrospective approach. We adopted this guidance in the current quarter, effective April 1, 2017. As a result, the warrants issued on May 12, 2017, in connection with prosepective or retrospective application permitted.the bridge financing, were equity-classified.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update will be effective for all interim and annual reporting periods beginning after December 15, 2018. We do not expectbelieve that the adoption of this newpronouncement has an impact on the presentation of its financial statements.


In March 2018, the FASB issued Accounting Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). ASU 2018-05 adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB No. 118”), which was effective immediately. SAB No.118 provides for a provisional one year measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Cuts and Jobs Act. The adoption of ASU 2018-05 had no material impact on our consolidated financial statements as of and for the year ending December 31, 2018. See Note 10, Income Taxes, for disclosures related to this amended guidance.

In June 2018, the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share based compensation. The guidance is effective for our fiscal year beginning January 1, 2020. While the exact impact of this standard is not known, the guidance is not expected to have a material impact on our consolidated financial statements, as non-employee stock compensation is nominal relative to our total expenses as of December 31, 2018.

In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). This ASU reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). A VIE is an organization in which consolidation is not based on a majority of voting rights. The new guidance supersedes the private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We are currently assessing the impact the adoption of ASU 2018- 17 will have on the Company’s consolidated financial statements.

27
The Company doesthe earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company’s fiscal year beginning April 1, 2019 and subsequent interim periods. Our current lease arrangements expire through 2021 and we are currently evaluating the impact the adoption of these ASUs will have on our consolidated financial statements.

We do not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.


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,” we 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. We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an "emerging growth company" or (ii) affirmatively and irrevocably opt out of this extended transition period. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an "emerging growth company" or affirmatively and irrevocably opt 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 our consolidated financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.
28
statements. 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Consolidated Financial Statements


The financial statements required by this item begin on page F-1 hereof.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


None.


ITEM 9A.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures

An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”), its principal executive officer, and Chief AccountingFinancial Officer (“CAO”CFO”), its principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of December 31, 2015.2018. Based on that evaluation, due to the material weaknesses in the Company’s internal control over financial reporting discussed below, the CEO and CAOCFO concluded that, for the reasons discussed below, our disclosure controls and procedures were not effective as of December 31, 2015.

2018. This was due to certain deficiencies in our controls over financial reporting, described below.

Management’s Report on Internal Control over Financial Reporting

Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal controls over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal controls over financial reporting.


Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal controls over financial reporting refers to the process designed by, or under the supervision of our Chief Executive Officer and our Chief Accounting Officer, and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:

(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

(1)pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

(2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

(3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management relies upon the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in designing a system intended to meet the needs of our Company and provide reasonable assurance for its assessment.

In connection with their review of our internal controls over financial reporting for the fiscal year ended December 31, 2015, and  after our independent registered public accountants met with the Audit Committee to discuss the Company’s internal control environment,2018, our Chief Executive Officer and Chief AccountingFinancial Officer have concluded that our internal controls over financial reporting were not effective as of December 31, 2015.2018. In particular, certain portions of our controls over financialinventory control system have not been integrated into the management system used by the balance of the Company which could result in a failure to properly account for the costs associated with work in process, slow moving inventory and the value of inventory on hand, and the enterprise reporting system used to track employee hours and, hence, costs to be included in work in process, is not sufficiently automated to ensure compliance at all times. In addition, our Chief Executive Officer and Chief Financial Officer concluded that our quarterly closing process was deficient and that our consolidating process and period end reporting and disclosure procedures were not effective duematerially weak. They also concluded that we lacked the accounting personnel necessary to a material weaknessaccount for complex accounting matters and unusual and non-standard transactions and were deficient in supervision and internal control monitoring. While we have taken remedial action both prior to and subsequent to the year ended December 31, 2018, by adding to our accounting staff, continuing to implement our ERP system throughout our operations and reducing the complexity of our operations as a result of the inabilitysale or wind down of various businesses we do not feel that enough time has passed to allow us to determine whether these remedial efforts have been effective and eliminated all of our internal accounting personnel to identify,analyze, record and disclose the tax and financial reporting implications of certain complex accounting matters related to non-standard and unusual transactions.. deficiencies.

To remedy this weaknessthese weaknesses, when financially able, we plan to supplement our accounting staff with additional experienced financial professionals, redefining and realigning responsibilities and by defining additional controls, reporting processes and procedures to address the accounting requirements and disclosures for non-standard and unusual transactions. In addition, until we locate and engage appropriate accounting personnel, we will engage third party consultants to assist in accounting for non-recurring complex transactions.


In addition, our Chief Executive Officer and Chief Accounting Officer determined, after our independent registered  public accountants met with the Audit Committee to discuss the Company’s internal control environment, that we have a material weakness with respect to inventory accounting, in particular with respect to tracking for the aging of certain items reserving for slow moving inventory and obsolescence and, consequently, valuation of our inventory. In recent years, we have expanded our business in part through acquisitions, primarily of private companies.  The companies we have acquired have not had the level of accounting systems and controls, in particular with respect to inventory, appropriate for a public company.  To remedy this weakness we plan to supplement our accounting staff with additional experienced financial professionals to be located at certain of the companies we acquired and to upgrade the systems utilized by these companies so that they maintain records and produce the reports necessary for a public company.

The material weaknesses discussed above will not be considered remediated until the necessary personnel have been engaged and the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively

effectively.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. The rules of the Securities and Exchange Commission do not require an attestation of the Management’s report by our registered public accounting firm in this annual report.

Change in Internal Control over Financial Reporting


There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter and year ended December 31, 20152018 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.


ITEM 9B.  OTHER INFORMATION.

None


None
PART III

Item 10.  Directors, Executive Officers, and Corporate Governance


Incorporated

The information required by Paragraph (a), and Paragraphs (c) through (g) of Item 401 of Regulation S-K (except for information required by Paragraph (e) of that Item to the extent the required information pertains to our executive officers) and Item 405 of Regulation S-K is hereby incorporated by reference from the information in our Proxy Statement for our 2016 Annual Meeting of Stockholders, which we will filedefinitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year.

The following table presents the information required by Paragraph (b) of Item 401 of Regulation S-K.

Our directors and executive officers are:

Name:AgePosition
Luciano (Lou) Melluzzo54President and Chief Executive Officer
Michael E. Recca68Chief Financial Officer
Michael N. Taglich53Chairman of the Board
Robert F. Taglich52Director
David J. Buonnano63Director
Peter D. Rettaliata68Director
Robert C. Schroeder52Director
Michael Brand61Director
Michael D. Porcelain50Director

Luciano (Lou) Melluzzo has been our President and Chief Executive Officer since November 15, 2017. He joined our company on September 11, 2017 as Chief Operating Officer. From November 2003 to September 2011, Mr. Melluzzo was employed in various capacities by EDAC Technologies Corporation (“EDAC”), a designer, manufacturer and distributor of precision aerospace components and assemblies, precision spindles and complex fixturing, tooling and gauging with design and build capabilities, whose shares were then listed on the Nasdaq Capital Market. He served as EDAC’s Vice President and Chief Operating Officer from November 2005 until February 2010. From September 2011 to November 2015, Mr. Melluzzo was self-employed in the residential real estate redevelopment industry. From November 2015 to January 2017, he was general manager of Polar Corporation, a privately-held company specializing in computer numeric controlled milling and turning of small hardware components for the aerospace industry.

Michael E. Recca has been our Chief Financial Officer since October 1, 2016. Mr. Recca has been engaged by us since September 2008 in a variety of positions related to our capital finance and acquisition programs. Most recently he served as Chief of Corporate Development& Capital Markets, a position in which he directed our acquisition program and coordinated with our lenders. Mr. Recca received a Bachelor of Arts degree from the SUNY Stony Brook and an MBA from Columbia University.

Michael N. Taglichhas been Chairman of our Board of Directors since September 22, 2008. He is Chairman and President of Taglich Brothers, a New York City based securities firm which he co-founded in 1992 and which is focused on public and private micro-cap companies.  Mr. Taglich is currently Chairman of the endBoard of Mare Island Dry Dock LLC, a company engaged in ship repair services, and BioVentrix, Inc., a privately held medical device company whose products are directed at heart failure. He also serves as a Director of Bridgeline Digital Inc., a publicly traded company, Icagen Inc., a reporting but not trading company engaged in early stage pharmaceutical research, Decision Point Systems Inc., a private company engaged in Field service automation, Dilon Technologies, a private medical device company and Autonet Mobile Inc., a private company focused on connecting automobiles to the internet.


Robert F. Taglichhas been a director of our company since 2008. He is a Managing Director of Taglich Brothers, which he co-founded in 1992. Prior to founding Taglich Brothers, Mr. Taglich was a Vice President at Weatherly Securities. Mr. Taglich has served in various positions in the securities brokerage industry for the past 25 years. Mr. Taglich serves on the board of privately held BioVentrix, Inc., a medical device company whose products are directed at heart failure. Mr. Taglich holds a Bachelor’s degree from New York University.

David J. Buonannohas been a director of our company since 2008. He is the Founder and President of Buonanno Enterprises Consulting, providing strategic management, supply chain/operations and recruitment services to aerospace and defense industry clients. Mr. Buonanno has extensive experience in manufacturing, supply management and operations. He was employed by Sikorsky Aircraft, Inc., a subsidiary of United Technologies Corporation, as Vice President, Supply Management and International Offset (from January 1997 to July 2006) and as Director, Systems Subcontracts (from November 1992 to January 1997). From May 1987 to November 1992, he was employed by General Electric Company serving as Operations Manager and Manager, Program Materials Management of GE’s Astro-Space Division. From June 1977 to May 1987, he was employed by RCA and affiliated companies. Mr. Buonanno attended Lehigh University College of Electrical Engineering and holds a B.S. in Business Administration from Rutgers University. He completed the Program for Management Development at Harvard Business School in 1996.

Peter D. Rettaliatahas been a director of our company since 2005. He served as our Acting President and Chief Executive Officer from March 2, 2017 to November 15, 2017, and served as our President and Chief Executive Officer from November 30, 2005 to December 31, 2014. He also served as the President of our wholly-owned subsidiary, AIM, from 1994 to 2008. Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman Aerospace Corporation for twenty-two years, where he attained the position of Senior Procurement Officer. Professionally, Mr. Rettaliata has served as the Chairman of “ADDAPT”, an organization of regional aerospace companies, as a member of the fiscal yearBoard of Governors of the Aerospace Industries Association, and as a member of the Executive Committee of the AIA Supplier Council. He is a graduate of Niagara University where he received a B.A. in History and Harvard Business School where he completed the PMD Program.

Robert C. Schroederhas been a director of our company since 2008. He is Vice President - Investment Banking of Taglich Brothers and specializes in advisory services and capital raising for small public and private companies. Mr. Schroeder joined Taglich Brothers in April 1993 as an Equity Analyst publishing sell-side research. Prior to which this Annual Report relates.

joining Taglich Brothers, he served in various positions in the brokerage and public accounting industry. Mr. Schroeder also serves as a director of the following publicly traded companies: DecisionPoint Systems, Inc., a leading provider and integrator of Enterprise Mobility, Wireless Applications and RFID solutions, and Intellinetics, Inc., a provider of cloud-based enterprise content management solutions. Mr. Schroeder received a B.S. degree in accounting and economics from New York University. He is a Chartered Financial Analyst and a member of the Association for Investment Management and Research and a member of the New York Society of Security Analysts.

Michael Brandhas been a director of our company since 2012, and from March 2017 to November 2017 served as a consultant to our company focused on day to day production issues, scheduling of the products to be manufactured and related operational issues such as the maintenance of appropriate inventory levels. He was the President of Goodrich Landing Gear, a unit of Goodrich Corporation, from July 2005 to June 2012. Prior to joining Goodrich for over 25 years he held senior management positions in the Aerospace industry. He began his career at General Electric Corporation and rose to senior management in its jet engine manufacturing operations. Mr. Brand is a graduate of Clarkson University, with advanced degrees and certificates from Xavier University and the Wharton School.


Michael Porcelainhas a director of our company since October 23, 2017. Mr. Porcelainhas been Senior Vice President and Chief Financial Officer of Comtech Telecommunications Corp., a publicly traded company and leading provider of advanced communication solutions for both commercial and government customers worldwide, since March 2006, and from 2002 to March 2006, he served as Vice President of Finance and Internal Audit of Comtech. From 1998 to 2002, Mr. Porcelain was Director of Corporate Profit and Business Planning for Symbol Technologies, a mobile wireless information solutions company. Previously, he spent five years in public accounting holding various positions, including Manager in the Transaction Advisory Services Group of PricewaterhouseCoopers. Since 1998, he has owned and operated The Independent Adviser Corporation, a privately held company which holds the rights to use certain intellectual properties and trademarks (including various Internet websites) related to the financial planning and advisory industry. Mr. Porcelain is an Adjunct Professor at St. John’s University located in New York where he teaches graduate level accounting courses. Mr. Porcelain has a B.S. in Business Economics from State University of Oneonta, New York, a M.S. in Accounting and an M.B.A. degree from Binghamton University.

Michael N. Taglich and Robert F. Taglich are brothers.

Code of Ethics

We have adopted a written code of ethics that applies to our principal executive officers, senior financial officers and persons performing similar functions. Upon written request to our corporate secretary, we will provide you with a copy of our code of ethics, without cost.

Corporate Governance

The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year.

Item 11.  Executive Compensation


Incorporated

The information required by this Item is hereby incorporated by reference from the information in our Proxy Statement for our 2016 Annual Meeting of Stockholders, which we will filedefinitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the end of theour fiscal year to which this Annual Report relates.


year.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Incorporated

The information required by Item 403 of Regulation S-K is hereby incorporated by reference from the information in our Proxy Statement for our 2016 Annual Meeting of Stockholders, which we will filedefinitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the end of theour fiscal year to which this Annual Report relates.


year.

Item 13.  Certain Relationships and Related Transactions and Director Independence


Incorporated

The information required by this Item is hereby incorporated by reference from the information in our Proxy Statement for our 2016 Annual Meeting of Stockholders, which we will filedefinitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the end of theour fiscal year to which this Annual Report relates.


year.

Item 14.  Principal Accountant Fees and Services


Incorporated

The information required by this Item is hereby incorporated by reference from the information in our Proxy Statement for our 2016 Annual Meeting of Stockholders, which we will filedefinitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the end of theour fiscal year to which this Annual Report relates.year. 


PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


The following exhibits are included as part of this report. References to “the Company” in this Exhibit No.  Description


List mean Air Industries Group, a Nevada corporation.

Exhibit No. Description
2.1Agreement and Plan of Merger dated July 29, 2013 between Air Industries Group, Inc. and Air Industries Group (incorporated herein by reference to Exhibit 2.1 to the Registrant'sCompany’s Current Report on Form 8-K filed August 30, 2013).
  
2.2Articles of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 28, 2013 (incorporated herein by reference to Exhibit 3.2 to the Registrant'sCompany’s Current Report on Form 8-K filed August 30, 2013).
  
2.3Certificate of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 29, 2013 (incorporated herein by reference to Exhibit 3.3 to the Registrant'sCompany’s Current Report on Form 8-K filed August 30, 2013).
  
3.1Articles of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Registrant'sCompany’s Current Report on Form 8-K filed August 30, 2013).
  
3.2Certificate of Designation authorizing the issuance of the Series A Preferred Stock (incorporated herein by reference to exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 1, 2016).
3.3Certificate of Amendment increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).
3.4Amendment to Certificate of Designation (incorporated herein by reference to the Company’s Registration Statement on Form S-1 (Amendment No. 2) filed on June 19, 2017 declared effective on July 6, 2017).
3.5Amended and Restated By-Laws of the RegistrantCompany (incorporated herein by reference to Exhibit 3.2 to the Registrant’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).
  
4.1Form of specimen common stock certificate (incorporated herein by reference to exhibit 4.1 to the Company’s Registration Statement on Form S-3 (Registration No. 333-191748) filed on August 26, 2014 and declared effective on August 26, 2014).
4.2Form of Placement Agent’s Warrant Agreement dated as of December 31, 2008 between the Registrant and Taglich Brothers, Inc. (incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed January 7, 2009).
4.2Form of Placement Agent’s Warrant Agreement (incorporated by reference to Exhibit 4.1 to the Registrant’sCompany’s Current Report on Form 8-K filed May 29, 2014).
  
10.14.3ContractForm of Sale,Warrant issued to Taglich Brothers, Inc. in connection with Capital Market Advisory Agreement dated as of November 7, 2005, by and between KPK Realty Corp. and Gales Industries Incorporated for the purchase of the property known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore, NYJanuary 1, 2014 (incorporated herein by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K filed December 6, 2005).
10.2 Mortgage and Security Agreement, dated as of November 30, 2005, by and between Air Industries Machining, Corp. and PNC Bank (incorporated by reference to Exhibit 10.20 of the Registrant's Current Report on Form 8-K filed December 6, 2005).
10.3 Long Term Agreement, dated as of August 18, 2000, between Air Industries Machining, Corp. and Sikorsky Aircraft Corporation (incorporated by reference to Exhibit 10.21 of the Registrant's Current Report on Form 8-K filed December 6, 2005).
10.4 Long Term Agreement, dated as of September 7, 2000, between Air Industries Machining, Corp. and Sikorsky Aircraft Corporation (incorporated by reference to Exhibit 10.22 of the Registrant's Current Report on Form 8-K filed December 6, 2005).

10.5 Stock Purchase Agreement, dated March 9, 2009, between Gales Industries Incorporated and John Gantt and Lugenia Gantt, the shareholders of Welding Metallurgy, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed March 14, 2009).
10.6Amendment No. 1 dated August 2, 20094.3 to the Stock Purchase Agreement, dated March 9, 2009, between Gales Industries Incorporated and John Gantt and Lugenia Gantt, the shareholders of Welding Metallurgy, Inc. (incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K/A filed August 3, 2009).
10.7 7% Promissory Note of Registrant in the principal amount of $2,000,000 in favor of John and Lugenia Gantt (incorporated by reference from the Registrant's Current Report on Form 8-K filed August 26, 2009).
10.8Registration Rights Agreement dated as of August 24, 2009 by and among the Registrant and John and Lugenia Gantt (incorporated by reference from the Registrant's Current Report on Form 8-K filed August 26, 2009).
10.9Amended and Restated Promissory Note dated as of August 26, 2009 payable to John and Lugenia Gantt (the "Amended and Restated Gantt Note") (incorporated by reference from Exhibit 10.46 to the Registrant'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”)2016 filed on April 19, 2017).
  
10.104.4Amendment dated asPlacement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with first closing of October 9, 2009 to Amended and Restated Gantt NoteSeries A Preferred Stock Offering (incorporated herein by reference fromto Exhibit 10.474.1 to the Registrant's 2007Company’s Current Report on Form 10-K)8-K filed on June 1, 2016).
  
10.11 4.5Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 1, 2016).
4.6Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 3, 2016).
4.7Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 3, 2016).
4.8Form of Warrant issued to purchasers of 12% Notes in connection with 12% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 22, 2016).


4.9Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with 12% Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).
4.10Form of 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 23, 2016).
4.11Form of Warrant issued to purchasers of the 8% subordinated convertible notes (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 23, 2016).
4.12Form of Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with the offering of 8% subordinated convertible notes (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 17, 2017).
4.13Form of 8% Subordinated Convertible Note due January 31, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2017).
4.14Form of Warrant issued to purchasers of 8% subordinated convertible notes (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 17, 2017).
4.158% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 23, 2016).
4.16Warrant issued to RBI Private Investment III, LLC (incorporated herein by reference to exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 4, 2018).
4.17Form of 6% Subordinated Convertible Note Due December 31, 2020 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 4, 2018).
Agreements Relating to PNC Loan Facility
10.1Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “PNC Loan Agreement”) dated June 27, 2013 by and among PNC Bank, National Association, as Lender and Agent, and Air Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc. and Air Industries Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant'sCompany’s Current Report on Form 8-K filed June 27,July 3, 2013).
  
10.1210.2Guarantor’s Ratification by Air Industries Group, Inc. under PNC Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the Registrant'sCompany’s Current Report on Form 8-K filed June 27,July 3, 2013).
  
10.132010 Equity Incentive Plan (incorporated by reference to Exhibit 10.24 to the Registrant's Form 10).
 
10.1410.32013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-191560) filed on October 4, 2013).
 
10.15
2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-206341) filed on August 13, 2015).
10.16Subscription documents for purchase of common stock and conversion of junior subordinated notes into common stock. (incorporated by reference to Exhibit 10.25 to the Registrant's Form 10).
10.17 Placement Agent Agreement dated as of May 21, 2012 between the Registrant and Taglich Brothers Inc. (incorporated by reference to Exhibit 10.26 to the Registrant's Form 10).
10.18Common Stock Purchase Agreement dated October 25, 2013 with Kimura Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed October 29, 2013).
10.19First Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.22 to the Registrant'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 25, 2014 (the “2013 Form 10-K”).
  
10.2010.4
Amended and Restated
Second Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.23 to the Registrant'sCompany’s 2013 Form 10-K.)
10-K).
10.21
10.5Amended and Restated Revolving Credit Note issued under the PNC to Loan Agreement (incorporated herein by reference from Exhibit 10.24 to the Registrant'sCompany’s 2013 Form 10-K).
  
10.2210.6Second Amendment toAmended and Restated Term Note in the principal amount of $1,947,603.50 issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.25 to the Registrant'sCompany’s 2013 Form 10-K).
10.23Stock Purchase
10.7Third Amendment to PNC Loan Agreement dated as of April 1, 2014 by and among WMI and the shareholders of Woodbine Products, Inc. (incorporated herein by reference to Exhibit 10.110.2 to the Registrant'sCompany’s Current Report on Form 8-K filed April 2, 2014).
  
10.2410.8ThirdSixth Amendment to Amended and RestatedPNC Loan and Security Agreement with PNC Bank, N.A (incorporated herein by reference to Exhibit 10.210.4 to the Registrant's Current Report on Form 8-K filed April 2, 2014).
10.25Form of Subscription Agreement, dated as of May 28, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 29, 2014).
10.26Placement Agent Agreement, dated as of May 28, 2014, between the Registrant and Taglich Brothers, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 29, 2014).
10.27Stock Purchase Agreement dated as of June 4, 2014, by and among the Registrant and the shareholders of Eur-Pac Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 4, 2014).
10.28Stock Purchase Agreement dated as of October 1, 2014, between the Registrant and Dynamic Materials Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed (October 2, 2014).
10.29Promissory Note of Registrant payable to AMK Welding, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’sCompany’s Current Report on Form 8-K filed October 2, 2014).
  
10.3010.9Mortgage and Security AgreementTerm Note in favorthe principal amount of Dynamic Materials Corporation$3,500,000 (incorporated herein by reference to Exhibit 10.310.5 to the Registrant’sCompany’s Current Report on Form 8-K filed October 2, 2014).
  
10.3110.10Eighth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 10, 2015).


10.11Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 10, 2015).
10.12Tenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 23, 2015).
10.13Fifth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 23, 2015).
10.14Eleventh Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 12, 2016).
10.15Sixth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 12, 2016).
10.16Twelfth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the Registrant’sCompany’s Current Report on Form 8-K filed October 2, 2014)on June 1, 2016).
  
10.3210.17Capital Market Advisory Agreement dated asTerm Loan in the principal amount of January 1, 2014 between the Registrant and Taglich Brothers, Inc.$7,388,000 (incorporated herein by reference to Exhibit 10.3510.5 to the Registrant’s AnnualCompany’s Current Report on Form 10-K for the year ended December 31, 20148-K filed on March 31, 2015)June 1, 2016).
  
10.3310.18Thirteenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2016).
10.19Fourteenth Amendment to PNC Loan Agreement. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 30, 2017).
10.20Sixteenth Amendment to Loan Facility with PNC Bank, N.A. (incorporated herein by reference to Exhibit 10.37 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 filed August 18, 2018).
10.21Seventeenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 3, 2019).
10.22Eighteenth Amendment to PNC Loan Agreement
Agreements Relating to Acquisitions/Dispositions
10.23Agreement and Plan of Merger dated as of February 27, 2015, by and among the Registrant, SEC Acquisition Corp., The Sterling Engineering Corporation (“Old Sterling”) and the shareholders of Old Sterling (incorporated herein by reference to Exhibit 10.1 to the Registrant’sCompany’s Current Report on Form 8-K filed March 5, 2015).
  
10.3410.24Term Note in the principal amountStock Purchase Agreement dated as of $3,500,000January 27, 2017, between Air Industries Group, AMK Welding, Inc., Air Industries Group Poland, LLC and Meyer Tool, Inc. (incorporated herein by reference to Exhibit 10.210.1 to the Registrant’sCompany’s Current Report on Form 8-K filed January 30, 2017).
10.25Stock Purchase Agreement dated March 21, 2018 with CPI Aerostructures, Inc. (“CPI SPA”) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 10, 2015)23, 2018).
  
10.3510.26Open End Mortgage DeedSecond Amendment dated as of December 20, 2018 to CPI SPA.
Agreements Relating to Real Property
10.27Contract of Sale, dated as of November 7, 2005, by and Security Agreement with respect to South Windsor, Connecticut premisesbetween KPK Realty Corp. and Gales Industries Incorporated for the purchase of the property known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore, NY (incorporated herein by reference to Exhibit 10.3 to10.6 of the Registrant’sCompany’s Current Report on Form 8-K filed March 10, 2015)December 6, 2005).
  
10.36Collateral Assignment of Rents, Leases and Profits with respect to South Windsor, Connecticut premises (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed March 10, 2015).
 
10.3710.28Open End Mortgage Deed and Security Agreement with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.5 to the Registrant’sCompany’s Current Report on Form 8-K filed  March 10, 2015).


10.3810.29Collateral Assignment of Rents, Leases and Profits with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.6 to the Registrant’sCompany’s Current Report on Form 8-K filed March 10, 2015).
  
10.39 Offer Letter to Daniel R. GodinAgreements With Officers, Directors and Related Persons
10.30Capital Market Advisory Agreement dated as of January 1, 2014 between the Registrant and Taglich Brothers, Inc. (incorporated herein by reference to Exhibit 10.4210.35 to the Registrant’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).
  
10.4010.31Asset PurchaseSubordinated Note due May 31, 2019 payable to Michael Taglich in the principal amount of $1,000,000 (incorporated herein by reference to Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 filed August 18, 2018).
10.32Subordinated Note due May 31, 2019 payable to Robert Taglich in the principal amount of $100,000. (incorporated herein by reference to Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 filed August 18, 2018).
10.337% Senior Secured Convertible Promissory Note due December 31, 2020 in the principal amount of $1,000,000 registered in the name of Michael Taglich (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 17, 2019).
10.347% Senior Secured Convertible Promissory Note due December 31, 2020 in the principal amount of $1,000,000 registered in the name of Robert Taglich (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 17, 2019).
10.357% Senior Secured Convertible Promissory Note due December 31, 2020 in the principal amount of $80,000 registered in the name of Taglich Brothers, Inc..(incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 17, 2019).
Agreements Relating to Issuance of Securities
10.36Form of Subscription Agreement for the 2019 Notes (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 17, 2017).
10.37Placement Agency Agreement with Taglich Brothers, Inc. for the offering of 8% Subordinated Convertible Notes issued in February 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2017).
10.38Placement Agency Agreement with Taglich Brothers, Inc. for the offering of 8% Subordinated Convertible Notes issued in March 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 22, 2017).
10.39 Placement Agency Agreement with Taglich Brothers, Inc. dated asNovember 29, 2017 for the offering of August 31, 2013 between the Registrant, on the one hand,shares of common stock and Compaq Development Corporation, Peter C. Rao and Vito Valenti, the shareholders of Compaq Development Corporation, on the other handwarrants (incorporated herein by reference to Exhibit 10.1 to the Registrant’sCompany’s Current Report on Form 8-K filed September 1, 2015)on December 12, 2017).
  
10.4110.40 Fifth AmendedSubscription Agreement for the offering of shares of common stock and Restated Revolving Credit Notewarrants (incorporated herein by reference to Exhibit 10.2 to the Registrant'sCompany’s Current Report on Form 8-K filed November 23, 2015)on December 12, 2017).
  
10.4210.41Tenth Amendment to Amended and Restated Loan and SecurityPlacement Agency Agreement with PNC Bank, N.ATaglich Brothers, Inc. dated September 28, 2018 (incorporated herein by reference to Exhibit 10.1 to the Registrant'sCompany’s Current Report on Form 8-K filed November 23, 2015)on October 4, 2018).
10.42Subscription Agreement with RBI Private Investment III, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 4, 2018).
  
10.43Eleventh AmendmentsForm of Subscription Agreement for offering of Subordinated Notes due May 31, 2019 and shares of common stock, together with form of Subordinated Note (incorporated herein by reference to AmendedExhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 22, 2018).
10.44Placement Agency Agreement for offering of Subordinated Notes due May 31, 2019 and Restated Loan and Security Agreement with PNC Bank, N.Ashares of common stock (incorporated herein by reference to Exhibit 10.1 to the Registrant'sCompany’s Current Report on Form 8-K filed February 12, 2016).on May 22, 2018)
  
10.4410.45Sixth Amended and Restated Revolving Credit NoteForm of Subscription Agreement for July 2018 offering of sale of shares of common stock.(incorporated herein by reference to Exhibit 10.38 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2018 filed August 15, 2018).


10.46Placement Agency Agreement with Taglich Brothers, Inc. dated September 28, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 4, 2018).
10.47Form of Subscription Agreement (incorporated herein by reference to Exhibit 10.2 to the Registrant'sCompany’s Current Report on Form 8-K filed February 12, 2016)on October 4, 2018).
 
10.45Promissory Note dated as of September 8, 2015 payable to Michael N. Taglich in the principal amount of $350,000.
10.46Real Estate Purchase and Sale Contract dated December 7, 2015 for the sale of 283 Sullivan Avenue, South Windsor, CT (“South Windsor Contract”).
10.47First Amendment to South Windsor Contract dated January 26, 2016.
  
10.48Second AmendmentPlacement Agency Agreement with Taglich Brothers, Inc. dated May 17, 2018 (incorporated herein by reference to South Windsor ContractExhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 22, 2018).
10.49Form of Subordinated Note due May 31, 2019 (see Exhibit A to Exhibit 10.2). (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 22, 2018).
10.50Form of Subscription Agreement for Subordinated Notes and shares of Common Stock (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 22, 2018).
Other Material Agreements
10.51Purchase Agreement with the Purchasers dated February 24, 2016.January 15, 2019 (incorporated herein by referenceto Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 17, 2019).
Equity Incentive Plans
10.522013 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-191560) filed on October 4, 2013).
10.532015 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-206341) filed on August 13, 2015).
10.542016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).
10.552017 Equity Incentive Plan incorporated herein by reference to Exhibit 10.79 to the Company’s Registration Statement on Form S-1 (Registration No. 333-219490) filed July 26, 2017 and declared effective August 4, 2017.
14.1Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended March 31, 2017 filed on April 30, 2018.
  
21.1Subsidiaries.
  
23.1Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C.
  
31.1 Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934.
  
31.2Certification of principal financial officer pursuant to Rule 13a-14 or Rule 15d-14 of the Exchange Act of  1934.
  
32.1Certification of principal executive officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002  (18 U.S.C. Section 1350).
  
32.2Certification of principal financial officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101.SCHXBRL Taxonomy Extension Schema DocumentDocument*
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentDocument*
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentDocument*
101.LABXBRL Taxonomy Extension Label  Linkbase DocumentDocument*
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentDocument*
SIGNATURES


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: April 4, 2016

1, 2019

 AIR INDUSTRIES GROUP
   
 By:/s/ Daniel R. GodinLuciano Melluzzo
  
Daniel R. Godin

Luciano Melluzzo

President and CEO

Chief Executive Officer

(principal executive officer)

   
 By:/s/ James SartoriMichael E. Recca
  
 James Sartori
VP,

Michael E. Recca

Chief AccountingFinancial Officer

(principal financial and accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on April 4, 20161, 2019 in the capacities indicated.

Signature Capacity
   
/s/ Daniel R. Godin
Daniel R. GodinLuciano Melluzzo President and CEO
Luciano Melluzzo(principal executive officer)
   
/s/ James SartoriMichael E. Recca Chief Financial Officer
 James SartoriMichael E. Recca VP, Chief Accounting Officer(principal financial and accounting officer)
   
/s/ Michael N. Taglich  Chairman of the Board
Michael N. Taglich Chairman of the Board
   
/s/ Seymour G. SiegelPeter D. Rettaliata  Director
Seymour G. SiegelPeter D. Rettaliata Director
   
/s/ Robert F. Taglich  Director
Robert F. Taglich Director
   
/s/ David J. Buonanno  Director
David J. Buonanno Director
   
/s/ Robert Schroeder  Director
Robert Schroeder Director
   
/s/ Michael Brand  Director
Michael Brand 
/s/ Michael PorcelainDirector
Michael Porcelain


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Air Industries Group

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Air Industries Group and Subsidiariessubsidiaries (the "Company"“Company”) as of December 31, 20152018 and 20142017, and the related consolidated statements of operations, changes in stockholders'stockholders’ equity and cash flows for the years then ended. The consolidatedended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.


We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits, included considerationwe are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.


In our opinion,

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, referredamong other going concern matters discussed, the Company has suffered a net loss in 2018 and is dependent upon future issuances of equity or other financing to above present fairly,fund ongoing operations, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in all material respects,regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change In Accounting Estimate Effected By A Change in Accounting Principal

As discussed in Note 3 to the financial positionstatements, management has elected to change its method of the Company as of December 31, 2015 and 2014 and the results of their operations and cash flowsaccounting for the years then ended, in conformity with accounting principles generally acceptedpre-production engineering costs in the United States of America.


/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
2018 financial statements. Our opinion is not modified in respect to that matter.

 

We have served as the Company’s auditors since 2008.

Saddle Brook, New Jersey

NJ

April 4, 2016

AIR INDUSTRIES GROUP
Consolidated Balance Sheets
       
  December 31,  December 31, 
  2015  2014 
ASSETS      
Current Assets      
Cash and Cash Equivalents $529,000  $1,418,000 
Accounts Receivable, Net of Allowance for Doubtful Accounts        
of $985,000 and $1,566,000, respectively  13,662,000   11,916,000 
Inventory  36,923,000   28,651,000 
Deferred Tax Asset, net  1,725,000   1,421,000 
Prepaid Expenses and Other Current Assets  1,583,000   831,000 
    Assets Held for Sale   1,700,000   - 
Total Current Assets  56,122,000   44,237,000 
         
Property and Equipment, Net  15,299,000   9,557,000 
Capitalized Engineering Costs - Net of Accumulated Amortization        
of $4,595,000 and $4,184,000, respectively  1,027,000   712,000 
Deferred Financing Costs, Net, Deposits and Other Assets  1,094,000   869,000 
Intangible Assets, Net  3,852,000   4,513,000 
Deferred Tax Asset, Net  338,000   858,000 
Goodwill  10,518,000   5,434,000 
         
TOTAL ASSETS $88,250,000  $66,180,000 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current Liabilities        
Notes Payable and Capitalized Lease Obligations - Current Portion $40,893,000  $19,508,000 
Accounts Payable and Accrued Expenses  12,053,000   6,948,000 
Lease Impairment - Current Portion  -   56,000 
Deferred Gain on Sale - Current Portion  38,000   38,000 
Deferred Revenue  958,000   418,000 
Dividends Payable  -   1,066,000 
Income Taxes Payable  14,000   71,000 
Total Current Liabilities  53,956,000   28,105,000 
         
Long Term Liabilities        
Notes Payable and Capitalized Lease Obligations - Net of Current Portion  3,912,000   8,213,000 
Lease Impairment - Net of Current Portion  -   4,000 
Deferred Gain on Sale - Net of Current Portion  371,000   409,000 
Deferred Rent  1,206,000   1,177,000 
TOTAL LIABILITIES  59,445,000   37,908,000 
         
Commitments and Contingencies        
         
Stockholders' Equity        
Preferred Stock - Par Value $.001 - Authorized 1,000,000 Shares, None Issued and        
Outstanding at December 31, 2015 and 2014  -   - 
Common Stock - Par Value $.001 - Authorized 25,000,000 Shares, 7,560,040 and        
7,108,677 Shares Issued and Outstanding as of December 31, 2015 and 2014,        
respectively  7,000   7,000 
Additional Paid-In Capital  44,155,000   42,790,000 
Accumulated Deficit  (15,357,000)  (14,525,000)
TOTAL STOCKHOLDERS' EQUITY  28,805,000   28,272,000 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,250,000  $66,180,000 
See Notes to Consolidated Financial Statements
1, 2019


AIR INDUSTRIES GROUP
Consolidated Statements of Operations For the Years Ended December 31,
  2015  2014 
       
Net Sales $80,442,000  $64,331,000 
         
Cost of Sales  63,161,000   50,233,000 
         
Gross Profit  17,281,000   14,098,000 
         
Operating Expenses  16,557,000   11,960,000 
         
Acquisition Costs  98,000   403,000 
         
Income from Operations  626,000   1,735,000 
         
Interest and Financing Costs  (1,858,000)  (1,295,000)
         
Other Income (Expense), Net  114,000   (141,000)
         
(Loss) Income before Benefit from Income Taxes  (1,118,000)  299,000 
         
Benefit from Income Taxes  286,000   368,000 
         
Net (Loss) Income $(832,000) $667,000 
         
(Loss) Income per share - basic      
 $(0.11) $0.10 
(Loss) Income per share - diluted $(0.11) $0.10 
         
Weighted average shares outstanding - basic  7,478,223   6,591,755 
Weighted average shares outstanding - diluted  7,478,223   6,915,688 
See Notes to Consolidated Financial Statements
F-3

AIR INDUSTRIES GROUP

Table of ContentsConsolidated Balance Sheets

AIR INDUSTRIES GROUP
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2015 and 2014
              Additional     Total 
  Preferred Stock  Common Stock  Paid-in  Accumulated  Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Equity 
Balance, January 1, 2014  -  $-   5,844,093  $6,000  $36,799,000  $(15,192,000) $21,613,000 
Issuance of Shares For Public Offering  -   -   1,170,000   1,000   9,561,000   -   9,562,000 
Issuance of Shares For Acquisitions  -   -   50,000   -   485,000   -   485,000 
Exercise of Options/Warrants  -   -   44,584   -   -   -   - 
Dividends Paid  -   -   -   -   (3,031,000)  -   (3,031,000)
Dividends Payable  -   -   -   -   (1,066,000)  -   (1,066,000)
Stock Compensation Expense  -   -   -   -   42,000   -   42,000 
Net Income  -   -   -   -   -   667,000   667,000 
Balance, December 31, 2014  -   -   7,108,677   7,000   42,790,000   (14,525,000)  28,272,000 
Issuance of Shares For Acquisitions and Restricted Stock Grants  -   -   425,005   -   4,666,000   -   4,666,000 
Issuance of Shares For Records Correction  -   -   539   -   -   -   - 
Exercise of Options/Warrants  -   -   25,819   -   -   -   - 
Dividends Paid  -   -   -   -   (3,401,000)  -   (3,401,000)
Stock Compensation Expense  -   -   -   -   100,000   -   100,000 
Net Loss  -   -   -   -   -   (832,000)  (832,000)
Balance, December 31, 2015  -  $-   7,560,040  $7,000  $44,155,000  $(15,357,000) $28,805,000 
See Notes to Consolidated Financial Statements
AIR INDUSTRIES GROUP
Consolidated Statements of Cash Flows For the Years Ended December 31,
  2015  2014 
       
CASH FLOWS FROM OPERATING ACTIVITIES      
Net Income (loss) $(832,000) $667,000 
Adjustments to reconcile net income (loss) to net        
cash used in operating activities        
Depreciation of property and equipment  3,090,000   2,364,000 
Amortization of intangible assets  1,262,000   1,163,000 
Amortization of capitalized engineering costs  341,000   375,000 
Bad debt expense  176,000   299,000 
Non-cash compensation expense  100,000   42,000 
Amortization of deferred financing costs  204,000   49,000 
Gain on sale of real estate  (38,000)  (38,000)
Deferred income taxes  (215,000)   (1,043,000)
         
Changes in Assets and Liabilities        
(Increase) Decrease in Operating Assets:        
Accounts receivable  91,000   (2,417,000)
Inventory  (8,412,000)  (1,646,000)
Prepaid expenses and other current assets  (748,000)  (244,000)
Deposits and other assets  (18,000)  (164,000)
Increase (Decrease) in Operating Liabilities:        
Accounts payable and accrued expenses  3,593,000   (577,000)
Deferred rent  29,000   45,000 
Deferred revenue  540,000   (249,000)
Income taxes payable  (57,000)  (1,425,000)
NET CASH USED IN OPERATING ACTIVITIES  (894,000)  (2,799,000)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Cash paid for acquisitions  (6,945,000)  (8,930,000)
Cash acquired in acquisitions  605,000   173,000 
Capitalized engineering costs  (656,000)  (335,000)
Purchase of property and equipment  (1,564,000)  (571,000)
NET CASH USED IN INVESTING ACTIVITIES  (8,560,000)  (9,663,000)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Notes payable - sellers  (41,000)  (691,000)
Note payable - revolver, net  11,933,000   3,142,000 
Proceeds from note payable - term loans  3,500,000   7,328,000 
Payments of note payable - term loans  (2,030,000)  (913,000)
Proceeds from note payable  350,000   - 
Capital lease obligations  (717,000)  (143,000)
Proceeds from capital lease refinance  500,000   - 
Deferred financing costs  (402,000)  (151,000)
Payments related to lease impairment  (60,000)  (67,000)
Dividends paid  (4,468,000)  (3,748,000)
Proceeds from public issuance in 2014 and private placement in 2013  -   9,530,000 
Costs to raise capital  -   (968,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES  8,565,000   13,319,000 
         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (889,000)  857,000 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  1,418,000   561,000 
CASH AND CASH EQUIVALENTS AT END OF YEAR $529,000  $1,418,000 

AIR INDUSTRIES GROUP
Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued)
  2015  2014 
       
Supplemental cash flow information      
Cash paid during the period for interest $1,649,000  $1,074,000 
         
Supplemental cash flow information        
Cash paid during the period for income taxes $445,000  $2,494,000 
         
Supplemental schedule of non-cash investing and financing activities        
Dividends payable $-  $1,066,000 
         
Acquisition of property and equipment financed by capital lease $1,811,000  $- 
         
Conversion of junior subordinated notes $-  $1,000,000 
         
            Classification of assets held for sale $1,700,000  $- 
         
Purchase of assets of Compac and assumption        
of liabilities in the acquisition as follows:        
Fair Value of tangible assets acquired $406,000  $- 
Intangible assets  600,000   - 
Goodwill  560,000   - 
Liabilities assumed  (95,000)  - 
Cash paid for acquisition $1,471,000  $- 
         
Purchase of stock of The Sterling Engineering Corporation and assumption        
of liabilities in the acquisition as follows:        
Fair Value of tangible assets acquired $8,181,000  $- 
Goodwill  4,540,000   - 
Cash acquired  588,000   - 
Liabilities assumed  (3,169,000)  - 
Common stock issued  (4,666,000)  - 
Cash paid for acquisition $5,474,000  $- 
         
Purchase of substantially all assets of AMK Welding, Inc. and assumption        
of liabilities in the acquisition as follows:        
Fair Value of tangible assets acquired $-  $5,637,000 
Intangible assets, subject to amortization  -   950,000 
Goodwill  -   635,000 
Cash acquired  -   184,000 
Liabilities assumed  -   (453,000)
Due to seller  -   (2,500,000)
Cash paid for acquisition $-  $4,453,000 
         
Purchase of stock of Woodbine Products, Inc.        
Fair value of tangible assets acquired $-  $309,000 
Goodwill  -   2,565,000 
Liabilities assumed  -   (19,000)
Common stock issued  -   (290,000)
Cash paid for acquisition $-  $2,565,000 
         
Purchase of stock of Eur-Pac Corporation        
Fair value of tangible assets acquired $-  $412,000 
Goodwill  -   1,656,000 
Liabilities assumed  -   (170,000)
Common stock issued  -   (195,000)
Cash paid for acquisition $-  $1,703,000 
         
Purchase of stock of Electronic Connection Corporation        
Fair value of tangible assets acquired $-  $126,000 
Goodwill  -   109,000 
Cash acquired  -   5,000 
Liabilities assumed  -   (31,000)
Cash paid for acquisition $-  $209,000 

  December 31,  December 31, 
  2018  2017 
ASSETS      
Current Assets      
Cash and Cash Equivalents $2,012,000  $630,000 
Escrow Deposits      - 
Accounts Receivable, Net of Allowance for Doubtful Accounts of $524,000 and $494,000, respectively  6,522,000   5,464,000 
Inventory  29,051,000   31,141,000 
Prepaid Expenses and Other Current Assets  414,000   214,000 
Prepaid Taxes  49,000   49,000 
   Assets Held for Sale  -   10,082,000 
Total Current Assets  38,048,000   47,580,000 
         
Property and Equipment, Net  8,777,000   10,050,000 
Capitalized Engineering Costs - Net of Accumulated Amortization of $0 and $5,380,000, respectively  -   2,188,000 
Deferred Financing Costs, Net, Deposits and Other Assets  768,000   665,000 
Goodwill  163,000   272,000 
         
TOTAL ASSETS $47,756,000  $60,755,000 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current Liabilities        
Notes Payable and Capitalized Lease Obligations - Current Portion $16,793,000  $23,131,000 
Notes Payable – Related Party – Current Portion  2,552,000   262,000 
Accounts Payable and Accrued Expenses  8,723,000   10,872,000 
Deferred Gain on Sale - Current Portion  38,000   38,000 
Deferred Revenue  881,000   931,000 
Liabilities Directly Associated with Assets Held for Sale  -   2,795,000 
Income Taxes Payable  20,000   20,000 
Total Current Liabilities  29,007,000   38,049,000 
         
Long Term Liabilities        
Notes Payable and Capitalized Lease Obligations - Net of Current Portion  3,438,000   1,798,000 
Notes Payable – Related Party – Net of Current Portion  2,283,000   1,650,000 
Deferred Gain on Sale - Net of Current Portion  257,000   295,000 
Deferred Rent  1,165,000   1,197,000 
TOTAL LIABILITIES  36,150,000   42,989,000 
         
Commitments and Contingencies        
         
Stockholders’ Equity        
Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 outstanding at December 31, 2018 and 2017  -   - 
Common Stock - Par Value $.001 - Authorized 50,000,000 Shares, 28,392,070 and 25,213,805 Shares Issued and Outstanding as of December 31, 2018 and December 31, 2017, respectively  28,000   25,000 
Additional Paid-In Capital  76,101,000   71,272,000 
Accumulated Deficit  (64,523,000)  (53,531,000)
TOTAL STOCKHOLDERS’ EQUITY  11,606,000   17,766,000 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $47,756,000  $60,755,000 

See Notes to Consolidated Financial Statements


AIR INDUSTRIES GROUP

Consolidated Statements of Operations For the Years Ended December 31,

  2018  2017 
       
Net Sales $46,309,000  $49,869,000 
         
Cost of Sales  40,895,000   45,002,000 
         
Gross Profit  5,414,000   4,867,000 
         
Operating Expenses  8,839,000   11,430,000 
         
Impairment of goodwill  (109,000)  (6,195,000)
         
Impairment on abandonment of assets  (386,000)  - 
         
Capitalized engineering costs writeoff  (2,043,000)  - 
         
Loss from Operations  (5,963,000)  (12,758,000)
         
Interest and Financing Costs  (3,921,000)  (3,378,000)
         
Loss on Extinguishment of Debt  -   (112,000)
         
Other Income (Expense), Net  278,000   (22,000)
         
Loss before Provision for Income Taxes  (9,606,000)  (16,270,000)
         
(Benefit from) Provision for Income Taxes  3,000   (197,000)
         
Loss from Continuing Operations, net of taxes  (9,609,000)  (16,073,000)
         
Loss from Discontinued Operations, net of taxes        
Losses from discontinued operating activities  (1,042,000)  (6,678,000)
         
Loss (Gain) on Sale of Subsidiary  (341,000)  200,000 
         
Total Loss from Discontinued Operations, net of tax  (1,383,000)  (6,478,000)
Net Loss $(10,992,000) $(22,551,000)
Net Loss per share – basic        
Continuing operations  (0.36) $(1.21)
Discontinued operations $(0.05) $(0.49)
Net Loss per share – diluted        
Continuing operations  (0.36)  (1.21)
Discontinued operations $(0.05) $(0.49)
         
Weighted average shares outstanding – basic  26,897,639   13,230,775 
Weighted average shares outstanding – diluted  26,900,952   13,230,775 

See Notes to Consolidated Financial Statements


AIR INDUSTRIES GROUP

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2018 and 2017

              Additional     Total 
  Preferred Stock  Common Stock  Paid-in  Accumulated  Stockholders’ 
  Shares  Amount  Shares  Amount  Capital  Deficit  Equity 
Balance, January 1, 2017  1,202,548  $1,000   7,626,945  $7,000  $55,862,000  $(30,980,000) $24,890,000 
Issuance of Preferred Stock  91,893   -   -   -   -   -   - 
Fair Value Allocation of Warrants  -   -   -   -   2,500,000   -   2,500,000 
Issuance of Common stock  -   -   5,900,390   6,000   7,621,000   -   7,627,000 
Common stock issued for directors fees  -   -   154,463   -   232,000   -   232,000 
Common stock issued for legal fees  -   -   92,000   -   200,000   -   200,000 
Conversion of preferred to common  (1,294,441)  (1,000)  8,629,606   9,000   -   -   8,000 
Common stock issued for convertible notes  -   -   2,810,401   3,000   4,525,000       4,528,000 
Stock Compensation Expense  -   -   -   -   332,000   -   332,000 
Net Loss  -   -   -   -   -   (22,551,000)  (22,551,000)
Balance, December 31, 2017  -   -   25,213,805  $25,000  $71,272,000  $(53,531,000) $17,766,000 
                             
Fair Value Allocation of Warrants  -   -   -   -   193,000   -   193,000 
Issuance of Common stock  -   -   2,139,235   2,000   2,812,000   -   2,812,000 
Common stock issued for directors fees  -   -   253,071   -   305,000   -   305,000 
Common stock issued for legal fees  -   -   123,456   -   200,000   -   200,000 
Common stock issued for convertible notes accrued interest payment  -   -   663,286   1,000   1,026,000   -   1,027,000 
Stock Compensation Expense  -   -   -   -   293,000   -   293,000 
Net Loss  -   -   -   -   -   (10,992,000)  (10,992,000)
Balance, December 31, 2018  -   -   28,392,853  $28,000  $76,101,000   (64,523,000) $11,606,000 

See Notes to Consolidated Financial Statements


AIR INDUSTRIES GROUP

Consolidated Statements of Cash Flows For the Years Ended December 31,

  2018  2017 
       
CASH FLOWS FROM OPERATING ACTIVITIES      
Net Loss $(10,992,000) $(22,551,000)
Adjustments to reconcile net loss to net cash used in operating activities        
Depreciation of property and equipment  2,877,000   2,723,000 
Amortization of intangible assets  -   673,000 
Amortization of capitalized engineering costs  668,000   423,000 
Loss on impairment of goodwill – continuing operations  109,000   6,195,000 
Loss on impairment of goodwill – discontinued operations  -   3417,000 
Bad debt expense  49,000   87,000 
Non-cash employee compensation expense  292,000   332,000 
Non-cash directors compensation expense  64,000   232,000 
Amortization of deferred financing costs  212,000   267,000 
Deferred gain on sale of real estate  (38,000)  (38,000)
(Gain) on sales of subsidiaries  340,000   (200,000)
Change in useful life of capitalized engineering costs  2,043,000   - 
Loss on impairment of intangible assets – discontinued operations  -   1,085,000 
Loss on Assets Held for Sale  386,000   1,563,000 
Loss on extinguishment of debt  -   112,000 
Amortization of convertible notes payable  941,000   2,301,000 
Changes in Assets and Liabilities        
(Increase) Decrease in Operating Assets:        
Assets held for sale - AMK Cash  -   39,000 
Accounts receivable  (561,000)  1,004,000 
Inventory  1,395,000   905,000 
Prepaid expenses and other current assets  39,000  281,000 
Prepaid taxes  -   360,000 
Deposits and other assets  (1,112,000)  (113,000)
Increase (Decrease) in Operating Liabilities:        
Accounts payable and accrued expense  (1,127,000)  (3,527,000)
Deferred rent  3,000   34,000 
Deferred revenue  2,076,000   410,000 
NET CASH USED IN OPERATING ACTIVITIES  (2,336,000)  (3,986,000)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Capitalized engineering costs  (523,000)  (985,000)
Purchase of property and equipment  (1,264,000)  (1,514,000)
Proceeds from sale of subsidiary  

5,472,000

   4,260,000 
NET CASH PROVIDED BY INVESTING ACTIVITIES  3,685,000   1,761,000 
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Note payable – revolver – net  (2,415,000)  (7,938,000)
Payments of note payable – term notes  (1,899,000)  (3,178,000)
Capital lease obligations  (1,286,000)  (1,397,000)
Proceeds from note payable – related party  2,803,000   2,660,000 
Proceeds from notes payable – third parties  70,000   4,184,000 
Payments of notes payable – third parties  -   (463,000)
Deferred financing costs  (125,000)  (50,000)
Proceeds from issuance of common stock  2,885,000   7,733,000 
NET CASH PROVIDED BY FINANCING ACTIVITIES  33,000   1,551,000 
         
NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENT  1,382,000   (674,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  630,000   1,304,000 
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,012,000  $630,000 

See Notes to Consolidated Financial Statements


AIR INDUSTRIES GROUP

Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued)

  2018  2017 
       
Supplemental cash flow information      
Cash paid during the period for interest $1,509,000  $2,035,000 
Cash paid during the period for income taxes $2,000  $8,000 
         
Supplemental schedule of non-cash investing and financing activities        
Common Stock issued for notes payable - related party  330,000   2,254,000 
Common Stock issued for notes payable - third parties  30,000   1,941,000 
Common Stock issued in lieu of accrued interest  1,027,000   - 
Placement agent warrants issued  -   85,000 
         
Preferred stock issued for PIK dividends $-  $913,000 
         
Acquisition of property and equipment financed by capital lease $-  $225,000 
         
Classification of assets held for sale $-  $10,082,000 
         
Liabilities directly associated with assets held for sale $-  $(2,795,000)

See Notes to Consolidated Financial Statements


AIR INDUSTRIES GROUP

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"(“WMI” or “Welding”), Miller Stuart, Inc. (“Miller Stuart”), Nassau Tool Works, Inc. (“NTW”), Woodbine Products, Inc. (“Woodbine” or “WPI”), Decimal Industries, Inc. ("Decimal"(“Decimal”), Eur-Pac Corporation (“Eur-Pac” or “EPC”), Electronic Connection Corporation (“ECC”), AMK Welding, Inc. (“AMK”), Air Realty Group, LLC ("(“Air Realty"Realty”) The  Sterling Engineering Corporation ("Sterling"(“Sterling”) effective March 1, 2015,, and Compac Development Corporation (“Compac”) effective September 1, 2015, (together,, together, the “Company”(“Company”).


Note 2. ACQUISITIONS

Woodbine

On April 1, 2014,

Going Concern

The Company suffered losses from operations of $5,963,000 and $12,758,000 for the years ended December 31, 2018 and 2017, and net losses of $10,992,000 and $22,551,000 for the years ended December 31, 2018 and 2017, respectively. The Company also had negative cash flows from operations for the year ended December 31, 2017. In January 2017, the Company throughsold one of its wholly-owned subsidiary Welding, acquiredoperating subsidiaries. In December 2018, the Company sold 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.

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 common stock of Woodbine for $2.4 million and 30,000outstanding shares of the common stockAMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017 for a purchase price of AIRI. The common stock was valued at $9.68 per share, which was the closing share price on April 1, 2014. Additionally,$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.


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 later was applied to the payment of the Revolving Advance.

Sale of Welding Metallurgy Inc.

On December 20, 2018, the Company sold 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, reduced by a working capital adjustment of ($1,093,000). The sale required 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. The amount of the working capital deficit has been contested by CPI and the discrepancy will likely be resolved through arbitration in accordance with the terms of the Stock Purchase Agreement.

At December 31, 2017, WMI’s assets and liabilities had been reclassified as Assets Held for Sale and Liabilities Directly Associated with Assets Held for Sale, respectively.

Closing EPC and ECC

On April 30, 2018 Eur Pac Corporation (EPC) received a “Notice of Proposed Debarment” from the Department of the Navy – its principal customer. Immediately after receiving this notice, EPC and AIRI retained counsel to appeal the proposed debarment, and submitted information in opposition to the proposed debarment, and EPC representatives met with the Navy to discuss the matter.

On November 8, 2018 EPC received formal notice from the Department of the Navy that EPC’s opposition to debarment was rejected and that EPC was debarred from future government contracts until October 29, 2020. Management implemented its plan to complete existing contracts that had already been awarded and closed EPC by March 31, 2019.

The Company recognized a loss on abandoned assets of $386,000 in connection with the shutdown of EPC. Additionally, the Company determined that goodwill for ECC in the amount of $165,000 was paid$109,000 had been impaired and is included in the loss from continuing operations.


Subsequent Events

On January 15, 2019, the Company entered into a Purchase Agreement with 15 accredited investors (the “Purchasers”), pursuant to which the Company assigned to the former stockholdersPurchasers all of Woodbine during Juneits right, title and interest to the remaining $1,136,710 of 2014. The Company financed the acquisition$1,500,000 in payments due from Meyer Tool, Inc. for the sale of Woodbine by increasing its borrowings on its existing revolving loan and term loan facilities (see Note 9).


Woodbine, founded in 1954, is a long established manufacturer of aerospace components whose customers include major aircraft component suppliers. Woodbine specializes in welded and brazed chassis structures housing electronics in aircraft. Woodbine’s products and customers are very complementary to those of Decimal, the assets and business of which was acquired in July 2013.

The acquisition of Woodbine was accountedAMK Welding, Inc. (the “Remaining Amount”) for under Financial Accounting Standards Board (“FASB”) ASC 805, “Business Combinations” (“ACS 805”). Thean aggregate purchase price allocation is set forth below.

Fair value of tangible assets acquired $   309,000 
Goodwill  2,565,000 
Liabilities assumed      (19,000) 
Total $2,855,000 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Eur-Pac

On June 1, 2014,$800,000, including $100,000 from each of Michael and Robert Taglich, and $75,000 for the benefit of the children of Michael Taglich. The payments are based upon the net sales of AMK Welding, Inc., which the Company acquired allsold to Meyer Tool in January 2017. The Purchasers have the right to demand payment of the common stock of Eur-Pac for $1.6 million and 20,000 shares of the common stock of AIRI. The common stock was valued at $9.78 per share, which was the closing share price on that date. Additionally, a working capital adjustment in the amount of $78,000 was paid in August 2014. The Company financed the acquisition of Eur-Pac with atheir pro rata portion of the proceeds of its Registered Direct Offering (see Note 11)unpaid Remaining Amount from us commencing March 31, 2023 (“Put Right”).

Eur-Pac specializes in military packaging and supplies. Eur-Pac’s primary business is “kitting” of supplies for all branches To the extent the Purchasers exercise their Put Right, the remaining payments from Meyer will be made to the Company.

The Purchasers have agreed to pay Taglich Brothers, Inc. a fee equal to 2% per annum of the United States Defense Department including ordnance parts, hose assemblies, hydraulic, mechanical and electrical assemblies.


The acquisition of Eur-Pac was accounted for under ASC 805. The purchase price allocation is set forth below.

Fair Value of tangible assets acquired $412,000 
Goodwill  1,656,000 
Liabilities assumed  (170,000)
Total $1,898,000 

ECC

On September 1, 2014,paid by such Purchasers, payable quarterly, to be deducted from the payments of the Remaining Amount, for acting as paying agent in connection with the assignment of the Company’s rights to the payments from Meyer Tool. Michael and Robert Taglich, directors of the Company, through its wholly-owned subsidiary Eur-Pac, acquired allare the principals of the common stock of ECC for $209,000. The Company financed the acquisition from its working capital.

ECC is a manufacturer of stripped, terminated, bonded and tinned lead wires, used by a variety of contractors, manufacturers and OEMs.

The acquisition of ECC was accounted for under ASC 805. The purchase price allocation is set forth below.

Fair value of tangible assets acquired $126,000 
Goodwill  109,000 
Cash acquired  5,000 
Liabilities assumed  (31,000)
Total $209,000 

AMK

Taglich Brothers, Inc.

On October 1, 2014,January 15, 2019, the Company acquired allissued its 7% senior subordinate convertible promissory notes due December 31, 2020, each in the principal amount of $1,000,000 (together the common stock“Notes” and each a “Note”), to Michael Taglich and Robert Taglich, each for a purchase of AMK, for $6.9 million. At closing, the Company paid $4,453,000 and issued a Seller$1,000,000. Each Note and Mortgage of $2,500,000. The note borebears interest at the rate of 5%7% per annum, and interest and principal were due and payable on or before December 31, 2015. The note was paid in 2014 with the proceeds from the issuance of Term Loan B and the mortgage released in January 2015 (see Note 9).


AMK is a long established provider of sophisticated welding and machining services for diversified aerospace and industrial customers.

The acquisition of AMK was accounted for under ASC 805. The purchase price allocation is set forth below.

Fair value of tangible assets acquired $5,637,000 
Intangible assets, subject to amortization  950,000 
Goodwill  635,000 
Cash acquired  184,000 
Liabilities assumed  (453,000)
Total $6,953,000 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sterling

On March 1, 2015, the Company acquired all of the common stock of Sterling for $5.4 million in cash and 425,005convertible to shares of the Company’s common stock at a conversion price of AIRI. The common stock was valued at $9.89$0.93 per share, which was the closing share price on February 27, 2015. The cash consideration is subject to adjustment for working capital changes. the anti-dilution adjustments set forth in the 7% Note, is subordinated to the Company’s indebtedness under its credit facility with PNC Bank, National Association, and matures at December 31, 2020, or earlier upon an Event of Default (as defined in the Note).

The Company has also entered into employment and non-compete agreements for two and three year periods with twowill pay Taglich Brothers, Inc. a fee of $80,000 (4% of the principals of Sterling. In connection with these agreements, the Company granted 52,000 shares of restricted common stock to these individuals, which was accounted for as additional purchase price. The Company financed the acquisition of Sterling with the proceeds from the issuance of Term Loan D (see Note 9).


At the time of acquisition, Sterling had capital lease obligations for equipment with a remaining balance of approximately $1.3 million. On April 21, 2015, the Company refinanced the $1.3 million capital lease obligations with the same financing company. This refinancing generated approximately $500,000 of cash for the Company. This capital lease obligation has been accounted for and summarized with the remainderprice of the Company's capital leases as disclosed in Note 9.

Sterling founded in 1941 manufactures components for aircraft and ground turbine engines.

The acquisition of Sterling was accounted for under ASC 805. The provisional purchase price allocation is set forth below.

Fair value of tangible assets acquired $8,181,000 
Goodwill  4,540,000 
Cash acquired  588,000 
Liabilities assumed  (3,169,000)
Total $10,140,000 
Compac

On September 1, 2015, the Company, through its wholly-owned subsidiary WMI, acquired certain assets, including production equipment, inventory and intangible assets, of Compac in an asset acquisition for $1.2 million in cash plus a working capital adjustment of $271,000.

Compac located in Bay Shore, New York specializesNotes), payable in the manufactureform of RFI/EMI (Radio Frequency Interference – Electro-Magnetic Interference) shielded enclosures for electronic components.

Ina promissory note having terms similar to the Notes, in connection with the asset purchase of the Notes. 

Management has evaluated subsequent events through the date of this filing.

Note 2. DISCONTINUED OPERATIONS

As discussed in Note 1, the Company has assumed Compac’s lease for its Bay Shore facility which extends through April 30, 2018 and has annual rent of approximately $80,000, whichsold WMI in December 2018. As such, this business is offset by rent received from the sub-tenant of approximately $20,000 per year.


The acquisition of Compac was accounted for under ASC 805. The provisional purchase price allocation is set forth below.

Fair value of tangible assets acquired $406,000 
Intangible assets  600,000 
Goodwill  560,000 
Liabilities assumed  (95,000)
Total $1,471,000 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The below table sets forth selected financial information for the 2014 and 2015 acquisitions, which are included in our reported results ofas discontinued operations for the years ended December 31, 20152018 and 2014.
For2017. As required, the Year Ended December 31, 2015
  Woodbine  Eur-Pac  ECC  AMK  Sterling  Compac 
Net Sales $753,000  $4,802,000  $605,000  $4,057,000  $6,894,000  $467,000 
Income (loss) from operations $21,000  $(642,000) $176,000  $(1,949,000) $(1,196,000) $(14,000)
                         
For the Year Ended December 31, 2014                   
                    
  Woodbine  Eur-Pac  ECC  AMK  Sterling  Compac 
Net Sales $1,047,000  $2,756,000  $281,000  $1,838,000  $-  $- 
Income (loss) from operations $300,000  $637,000  $67,000  $359,000  $-  $- 
Company has retrospectively recast its consolidated statements of operations and balance sheets for all periods presented. The belowCompany has not segregated the cash flows of this business 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.

The following table sets forth selected proformapresents a reconciliation of the major financial information as if AMKlines 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, 
  2018  2017 
Net revenue $13,852,000  $13,129,000 
Cost of goods sold  13,596,000   11,245,000 
Gross profit  256,000   1,884,000 
Operating expenses:        
Selling, general and administrative  1,306,000   2,488,000 
Loss on assets held for sale  -   2,648,000 
Impairment of Goodwill  -   3,417,000 
Total operating expenses  1,306,000   8,553,000 
Interest expense  1,000   (12,000)
Other income  7,000   3,000 
Loss from discontinued operations before income taxes  (1,042,000)  (6,678,000)
         
Provision for income taxes  -   - 
Net loss from discontinued operations $(1,042,000) $(6,678,000)

The following table presents a reconciliation of WMI net cash flow from operating, investing and Sterling were ownedfinancing activities for the years ended December 31, 2015periods indicated below:

  2018  2017 
Net cash used in operating activities - discontinued operation $( 439,000) $(2,765,000)
Net cash used in investing activities - discontinued operation $  49,000  $(33,000)
Net cash provided by financing activities - discontinued operations $475,000  $2,665,000 
         
Depreciation and amortization $156,000   $375,000 
Capital expenditures $   -  $(33,000)

See Note 8 for a reconciliation of the carrying amounts of major classes of assets and 2014.

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.


For the Year Ended December 31, 2015    
     
Net Sales $82,281,000 
Income (loss) from operations $773,000 
     
     
For the Year Ended December 31, 2014    
     
Net Sales $77,935,000 
Income (loss) from operations $1,313,000 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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'sworld’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. Woodbine specializes in welded and brazed chassis structures housing electronics in aircraft. Eur-Pac specializes in military packaging and supplies. Eur-Pac’sEur-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. AMK is a provider of sophisticated welding and machining services for diversified aerospace and industrial customers. Sterling manufactures components for aircraft and ground turbine engines. 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.


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

Prior to its sale, WMI was 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'smanagement’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.


an estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods. The value of the majority of the items in inventory has been estimated using a gross profit percentage based on sales of previous periods compared to the net sales of the current period, as management believes that the gross profit percentage on these items are materially consistent from period to period. The remainder of the inventory value is based on the Company’s standard cost perpetual inventory system, as management believes the perpetual system computed value for these items provides a better estimate of value for that inventory.

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.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets include purchase deposits, miscellaneous prepaid expenses and cash in escrow less a reserve. The changes in the reserve are shown below.

Description Balance at Beginning of Year  Charges to Loss on Sale of Subsidiary  Deductions  Balance at end of year 
Valuation reserve deducted from Prepaid Expenses and Other Current Assets:            
Year ended December 31, 2018 $-  $1,770,000  $-  $1,770,000 
Year ended December 31, 2017 $-  $-  $-  $- 

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 arewere 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.


Based on various technological advances by our customer’s and the rapid pace of innovation including change in future production methodologies and systems, it has become more complicated to estimate the future life and recoverability of the assets we are currently capitalizing. It is the belief of the Company that it would be preferable and therefore justifiable to expense these costs as incurred through cost of goods sold, rather than continue to capitalize these costs and amortize them through operating expense.

As of December 31, 2018, the Company has written off all capitalized engineering costs.

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$10,000 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, 20152018 and 2014.


2017.

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.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.


Revenue Recognition

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 recognizesaccounts for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging.

Revenue Recognition

On January 1, 2018, the Company adopted ASC 606 “Revenue from Contracts with Customers”, as amended regarding revenue from contracts with customers using the modified retrospective approach, which was applied to all contracts with Customers. Under the new standard an entity is required to recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods.

There was no cumulative financial statement effect of initially applying the new revenue standard because an analysis of our contracts supported the recognition of revenue consistent with our historical approach. In accordance with the modified retrospective approach, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact on the Company’s revenues or net income on an ongoing basis.

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition, as described below. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.

Our rights to payments for goods transferred to customers are conditional only on the passage of time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 75 days.

For 2017 the Company recognized revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue“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

For 2018 and 2017, the Company recognizesrecognized certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement, the Company makesmade an evaluation as to whether the bill and hold arrangement qualifiesqualified 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.

recognition. The customer would initiate the request for the bill and hold arrangement. The customer must have made its request in writing in addition to their fixed commitment to purchase the item. The risk of ownership has passed to the customer, payment terms were not modified and payment would be made if the goods had shipped.

The Company had approximately $2,914,000 or 3.6%$89,000 and $619,000 of net sales that were billed but not shipped under such bill and hold arrangements as of December 31, 2015.


2018 and 2017, 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.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 fourthree customers that represented 59.3%70.0% of total sales, and twothree customers that represented 47.3%62.0% of total sales for the years ended December 31, 20152018 and 2014,2017, respectively. This is set forth in the table below.


Customer  Percentage of Sales 
   2015  2014 
        
 1   20.5   26.8 
 2   15.4   20.5 
 3   12.0   * 
 4   11.4   * 

* Customer was less than 10% of sales for the year ended December 31, 2014
Customers 1 and 2 are owned by the same corporate entity.

Customer Percentage of Sales 
  2018  2017 
       
1  30.7   20.5 
2  27.4   25.5 
3  11.9   * 
4  *   16.0 

*Customer was less than 10% of sales at December 31, 2018 and 2017, respectively.

There were fourtwo customers that represented 61.1%64.5% of gross accounts receivable and three customers that represented 50.4%68.7% of gross accounts receivable at December 31, 20152018 and 2014,2017, respectively. This is set forth in the table below.


Customer  Percentage of Receivables 
   December  December 
   2015  2014 
 1   26.6   29.0 
 2   13.6   11.4 
 3   10.5                * 
 4   10.4   10.0 

* Customer was less than 10% of gross accounts receivable at December 31, 2014
Customers 1 and 3 are owned by the same corporate entity.

Customer Percentage of Receivables 
  December  December 
  2018  2017 
1  38.3   41.9 
2  26.2   14.6 
3  *   12.2 

*Customer was less than 10% of gross accounts receivable at December 31, 2018.

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.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes


The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income“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. Deferred


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 benefit (expense) results fromassets requires sufficient taxable income within the change in netcarryback, 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 or deferred tax liabilities. A valuation allowance is recordedare realizable. Valuation allowances are established when it is more likely than not that some or allthe tax benefit of the deferred tax assetsasset 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“Accounting for Uncertainty in Income Taxes."” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise'senterprise’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.


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:


  2015  2014 
       
Weighted average shares outstanding used to compute basic earnings per share  7,478,223   6,591,755 
Effect of dilutive stock options and warrants  -   323,933 
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share  7,478,223   6,915,688 

  2018  2017 
       
Weighted average shares outstanding used to compute basic earnings per share  26,897,639   13,230,775 
Effect of dilutive stock options and warrants  3,313   - 
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share  26,900,952   13,230,775 

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, 
  2018  2017 
Stock Options  568,000   354,000 
Warrants  1,960,000   1,480,000 
   2,528,000   1,834,000 
  December 31,  December 31, 
  2015  2014 
Stock Options  234,000   22,888 
Warrants  46,800   46,800 
   280,800   69,688 

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 that period:


  December 31,  December 31, 
  2015  2014 
Stock Options  330,342   - 
Warrants  117,785   - 
   448,127   - 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the years:

  December 31,  December 31, 
  2018  2017 
Stock Options  3,000   146,000 
Warrants  7,000   41,000 
   10,000   187,000 

Stock-Based Compensation


The Company accounts for stock-based compensation in accordance with FASB ASC 718, "Compensation“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 $10,518,000$163,000 at December 31, 20152018 relates to the acquisition of NTW. The goodwill amount of $272,000 at December 31, 2017 relates to the acquisitions of Welding ($291,000), NTW ($162,000), Woodbine ($2,565,000), Eur-Pac ($1,656,000),$163,000 and ECC ($109,000), AMK ($635,000), Sterling ($4,540,000) and Compac ($560,000). 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.


$109,000.

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 performedperforms a qualitative assessment in the fourth quarter of 2015each 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 and Compac wasa reporting unit is less than its carryingcarting amount.


The Company has

During 2018 the company determined that there hasgoodwill for ECC in the amount of $109,000 had been no impairmentimpaired and is included in the loss from continuing operations.

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 was included in the loss from continuing operations.

Also, during 2017, the Company determined that goodwill at December 31, 2015for Welding, Woodbine and 2014.


Compac in the amounts of $292,000, $2,565,000, $560,000, respectively, had been impaired. The total of $3,417,000 was included in loss from discontinued operations.

Freight Out


Freight out is included in operating expenses and amounted to $197,000$151,000 and $98,000$196,000 for the years ended December 31, 20152018 and 2014,2017, respectively.


AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 anAn “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, that 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 CompanyA 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“emerging growth company"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. Untilperiod until December 31, 2018, the date that it iswas no longer an "emerging“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.


company”.

Recently Issued Accounting Pronouncements


In January 2015,February 2016, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (“ASU 2015-01”)No. 2016-02, “Leases (Topic 842). ASU 2015-01 eliminates the concept of an extraordinary item from accounting principles generally accepted” Among other things, in the United States of America. As a result, an entityamendments in ASU 2016-02, lessees will no longer be required to segregate extraordinary itemsrecognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the resultslessee’s right to use, or control the use of, ordinary operations,a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to separately present an extraordinary item on its income statement, net of tax, after incomealign, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However,Contracts with Customers. The amendments in this ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 becomes effective for interim and annual periodsfiscal years beginning on or after December 15, 2015.2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements. The Company has been gathering the lease agreement data and has begun to analyze the financial impact to the consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is permitted.modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company’s fiscal year beginning April 1, 2019 and subsequent interim periods. The Company’s current lease arrangements expire through 2021 and the Company is currently evaluating the effectsimpact the adoption of Adoptingthese ASUs will have on the Company’s consolidated financial statements.


In January 2017, the FASB issued ASU 2015-012017-01 (“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 does not believe that the adoption of this pronouncement has an impact on the the presentation of its 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 February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update will be effective for all interim and annual reporting periods beginning after December 15, 2018. The Company does not believe that the adoption of these amendments have an impact on its consolidated financial statements.


In March 2018, the FASB issued Accounting Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). ASU 2018-05 adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB No. 118”), which was effective immediately. SAB No.118 provides for a provisional one year measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Cuts and Jobs Act. The adoption of ASU 2018-05 had no material impact on the Company’s consolidated financial statements butas of and for the adoptionyear ending December 31, 2018. See Note 15, Income Taxes, for disclosures related to this amended guidance.

In June 2018, the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share based compensation. The guidance is effective for the Company for the fiscal year beginning January 1, 2020. While the exact impact of this standard is not known, the guidance is not expected to have a significantmaterial impact on the Company’s consolidated financial statements.


statements, as non-employee stock compensation is nominal relative to the Company’s total expenses as of December 31, 2018.

In February 2015,October 2018, the FASB issued amended guidanceASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). This ASU reduces the cost and complexity of financial reporting associated with consolidation standard which updates the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendment modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or(VIEs). A VIE is an organization in which consolidation is not based on a majority of voting interest entitiesrights. The new guidance supersedes the private company alternative for common control leasing arrangements issued in 2014 and affects the consolidation analysis of reporting entities thatexpands it to all qualifying common control arrangements. The amendments in this ASU are involved with VIEs, particularly those that have fee arrangements and related party relationships, among other provisions. This amended guidance will be effective for the Companyfiscal years beginning after December 15, 2019, and interim periods within those fiscal year 2016. Early adoption is permitted.years. The Company is currently assessing the impact the adoption of the amended guidanceASU 2018- 17 will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.


In April 2015,July 2018, the FASB issued amended guidance which requires debt issuance costsASU 2018-10, Codification Improvements to beTopic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented asin the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a direct deductioncumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the carryingassociated lease component if certain conditions are present. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the associated debt liability rather than as separate assets on the balance sheet. The recognitionremaining minimum rental payments that were tracked and measurement guidance for debt issuance costs are not affected by this amendment. This amended guidancedisclosed under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company beginningCompany’s fiscal year 2016. Early adoption is permitted,beginning April 1, 2019 and the new guidance will be applied on a retrospective basis.subsequent interim periods. The Company does not expect the adoption of this amended guidance to have a significant impact on its consolidated financial statements.


In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The amendments in ASU 2014-09 affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts orCompany’s current lease contracts). This ASU will supersede the revenue recognition requirements in ASC 605, “Revenue Recognition” and most industry-specific guidance and creates ASC 606, “Revenue from Contracts with Customers.” On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one yeararrangements expire through 2021 and the amendments are now effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently assessing the impact on its consolidated financial statements.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value when the FIFO or average cost method is used. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively. Earlier adoption is permitted. The Company is currently assessingevaluating the impact the adoption of the amended guidancethese ASUs will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments”. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this update eliminate the requirement to retrospectively account for those adjustments. The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update, with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of this amended guidance to have a significant impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, which requires companies to classify all deferred tax assets and liablilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods thereafter, with early adoption permitted and either with prosepective or retrospective application permitted. We do not expect this new guidance to have a material impact on our 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 consolidated financial statements.


Reclassifications


Certain account balances in 2014 have been reclassified

Reclassifications occurred to certain 2017 amounts to conform to the current year presentation.

2018 classification.


Subsequent Events

Management has evaluated subsequent events through the date of this filing.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. ACCOUNTS RECEIVABLE


The components of accounts receivable at December 31, are detailed as follows:


  December 31,  December 31, 
  2015  2014 
       
Accounts Receivable Gross $14,647,000  $13,482,000 
Allowance for Doubtful Accounts  (985,000)   (1,566,000)
Accounts Receivable Net $13,662,000  $11,916,000 

  December 31,  December 31, 
  2018  2017 
       
Accounts Receivable Gross $7,046,000  $5,958,000 
Allowance for Doubtful Accounts  (524,000)  (494,000)
Accounts Receivable Net $6,522,000  $5,464,000 

The allowance for doubtful accounts for the years ended December 31, 20152018 and 20142017 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, 2015            
Allowance for Doubtful Accounts $1,566,000  $177,000  $758,000  $985,000 
Year ended December 31, 2014                
Allowance for Doubtful Accounts $783,000  $816,000  $33,000  $1,566,000 

  Balance at Beginning of Year  Charged to Costs and Expenses  Deductions
from
Reserves		  Balance at
End of Year		 
Year ended December 31, 2018            
Allowance for Doubtful Accounts $494,000  $30,000  $          -  $524,000 
Year ended December 31, 2017                
Allowance for Doubtful Accounts $403,000  $91,000  $-  $494,000 

Note 5. INVENTORY


The components of inventory at December 31, consisted of the following:


  December 31,  December 31, 
  2015  2014 
       
Raw Materials $9,188,000  $7,168,000 
Work In Progress  19,743,000   14,886,000 
Finished Goods  11,838,000   10,072,000 
Inventory Reserve  (3,846,000)   (3,475,000)
Total Inventory $36,923,000  $28,651,000 

  December 31,  December 31, 
  2018  2017 
       
Raw Materials $4,622,000  $5,346,000 
Work In Progress  17,530,000   19,947,000 
Finished Goods  10,915,000   10,122,000 
Inventory Reserve  (4,016,000)  (4,274,000)
Total Inventory $29,051,000  $31,141,000 

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, 2015            
Reserve for Inventory $(3,475,000) $(785,000) $414,000  $(3,846,000)
Year ended December 31, 2014                
Reserve for Inventory $(2,742,000) $(743,000) $10,000  $(3,475,000)
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Balance at Beginning of Year  Additions to Reserve  Deductions
from
Reserves		  Balance at
End of Year		 
Year ended December 31, 2018            
Reserve for Inventory $(4,274,000) $(163,000) $421,000  $(4,016,000)
Year ended December 31, 2017                
Reserve for Inventory $(3,776,000) $(503,000) $5,000  $(4,274,000)

Note 6. PROPERTY AND EQUIPMENT


The components of property and equipment at December 31, consisted of the following:

  December 31,  December 31,  
  2015  2014  
        
Land $300,000     $              200,000  
Buildings and Improvements  1,658,000               1,680,000   31.5 years
Machinery and Equipment  15,109,000             12,495,000   5 - 8 years
Capital Lease Machinery and Equipment  5,869,000               1,800,000   5 - 8 years
Tools and Instruments  6,993,000               5,566,000   1.5 - 7 years
Automotive Equipment  191,000      162,000   5 years
Furniture and Fixtures  425,000       294,000   5 - 8 years
Leasehold Improvements  910,000       646,000   Term of Lease
Computers and Software  482,000        372,000   4 - 6 years
Total Property and Equipment  31,937,000              23,215,000  
Less: Accumulated Depreciation  (16,638,000)             (13,658,000)  
Property and Equipment, net $15,299,000    $              9,557,000  

  December 31,  December 31,    
  2018  2017    
          
Land $300,000  $300,000     
Buildings and Improvements  1,708,000   1,650,000   31.5 years 
Machinery and Equipment  11,579,000   11,554,000   5 - 8 years 
Capital Lease Machinery and Equipment  6,495,000   6,534,000   5 - 8 years 
Tools and Instruments  9,882,000   8,538,000   1.5 - 7 years 
Automotive Equipment  177,000   172,000   5 years 
Furniture and Fixtures  303,000   311,000   5 - 8 years 
Leasehold Improvements  520,000   528,000   Term of Lease 
Computers and Software  425,000   406,000   4 - 6 years 
Total Property and Equipment  31,389,000   29,993,000     
Less: Accumulated Depreciation  (22,612,000)  (19,943,000)    
Property and Equipment, net $8,777,000  $10,050,000     

Depreciation expense for the years ended December 31, 20152018 and 20142017 was approximately $3,090,000$2,720,000 and $2,364,000,$2,548,000, 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 2018 and 2017. Accumulated depreciation on these assets was approximately $4,827,000 and $3,595,000 as of December 31, 2018 and 2017, respectively.

Note 7. INTANGIBLE ASSETS


The components of the intangibles assets at December 31, consisted of the following:


  December 31,  December 31,  
  2015  2014  
        
Customer Relationships $6,555,000  $6,255,000        5 to 14 years
Trade Names  1,480,000   1,280,000            15-20 years
Technical Know-how  660,000   660,000            10 years
Non-Compete  150,000   50,000              5 years
Professional Certifications  15,000   15,000        .25 to 2 years
Total Intangible Assets  8,860,000   8,260,000  
Less: Accumulated Amortization  (5,008,000)   (3,747,000) 
Intangible Assets, net $3,852,000  $4,513,000  

  December 31,  December 31,   
  2018  2017   
         
Customer Relationships $4,925,000  $4,925,000  5 to 14 years
Non-Compete  50,000   50,000  5 years
Total Intangible Assets  4,975,000   4,975,000   
Less: Accumulated Amortization  (4,975,000)  (4,975,000)  
Intangible Assets, net $-  $-   

The expense for amortization of the intangibles for the years ended December 31, 20152018 and 20142017 was approximately $1,262,000$0 and $1,163,000,$471,000, respectively.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future amortization of intangibles as As of December 31, 2015 is as follows:
2017 intangible assets had been fully amortized.


For the year ending Amount 
December 31, 2016 $1,279,000 
December 31, 2017  754,000 
December 30, 2018  284,000 
December 31, 2019  284,000 
December 31, 2020  284,000 
Thereafter  967,000 
Total $3,852,000 

Note 8. ASSETS HELD FOR SALE AND LEASEBACK TRANSACTION


On October 24, 2006, the Company consummated a Sale - Leaseback Arrangement, wherebyLIABILITES DIRECTLY ASSOCIATED

WMI

As discussed in Note 1, on December 20, 2018, the Company sold the buildingsall of its outstanding shares of WMI and real property located in Bay Shore, New York (the "Property")its subsidiaries to CPI for a purchase price of $6,200,000.$9,000,000, reduced by a working capital adjustment of ($1,093,000). At December 31, 2017, the Company reclassified its assets held for sale and the liabilities directly associated to these assets. The Company accountedcomponents of these assets and liabilities are as follows:

Components of Assets Held for Sale and Liabilities Directly Associated

  December 31,
2017		 
Assets Held for Sale   
Accounts Receivable, net of allowance for doubtful accounts $2,217,000 
Inventory, net of reserves  8,065,000 
Prepaid and other assets  485,000 
Property and equipment, net of accumulated depreciation  878,000 
Impairment of Assets Held for Sale  (1,563,000)
     
Assets Held for Sale $10,082,000 
     
Accounts payable and accrued expenses  2,138,000 
Deferred Revenue  521,000 
Notes Payable & Capital lease obligations  11,000 
Deferred rent  125,000 
     
Liabilities directly associated to Assets Held for Sale $2,795,000 

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 transaction under the provisions of FASB ASC 840-40, “Leases – Sale-Leaseback Transactions”. The Company realized a gain on the sale of $1,051,000 of which $300,000 was recognized during the yearyears ended December 31, 2006. 2018 and 2017, respectively:

Segment Data 2018  2017 
Aerostructures & Electronics       
Net Sales $13,853,000  $13,129,000 
Gross Profit  256,000   1,884,000 
Pre Tax (Loss) Income  (1,042,000)   (6,678,000)
Assets  -   10,082,000 

Note 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The remaining $751,000 is being recognized ratably over the remaining termcomponents of the twenty year leaseaccounts payable 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 $409,000 and $447,000 as of December 31, 2015 and 2014, respectively, is classifiedare detailed as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets.


Simultaneous with the closing of the sale of the 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 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 13 Commitments and Contingencies.
follows:

  December 31,  December 31, 
  2018  2017 
       
Accounts Payable $6,782,000  $8,634,000 
Accrued Expenses  1,941,000   2,238,000 
  $8,723,000  $10,872,000 

Note 9.10. 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 $295,000 and $333,000 as of December 31, 2018 and 2017, 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.

F-22

The Company accounted for these transactions under the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions”. 

Note 11. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS


Notes payable and capital lease obligations consist of the following:

  December 31,  December 31, 
  2015  2014 
       
Revolving credit note payable to PNC Bank N.A. ("PNC") $29,604,000  $17,672,000 
Term loans, PNC  9,833,000   8,363,000 
Capital lease obligations  5,018,000   1,645,000 
Related party notes payable  350,000   - 
Other note payable  -   41,000 
Subtotal  44,805,000   27,721,000 
Less:  Current portion of notes and capital obligations  (40,893,000)   (19,508,000)
Notes payable and capital lease obligations, net of current portion $3,912,000  $8,213,000 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  December 31,  December 31, 
  2018  2017 
       
Revolving credit note payable to PNC Bank N.A. (“PNC”) $14,043,000  $16,455,000 
Term loans, PNC  1,572,000   3,471,000 
Capital lease obligations  1,786,000   3,073,000 
Related party notes payable, net of debt discount  4,835,000   1,912,000 
Other note payable  2,830,000   1,930,000 
Subtotal  25,066,000   26,841,000 
Less:  Current portion of notes and capital obligations  (19,345,000)  (23,393,000)
Notes payable and capital lease obligations, net of current portion $5,721,000  $3,448,000 

PNC Bank N.A. ("PNC"(“PNC”)

The Company has a credit facilityLoan Facility with PNC (the "Loan Facility") secured by substantially all of its assets. The Loan Facilitythat has been amended many times during its term. Substantially all of its assets are pledged as collateral under the Loan Facility. The Company enteredis required to maintain a lockbox account with PNC, into an amendment to thewhich substantially all of its cash receipts are paid. The Loan Facility in November 2015 and paid an amendment fee of $40,000. At December 31, 2015, the Loan Facility consisted ofprovides for a $33,000,000$15,000,000 revolving loan (which includes an inventory sub-limitand a term loan with a balance of $15,000,000) and four term loans (Term Loan A, Term Loan B, Term Loan C, and Term Loan D), described below.


Under the terms of the Loan Facility the revolving credit note bore interest at the sum of the Alternate Base Rate plus three quarters of one percent (0.75%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and three quarters of one percent (2.75%) with respect to Eurodollar Rate Loans. The revolving credit note had an interest rate of 4.00% per annum$1,572,000 at December 31, 2015 and 2014, and an outstanding balance of $29,604,000 and $17,672,000, respectively. The maturity date of the revolving credit note is November 30, 2016.

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. Because the revolving loans contain a subjective acceleration clause which could permit PNC to require repayment prior to maturity, the loans are classified with the current portion of notes and capital lease obligations.

2018 (the “Term Loan”). The repayment terms of the Term Loan A were amended in 2014. On April 1, 2014, the Company borrowed $2,676,000, representing an additional $1,328,000, to partially fund the acquisition of Woodbine. The repayment terms of Term Loan A consists of thirty-two consecutiveprovide for monthly principal installments the first thirty-one in the amount of $31,859 which commenced on the first business day of May 2014, and continued$123,133, payable on the first business day of each month, thereafter, with a thirty-second and final payment of any unpaid balance of principal and interest payable on the last business day of November 2016. Term Loans A and B bear 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 three percent (3.00%) with respect to LIBOR Rate Loans. At December 31, 2015 and 2014, the balance due under Term Loan A was $2,039,000 and $2,421,000, respectively.

On October 1, 2014, the Company borrowed $3,500,000 under Term Loan B for the acquisition of AMK. The repayment of Term Loan B consists of sixty consecutive monthly principal installments, the first fifty-nine in the amount of $58,333 which commenced on the first business day of December 2014, and continued on the first business day of each month thereafter, with a sixtieth and final payment of any unpaid balance of principal and interest on the last business day of November 2019. At December 31, 2015 and 2014, the balance due under Term Loan B was $2,742,000 and $3,442,000, respectively.

On December 31, 2014, the Company borrowed $2,500,000 under Term Loan C to refinance the Seller Note and Mortgage of $2,500,000 issued as part of the acquisition of AMK. Thescheduled maturity date of Term Loan C is the first business day of January 2021, and it is to be paid in seventy two consecutive monthly principal installments, which commenced on the first business day of February 2015, and continue on the first business day of each month thereafter. The first seventy-one of the installments shall be in the amount of $34,722 with a seventy second and final payment of any unpaid principal and interest on the first business day of January 2021. Term Loan C bears interest at (a) the sum of the Alternate Base Rate plus two percent (2.00%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three and one-quarter percent (3.25%) with respect to LIBOR Rate Loans. At December 31, 2015 and 2014, the balance due under Term Loan C was $2,118,000 and $2,500,000, respectively.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On March 9, 2015, the Company borrowed $3,500,000 under Term Loan D for the acquisition of Sterling. The repayment of Term Loan D consists of twenty consecutive monthly principal installments, the first nineteen in the amount of $62,847 which commenced on the first business day of April 2015, and continued on the first business day of each month thereafter, with a twentieth and final payment of any unpaid balance of principal and interest on the last business day of November 2016. Term Loan D bears interest at (a) the sum of the Alternate Base Rate plus two and one quarter percent (2.25%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three and one-half percent (3.50%) with respect to LIBOR Rate Loans. At December 31, 2015, the balance due under Term Loan D was $2,934,000.

The Loan Facility was amended in February 2016 to increase the revolving loan to $37,500,000, including an overdraft facility of $4,500,000. 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 three quarters of one percent (0.75%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one half of one percent (2.50%) with respect to LIBOR Rate Loans. We paid a fee of $75,000 in connection with the 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.

date.

The terms of the Loan Facility require, that, among other things, that the Company maintain a specified Fixed Charge Coverage Ratio.Ratio and maintain a minimum EBITDA (as defined in the Loan Facility) for specified periods. In addition, the Company iswe are limited in the amount of Capital Expenditures it can make. The Company is also limited to the amount of Dividendsdividends it can pay its shareholders as defined in the Loan Facility.

The Loan Facility has been amended many times during its term, most recently on May 30, 2018 (the “Sixteenth Amendment”), January 2, 2019 (the “Seventeenth Amendment”) and February 8, 2019 (the “Eighteenth Amendment”).

The Sixteenth Amendment waived Fixed Charge Coverage Ratio covenant violations for the periods ending September 30, 2017, December 31, 2017 and March 31, 2018. The Sixteenth Amendment imposes minimum EBITDA (as defined in the Loan Agreement) covenants of not less than (i) $75,000 for the three-month period ending March 31, 2018, (ii) $485,000 for the six month period ending June 30, 2018, and (iii) $1,200,000 for the nine-month period ending September 30, 2018. The Company complied with these new covenants for the three-months ended March 31, 2018, the six-month period ended June 30, 2018 and the nine-month period ended September 30, 2018. In addition, the Company is prohibited from paying dividends to its stockholders and limits capital expenditures.

Under the terms of the Seventeenth Amendment, the revolving loan and the Term Loan bear interest at a rate equal to the sum of the Alternate Base Rate (as defined in the Loan Agreement) plus four percent (4%). In addition to the amounts available as revolving loans secured by inventory and receivables pursuant to the formula set forth in the Loan Agreement, PNC has agreed to permit the revolving advances to exceed the formula amount by $1,000,000 as of December 31, 2018, provided that we reduce the “Out-of-Formula Loan” by $25,000 per week commencing April 1, 2019, with the unpaid balance payable in full on December 31, 2019. The indebtedness under the revolving loan and the Term Loan are classified with the current portion of notes and capital lease obligations.

Both the revolving loan, inclusive of the Out-of Formula Loan, and the Term Loan mature on December 31, 2019. As a condition to its agreement to extend the maturity of the obligations due under the Loan Agreement (the “Obligations”), we are obligated to pay PNC an extension fee of (i) $250,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) June 30, 2019, (ii) $125,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of July 1, 2019, (iii) $125,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of October 1, 2019 (iv) $500,000 on December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of December 31, 2019. As a further condition to PNC’s agreement to extend the maturity of the Obligations, Michael and Robert Taglich purchased $2,000,000 principal amount of our Senior Subordinated Convertible Notes and arranged a financing giving purchasers a right to receive a pro rata portion of the AMK Revenue Stream Payments resulting in gross proceeds of $800,000, including $275,000 from Michael and Robert Taglich.


The Eighteenth Amendment requires us to maintain a minimum EBITDA of not less than (i) $1,500,000 for the twelve-month period ending December 31, 2018, (ii) $655,000 for the three-month period ending March 31, 2019, (iii) $1,860,000 for the six-month period ending June 30, 2019 and (iv) $3,110,000 for the nine-month period ending September 30, 2019. At December 31, 2018 we were in compliance with the minimum EBIDA covenant.

As of December 31, 2015,2018, our debt to PNC in the Company was not in compliance with the Fixed Charge Coverage Ratio covenant. Because the Loan Facility contains a subjective acceleration clause which could permit PNC to require repayment prior to maturity,amount of $15,615,000 consisted of the revolving credit loan is classified as current in the accompanying condensed consolidated balance sheet. The failure to maintainamount of $14,043,000 and the requisite Fixed Charge Coverage Ratio constitutes a default under the Loan Facility and, PNC, at its option, may give notice to the Company that all amounts under the Loan Facility are immediately due and payable. Consequently, all amounts due under the Term Loans are also classified as current. As of the date of issuance of the accompanying financial statements, PNC has not given such notice. In addition, the Company has requested a waiver from PNC for the failure to meet the Fixed Charge Coverage Ratio covenant. At December 31, 2015, the Company was in compliance with all other terms of the Loan Facility. At December 31, 2014, the Company was in compliance with all terms of the Loan Facility.


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 occurredterm loan in the Company's condition, resultsamount of operations, assets, business, properties or prospects allowing it$1,572,000. The revolver balance was increased to demand repaymentinclude the Company’s negative general ledger balances of the Loan Facility.

its controlled disbursement cash accounts. As of December 31, 20152017, our debt to PNC in the amount of $19,926,000 consisted of the revolving credit note due to PNC in the amount of $16,455,000 and the term loan due to PNC in the amount of $3,471,000. In addition, as of December 31, 2018 we had capitalized lease obligations to third parties of $1,786,000, as compared to capitalized lease obligations to third parties of $3,073,000 as of December 31, 2017.

As of December 31, 2018 the future minimum principal payments for the term loans are as follows:


For the year ending Amount 
December 31, 2016 $6,090,000 
December 31, 2017  1,117,000 
December 31, 2018  1,117,000 
December 31, 2019  1,058,000 
December 31, 2020  416,000 
Thereafter  35,000 
PNC Term Loans payable  9,833,000 
Less: Current portion  (9,833,000)
Long-term portion $- 

For the year ending Amount 
December 31, 2019 $1,478,000 
December 31, 2020  94,000 
     
PNC Term Loans payable  1,572,000 
Less: Current portion  1,572,000 
Long-term portion $- 

Interest expense related to these credit facilities amounted to approximately $1,414,000$1,775,000 and $853,000$2,122,000 for the years ended December 31, 20152018 and 2014,2017, respectively.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $5,018,000$1,786,000 and $1,645,000$3,073,000 as of December 31, 20152018 and 2014,2017, respectively, with various interest rates ranging from approximately 4% to 7%14%.


As of December 31, 2015,2018, 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, 2016 $1,348,000 
December 31, 2017  1,348,000 
December 31, 2018  1,318,000 
December 31, 2019  1,139,000 
December 31, 2020  455,000 
Thereafter  - 
 Total future minimum lease payments  5,608,000 
 Less: imputed interest  (590,000)
 Less: current portion  (1,106,000)
Total Long Term Portion $3,912,000 

For the year ending Amount 
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  1,873,000 
Less: imputed interest  (87,000)
Less: current portion  (1,196,000)
Total Long Term Portion $590,000 

Related Party NoteNotes 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 as individuals in the Company a total of $ 8,860,000 through various debt and equity financings.

From November 23, 2016 through March 21, 2017, the Company received gross proceeds of $1,950,000 from Robert and Michael Taglich, from the sale of an equal principal amount of our 8% Subordinated Convertible Notes (the “8% Notes”). See “Private Placements of 8% Subordinated Convertible Notes” below.


In November 2017, Michael Taglich and Robert Taglich purchased 144,927 shares and 72,463 shares, respectively, of common stock, together with warrants to purchase an additional 48,000 shares and 24,000 shares, respectively, of common stock, for a purchase price of $200,000 and $100,000, respectively, in a private placement of the Company’s equity securities completed in January 2018 from which the Company received gross proceeds of $2,000,000. Taglich Brothers, Inc., which as placement agent for the sale of the shares and warrants, received a placement agent fee equal to $160,000 (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 issued in the offering. See Note 12 below.

Private Placement of Subordinated Notes due May 31, 2019, together with Shares of Common Stock

On September 8, 2015,March 29, 2018 and April 4, 2018, Michael Taglich and Robert Taglich advanced $1,000,000 and $100,000, respectively, to the Company for use as working capital. The Company subsequently issued its Subordinated Notes due May 31, 2019 to Michael Taglich and Robert Taglich, together with shares of common stock, in the financing described below, to evidence its obligation to repay the foregoing advances.

In May 2018, the Company issued $1,200,000 of Subordinated Notes due May 31, 2019 (the “2019 Notes”), together with a promissory notetotal of 214,762 shares of common stock (the “Taglich Note”“Shares”), to Michael Taglich, Robert Taglich and another accredited investor. As part of the financing, the Company issued to Michael Taglich $1,000,000 principal amount of 2019 Notes and 178,571 shares of common stock for a purchase price of $1,000,000 and the Company issued to Robert Taglich $100,000 principal amount of 2019 Notes and 17,857 shares of common stock. The Company issued and sold a 2019 Note in the principal amount of $350,000.$100,000, plus 18,334 shares of common stock, to the other accredited investor for a purchase price of $100,000. Seventy percent (70%) of the total purchase price for the 2019 Notes and Shares purchased by each investor has been allocated to the 2019 Notes with the remaining thirty percent (30%) allocated to the Shares purchased with the 2019 Notes. The number of Shares purchased by Michael Taglich Note bears interestand Robert Taglich was calculated based upon $1.68, the closing price of the common stock on May 20, 2018, the trading day immediately preceding the date they purchased the 2019 Notes and shares of common stock. 

Interest on the 2019 Notes is payable on the outstanding principal amount thereof at the rate of 4%one percent (1%) per annum. The principalmonth, payable monthly commencing June 30, 2018. Upon the occurrence and continuation of a failure to pay accrued interest, are due tointerest shall accrue and be paidpayable on September 7, 2016. The Company's obligation under the Taglich Note is subordinated to its indebtedness to PNC.


Interest expense related to the Taglich Note was $1,000 for the year ended December 31, 2015.
Other Notes Payable
In connection with the acquisition of Welding on August 24, 2007, the Company incurred a note payable (“WMI Note”) to the former stockholders of Welding. The Company's obligation under the WMI Note was subordinated to its indebtedness to PNC.

The WMI Note and payment terms were adjusted and/or amended several times and on January 5, 2015 the remaining balance of $41,000 was paid and the obligation was satisfied. At December 31, 2015 and 2014, the balance owed under the WMI Note was $0 and $41,000, respectively.

Interest expense related to the WMI Note was $0 and $30,000 for the years ended December 31, 2015 and 2014, respectively.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Junior Subordinated Notes

In 2008 and 2009, the Company sold in a series of private placements to accredited investors $5,990,000 of principalsuch amount in Junior Subordinated Notes. The notes bear interest at the rate of 1%1.25% per month; provided that upon the occurrence and continuation of a failure to timely pay the principal amount of the 2019 Note, interest shall accrue and be payable on such principal amount at the rate of 1.25% per month (or 12% per annum)and shall no longer be payable on interest accrued but unpaid. The 2019 Notes are subordinate to the Company’s obligations to PNC.

Taglich Brothers acted as placement agent for the offering and received a commission in the aggregate amount of 4% of the amount invested which was paid in kind.

Related party advances and notes payable, net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled $4,835,000 and $1,912,000, as of December 31, 2018 and December 31, 2017, respectively.

The gross proceeds of $1,200,000 was completed in the following closings:

Date Gross Proceeds  Promissory Note  $  Common Stock Price  Shares 
3/29/2018  1,000,000   700,000   300,000   1.68   178,571 
4/4/2018  100,000   70,000   30,000   1.68   17,857 
5/21/2018  100,000   70,000   30,000   1.64   18,334 
                     
Total  1,200,000   840,000   360,000       214,762 

Private Placements of 8% Subordinated Convertible Notes and Amendments Thereto

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 Company's Junior Subordinated8% Notes, the Company issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc. ("Taglich Brothers"), as placement agent for the 8% Note Offerings, in lieu of payment of cash compensation for sales commissions, together with warrants to purchase a Junior Subordinated Notetotal 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 $510,000. Thethe 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 2018, we issued $297,000 principal amount of 8% Notes in lieu of cash payment of accrued interest. As of September 30, 2018, we had outstanding $4,775,000 principal amount of 8% Notes, of which $2,575,000 principal amount was due on November 30, 2018 and $2,200,000 principal amount was due on February 28, 2019. 


In September 2018, holders of a majority of the outstanding principal amount of the 8% Notes consented to an amendment to the terms of the note issued8% Notes to Taglich Brothers are identicalextend the maturity date to December 31, 2020 and to provide that interest on the notes. In8% Notes, as amended (the “Amended Notes”), shall accrue and be paid on the due date of the Amended Notes or, if earlier, upon conversion of the Amended Notes into shares of common stock. 

For soliciting noteholders in connection with the amounts raised in 2009,adoption of the amendments, the Company issuedagreed to pay Taglich Brothers $95,550, representing a Junior Subordinated Notefee equal to 2% of the outstanding principal amount of Notes whose registered holders (other than Taglich Brothers) received shares of common stock in lieu of cash payment of accrued interest on the same terms8% Notes as the Junior Subordinated Notes referred to above for commission of $44,500.


In conjunction with the Private Placement of our common stock to raise money for the NTW Acquisition, the Company solicited the holders of our Junior Subordinated Notes to convert their notes to Common Stock at a price of $6.00 per share. On June 29, 2012, the Company issued 867,461 shares of its Common Stock in exchange for approximately $5,204,000 of its Junior Subordinated Notes. On July 26, 2012, the Company repaid $115,000 of its Junior Subordinated Notes along with the accrued interest thereon of approximately $1,000.

The due dates of the remaining Junior Subordinated Notes were extended from November 18, 2013 to mature on NovemberSeptember 30, 2016 and were subordinated to the Company's obligations to PNC. The Junior Subordinated Notes were satisfied in June 2014.

The balance owed on the Junior Subordinated Notes was $0 at both December 31, 2015 and 2014.

Interest expense on the Junior Subordinated Notes amounted to $0 and $61,000 for the years ended December 31, 2015 and 2014, respectively.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The components of accounts payable at December 31, are detailed as follows:

  December 31,  December 31, 
  2015  2014 
       
Accounts Payable $9,722,000  $5,636,000 
Accrued Expenses  1,807,000   812,000 
Other Payables  524,000   500,000 
  $12,053,000  $6,948,000 

2018.

Note 11. STOCKHOLDERS'12. STOCKHOLDERS’ EQUITY


Common

Issuance of Series A Preferred Stock Issuances


and Related Financings

Preferred Stock

During the year ended December 31, 2015, the Company2016 we issued 25,819 shares of itsour Series A Convertible Preferred Stock (“Series A Preferred Stock”) in a series of private financings. The shares were converted into shares of our common stock pursuant to the cashless exercise of Stock Options.


During the year ended December 31, 2014, the Company issued 26,972 shares of its common stock pursuant to the cashless exercise of Warrants and 17,612 shares of its common stock pursuant to the cashless exercise of Stock Options.

On March 1, 2015, in connection with the acquisitionpublic offering of Sterling, the Company issued 425,005our common stock in July 2017 (the “Public Offering”).

The shares of its common stock to the former stockholdersSeries A Preferred Stock had a stated value of Sterling.


On April 1, 2014, in connection with the acquisition of Woodbine, the Company issued 30,000 shares of its common stock to the former stockholders of Woodbine.

On June 3, 2014, in connection with its Registered Direct Offering (“the Offering”), the Company issued 1,170,000 shares of its common stock. These securities$10.00 per share and are were offered pursuant to the Company’s effective “shelf” registration statement on Form S-3 (File NO. 333-191748), which was declared effective by the Securities and Exchange Commission on December 11, 2013. Taglich Brothers acted as the exclusive placement agent for the Offering (see Note 16). The gross proceeds of the offering were $10,530,000 comprised of $9,530,000 in cash and $1,000,000 in the conversion of our Junior Subordinated Notes (see Note 9). The Company paid to Taglich Brothers a commission of approximately $842,000 and warrants to purchase up to 46,800initially 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 additional shares of Series A Preferred Stock (“PIK Shares”) in lieu of payment of cash dividends payable until June 15, 2018, and to 16% per annum after June 2018, 19% per annum to the extent dividends were paid in additional shares of Series A Preferred Stock (“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 $11.25. Additionally,$1.50 per share (a conversion rate of 6.6667 shares of common stock per share of Series A Preferred Stock), 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, which was subsequently obtained on October 3, 2017 at the Company’s 2017 Annual Meeting of Stockholders., 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.


On October 3, 2017, holders of 1,294,551 outstanding shares of the Company’s Series A Preferred Stock automatically converted into 8,629,606 shares of common stock.

As of December 31, 2018 and 2017, the Company paid legal feeshad no outstanding shares of Series A Preferred Stock.

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, 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 Taglich Brothersthe 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 was completed in four closings for gross proceeds of $2,000,000 as follows:

  Total  Shares  Warrants 
Date 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     

On January 9, 2018 the Company issued and sold to 35 accredited investors an aggregate of 852,000 Shares and Warrants to purchase an additional 255,600 shares of common stock, for gross proceeds of $1,065,000 pursuant to 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 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 amountevent of $75,000certain fundamental transactions such as mergers and paidother business combinations, and may be exercised on a qualified independent underwriter approximately $50,000cashless basis for their services.a lesser number of shares depending upon prevailing market prices at the time of exercise. The Company netted cash of approximately $8,562,000 from the Offering. A portion of these funds were used to finance the acquisition of Eur-Pac Corporation (see Note 2).

Warrants may be exercised until November 30, 2022.


On June 4, 2014, in

In connection with the acquisitionOffering completed from November 2017 through January 2018, Taglich Brothers, Inc., a related party, which acted as placement agent for the sale of Eur-Pac,the Shares and Warrants, is entitled to a placement agent fee equal to $104,000 (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. 

On July 19, 2018, the Company issued 20,000and sold a total of 322,000 shares of its common stock for gross proceeds of $460,460, or a $1.43 per share, to four accredited investors pursuant to subscription agreements.

For acting as placement agent of the offering, Taglich Brothers, Inc. is entitled to a placement agent fee equal to $27,627 (6% of the gross proceeds of the offering), payable at the Company’s option, in cash or shares of Common Stock on the terms sold to the former stockholderspurchasers. 

On October 1, 2018, the Company sold 800,000 shares of Eur-Pac.

common stock and warrants to purchase 280,000 additional shares of common stock for gross proceeds of $1,000,000 to an accredited investor within the meaning of Rule 501(a) of Regulation D under the Securities Act (“Regulation D”), in a private offering exempt from the registration requirements of the Securities Act under Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act. The Company agreed to pay Taglich Brothers $70,000 (7% of the gross proceeds of the offering) for acting as placement agent for the offering.

During the year ended December 31, 2015, the Company granted 52,000 shares of restricted common stock pursuant to an agreement in connection with the acquistion of Sterling. The value of $463,000 related to this grant has been recorded as additional paid in capital.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends
On January 24, 2014, the Company paid a dividend equal to $0.125 per common share to all shareholders of record as of January 9, 2014. The approximate amount of the divided was $717,000.

On April 22, 2014, the Company paid a dividend equal to $0.15 per common share to all shareholders of record as of April 15, 2014. The approximate amount of the dividend was $885,000.

On July 10, 2014 the Company paid a dividend equal to $0.15 per common share to all shareholders of record as of June 30, 2014. The approximate amount of the dividend was $1,064,000.

On November 3, 2014, the Company paid a dividend equal to $0.15 per common share to all shareholders of record as of October 20, 2014. The approximate amount of the dividend was $1,065,000.
On January 15, 2015 the Company paid a dividend equal to $0.15 per common share or $1,066,000 to all shareholders of record as of January 2, 2015.
On April 24, 2015 the Company paid a dividend equal to $0.15 per common share or $1,134,000 to all shareholders of record as of April 13, 2015.
On August 12, 2015, the Company paid a dividend equal to $0.15 per common share or $1,134,000 to all shareholders of record as of August 3, 2015.
On December 1, 2015, the Company paid a dividend equal to $0.15 per common share or $1,133,000 to all shareholders of record as of November 23, 2015.
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.”

Warrants Issued To Taglich Brothers

As discussed above,2018, the Company issued warrants123,456 shares of common stock in lieu of cash payment for various services provided to Taglich Brothers. Such warrants contain “cashless exercise” provisions. As a result, the value of the warrants has to be recognized as a liability. In addition, the Company would be required to revalue the derivative liability at the endand 253,071 shares of each reporting period with the changecommon stock in value reported on the consolidated statementpayment of operations. The Company did not account for the derivative liability in its consolidated financial statements as it was determined to not be material.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

directors’ fees.

Note 12.13. 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"“Union”). The contractAgreement was renewed as of December 31, 2018 and expires on December 31, 2018.


2021 and covers all of AIM’s production personnel, of which there are approximately 104 people. AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the United Services Worker’s Security Fund. This is the only pension benefit required by the Agreement and the Company is not obligated for any future defined benefit to retirees. The Agreement contains a “no-strike” clause, whereby, during the term of the Agreement, the Union will not strike and AIM will not lockout its employees. Medical benefits for union employees are provided through a policy with Insperity,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 $247,000$172,000 and $242,000136,000 for the years ended December 31, 20152018 and 2014,2017, respectively.

The Company adopted ASU No. 2011-09, "Compensation“Compensation - Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer'sEmployer’s Participation in a Multiemployer Plan" ("Plan” (“ASU 2011-09"2011-09”). ASU 2011-09 requires additional disclosures about an employer'semployer’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 Insperity.


Extensis.

The Company has two defined contribution plans under Section 401(k) of the Internal Revenue Code (the "Plans"“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 13.14. 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 $2,225,000$1,668,000 and $2,270,000$1,544,000 for the years ended December 31, 20152018 and 2014,2017, respectively. The Company is responsible for paying all operating costs under the terms of the leases. As of December 31, 2015,2018, the aggregate future minimum lease payments are as follows:

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Plant Avenue  Fifth Avenue  Lamar Street  Motor Parkway  Porter Street  Clinton Avenue    
For the year ending Annual Rent  Annual Rent  Annual Rent  Annual Rent  Annual Rent  Annual Rent  Total Rents 
December 31, 2016 $615,000  $704,000  $360,000  $103,000  $115,000  $76,000  $1,973,000 
December 31, 2017  543,000   725,000   360,000   106,000   115,000   78,000   1,927,000 
December 31, 2018  559,000   747,000   300,000   110,000   115,000   26,000   1,857,000 
December 31, 2019  576,000   769,000   -   113,000   48,000   -   1,506,000 
December 31, 2020  593,000   792,000   -   116,000   -   -   1,501,000 
Thereafter  3,272,000   5,040,000   -   103,000   -   -   8,415,000 
Total Rents $6,158,000  $8,777,000  $1,020,000  $651,000  $393,000  $180,000  $17,179,000 

  Fifth Avenue  Lamar Street  Motor Parkway  Porter Street    
For the year ending Annual Rent  Annual Rent  Annual Rent  Annual Rent  Total Rents 
December 31, 2019 $792,000  $196,000  $113,000  $48,000  $1,149,000 
December 31, 2020  817,000   202,000   -   -   1,019,000 
December 31, 2021  842,000   173,000   -   -   1,015,000 
December 31, 2022  868,000   -   -   -   868,000 
December 31, 2023  895,000   -   -   -   895,000 
Thereafter  2,604,000   -   -   -   2,604,000 
Total Rents $6,818,000  $571,000  $113,000  $48,000  $7,550,000 

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.


One

On December 20, 2018, the Company sold all of the Company’sstock of WMI and WMI has relocated from this facility. The facility has been sublet and payments are to be made by the new tenant directly to the landlord.

Loss Contingencies

A number of actions have been commenced against us by vendors, landlords and former subsidiaries was located in the Plant Avenue facility and following the discontinuancelandlords, including a third party claim as a result of its operations,an injury suffered on a portion of a leased property not occupied by us. 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 facilityNYS 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. We believes that we have a meritorious defense, and there was vacant.no lease on the property and that our subsidiary Compac Development Corp was a hold-over tenant occupying the space on month-to-month tenancy. We recently submitted our response to plaintiff’s motion for summary judgement.

An employee of our 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. We believe we are not liable to the employee and any amount we might have to pay in excess of our deductible would be covered by insurance.

An employee of our 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 Company recordedaction remains in the early pleading stage. We believe we are not liable to the employee and any amount we might have to pay would be covered by insurance.

Contract Pharmacal Corp. commenced an action on October 2, 2018, relating to a chargeSublease entered into between us and Contract Pharmacal in May 2018 with respect to the property we at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal seeks damages for $579,000 at December 31, 2009 representingan amount in excess of $1,000,000 for our failure to make the estimated discounted future cost of partentire premises available by the Sublease commencement date. We dispute the validity of the Plant Avenue facility.


Asclaims asserted by Contract Pharmacal and believe we have has meritorious defenses to those claims and have recently submitted a motion in opposition to its motion for summary judgement.

On October 15, 2018, a complaint was filed by a stockholder of December 31, 2015,our company in the accrued lease impairment was $0.

On December 7, 2015,United States District Court for the Eastern District of New York (Michael Kishmoianvs.Air Industries et al Case No. 18cv5757) naming the Company executedand certain of its directors and a Sale - Leaseback Arrangement, wherebyformer director. The Complaint alleges that the Company agreedproxy statement for our 2017 Annual Meeting contained false and misleading misstatements relating to sellwhether brokers had discretionary authority to vote the buildings and real property locatedshares of their customers in South Windsor, Connecticut (the "Property") for a purchase price of $1,700,000. The contract expects to close in April 2016.   At December 31, 2015, the Company classified the Property as Assets Held for Sale with a balance of $1,700,000.
Simultaneousconnection with the closingproposal to increase the number of shares we are authorized to issue (the “2017 Charter Amendment”). In the Complaint the plaintiff seeks to void the amendment and rescind any shares issued using the shares authorized by the amendment. Our Board of Directors has adopted an amendment to further increase the number of shares of Common Stock we are authorized to issue (the “2019 Charter Amendment”), subject to stockholder approval at our 2019 Annual Meeting of Stockholders, which we anticipate will be held in May or June of 2019. Counsel to our insurance carrier has advised counsel to the plaintiff of the saleproposed amendment. We believe that approval of the Property,2019 Charter Amendment will remove any issues concerning our ability to issue shares of Common Stock, or the Company will enter into a 15-year lease (the "Lease") withvalidity of shares issued in excess of 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. Pursuant25,000,000 authorized pursuant to the termsadoption of the Lease,2017 Charter Amendment and that any amount we may pay to resolve this action will not be material.

From time to time we also may be engaged in various lawsuits and legal proceedings in the Companyordinary course of our business. We are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or operating results. We, however, have had claims brought against us by a number of vendors due to our liquidity constraints.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder of our common stock, is requiredan adverse party or has a material interest adverse 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.

The Company will account for the transaction under the provisions of FASB ASC 840-40, “Leases – Sale-Leaseback Transactions”.
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

our interest.

Note 14.15. INCOME TAXES


The provision for (benefit from) income taxes as of December 31, is set forth below:

  2018  2017 
       
Current        
Federal tax refund $-  $(178,000)
State  3,000   8,000 
Prior Year overaccruals        
Federal  -   - 
State  -   (27,000)
         
Total (Benefit) Expense  3,000   (197,000)
Deferred Tax Benefit  (921,000)  (2,025,000)
Valuation Allowance  921,000   (2,025,000)
Net Provision for (Benefit from) Income Taxes $3,000  $(197,000)


  2015  2014 
       
Current      
Federal $-  $939,000 
State  53,000   16,000 
Prior year overaccruals        
Federal  (123,000)  10,000 
State  -   (290,000)
Total (Benefit) Expense  (70,000)  675,000 
         
Deferred Tax Benefit  (216,000)  (1,043,000)
         
Net Benefit from Income Taxes $(286,000) $(368,000)

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,

  2015  2014 
U.S. statutory income tax rate  -34.0%  34.0%
State taxes  4.7%  10.0%
Permanent differences, overaccruals and non-deductible items  3.0%  -167.0%
Rate change and provision to return true-up  -40.2%  0.0%
Expired stock options  40.8%  0.0%
Total  -25.7%  -123.0%
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  2018  2017 
U.S. statutory income tax rate  21.00%  34.00%
State taxes  -0.12%  0.09%
Permanent differences, overaccruals and non-deductible items  5.71%  -0.22%
Rate change and provision to return true-up  -18.36%  -22.60%
Expired stock options  0.00%  -0.19%
Deferred tax valuation allowance   -8.38%  -10.09%
Total  -0.15%  0.99%

The components of net deferred tax assets at December 31, 20152018 and December 31, 20142017 are set forth below:

  December 31,  December 31, 
  2018  2017 
Deferred tax assets        
Current:        
Net operating losses $6,811,000  $7,730,000 
Bad debts  124,000   135,000 
Inventory - 263A adjustment  248,000   591,000 
Accounts payable, accrued expenses and reserves  -   - 
Total current deferred tax assets before valuation allowance  7,183,000   8,456,000 
Valuation allowance  (7,183,000)  (8,456,000)
Total current deferred tax assets after valuation allowance  -   - 
         
Non-current:        
Stock based compensation - options and restricted stock  161,000   124,000 
Capitalized engineering costs  809,000   281,000 
Deferred rent  248,000   299,000 
Amortization - NTW Transaction  810,000   519,000 
Inventory reserves  942,000   960,000 
Deferred gain on sale of real estate  80,000   80,000 
Accrued Expenses  49,000   - 
Disallowed interest  918,000   - 
Other  314,000   114,000 
Total non-current deferred tax assets before valuation allowance  4,331,000   2,377,000 
Valuation allowance  (2,952,000)  (758,000)
Total non-current deferred tax assets after valuation allowance  1,379,000   1,619,000 
         
Deferred tax liabilities:        
Property and equipment  (1,379,000)  (1,619,000)
Amortization – NTW Goodwill  -   - 
Amortization – Welding Transaction  -   - 
Total non-current deferred tax liabilities  (1,379,000)  (1,619,000)
         
Net non-current deferred tax asset $-  $- 

       
  December 31,  December 31, 
  2015  2014 
Deferred tax assets      
Current:      
Net operating losses $462,000  $- 
Bad debts  336,000   650,000 
Inventory - 263A adjustment  8,000   9,000 
Accounts payable, accrued expenses and reserves  919,000   762,000 
Total current deferred tax assets before valuation allowance  1,725,000   1,421,000 
Valuation allowance  -   - 
Total current deferred tax assets after valuation allowance  1,725,000   1,421,000 
         
         
Non-current:        
Capital loss carry forwards  -   1,088,000 
Section 1231 loss carry forward  4,000   4,000 
Stock based compensation - options and restricted stock  79,000   527,000 
Capitalized engineering costs  432,000   522,000 
Deferred rent  410,000   483,000 
Amortization - NTW Transaction  789,000   663,000 
Inventory reserves  680,000   - 
Lease impairment  -   22,000 
Deferred gain on sale of real estate  126,000   179,000 
Other  257,000   - 
Total non-current deferred tax assets before valuation allowance  2,777,000   3,488,000 
Valuation allowance  (4,000)  (1,092,000)
Total non-current deferred tax assets after valuation allowance  2,773,000   2,396,000 
         
Deferred tax liabilities:        
Property and equipment  (2,091,000)  (1,082,000)
Amortization - NTW Goodwill  (13,000)  (11,000)
Amortization - AMK Goodwill  (18,000)  (4,000)
Amortization - Welding Transaction  (313,000)  (441,000)
Total non-current deferred tax liabilities  (2,435,000)  (1,538,000)
         
Net non current deferred tax asset $338,000  $858,000 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had a capital loss carry forward from the sale of Sigma Metals, Inc., a former subsidiary of the Company, of $2,719,000 which expired in fiscal 2015.

During the yearyears ended December 31, 2014,2018 and December 31, 2017, 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, 2018 and 2017, the Company provided a valuation allowance on theits deferred tax assets related to capital lossof $10,135,000 and section 1231 loss carryforwards. The valuation allowance at December 31, 2015 and 2014 amounted to $4,000 and $1,092,000,$9,214,000, respectively. Management believes that the remainder of the net deferred tax assets are more likely than not to be realized.

At December 31, 20152018 and 2014,2017, 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, 20152018 and 2014,2017, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.


In certain cases, the Company'sCompany’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 20122014 through 20152017 tax years generally remain subject to examination by federal and state tax authorities.


Note 15.16. STOCK OPTIONS AND WARRANTS


Stock-Based Compensation


On March 30, 2015,

Stock Options

In July 2017, the Board of Directors adopted the Company’s 20152017 Equity Incentive Plan (“20152017 Plan”). The 2015 Plan is virtually identical to the Company’s 2013 Equity Incentive Plan. The 2015 Plan was approved by the Company’s stockholders on June 25, 2015. The Plan which authorized the grant of rights with respect to up to 350,0001,200,000 shares. No stock options have been issued under theThe 2017 Plan aswas approved by affirmative vote of December 31, 2015.


On June 3, 2013, the Company's Board of Directors adopted, and on July 29, 2013, the Company’s stockholders approved, the 2013 Equity Incentive Plan (the “2013 Plan”). The Company reserved 600,000 shares of its Common Stock for various issuances. The 2013 Plan permits the Company to grant non-qualified and incentive stock options to employees, directors, and consultants.

on October 3, 2017.

During the yearsyear ended December 31, 20152018, the Company granted options to purchase 88,000 shares of common stock to certain of its employees and 2014, the Board of Directors approved the issuance of 18,000 and 24,000 options, respectively, to the non-employee membersdirectors. The weighted average fair value of the Company’s Boardgranted options was estimated using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of Directors. These options vested immediately.


On2.69%; expected volatility factor of 66%; expected dividend yield of 0%; and estimated option term of 5 years.

During the year ended December 1, 2014,31, 2017, the Board of Directors approved the issuance of 120,000Company granted options to the Company's chief executive officer. These options vest ratably over three years.


At various dates during 2015, the Boardpurchase 695,000 shares of Directors approved the issuance of 81,000 optionscommon stock to certain management employees. Theseof its employees and directors. The weighted average fair value of the granted options vest ratably over twowas estimated using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 1.72% to four1.81%; expected volatility factors of 82% to 85%; expected dividend yield of 0%; and estimated option term of 5 years.


The Company recorded stock based compensation expense of $100,000$293,000 and $42,000$323,000 in its consolidated statement of operations for the years ended December 31, 20152018 and 2014,2017, respectively, and such amounts were included as a component of general and administrative expense.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:


  2015  2014 
Risk-free interest rates  1.31% - 1.49%   1.55% - 1.68%
Expected life (in years)            5 - 6   5 - 7 
Expected volatility  25%  25%
Dividend yield  5.9%  5.6% - 6.1%
         
Weighted-average grant date fair value per share  $1.10   $1.10 

  2018  2017 
Risk-free interest rates  2.69%  1.72% - 1.81%
Expected life (in years)  4.9   4.9 
Expected volatility  66%  82% - 85%
Dividend yield  0.0%  0.0%
         
Weighted-average grant date fair value per share $0.72  $0.90 

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 New York Stock Exchange ARCA Defense Index. The Company did not use the volatility rate for its common stock as the Company determined that its common stock is thinly traded.


Company’s experience.

A summary of the status of the Company'sCompany’s stock options as of December 31, 20152018 and 2014,2017, and changes during the two years then ended are presented below.


  Options  Wtd. Avg. Exercise Price 
 Balance, December 31, 2013  422,332  $9.34 
 Granted during the period  144,000   10.13 
 Exercised during the period  (33,133)   4.74 
 Terminated/Expired during the period  (4,660)   103.45 
 Balance, December 31, 2014  528,539   9.01 
 Granted during the period  99,000   10.20 
 Exercised during the period  (46,473)   4.50 
 Terminated/Expired during the period  (16,724)   84.78 
 Balance, December 31, 2015  564,342  $7.35 
         
Exercisable at December 31, 2015  410,190  $6.56 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Options  Wtd. Avg. Exercise Price 
 Balance, January 1, 2017  636,342  $7.01 
 Granted during the period  695,000   1.45 
 Exercised during the period  -   - 
 Terminated/Expired during the period  (285,715)  7.66 
 Balance, December 31, 2017  1,048,627   3.20 
 Granted during the period  88,000   1.56 
 Exercised during the period  -   - 
 Terminated/Expired during the period  (298,478)  3.04 
 Balance, December 31, 2018  838,149  $3.08 
         
Exercisable at December 31, 2018  598,149  $3.73 

The following table summarizes information about stock options at December 31, 2015:


Range of Exercise
Prices
  
Remaining
Number
Outstanding
 
Wtd. Avg.
Life
 
Wtd. Avg.
Exercise Price
 
 $0.00 - $5.00   199,696 3.6 years  $4.37 
 $5.01 - $20.00   364,646 4.2 years  8.98 
 $0.00 - $20.00    564,342 4.0 years  $7.35 

2018:

Range of Exercise Prices  Number Outstanding  

Wtd. Avg.

Life

 

Wtd. Avg.

Exercise Price 

 
$0.00 - $5.00   646,000  5.2 years $8.18 
$5.01 - $20.00   192,149  1.6 years  1.56 
$0.00 - $20.00   838,149  4.4 years $3.08 

As of December 31, 2015,2018, there was $184,000$98,000 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average vesting period of three1.3 years.


The aggregate intrinsic value at December 31, 20152018 was based on the Company'sCompany’s closing stock price of $8.15$0.72 was $945,232.$0. 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, 20152018 was 316,842.


0.

The weighted average fair value of options granted during the years ended December 31, 20152018 and 20142017 was $1.10$0.72 and $1.10$0.90 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 20152018 and 20142017 was $169,626$0 and $191,552,$0, respectively. The total fair value of shares vested during the years ended December 31, 20152018 and 20142017 was $33,845$224,718 and $51,828,$235,550, respectively.


Warrants


During the year ended December 31, 2018 and 2017, the Company issued 535,600 and 971,611 warrants, respectively, in connection with convertible notes payable and common stock issuances.

The following tables summarize the Company'sCompany’s outstanding warrants as of December 31, 20152018 and changes during the two years then ended:


  Warrants  
Wtd. Avg.
Exercise Price
 
 Balance, December 31, 2013  118,585  $6.30 
 Granted during the period  56,800   10.80 
 Exercised during the period  (10,800)   6.30 
 Terminated/Expired during the period  -   - 
 Balance, December 31, 2014  164,585   7.85 
 Granted during the period  -   - 
 Exercised during the period  -   - 
 Terminated/Expired during the period  -   - 
 Balance, December 31, 2015  164,585  $7.85 
         
Exercisable at December 31, 2015  164,585  $7.85 

  Warrants  

Wtd. Avg.

Exercise
Price 

  Wtd. Ave. Remaining Contractual Life (years) 
Balance, January 1, 2017  840,276  $5.13   4.01 
Granted during the period  971,611   2.61   4.42 
Exercised during the period  -   -   - 
Terminated/Expired during the period  (107,785)  3.62   - 
Balance, December 31, 2017  1,704,102   2.66   4.04 
Granted during the period  535,600   1.45   4.35 
Terminated/Expired during the period  -   -   - 
Balance, December 31, 2018  2,239,702  $3.10   3.35 
             
Exercisable at December 31, 2018  2,239,702  $3.10   3.35 

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:

  2015  2014 
Risk-free interest rates  n/a   1.55% - 1.56%
Expected life (in years)  n/a   5 
Expected volatility  n/a   20.56%
Dividend yield  n/a   6%
     n/a     
Weighted-average grant date fair value per share  n/a   $0.67-$1.38 
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about warrants at December 31, 2015:
Range of Exercise Prices  Warrants Wtd. Avg. Life Wtd. Avg. Exercise Price 
 $6.30   107,785 1.5 years  $6.30 
 $8.72 - $11.25   56,800 3.4 years  10.80 
 $6.30 - $11.25   164,585 2.1 years  $7.85 

Note 16. RELATED PARTY TRANSACTIONS

Taglich Brothers is a corporation co-founded by two of the directors of the Company. In addition, a third director of the Company is a vice president of Taglich Brothers.

As discussed in Note 9, on September 8, 2015, the Company issued a promissory note payable to Michael Taglich, one of the co-founders of Taglich Brothers and a director of the Company in the principal amount of $350,000.

On January 1, 2014, we entered into a Capital Market Advisory Agreement with Taglich Brothers pursuant to which Taglich Brothers provides us, on a non-exclusive basis, business advisory services for a monthly fee of $7,000, a warrant to purchase 10,000 shares of our common stock at an exercise price of $8.72 per share, vesting quarterly over a one-year period and any reasonable out of pocket expenses.

As discussed above, in connection with our public offering of 1,170,000 shares of common stock completed on June 3, 2014, we paid Taglich Brothers, which acted as placement agent for the offering, $842,400, representing 8% of the gross proceeds of the offering as a sales commission, plus an additional $75,000 in reimbursement of expenses, including counsel fees. In addition, we granted Taglich Brothers placement agent warrants to purchase 46,800 shares of common stock, representing 4% of the shares sold in the offering as additional compensation. The Warrants are exercisable for cash or on a cashless basis at a per share exercise price equal to $11.25, commencing May 29, 2015 and expiring May 28, 2019.

  2018  2017 
Risk-free interest rates  2.33%  1.85% - 2.20% 
Expected life (in years)  4.9   5 
Expected volatility  116%  63%-115% 
Dividend yield  0   0 
Weighted-average grant date fair value per share $1.24   $1.10-$2.89 

Note 17. SEGMENT REPORTING


In accordance with FASB ASC 280, “Segment Reporting” ("(“ASC 280"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 threetwo operating segments: Complex Machining which consists of AIM and NTW; Aerostructures and Electronics which consists of WMI, WPI, MSI, Eur-Pac, ECC, and Compac beginning September 1, 2015 ;NTW and Turbine Engine Components which consists of Sterling and AMK and Sterling, beginning March 2015. for the period January 1, 2017 until AMK was disposed of on January 27, 2017. We also separately report our corporate segment (which was comprised of certain operating costs that were not directly attributable to a particular segment).

Along with our operating subsidiaries, we report the results of our corporate division as an independent segment.

AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 arewere allocated to segments.segments through March 31, 2018. These costs include corporate costs such as legal, audit, tax and other professional fees including those related to being a public company.


  Year Ended December 31, 
  2015  2014 
       
COMPLEX MACHINING      
Net Sales $42,356,000  $44,220,000 
Gross Profit  10,412,000   8,691,000 
Pre Tax Income (Loss)  1,825,000   711,000 
Assets  48,353,000   40,611,000 
         
AEROSTRUCTURES & ELECTRONICS        
Net Sales  27,134,000   18,273,000 
Gross Profit  6,553,000   4,812,000 
Pre Tax Income (Loss)  386,000   (554,000)
Assets  20,229,000   16,788,000 
         
TURBINE ENGINE COMPONENTS        
Net Sales  10,952,000   1,838,000 
Gross Profit  316,000   595,000 
Pre Tax Income (Loss)  (3,329,000)  142,000 
Assets  19,076,000   8,150,000 
         
CORPORATE        
Net Sales  -   - 
Gross Profit  -   - 
Pre Tax Income (Loss)  -   - 
Assets  592,000   631,000 
         
CONSOLIDATED        
Net Sales  80,442,000   64,331,000 
Gross Profit  17,281,000   14,098,000 
Pre Tax Income (Loss)  (1,118,000)  299,000 
Benefit from Income Taxes  286,000   368,000 
Net (Loss) Income  (832,000)  667,000 
Assets $88,250,000  $66,180,000 

Financial information about the Company’s reporting segments for the years ended December 31, 2018 and December 31, 2017 are as follows:

  Year Ended December 31, 
  2018  2017 
       
COMPLEX MACHINING        
Net Sales $39,745,000  $38,489,000 
Gross Profit  5,871,000   4,906,000 
Pre Tax Loss  (75,000)  (2,839,000)
Assets  41,947,000   43,207,000 
         
AEROSTRUCTURES & ELECTRONICS        
Net Sales  1,779,000   4,574,000 
Gross (Loss) Profit  (31,000)  507,000 
Pre Tax Loss  (1,380,000)  (4,233,000)
Assets  110,000   1,021,000 
         
TURBINE ENGINE COMPONENTS        
Net Sales  4,785,000   6,806,000 
Gross Loss  (426,000)  (546,000)
Pre Tax Loss  (1,385,000)  (7,599,000)
Assets  5,243,000   6,157,000 
         
CORPORATE        
Net Sales  -   - 
Gross Profit  -   - 
Pre Tax Loss  (6,766,000)  (1,599,000)
Assets  456,000   288,000 
         
CONSOLIDATED        
Net Sales  46,309,000   49,869,000 
Gross Profit  5,414,000   4,867,000 
Pre Tax Loss  (9,606,000)  (16,270,000)
(Benefit from) provision for Income Taxes  (3,000)  197,000 
Loss from Discontinued Operations  (1,383,000)  (6,478,000)
Assets Held for Sale  -   10,082,000 
Net Loss  (10,992,000)  (22,551,000)
Assets $47,756,000  $50,673,000 

F-35

 
F-36