UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2022March 31, 2023
or
☐ Transition Report Pursuant To 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
(Exact name of registrant as specified in its charter)
| Nevada | 80-0948413 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1460 Fifth Avenue, Bay Shore, New York 11706
(Address of principal executive offices)
(631) 968-5000
(631) 968-5000
(Registrant’s telephone number, including area code)
Securities Registered pursuant to Section 12(b)1(b) of the Act
| Title of Each Class | Trading Symbol(s) | Name of each Exchange on | ||
| Common Stock | AIRI | NYSE-American |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ☐ | Non-Accelerated Filer ☒ |
| Accelerated Filer ☐ | Smaller Reporting Company ☒ |
| 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 Exchange Act). Yes ☐ No ☒
There were 3,247,9373,289,827 shares of the registrant’s common stock outstanding as of November 8, 2022.August 4, 2023.
INDEX
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. 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” and similar expressions. 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.
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. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended,2022, and elsewhere in this report and the risks discussed in our other filings with the SEC.
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 the securities laws of the United States.
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PART I
FINANCIAL INFORMATION
| 1 |
1
AIR INDUSTRIES GROUP
Condensed Consolidated Balance Sheets
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 1,125,000 | $ | 281,000 | ||||
| Accounts Receivable, Net of Allowance for Credit Loss of $285,000 and $281,000 | 7,273,000 | 9,483,000 | ||||||
| Inventory | 32,444,000 | 31,821,000 | ||||||
| Prepaid Expenses and Other Current Assets | 288,000 | 307,000 | ||||||
| Contract Costs Receivable | 296,000 | 296,000 | ||||||
| Prepaid Taxes | 29,000 | 28,000 | ||||||
| Total Current Assets | 41,455,000 | 42,216,000 | ||||||
| Property and Equipment, Net | 8,948,000 | 8,593,000 | ||||||
| Operating Lease Right-Of-Use-Assets | 2,327,000 | 2,473,000 | ||||||
| Deferred Financing Costs, Net, Deposits and Other Assets | 627,000 | 532,000 | ||||||
| TOTAL ASSETS | $ | 53,357,000 | $ | 53,814,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Debt - Current Portion | $ | 14,450,000 | $ | 14,477,000 | ||||
| Accounts Payable and Accrued Expenses | 7,689,000 | 7,542,000 | ||||||
| Operating Lease Liabilities - Current Portion | 803,000 | 778,000 | ||||||
| Deferred Gain on Sale - Current Portion | 38,000 | 38,000 | ||||||
| Customer Deposits | 508,000 | 781,000 | ||||||
| Total Current Liabilities | 23,488,000 | 23,616,000 | ||||||
| Long Term Liabilities | ||||||||
| Debt - Net of Current Portion | 5,040,000 | 4,629,000 | ||||||
| Subordinated Notes Payable - Related Party | 6,162,000 | 6,162,000 | ||||||
| Operating Lease Liabilities - Net of Current Portion | 2,252,000 | 2,463,000 | ||||||
| Deferred Gain on Sale - Net of Current Portion | 95,000 | 105,000 | ||||||
| TOTAL LIABILITIES | 37,037,000 | 36,975,000 | ||||||
| Commitments and Contingencies (see Note 8) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both March 31, 2023 and December 31, 2022. | - | - | ||||||
| Common Stock - Par Value $.001 - Authorized 6,000,000 Shares, 3,259,367 and 3,247,937 Shares Issued and Outstanding as of March 31, 2023 and December 31, 2022, respectively | 3,000 | 3,000 | ||||||
| Additional Paid-In Capital | 82,545,000 | 82,446,000 | ||||||
| Accumulated Deficit | (66,228,000 | ) | (65,610,000 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 16,320,000 | 16,839,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 53,357,000 | $ | 53,814,000 | ||||
See Notes to Condensed Consolidated Financial Statements
| 2 |
AIR INDUSTRIES GROUP
Condensed Consolidated Balance SheetsStatements of Operations
For the Three Months Ended March 31,
(Unaudited)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 192,000 | $ | 627,000 | ||||
| Accounts Receivable, Net of Allowance for Doubtful Accounts of $493,000 and $594,000 | 8,658,000 | 10,473,000 | ||||||
| Inventory | 33,408,000 | 29,532,000 | ||||||
| Prepaid Expenses and Other Current Assets | 250,000 | 226,000 | ||||||
| Prepaid Taxes | 25,000 | 22,000 | ||||||
| Total Current Assets | 42,533,000 | 40,880,000 | ||||||
| Property and Equipment, Net | 8,478,000 | 8,404,000 | ||||||
| Operating Lease Right-Of-Use-Asset | 2,615,000 | 3,018,000 | ||||||
| Deferred Financing Costs, Net, Deposits and Other Assets | 989,000 | 960,000 | ||||||
| Goodwill | 163,000 | 163,000 | ||||||
| TOTAL ASSETS | $ | 54,778,000 | $ | 53,425,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Debt - Current Portion | $ | 14,820,000 | $ | 14,112,000 | ||||
| Accounts Payable and Accrued Expenses | 6,979,000 | 6,723,000 | ||||||
| Operating Lease Liabilities - Current Portion | 754,000 | 686,000 | ||||||
| Deferred Gain on Sale - Current Portion | 38,000 | 38,000 | ||||||
| Customer Deposits | 1,291,000 | 1,470,000 | ||||||
| Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary | - | 59,000 | ||||||
| Deferred payroll tax liability - CARES Act | 314,000 | 314,000 | ||||||
| Total Current Liabilities | 24,196,000 | 23,402,000 | ||||||
| Long Term Liabilities | ||||||||
| Debt - Net of Current Portion | 4,001,000 | 2,838,000 | ||||||
| Subordinated Notes Payable - Related Parties | 6,162,000 | 6,412,000 | ||||||
| Operating Lease Liabilities - Net of Current Portion | 2,669,000 | 3,241,000 | ||||||
| Deferred Gain on Sale - Net of Current Portion | 114,000 | 143,000 | ||||||
| TOTAL LIABILITIES | 37,142,000 | 36,036,000 | ||||||
| Commitments and Contingencies (Notes 4 and 8) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both September 30, 2022 and December 31, 2021. | - | - | ||||||
| Common Stock - Par Value $.001 - Authorized 6,000,000 Shares, 3,232,467 and 3,212,801 Shares Issued and Outstanding as of September 30, 2022 and December 31, 2021, respectively | 3,000 | 3,000 | ||||||
| Additional Paid-In Capital | 82,344,000 | 81,920,000 | ||||||
| Accumulated Deficit | (64,711,000 | ) | (64,534,000 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 17,636,000 | 17,389,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 54,778,000 | $ | 53,425,000 | ||||
| 2023 | 2022 | |||||||
| Net Sales | $ | 12,549,000 | $ | 12,062,000 | ||||
| Cost of Sales | 10,669,000 | 9,984,000 | ||||||
| Gross Profit | 1,880,000 | 2,078,000 | ||||||
| Operating Expenses | 2,038,000 | 1,871,000 | ||||||
| (Loss) Income from Operations | (158,000 | ) | 207,000 | |||||
| Interest and Financing Costs | (358,000 | ) | (198,000 | ) | ||||
| Interest Expense - Related Parties | (118,000 | ) | (125,000 | ) | ||||
| Other Income, Net | 16,000 | 88,000 | ||||||
| Loss before Benefit From Income Taxes | (618,000 | ) | (28,000 | ) | ||||
| Provision for Income Taxes | - | - | ||||||
| Net Loss | $ | (618,000 | ) | $ | (28,000 | ) | ||
| (Loss) Income per share - Basic and diluted | $ | (0.19 | ) | $ | (0.01 | ) | ||
| Weighted Average Shares Outstanding - Basic and diluted | 3,258,478 | 3,218,322 | ||||||
Share and per share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022.
See Notes to Condensed Consolidated Financial Statements
2
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AIR INDUSTRIES GROUP
Condensed Consolidated Statements of OperationsStockholders’ Equity
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Sales | $ | 13,278,000 | $ | 14,354,000 | $ | 39,348,000 | $ | 43,519,000 | ||||||||
| Cost of Sales | 11,036,000 | 12,340,000 | 32,606,000 | 37,105,000 | ||||||||||||
| Gross Profit | 2,242,000 | 2,014,000 | 6,742,000 | 6,414,000 | ||||||||||||
| Operating Expenses | 2,073,000 | 1,837,000 | 6,116,000 | 5,770,000 | ||||||||||||
| Income from Operations | 169,000 | 177,000 | 626,000 | 644,000 | ||||||||||||
| Interest and Financing Costs | (205,000 | ) | (205,000 | ) | (566,000 | ) | (585,000 | ) | ||||||||
| Interest Expense - Related Parties | (118,000 | ) | (126,000 | ) | (369,000 | ) | (376,000 | ) | ||||||||
| Other Income, Net | 12,000 | 88,000 | 132,000 | 338,000 | ||||||||||||
| (Loss) Income before Provision for Income Taxes | (142,000 | ) | (66,000 | ) | (177,000 | ) | 21,000 | |||||||||
| Provision for Income Taxes | - | - | - | - | ||||||||||||
| Net (Loss) Income | $ | (142,000 | ) | $ | (66,000 | ) | $ | (177,000 | ) | $ | 21,000 | |||||
| (Loss) Income per share - Basic | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | 0.01 | |||||
| (Loss) Income per share - Diluted | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | 0.01 | |||||
| Weighted Average Shares Outstanding - basic | 3,232,467 | 3,207,405 | 3,224,912 | 3,202,287 | ||||||||||||
| Weighted Average Shares Outstanding - diluted | 3,232,467 | 3,207,405 | 3,224,912 | 3,874,377 | ||||||||||||
For the Three Months Ended March 31, 2023 and 2022
Share and per share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022.(Unaudited)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, January 1, 2023 | 3,247,937 | $ | 3,000 | $ | 82,446,000 | $ | (65,610,000 | ) | $ | 16,839,000 | ||||||||||
| Common Stock issued for directors fees | 11,430 | - | 54,000 | - | 54,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 45,000 | - | 45,000 | |||||||||||||||
| Net Loss | - | - | - | (618,000 | ) | (618,000 | ) | |||||||||||||
| Balance, March 31, 2023 | 3,259,367 | $ | 3,000 | $ | 82,545,000 | $ | (66,228,000 | ) | $ | 16,320,000 | ||||||||||
| Balance January 1, 2022 | 3,212,801 | $ | 3,000 | $ | 81,920,000 | $ | (64,534,000 | ) | $ | 17,389,000 | ||||||||||
| Common Stock issued for directors fees | 5,522 | - | 54,000 | - | 54,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 66,000 | - | 66,000 | |||||||||||||||
| Net Loss | - | - | - | (28,000 | ) | (28,000 | ) | |||||||||||||
| Balance, March 31, 2022 | 3,218,323 | $ | 3,000 | $ | 82,040,000 | $ | (64,562,000 | ) | $ | 17,481,000 | ||||||||||
See Notes to Condensed Consolidated Financial Statements
| 4 |
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Stockholders’ EquityCash Flows
For the Three and Nine Months Ended September 30, 2022 and 2021March 31,
(Unaudited)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, January 1, 2022 | 3,212,801 | $ | 3,000 | $ | 81,920,000 | $ | (64,534,000 | ) | $ | 17,389,000 | ||||||||||
| Common Stock issued for directors fees | 5,522 | - | 54,000 | - | 54,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 66,000 | - | 66,000 | |||||||||||||||
| Net Loss | - | - | - | (28,000 | ) | (28,000 | ) | |||||||||||||
| Balance, March 31, 2022 | 3,218,323 | $ | 3,000 | $ | 82,040,000 | $ | (64,562,000 | ) | $ | 17,481,000 | ||||||||||
| Common Stock issued for directors fees | 6,429 | - | 54,000 | - | 54,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 141,000 | - | 141,000 | |||||||||||||||
| Net Loss | - | - | - | (7,000 | ) | (7,000 | ) | |||||||||||||
| Balance, June 30, 2022 | 3,224,752 | $ | 3,000 | $ | 82,235,000 | $ | (64,569,000 | ) | $ | 17,669,000 | ||||||||||
| Common Stock issued for directors fees | 7,715 | - | 54,000 | - | 54,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 55,000 | - | 55,000 | |||||||||||||||
| Net Loss | - | - | - | (142,000 | ) | (142,000 | ) | |||||||||||||
| Balance, September 30, 2022 | 3,232,467 | $ | 3,000 | $ | 82,344,000 | $ | (64,711,000 | ) | $ | 17,636,000 | ||||||||||
| Balance January 1, 2021 | 3,190,698 | $ | 3,000 | $ | 81,267,000 | $ | (66,161,000 | ) | $ | 15,109,000 | ||||||||||
| Common Stock issued for directors fees | 4,196 | - | 52,000 | - | 52,000 | |||||||||||||||
| Stock Options exercised | 5,122 | - | - | - | - | |||||||||||||||
| Stock Compensation Expense | - | - | 157,000 | - | 157,000 | |||||||||||||||
| Net Loss | - | - | - | (152,000 | ) | (152,000 | ) | |||||||||||||
| Balance, March 31, 2021 | 3,200,016 | $ | 3,000 | $ | 81,476,000 | $ | (66,313,000 | ) | $ | 15,166,000 | ||||||||||
| Common Stock issued for directors fees | 3,739 | - | 52,000 | - | 52,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 57,000 | - | 57,000 | |||||||||||||||
| Net Income | - | - | - | 239,000 | 239,000 | |||||||||||||||
| Balance, June 30, 2021 | 3,203,755 | $ | 3,000 | $ | 81,585,000 | $ | (66,074,000 | ) | $ | 15,514,000 | ||||||||||
| Common Stock issued for directors fees | 3,998 | - | 52,000 | - | 52,000 | |||||||||||||||
| Stock Compensation Expense | - | - | 147,000 | - | 147,000 | |||||||||||||||
| Net Loss | - | - | - | (66,000 | ) | (66,000 | ) | |||||||||||||
| Balance, September 30, 2021 | 3,207,753 | $ | 3,000 | $ | 81,784,000 | $ | (66,140,000 | ) | $ | 15,647,000 | ||||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (618,000 | ) | $ | (28,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities | ||||||||
| Depreciation of property and equipment | 617,000 | 665,000 | ||||||
| Non-cash employee compensation expense | 45,000 | 66,000 | ||||||
| Non-cash directors compensation | 54,000 | 54,000 | ||||||
| Non-cash other income recognized | - | (89,000 | ) | |||||
| Amortization of Right-of-Use Assets | 146,000 | 131,000 | ||||||
| Deferred gain on sale of real estate | (10,000 | ) | (10,000 | ) | ||||
| Bad debt expense (recovery) | 4,000 | (118,000 | ) | |||||
| Amortization of deferred financing costs | 17,000 | 15,000 | ||||||
| Changes in Operating Assets and Liabilities | ||||||||
| (Increase) Decrease in Operating Assets: | ||||||||
| Accounts receivable | 2,206,000 | 3,033,000 | ||||||
| Inventory | (623,000 | ) | (2,467,000 | ) | ||||
| Prepaid expenses and other current assets | 19,000 | (32,000 | ) | |||||
| Prepaid taxes | (1,000 | ) | - | |||||
| Deposits and other assets | (105,000 | ) | (70,000 | ) | ||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts payable and accrued expenses | 146,000 | 354,000 | ||||||
| Operating lease liabilities | (186,000 | ) | (164,000 | ) | ||||
| Customer deposits | (273,000 | ) | (55,000 | ) | ||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 1,438,000 | 1,285,000 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (973,000 | ) | (430,000 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (973,000 | ) | (430,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments for revolving loan - Webster Bank | (132,000 | ) | (901,000 | ) | ||||
| Proceeds from note payable - term note - Webster Bank | 740,000 | - | ||||||
| Payments of term note - Webster Bank | (208,000 | ) | (203,000 | ) | ||||
| Payments of finance lease obligations | (20,000 | ) | (9,000 | ) | ||||
| Payments of loan payable - financed asset | (1,000 | ) | (5,000 | ) | ||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 379,000 | (1,118,000 | ) | |||||
| NET INCREASE (DECREASE) IN CASH | 844,000 | (263,000 | ) | |||||
| CASH AT BEGINNING OF PERIOD | 281,000 | 627,000 | ||||||
| CASH AT END OF PERIOD | $ | 1,125,000 | $ | 364,000 | ||||
Share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022.
See Notes to Condensed Consolidated Financial Statements
| 5 |
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (Loss) Income | $ | (177,000 | ) | $ | 21,000 | |||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities | ||||||||
| Depreciation of property and equipment | 1,906,000 | 2,105,000 | ||||||
| Non-cash employee compensation expense | 262,000 | 361,000 | ||||||
| Non-cash directors compensation | 162,000 | 156,000 | ||||||
| Non-cash other income recognized | (59,000 | ) | (274,000 | ) | ||||
| Non-cash interest expense | - | 82,000 | ||||||
| Amortization of operating Right-of-Use assets | 403,000 | 364,000 | ||||||
| Deferred gain on sale of real estate | (29,000 | ) | (29,000 | ) | ||||
| Bad debt recovery | (102,000 | ) | (54,000 | ) | ||||
| Amortization of deferred financing costs | 48,000 | 118,000 | ||||||
| Changes in Operating Assets and Liabilities | ||||||||
| Decrease (Increase) in Operating Assets: | ||||||||
| Accounts receivable | 1,917,000 | (1,692,000 | ) | |||||
| Inventory | (3,876,000 | ) | 2,761,000 | |||||
| Prepaid expenses and other current assets | (24,000 | ) | (159,000 | ) | ||||
| Prepaid taxes | (3,000 | ) | - | |||||
| Deposits and other assets | (74,000 | ) | (15,000 | ) | ||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts payable and accrued expenses | 256,000 | (1,261,000 | ) | |||||
| Operating lease liabilities | (504,000 | ) | (541,000 | ) | ||||
| Customer deposits | (179,000 | ) | 571,000 | |||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (73,000 | ) | 2,514,000 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (1,980,000 | ) | (983,000 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (1,980,000 | ) | (983,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Note payable - revolver - net - Webster Bank | 1,641,000 | (2,187,000 | ) | |||||
| Proceeds from term loan - Webster Bank | 1,945,000 | - | ||||||
| Payments of term loan - Webster Bank | (1,430,000 | ) | (1,147,000 | ) | ||||
| Payments of deferred Financing Costs | (20,000 | ) | - | |||||
| Payment of subordinated note payable - related party | (250,000 | ) | - | |||||
| Payments of finance lease obligations | (263,000 | ) | (3,000 | ) | ||||
| Payments of loan payable - financed asset | (5,000 | ) | (7,000 | ) | ||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 1,618,000 | (3,344,000 | ) | |||||
| NET DECREASE IN CASH | (435,000 | ) | (1,813,000 | ) | ||||
| CASH AT BEGINNING OF PERIOD | 627,000 | 2,505,000 | ||||||
| CASH AT END OF PERIOD | $ | 192,000 | $ | 692,000 | ||||
See Notes to Condensed Consolidated Financial Statements
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows
For the NineThree Months Ended September 30,March 31, (Continued)
(Unaudited)
(Unaudited)
| 2022 | 2021 | |||||||
| Supplemental cash flow information | ||||||||
| Cash paid during the period for interest | $ | 895,000 | $ | 918,000 | ||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Capitalization of related party note interest to principal | $ | - | $ | 400,000 | ||||
| 2023 | 2022 | |||||||
| Supplemental cash flow information | ||||||||
| Cash paid during the period for interest | $ | 476,000 | $ | 283,000 |
See Notes to Condensed Consolidated Financial Statements
| 6 |
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATIONORGANIZATION AND BASIS OF PRESENTATION
Organization
Air Industries Group is a Nevada corporation (“AIRI”). As of September 30, 2022, and for the three months ending March 31, 2023 and nine months ended September 30, 2022, and 2021, the accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated December 31, 20212022 was derived.
Effective with the Company’s first quarter ended March 31, 2022, the Company is presenting its operations as one reportable operating segment.
Historically the Company operated its businesses and reported its results as two separate segments with AIM and NTW comprising the Complex Machining segment (“CMS”) and Sterling as the Turbine & Engine Component segment (“TEC”). The CMS segment specialized in flight critical components including flight controls and landing gear. The TEC segment focused on manufacturing components for jet engines. Along with its operating subsidiaries, the Company reported the results of its corporate division as an independent segment.
In recent years the Company integrated and consolidated the business of AIM and NTW into one facility on Long Island and the operations of its CMS and TEC segments have become increasingly integrated. The Company also made significant capital expenditures and all of its operations now share the same manufacturing facilities and use most, if not all, of the same sales and marketing functions. The Company made these changes to take advantage of the long-term growth opportunities it sees in the aerospace and defense market. In early fiscal 2022, the Company further changed its management approach and is now making decisions about resources to be allocated and assesses performance based on one integrated business rather than two reporting segments. As such, effective with the first quarter ended March 31, 2022, the Company is presenting its operations as one reportable operating segment.
Reverse Stock Split
On October 4, 2022, the Company announced a reverse stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. All share and per share amounts of its common stock presented have been retroactively adjusted to reflect the 1-for-10 reverse stock split. As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the next whole share. See Note 7 for more information.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory Valuation
For annual periods,As of March 31,2023, the Company values inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods. ForPrior to 2023, for interim periods, substantially all of the inventory value has beenwas estimated using a gross profit percentage based on the annual gross profit percentage of the immediately preceding year as applied to the net sales of the current period. Adjustments to reconcile the annual physical inventory
The Company generally purchases raw materials and supplies uniquely suited to the Company’s books are recordedproduction 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 the fourth quarter.excess of purchase order quantities in anticipation of future purchase order demand, when it is economically advantageous to do so, since 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 not secured by purchase orders and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods, obsolescence and for other impairments of value.
| 7 |
Inventories consist of the following at:
| March 31, | December 31, | |||||||||||||||
| September 30, | December 31, | 2023 | 2022 | |||||||||||||
| 2022 | 2021 | |||||||||||||||
| Raw Materials | $ | 4,163,000 | $ | 3,410,000 | $ | 4,519,000 | $ | 4,198,000 | ||||||||
| Work In Progress | 22,329,000 | 20,926,000 | 19,840,000 | 20,488,000 | ||||||||||||
| Finished Goods | 9,677,000 | 8,350,000 | 11,648,000 | 10,748,000 | ||||||||||||
| Reserve | (2,761,000 | ) | (3,154,000 | ) | (3,563,000 | ) | (3,613,000 | ) | ||||||||
| Total Inventory | $ | 33,408,000 | $ | 29,532,000 | $ | 32,444,000 | $ | 31,821,000 | ||||||||
Credit and Concentration Risks
There were twofour customers that represented 63.9%57.1% and 67.7%three customers that represented 70.8% of total net sales for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. This is set forth in the table below.
| Percentage of Sales | ||||||||||||||||
| March 31, | March 31, | |||||||||||||||
| Customer | Percentage of Sales | 2023 | 2022 | |||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||
| 1 | 40.7 | % | 41.6 | % | 24.3 | % | 27.1 | % | ||||||||
| 2 | 23.2 | % | 26.1 | % | 11.6 | % | 25.2 | % | ||||||||
| 3 | 11.2 | % | ** | |||||||||||||
| 4 | 10.0 | % | ** | |||||||||||||
| 5 | * | 18.5 | % | |||||||||||||
| * | Customer was less than 10% of sales for the three months ended March 31, 2023 |
| ** | Customer was less than 10% of sales for the three months ended March 31, 2022 |
There were threetwo customers that represented 68.9%33.1% and 75.5%three customers 70.3% of total sales for the nine months ended September 30,gross accounts receivable at March 31, 2023 and December 31, 2022, and 2021, respectively. This is set forth in the table below.
| Percentage of Accounts Receivables | ||||||||
| March 31, | December 31, | |||||||
| Customer | 2023 | 2022 | ||||||
| 1 | 18.9 | % | 33.1 | % | ||||
| 2 | 14.2 | % | 23.6 | % | ||||
| 3 | * | 13.6 | % | |||||
| Customer | Percentage of Sales | |||||||
| September 30, 2022 | September 30, 2021 | |||||||
| 1 | 32.5 | % | 36.8 | % | ||||
| 2 | 19.5 | % | 26.2 | % | ||||
| 3 | 16.9 | % | 12.5 | % | ||||
There were two customers that represented 70.2% and three customers that represented 74.7% of gross accounts receivable at September 30, 2022 and December 31, 2021, respectively. This is set forth in the table below.
| Customer | Percentage of Receivables | |||||||
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 1 | 58.1 | % | 50.3 | % | ||||
| 2 | 12.1 | % | 12.7 | % | ||||
| 3 | * | 11.7 | % | |||||
| * | Customer was less than 10% of accounts receivable at |
| 8 |
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three and nine month periods ending September 30, 2022ended March 31, 2023 and 2021:2022:
| Product | March 31, 2023 | March 31, 2022 | ||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| Product | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||
| Military | $ | 11,266,000 | $ | 12,380,000 | $ | 33,399,000 | $ | 38,750,000 | $ | 10,032,000 | $ | 10,659,000 | ||||||||||||
| Commercial | 2,012,000 | 1,973,000 | 5,949,000 | 4,769,000 | 2,517,000 | 1,403,000 | ||||||||||||||||||
| Total | $ | 13,278,000 | $ | 14,353,000 | $ | 39,348,000 | $ | 43,519,000 | $ | 12,549,000 | $ | 12,062,000 | ||||||||||||
Concentration of Credit RiskCash
During the period, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC insurance limit. The Company has not experienced any losses on these accounts.
Major Suppliers
The Company has several key sole-source suppliers of various parts or services that are important for one or more of its products. These suppliers are its only source for such parts or services and, therefore, in the event any of them were to go out of business or be unable to provide parts or services for any reason, its business could be severely harmed.
Customer Deposits
The Company receives advance payments on certain contracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves the product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s invoice.
At September 30, 2022March 31, 2023 and December 31, 2021,2022, customer deposits were $1,291,000$508,000 and $1,470,000$781,000 respectively. The Company recognized revenue of $73,000 and $126,000$272,000 during the three and nine months ended September 30, 2022, respectively,March 31, 2023, that was included in the customer deposits balance as of December 31, 2021.2022. The Company recognized revenue of $132,000 and $507,000$45,000 during the three and nine months ended September 30, 2021, respectively,March 31, 2022, that was included in the customer deposits balance as of December 31, 2020.2021.
Backlog
Backlog represents anticipated revenue from remaining performance obligations under executed non-cancellable contracts that representin the form of firm purchase orders that are deliverable over the next 18- month18-month period. As of September 30, 2022,March 31, 2023, backlog relating to remaining performance obligations in contracts was approximately $65,000,000. We expect$72,200,000. The Company expects to recognize revenue amounts in future periods related to these remaining performance obligations as follows: approximately $13,000,000 to $15,000,000 of our backlog$40,300,000 during the remainder of 2022,period April 1to December 31, 2023, and approximately $25,000,000 to $30,000,000$31,900,000 during the period from January 1, 2023 - June2024, to September 30, 2023, and approximately $11,000,000 to $15,000,000 from July 1, 2023 through December 31, 2023.2024. This expectation assumes that raw material suppliers and that outsourced processing is completeddelivered and deliveredcompleted on-time and that itsthe Company’s customers will accept delivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales pursuant to customer orders and contracts that are not currently in the 18-month backlog.
Contract Costs Receivable
Contract costs receivable represent costs to be reimbursed from a terminated contract. The Company expects to collect the receivable in the next twelve months. Contract costs receivable totals $296,000 of both March 31, 2023 and December 31, 2022.
| 9 |
Leases
The Company accounts for leases under ASC 842, “Leases.” All leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. See Note 4.
Earnings (Loss) per share
Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.
For purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method.
The following is the calculation of net (loss) income applicable to common stockholders utilized to calculate the EPS:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| (Loss) Income - Basic | $ | (142,000 | ) | $ | (66,000 | ) | $ | (177,000 | ) | $ | 21,000 | |||||
| Add: Convertible Note Interest for Potential Note Conversion | - | - | - | 232,000 | ||||||||||||
| (Loss) Income used to calculate diluted earnings per share | $ | (142,000 | ) | $ | (66,000 | ) | $ | (177,000 | ) | $ | 253,000 | |||||
The following is a reconciliation of the denominators of basic and diluted earnings per share computations:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Weighted average shares outstanding used to compute basic earnings per share | 3,232,467 | 3,207,405 | 3,224,912 | 3,202,287 | ||||||||||||
| Effect of dilutive stock options and warrants | - | - | - | 266,300 | ||||||||||||
| Effect of dilutive convertible notes payable | - | - | - | 405,789 | ||||||||||||
| Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share | 3,232,467 | 3,207,405 | 3,224,912 | 3,874,376 | ||||||||||||
The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares:stock:
| Three Months Ended | ||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | 2023 | 2022 | |||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||
| Stock Options | 305,350 | 118,000 | 305,350 | 16,000 | 302,550 | 208,400 | ||||||||||||||||||
| Warrants | 76,000 | 183,000 | 76,000 | 142,000 | 28,000 | 126,100 | ||||||||||||||||||
| 381,350 | 301,000 | 381,350 | 158,000 | 330,550 | 334,500 | |||||||||||||||||||
The following securities have been excluded from the calculation even though the exercise price was less than the average market price of the common shares during the periods set forth below because the effect of including these potential shares was anti-dilutive due to the net loss incurred during these periods:that period:
| Three Months Ended | ||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | 2023 | 2022 | |||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||
| Stock Options | - | 133,000 | - | - | - | - | ||||||||||||||||||
| Convertible notes payable | 405,810 | 509,000 | 405,810 | - | 405,800 | 405,800 | ||||||||||||||||||
| 405,810 | 642,000 | 405,810 | - | 405,800 | 405,800 | |||||||||||||||||||
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation expense for employees amounted to $55,000$45,000 and $147,000$66,000 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $262,000 and $361,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense for directors amounted to $54,000 and $52,000$54,000 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively and $162,000 and $156,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expenseexpenses for employees and directors waswere included in operating expenses on the accompanying Condensed Consolidated Statements of Operations.
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $163,000 at both September 30, 2022 and December 31, 2021 relates to the acquisition of NTW.
| 10 |
Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.
Recently Issued Accounting Pronouncements
Effective January 1, 2022,2023, the Company adopted ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated with applying accounting principles generally accepted in the United States of America for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users. The adoption of ASU 2020-06 did not have a material effect on the Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by theThe Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. The adoption of ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. The Company is currently assessingdid not have a material effect on the impact ASU 2016-13 will have on its consolidatedCompany’s financial statements.
The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.
Note 3. PROPERTY AND EQUIPMENT
The components of property and equipment at September 30, 2022March 31, 2023 and December 31, 20212022 consisted of the following:
| March 31, | December 31, | |||||||||||||||
| September 30, | December 31, | 2023 | 2022 | |||||||||||||
| 2022 | 2021 | |||||||||||||||
| Land | $ | 300,000 | $ | 300,000 | $ | 300,000 | $ | 300,000 | ||||||||
| Buildings and Improvements | 1,945,000 | 1,723,000 | 1,789,000 | 1,789,000 | ||||||||||||
| Machinery and Equipment | 23,055,000 | 22,013,000 | 24,497,000 | 23,566,000 | ||||||||||||
| Finance Lease Machinery and Equipment | 375,000 | 375,000 | ||||||||||||||
| Finance Lease ROU Assets - Machinery and Equipment | 375,000 | 375,000 | ||||||||||||||
| Tools and Instruments | 13,495,000 | 12,866,000 | 13,774,000 | 13,744,000 | ||||||||||||
| Automotive Equipment | 266,000 | 200,000 | 266,000 | 266,000 | ||||||||||||
| Furniture and Fixtures | 290,000 | 290,000 | 300,000 | 290,000 | ||||||||||||
| Leasehold Improvements | 882,000 | 882,000 | 941,000 | 941,000 | ||||||||||||
| Computers and Software | 604,000 | 583,000 | 604,000 | 604,000 | ||||||||||||
| Total Property and Equipment | 41,212,000 | 39,232,000 | 42,846,000 | 41,875,000 | ||||||||||||
| Less: Accumulated Depreciation | (32,734,000 | ) | (30,828,000 | ) | (33,898,000 | ) | (33,282,000 | ) | ||||||||
| Property and Equipment, net | $ | 8,478,000 | $ | 8,404,000 | $ | 8,948,000 | $ | 8,593,000 | ||||||||
Depreciation expense for the three months ended September 30,March 31, 2023 and 2022 was approximately $617,000 and 2021 was $598,000 and $688,000, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $1,906,000 and $2,105,000,$665,000, respectively.
Assets held under financedfinance lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under finance leases is included in depreciation expense for 2022 and 2021.expense. Accumulated depreciation on these assets was approximately $12,000$13,000 and $32,000$0 as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
| 11 |
Note 4. LEASESOPERATING LEASE LIABILITIES
The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. The Company leases certain machinery and equipment under finance leases and leases its offices and manufacturing facilities under operating leases.facilities. The leases have remaining lease terms of one to sixfive years, some of which include options to extend or terminate the leases.
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Weighted Average Remaining Lease Term - in years | 3.91 | 4.53 | ||||||
| Weighted Average discount rate - % | 8.97 | % | 8.89 | % | ||||
| Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease cost: | $ | 271,000 | $ | 271,000 | ||||
| Total lease cost | $ | 271,000 | $ | 271,000 | ||||
| Other Information | ||||||||
| Cash paid for amounts included in the measurement lease liability: | 257,000 | 249,000 | ||||||
| Operating cash flow from operating leases | $ | 257,000 | $ | 249,000 | ||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Weighted Average Remaining Lease Term - in years | 3.40 | 3.64 | ||||||
| Weighted Average discount rate - % | 9.00 | % | 8.89 | % | ||||
The aggregate undiscounted cash flows of operating lease payments for leasesas of March 31, 2023, with remaining terms greater than one year are as follows:
| Amount | ||||
| December 31, 2023 (remainder of year) | $ | 781,000 | ||
| December 31, 2024 | 1,070,000 | |||
| December 31, 2025 | 992,000 | |||
| December 31, 2026 | 730,000 | |||
| Total future minimum lease payments | 3,573,000 | |||
| Less: discount | (518,000 | ) | ||
| Total operating lease maturities | 3,055,000 | |||
| Less: current portion of operating lease liabilities | (803,000 | ) | ||
| Total long term portion of operating lease maturities | $ | 2,252,000 | ||
| Amount | ||||
| December 31, 2022 (remainder of year) | $ | 257,000 | ||
| December 31, 2023 | 1,038,000 | |||
| December 31, 2024 | 1,070,000 | |||
| December 31, 2025 | 992,000 | |||
| December 31, 2026 | 729,000 | |||
| Total future minimum lease payments | 4,086,000 | |||
| Less: discount | (663,000 | ) | ||
| Total operating lease maturities | 3,423,000 | |||
| Less: current portion of operating lease liabilities | (754,000 | ) | ||
| Total long term portion of operating lease maturities | $ | 2,669,000 | ||
| 12 |
Note 5. DEBT
Notes payable, related party notes payable and finance lease obligations consist of the following:
| September 30, | December 31, | March 31, | December 31, | |||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| Revolving loan payable to Webster Bank (F/K/A Sterling National Bank) (“Webster”) | $ | 14,097,000 | $ | 12,456,000 | ||||||||||||
| Revolving loan to Webster Bank (“Webster”) | $ | 13,220,000 | $ | 13,352,000 | ||||||||||||
| Term loan, Webster | 4,691,000 | 4,192,000 | 5,933,000 | 5,396,000 | ||||||||||||
| Finance lease obligations | - | 263,000 | 308,000 | 328,000 | ||||||||||||
| Loans Payable - financed assets | 34,000 | 39,000 | 29,000 | 30,000 | ||||||||||||
| Related party subordinated notes payable | 6,162,000 | 6,412,000 | ||||||||||||||
| Related party notes payable | 6,162,000 | 6,162,000 | ||||||||||||||
| Subtotal | 24,984,000 | 23,362,000 | 25,652,000 | 25,268,000 | ||||||||||||
| Less: Current portion | (14,820,000 | ) | (14,112,000 | ) | (14,450,000 | ) | (14,477,000 | ) | ||||||||
| Long Term Portion | $ | 10,164,000 | $ | 9,250,000 | $ | 11,202,000 | $ | 10,791,000 | ||||||||
Webster Bank (F/K/A Sterling National Bank) (“Webster”)
The Company has a loan facility (“Webster Facility”) with Webster Bank that expires on December 30, 2025. The Webster Facility, which was first entered into on December 31, 2019, was amended several times, and now provides for a $20,000,000 revolving loan (“Revolving Line of Credit”), and a $5,000,000 term loan (“Term Loan”) and a $2,000,000 Equipment Line of Credit, which as it is drawn upon will beis added to the balance of the Term Loan.
On December 15, 2022, the Company made a draw against the capital expenditure line of credit in the amount of $877,913. The principal payments are $10,451 per month commencing in February 2023 with a balloon payment due on December 30, 2025.
On January 4, 2023, the Company made an additional draw against the capital expenditure line of credit in the amount of $739,500. The principal payments are $8,804 per month commencing in March 2023 with a balloon payment due on December 30, 2025.
As of September 30, 2022,March 31, 2023, there is currently $14,097,000$13,220,000 outstanding under the Webster Revolving Loan and $4,691,000$5,933,000 under the Term Loan.Webster term loan, inclusive of amounts drawn under the Equipment Line of Credit. Additionally, there is $382,000 remaining available under the equipment line of credit. The below table shows the timing of payments due under the Term Loan:
| For the period ending | Amount | |||
| December 31, 2022 (remainder of the year) | $ | 178,000 | ||
| December 31, 2023 | 714,000 | |||
| December 31, 2024 | 714,000 | |||
| December 31, 2025 | 3,156,000 | |||
| Webster Term Loan payable | 4,762,000 | |||
| Less: debt issuance costs | (71,000 | ) | ||
| Total Webster Term Loan payable, net of debt issuance costs | 4,691,000 | |||
| Less: Current portion of Webster Term Loan payable | (714,000 | ) | ||
| Total long-term portion of Webster Term Loan payable | $ | 3,977,000 | ||
| For the year ending | Amount | |||
| December 31, 2023 (remainder of the year) | $ | 904,000 | ||
| December 31, 2024 | 945,000 | |||
| December 31, 2025 | 4,144,000 | |||
| Webster Term Loan payable | 5,993,000 | |||
| Less: debt issuance costs | (60,000 | ) | ||
| Total Webster Term Loan payable, net of debt issuance costs | 5,933,000 | |||
| Less: Current portion of Webster Term Loan payable | (1,141,000 | ) | ||
| Total long-term portion of Webster Term Loan payable | $ | 4,792,000 | ||
As of December 31, 2021,2022, our debt to Webster in the amount of $16,648,000$18,748,000 consisted of the Webster Revolving Loan in the amount of $12,456,000$13,352,000 and the Webster term loan in the amount of $4,192,000.$5,396,000 which included $878,000 of what was drawn on the equipment line of credit.
| 13 |
Interest expense related to the Webster Facility amounted to approximately $204,000$332,000 and $181,000$155,000 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $506,000 and $542,000 for the nine months ended September 30, 2022 and 2021, respectively.
The below summarizes historical amendments to the Webster Facilityfacility and various terms:
In 2020, the Company entered into the First Amendment to the Webster Facility which increased the Term Loan to $5,685,000 and required the Company to make monthly principal installments in the amount of $67,679 beginning on December 1, 2020. Other minor modifications were made and the Company paid an amendment fee of $20,000.
In June 2021, the Company entered into the Second Amendment to the Webster Facility, which clarified the definition and calculation of Excess Cash Flow, and to confirm the due date of required payment of the Excess Cash Flow payment. For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay to Webster an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such fiscal year and (ii) the outstanding principal balance of the term loan. Such payment shall be made to Webster and applied to the outstanding principal balance of the term loan, on or prior to the close of the fiscal yearApril 15 immediately following such fiscal year. The Company made Excess Cash Flow payments of $558,750 in 2021 (for the fiscal year ended December 31, 2020) and $854,000 in April 2022 (for fiscal year ended December 31, 2021). In connection with these changes,As required, the Company paid an amendment feeprovided the calculation for the Excess Cash Flow payment of $10,000.$195,000 for fiscal year ended December 31, 2022 to Webster prior to the April 15, 2023 deadline for such payment and authorized such payment to be made from the Revolving Loan. On June 13, 2023, Webster applied this payment to the term loan.
On December 7, 2021, the Company entered into the Third Amendment to the Webster Facility (“Third Amendment”). The purpose of the amendment was to provide a maturity date for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022. Such amendment also increased the Revolving Line of Credit to its current limit of $20,000,000 (up from the original $16,000,000) and also provided for a similar increase in the inventory sublimit to $14,000,000 (up from the original $11,000,000). The Third Amendment, also allows the Company, subject to certain limitations, to begin amortizing $250,000 of its related party subordinated notes payable each quarter as long as certain conditions are met. In connection with these changes, the Company paid an amendment fee of $75,000.
On May 17, 2022, the Company entered into the Fourth Amendment to the Webster Facility (“Fourth Amendment”). The purpose of the amendment was to increase the Term Loan to $5,000,000, generating proceeds of $1,945,000, reducedreduce the monthly principal installments to be made in respect to the term loan, and establish a capital expenditure line of credit in the amount of $2,000,000 which the Company can draw upon from time to time to finance purchases of machinery and equipment, thereby increasing the amount of capital expenditures that the Company may make each year. The principleprincipal payments are $59,524 per month commencing in June 2022 with a balloon payment due on December 30, 2025. In connection with these changes, the Company paid an amendment fee of $20,000.
Under the terms of the Webster Facility, both the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal (or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum. The average interest rate charged was 4.70%7.04% and 3.50% for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively and was 3.94% and 3.50% for the nine months ended September 30, 2022 and 2021, respectively.
All amendmentAmendment fees paid in connection with the Webster Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance Sheets and are amortized over the term of the loan.
In connection with the Webster Facility, the Company is required to maintain a defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter. The Webster Facility limits the amount of Capital Expenditures and dividends the Company can pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the Webster Facility.
As of September 30, 2022,March 31, 2023, the Company was not in compliance with allone of its financial loan covenants.
On August 4, 2023, the Company entered into the Fifth Amendment to the Webster Facility (“Fifth Amendment”). The purpose of the amendment was to waive the default caused by the failure to achieve the required Fixed Coverage Charge Ratio for the Fiscal Quarter ended March 31, 2023 and decrease the required Fixed Coverage Charge Ratio to 0.95 to 1.00 for the Fiscal Quarters ending June 30, 2023 and September 30, 2023. Additionally, the Fifth Amendment increased the amount of purchase money secured Debt (including Capital Leases) the Company is allowed to have outstanding at any time to $2,000,000. In connection with these changes, the Company paid an amendment fee of $10,000.
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Finance Lease Obligations
The Company entered into a Financefinance lease in DecemberNovember of 20212022 for the purchase of new manufacturing equipment. The obligation for the Financefinance lease totaled $0$308,000 and $263,000$328,000 as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The lease hadhas an imputed interest rate of 4.2%7.48% per annum and wasis payable monthly with the final payment due on December 17,in September of 2026. In connection with
| Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2023 | 2022 | |||||||
| Finance Lease cost: | ||||||||
| Amortization of ROU assets | $ | 19,000 | $ | - | ||||
| Interest on lease liabilities | 6,000 | - | ||||||
| Total lease Costs | $ | 25,000 | $ | - | ||||
| Other Information: | ||||||||
| Cash Paid for amounts included in the measurement lease liabilities: | ||||||||
| Financing cash flow from finance lease obligations | $ | 20,000 | $ | 9,000 | ||||
| Supplemental disclosure of non-cash activity | ||||||||
| Acquisition of finance lease asset | $ | - | $ | - | ||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Weighted Average Remaining Lease Term - in years | 3.8 | 4 | ||||||
| Weighted Average Discount rate - % | 7.48 | % | 7.48 | % | ||||
As of March 31, 2023, the Fourth Amendment to the Webster Facility, this Finance Lease was paid in full.aggregate future minimum finance lease payments, including imputed interest are as follows:
| For the year ending | Amount | |||
| December 31, 2023 (remainder of the year) | $ | 75,000 | ||
| December 31, 2024 | 100,000 | |||
| December 31, 2025 | 100,000 | |||
| December 31, 2026 | 76,000 | |||
| Total future minimum finance lease payments | 351,000 | |||
| Less: imputed interest | (43,000 | ) | ||
| Less: Current portion | (80,000 | ) | ||
| Long-term portion | $ | 228,000 | ||
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Loan Payable – Financed Asset
The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled $33,000$28,000 and $39,000$30,000 as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.
The future minimum loan payments, are as follows:
| For the period ending | Amount | |||||||
| December 31, 2022 (remainder of the year) | $ | 2,000 | ||||||
| December 31, 2023 | 9,000 | |||||||
| For the year ending | Amount | |||||||
| December 31, 2023 (remainder of the year) | $ | 8,000 | ||||||
| December 31, 2024 | 9,000 | 9,000 | ||||||
| December 31, 2025 | 9,000 | 9,000 | ||||||
| December 31, 2026 | 4,000 | 3,000 | ||||||
| Loans Payable - financed assets | 33,000 | 29,000 | ||||||
| Less: Current portion | (9,000 | ) | (9,000 | ) | ||||
| Long-term portion | $ | 24,000 | $ | 20,000 | ||||
Related Party Notes Payable
Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich.
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.
From 2016 through 2020, the Company entered into various subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich. These notes resulted in proceeds to the Company totaling $6,550,000. In connection with these notes, Michael and Robert were issued a total of 35,508355,082 shares of common stock and Taglich Brothers Inc. was issued promissory notes totaling $554,000 for placement agency fees. At December 31, 2020, related party notes payable totaled $6,012,000 and accrued interest totaled $400,000.
On January 1, 2021, the related party subordinated notes due to Michael and Robert Taglich and Taglich Brothers, Inc., were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. Per the terms of the Webster Facility, these notes remain subordinate to the Webster Facility the outstanding principal amount and areany accrued but unpaid interest due on July 1, 2026. Approximately $2,732,000 of the related party convertible subordinated notes can be converted at the option of the holder into Common Stock of the Company at $15.00 per share and bears interest at a rate of 6% per annum, while the remaining $2,080,000 of the related party convertible subordinated notes can be converted at the option of the holder into common stock of the Company at $9.30 per share.share and bears interest rate of 7% per annum. The subordinated notes which are not convertible bear interest at the rate of 12% per annum. There are no periodic principal payments due on these notes.the subordinated notes payable and convertible subordinated notes payable. Under the terms of the Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations, to make principal payments of $250,000 per quarter of this subordinated debt.
For the three and nine months ended September 30,March 31, 2023 and 2022, ano principal payment of $250,000 waspayments have been made against the Subordinated Notes due to Michael Taglich. This payment was made pursuant to the conditions set forth in the Third Amendment to the Webster Facility.on these notes.
The note holders and the principal balance of the notes of September 30,March 31, 2023 and December 31, 2022 are shown below:
| Michael Taglich, | Robert Taglich, | Taglich Brothers, | Michael Taglich, | Robert Taglich, | Taglich | |||||||||||||||||||||||||||
| Chairman | Director | Inc. | Total | Chairman | Director | Brothers, Inc. | Total | |||||||||||||||||||||||||
| Convertible Subordinated Notes | $ | 2,666,000 | $ | 1,905,000 | $ | 241,000 | $ | 4,812,000 | $ | 2,666,000 | $ | 1,905,000 | $ | 241,000 | $ | 4,812,000 | ||||||||||||||||
| Subordinated Notes | 1,000,000 | 350,000 | - | 1,350,000 | 1,000,000 | 350,000 | - | 1,350,000 | ||||||||||||||||||||||||
| Total | $ | 3,666,000 | $ | 2,255,000 | $ | 241,000 | $ | 6,162,000 | $ | 3,666,000 | $ | 2,255,000 | $ | 241,000 | $ | 6,162,000 | ||||||||||||||||
Interest expense for the three months ended September 30,March 31, 2023 and 2022 and 2021 on all related party notes payable was $118,000 and $126,000, respectively, and $369,000 and $376,000 for the nine months ended September 30, 2022 and 2021,$125,000, respectively.
NOTE 6. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY
In connection with the sale of the Company’s wholly-owned subsidiary, AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., (“Meyer”) in 2017, Meyer was obligated to pay the Company within 30 days after the end of each calendar quarter, commencing April 1, 2017, an amount equal to five (5%) percent of the net sales of AMK for that quarter until the aggregate payments made to the Company (the “Meyer Agreement”) equals $1,500,000 (the “Maximum Amount”).
In order to increase liquidity, on January 15, 2019, the Company entered into a “Purchase Agreement” with 15 accredited investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to which the Company assigned to the Purchasers all of its rights, title and interest to the remaining $1,137,000 of the $1,500,000 in payments due from Meyer for the sale of AMK (the “Remaining Amount”) for an immediate payment 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.
The Company recognized $0 and $79,000 of non-cash income for the three months ended September 30, 2022 and 2021, respectively, and $94,000 and $274,000 of non-cash income for the nine months ended September 30, 2022 and 2021, respectively, reflected in “other income, net” on the condensed consolidated statements of operations and recorded $0 and $24,000 of related non-cash interest expense related to the Purchase Agreement for the three months ended September 30, 2022 and 2021, respectively, and $35,000 and $82,000 for the nine months ended September 30, 2022 and 2021, respectively.
The table below shows the activity within the liability account for:
| September 30, 2022 | December 31, 2021 | |||||||
| Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance | $ | 59,000 | $ | 322,000 | ||||
| Non-Cash other income recognized | (94,000 | ) | (360,000 | ) | ||||
| Non-Cash interest expense recognized | 35,000 | 97,000 | ||||||
| Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance | - | 59,000 | ||||||
| Less: unamortized transaction costs | - | (3,000 | ) | |||||
| Liability related to sale of future proceeds from disposition of subsidiary, net | $ | - | $ | 56,000 | ||||
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Note 7.6. STOCKHOLDERS’ EQUITY
On October 4, 2022 the Company announced a reverse stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the next whole share. An additional 7,287 shares were issued to account for this. As such all references to shares and per share price has been adjusted to retrospectively account for this transaction.
Common Stock – SaleIssuances of Securities
The Company issued 7,71511,430 and 3,9985,522 shares of common stock in payment of director fees totaling $54,000 and $52,000$54,000 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and 19,667 and 11,934 shares totaling $162,000 and $156,000 forrespectively.
During the nine months ended September 30, 2022 and 2021, respectively. Additionally,second quarter of 2023, the Company issued 5,122 shares of common stock upon the cashless exercise of stock options during the nine months ended September 30, 2021.
During the fourth quarter of 2022, the Company issued 8,18315,230 shares of common stock in payment of directors’ fees totaling $54,000.
IssuanceDuring the third quarter of Stock Options
Issued in 2022
On January 31, 2022,2023, the Company granted certain employees, stock options to purchase an aggregate of 3,000issued 15,230 shares of the Company’s common stock at a pricein payment of $8.50 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.director’s fees totaling $54,000
On April 6, 2022, the Company granted to its directors, stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one year.
On April 11, 2022, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of 53,000 shares of the Company’s common stock at a price of $8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.
Issued in 2021
On January 11, 2021, the Company granted to its directors, stock options to purchase an aggregate of 7,000 shares of the Company’s common stock at a price of $13.20 per share. The options expire on the seventh anniversary of the grant date and vested over a term of one year.
On March 24, 2021, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of 32,750 shares of the Company’s common stock at a price of $13.90 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.
On July 30, 2021, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of 41,500 shares of the Company’s common stock at a price of $12.20 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one to three years.
Note 8.7. CONTINGENCIES
A number of actions have been commenced against the Company 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 the Company. As certain of these claims represent amounts included in accounts payable they are not specifically discussed herein.
On October 2, 2018, Contract Pharmacal Corp. (“Contract Pharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with respect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal sought damages for an amount in excess of $1,000,000 for the Company’s failure to make the entire premises available by the Sublease commencement date. On July 8, 2021, the Court denied Contract Phamacal’s motion for summary judgement. In the Order, the court granted Contract Pharmacal’s Motions to drop its claim for specific performance and to amend its Complaint to reduce its claim for damages to $700,000. Subsequently, Contact Pharmacal moved to amend its Complaint. The Company opposed and the Court denied the request to amend the Complaint. Contract Pharmacal filed a Motion to reargue which the Court denied on November 30, 2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company will oppose.has opposed. The date for argument of the appeal has not been set by the Appellate Division. The Company disputes the validity of the claims asserted by Contract Pharmacal and intends to contest them vigorously.
Note 9.8. INCOME TAXES
The Company recorded no income tax expense for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 because the estimated annual effective tax rate was zero. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
As of September 30, 2022,March 31, 2023, and December 31, 2021,2022, the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.
Note 10.9. SUBSEQUENT EVENTS
Management has evaluated subsequent events throughOn May 23, 2023, the Company received a notice from NYSE American (the “Exchange”) stating that the Company is not in compliance with the continued listing standards of the Exchange under the timely filing criteria included in Section 1007 of the NYSE American Company Guide because the Company failed to file by the extended due date of May 23, 2023, its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Form 10-Q”).
In accordance with Section 1007 of the Company Guide, the Company will have six months from the date of the filing delinquency, or until November 22, 2023 (the “Initial Cure Period”), to file the Form 10-Q with the Securities and Exchange Commission. If the Company fails to file the Form 10-Q during the Initial Cure Period, the Exchange may, in its sole discretion, provide an additional six-month cure period depending on the Company’s specific circumstances.
Upon filing of the Form 10-Q, the Company will cure this filing.delinquency.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATION
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 20212022 (the “2021“2022 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report and in our 20212022 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements.
Business Overview
Air Industries Group is a holding company with three legal subsidiaries, Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”)AIM, NTW and the Sterling Engineering Company (“SEC”).SEC. SEC began manufacturing aircraft components in 1941 – over 80-years ago – for use in World War II. NTW was formed in the early 1960’s and AIM has been in business since 1971. We became a public company in 2005.
We manufacture aerospace components primarily for the defense industry. AIM and NTW manufacture structural parts and assemblies focusing on flight safety, including aircraft landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. SEC makes components and provides services for aircraft jet engines and ground-power turbines.
Products of AIM and NTW are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft. They also make a critical component for the Pratt & Whitney Geared TurboFan (“GTF”) aircraft engine used on commercial airliners. SEC makes products used in jet engines that are used on military and commercial aircraft including the USAF F-15 and F-16, the Airbus A-330 and the Boeing 777, and others, and in addition, a number of ground-power turbine applications.
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 products and service but also by increasing our ability to produce more complex and complete assemblies for our customers.
We are focused on maintainingattaining profitability and maintaining positive cash flows from operating activities. We remain resolute on meeting customers’ needs. To take advantage of the long-term growth opportunities we see in our markets, we have made significant capital investments in new equipment in recent years.equipment. We believe these investments will increase the velocity and efficiency of production, increase the size of product we can make and allow us to offer additional services to our customers. Some of our investments expandinvestment expands our capabilities allowing us to internally process product that was previously outsourced to third party processors.suppliers. We are pleased with the positive responses from our customers about these initiatives.
Our ability to operate profitably and generate positive cash flows from operating activities is determined by our ability to win new or renewal contracts and fulfilling these contracts on a timely and cost effective basis. Winning a contract generally requires that we submit a bid containing fixed prices for the product or products covered by the contract for an agreed upon period of time, sometimes for five-years or longer, with negotiated increases to reflect a portion of the impact of inflation. 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.
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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 variable 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. The invasion of the Ukraine by the Russian Federation and retaliatory measures imposed by the United States, United Kingdom, the European Union and other countries, and the responses of Russia to such measures, have negatively impacted the availability and market price of certain minerals, such as titanium, for which Russia was a source of supply. WeTo obtain necessary raw materials at prices deemed acceptable, we are working with those of our larger customers some of which have access to sources of metals necessary to manufacture their products not readily available to us or other companies of our size.size and seeking to qualify new suppliers with our customers. Nevertheless, there can be no assurance that disruptions in the markets for metals will not adversely impact our ability to timely meet the needs of our customers.
In addition, the market for the skilled labor we require to operate our plants is highly competitive. Changes in the available pool of labor caused by Covid-19 and life-style changes in response to Covid-19 have not materially adversely impacted our ability to meet our production schedules. Nevertheless, as we seek to grow our business, there can be no assurance that the skilled labor we need to operate our machinery will be available to us or that the costs incurred to maintain our current labor force and those we seek to bring on will not increase.
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. 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 decreases profits.
Our revenues are principally determined by orders from our customers for the delivery of product – which we call releases – against LTA’s with those customers. These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact of inflation, though over the term of a LTALTAs prices often increase and not all of the increase is covered byb agreed upon price protection clauses in our agreements. Our direct costs of production include costs for material, labor, and significant factory overhead; all of these costs may vary based on the efficiency of our factory operations. Our gross profit is highly variable due to the mix of products sold, and by sales volume, which can lead to the over absorption or under absorption of factory overhead costs.
Beyond these direct costs of production, we incur general and administrative costs termed Operating Expenses and financing costs for borrowed money, income taxes and miscellaneous income and expense.
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 reduces the demand for both new production and replacement spares and could adversely impact our business and our revenue.
RESULTS OF OPERATIONS
Selected Financial Information:
| Three Months Ended | ||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | March 31, | March 31, | |||||||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | 2023 | 2022 | |||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||
| Net sales | $ | 13,278,000 | $ | 14,354,000 | $ | 39,348,000 | $ | 43,519,000 | $ | 12,549,000 | $ | 12,062,000 | ||||||||||||
| Cost of sales | 11,036,000 | 12,340,000 | 32,606,000 | 37,105,000 | 10,669,000 | 9,984,000 | ||||||||||||||||||
| Gross profit | 2,242,000 | 2,014,000 | 6,742,000 | 6,414,000 | 1,880,000 | 2,078,000 | ||||||||||||||||||
| Operating expenses and interest and financing costs | 2,396,000 | 2,168,000 | 7,051,000 | 6,731,000 | ||||||||||||||||||||
| Operating expenses | 2,038,000 | 1,871,000 | ||||||||||||||||||||||
| Interest and financing costs | 476,000 | 323,000 | ||||||||||||||||||||||
| Other income, net | 12,000 | 88,000 | 132,000 | 338,000 | 16,000 | 88,000 | ||||||||||||||||||
| Net (loss) income | $ | (142,000 | ) | $ | (66,000 | ) | $ | (177,000 | ) | $ | 21,000 | |||||||||||||
| Provision/(Benefit) from income taxes | - | - | ||||||||||||||||||||||
| Net loss | $ | (618,000 | ) | $ | (28,000 | ) | ||||||||||||||||||
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Balance Sheet Data:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Cash | $ | 192,000 | $ | 627,000 | ||||
| Working capital | $ | 18,337,000 | $ | 17,478,000 | ||||
| Total assets | $ | 54,778,000 | $ | 53,425,000 | ||||
| Total stockholders’ equity | $ | 17,636,000 | $ | 17,389,000 | ||||
Results of Operations for the three months ended September 30, 2022
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Cash | $ | 1,125,000 | $ | 281,000 | ||||
| Working capital | $ | 17,968,000 | $ | 18,600,000 | ||||
| Total assets | $ | 53,357,000 | $ | 53,814,000 | ||||
| Total stockholders’ equity | $ | 16,321,000 | $ | 16,839,000 | ||||
Net Sales:
Consolidated net sales for the three months ended September 30, 2022March 31, 2023 were $13,278,000, a decrease$12,549,000, an increase of $1,076,000,$487,000, or 7.5%4.0%, compared with $14,354,000$12,062,000 for the three months ended September 30, 2021. The decrease in sales resulted principally from the sale of products with lower selling prices during the quarter.March 31, 2022.
As indicated in the table below, twofour customers represented 63.9%57.1% and 67.7%70.8% of total net sales for the three months ended September 30,March 31, 2023 and March 31, 2022, and September 30, 2021, respectively.
| Percentage of Sales | ||||||||||||||||
| Customer | Percentage of Sales | 2023 | 2022 | |||||||||||||
| 2022 | 2021 | |||||||||||||||
| Sikorsky Aircraft | 24.3 | % | 25.2 | % | ||||||||||||
| Goodrich Landing Gear Systems | 40.7 | % | 41.6 | % | 11.6 | % | 27.1 | % | ||||||||
| Sikorsky Aircraft | 23.2 | % | 26.1 | % | ||||||||||||
| Rohr | 11.2 | % | ** | |||||||||||||
| RUAG | 10.0 | % | ** | |||||||||||||
| United States Department of Defense | * | 18.5 | % | |||||||||||||
| * | Customer was less than 10% of sales for the three months March 31, 2023 |
| ** | Customer was less than 10% of sales for the three months March 31, 2022 |
Gross Profit:
Consolidated gross profit from operations for the three months ended September 30, 2022March 31, 2023 was $2,242,000, an increase$1,880,000, a decrease of $228,000,$198,000, or 11.3%9.5%, as compared to gross profit of $2,014,000$2,078,000 for the three months ended September 30, 2021.March 31, 2022. Consolidated gross profit as a percentage of sales was 16.9%15.0% and 14.0%17.2% for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. For interim periods,the three months ended March 31, 2022, substantially all of the inventory value has beenwas estimated using a gross profit percentage based on the annual gross profit percentage of the immediately preceding year. Inventory value and gross profit margin for 2021the first quarter of 2022 was estimated using the gross profit margin percentage in 2020. Gross2021.
Consolidated gross profit margins in 2020 werefor the March 2023 quarter was negatively impacted by Covid-19 and therefore impacted the estimated gross profit margins appliedsales of several lower margin products due to the 2021 interim periods. Actual gross profit margins returned to historical levelsincreased costs in 2021 and this higher gross profit margin have been used to calculate the gross profit margins for the interim periods for 2022.processing these products.
Operating Expense
Consolidated operating expenses for the three months ended September 30, 2022March 31, 2023 totaled $2,073,000$2,038,000 and increased by $239,000$167,000 or 13.0%8.9% compared to $1,837,000$1,871,000 for the three months ended September 30, 2021.March 31, 2022. The increase was caused by increases in employment costs, including employee health benefits increases which were not passed on to employees, increases in investor relationsprofessional fees and increased travel costs resulting from the resumption of travel to customers as Covid restrictions eased.information technology. These increased costs were partially offset by reductions in expenses related to information technologystock compensation expense and the recovery of bad debt.shipping expense.
Interest and Financing Costs
Interest and financing costs for the three months ended September 30, 2022March 31, 2023 were $323,000 a decrease$476,000 an increase of $8,000$153,000 or 2.4%47.4% compared to $331,000$323,000 for the three months ended September 30, 2021. The primary reason for this was lower balances on our debt with Webster Bank.March 31, 2022. The average interest rate charged was 4.70%7.04% and 3.50%3.5% for the three monthsmonth periods ended September 30March 31, 2023 and 2022, and 2021, respectively.
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Net Loss
Net loss for the three months ended September 30, 2022March 31, 2023 was $142,000,$618,000, compared to a net loss of $66,000$28,000 for the three months ended September 30, 2021March 31, 2022 due to the reasons stated above.
Results of Operations for the nine months ended September 30, 2022
Net Sales:
Consolidated net sales for the nine months ended September 30, 2022 were $39,348,000, a decrease of $4,171,000, or 9.6%, compared with $43,519,000 for the nine months ended September 30, 2021. The decrease in sales resulted principally from the sale of products with lower selling prices and from contracts that expired in 2021 and were not renewed in 2022.
As indicated in the table below, three customers represented 68.9% and 75.5% of total sales for the nine months ended September 30, 2022 and September 30, 2021, respectively.
| Customer | Percentage of Sales | |||||||
| 2022 | 2021 | |||||||
| Goodrich Landing Gear Systems | 32.5 | % | 36.8 | % | ||||
| Sikorsky Aircraft | 19.5 | % | 26.2 | % | ||||
| United States Department of Defense | 16.9 | % | 12.5 | % | ||||
Gross Profit:
Consolidated gross profit from operations for the nine months ended September 30, 2022 was $6,742,000, an increase of $328,000, or 5.1%, as compared to gross profit of $6,414,000 for the nine months ended September 30, 2021. Consolidated gross profit as a percentage of sales was 17.1% and 14.7% for the nine months ended September 30, 2022 and 2021, respectively. For interim periods, substantially all of the inventory value has been estimated using a gross profit percentage based on the annual gross profit percentage of the immediately preceding year. Inventory value and gross profit margin for 2021 was estimated using the gross profit margin percentage in 2020. Gross profit margins in 2020 were negatively impacted by Covid-19 and therefore impacted the estimated gross profit margins applied to the 2021 interim periods. Actual gross profit margins returned to historical levels in 2021 and this higher gross profit margin have been used to calculate the gross profit margins for the interim periods for 2022.
Operating Expense
Consolidated operating expenses for the nine months ended September 30, 2022 totaled $6,116,000 and increased by $346,000 or 6.0% compared to $5,770,000 for the nine months ended September 30, 2021. The increase was caused by increases in employment costs, including employee health benefits increases which were not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel to customers as Covid restrictions eased. These increased costs were partially offset by reductions in information technology and bad debt expense.
Interest and Financing Costs
Interest and financing costs for the nine months ended September 30, 2022 were $935,000 a decrease of $26,000 or 2.7% compared to $961,000 for the nine months ended September 30, 2021. The primary reason for this was lower balances on our debt with Webster Bank. The average interest rate charged was 3.94% and 3.50% for the nine months ended September 30 2022 and 2021, respectively.
Net (Loss) Income
Net Loss for the nine months ended September 30, 2022 was $177,000, compared to net income of $21,000 for the nine months ended September 30, 2021, for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our material cash requirements are for debt service, capital expenditures and funding working capital/operating costs.
As of September 30, 2022,March 31, 2023, we have debt service requirements related to:
| 1) | Our Webster Facility of |
| 2) | Related party debt consisting of convertible subordinated |
| 3) | Various equipment leases and contractual obligations related to our normal business. |
We have historically met our cash requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions. Based on our current revenue visibility and strength of our backlog, we believe that we have sufficient liquidity to meet our short-term cash requirements.requirements over the next twelve months out of cash flow from operations. On May 17, 2022, we entered into the Fourth Amendment to the Loan and Security Agreement with Webster Bank.Webster. The purpose of the amendment was to increase the Term Loan to $5,000,000, reduce the monthly principal installments to be made in respect to the term loan and establish a capital expenditure line of credit in the amount of $2,000,000 which we can draw upon from time to time to finance purchases of machinery and equipment, thereby increasing the amount of capital expenditures we may make each year. During December 2022 we borrowed $878,000 for a capital expenditure and again in January 2023 we borrowed $739,500 for an additional capital expenditure.
For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any Fiscal Year, we are obligated to pay Webster an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii) the outstanding principal balance of the term loan. Such payment shall be made to Webster and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such Fiscal Year. As required, we provided the calculation for the Excess Cash Flow payment of $195,000 for fiscal year ended December 31, 2022 to Webster prior to the April 15, 2023 deadline and authorized such payment to be made from the Revolving Loan. On June 13, 2023, Webster applied this payment to the term loan.
On August 4, 2023, we entered into the Fifth Amendment to the Webster Facility (“Fifth Amendment”). The purpose of the amendment was to waive the default caused by the failure to achieve the required Fixed Coverage Charge Ratio for the Fiscal Quarter ended March 31, 2023 and decrease the required Fixed Coverage Charge Ratio to 0.95 to 1.00 for the Fiscal Quarters ending June 30, 2023 and September 30, 2023. Additionally, the Fifth Amendment increased the amount of purchase money secured debt the Company is allowed to have outstanding at any time to $2,000,000. In connection with these changes, we paid an amendment fee of $10,000.
Because we believe that our fourth quarter fiscal 2022 sales in 2023 will be in line with the amount achieved in the comparable periodto those of 2021,2022, we believe our liquidity will continueremain stable, though our borrowing costs have increased and likely would increase further if prevailing interest rates increased or we failed to improve.meet our covenant in the Webster Facility. As a result of recent increases in the federal funds borrowing rate, interest rates and related expense under our Webster Facility are expectedincreased in 2023 compared to 2022 and if rates remain stable or increase from current levels. Suchin 2023, our interest expense will further increase in 2023 due to the timing of rate increases in 2022. However, such increases are not expected to materially impact our liquidity.
Our future Nevertheless, our liquidity may be adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such as COVID-19 anda widespread health crisis, the continuation of the war in the Ukraine, the outbreak of another conflict and the ongoing tensions between the United States and China, increases in inflation, disruptions in the labor market and other risks detailed in Part1,Part 1, Item 1A of our 20212022 Annual Report on Form 10-K. Should
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In addition to our loan with Webster and Subordinated Notes, we have various equipment leases and contractual obligations of an ongoing nature which we service in the ordinary course out of our cash requirements change beyondflow from operations. Substantially all of these obligations are described in the notes to our current expectations due to general economic conditions or a strategic decision, we may choose to raise additional funds through equity and debt financing transactions. We believe that we have sufficient access to credit and/or financing from public and private debt and equity markets.financial statements included in this report.
Changes in our cash flow are discussed further below.
Cash Flow
The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below:(in thousands):
| Three months ended | ||||||||||||||||
| Nine Months Ended | March 31, | |||||||||||||||
| September 30, | 2023 | 2022 | ||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Cash provided by (used in) | ||||||||||||||||
| Operating activities | $ | (73,000 | ) | $ | 2,514,000 | $ | 1,438 | $ | 1,285 | |||||||
| Investing activities | (1,980,000 | ) | (983,000 | ) | (973 | ) | (430 | ) | ||||||||
| Financing activities | 1,618,000 | (3,344,000 | ) | 379 | (1,118 | ) | ||||||||||
| Net decrease in cash | $ | (435,000 | ) | $ | (1,813,000 | ) | ||||||||||
| Net increase (decrease) in cash | $ | 844 | $ | (263 | ) | |||||||||||
Cash Provided by (Used in) Operating Activities
Cash used inprovided by operating activities primarily consists of our net loss adjusted for certain non-cash items and changes to working capital items.
For the ninethree months ended September 30, 2022, our net loss as adjusted for non-cash items provided cash of $2,414,000. This was a result ofMarch 31, 2023, our net loss of $177,000,$(618,000) was offset by $2,591,000$873,000 of non-cash items consisting primarily of depreciation of property and equipment of $1,906,000, non-cash$617,000, employee and director stock compensation expense of $262,000,$99,000 and amortization of right-of-use assets of $403,000 and non-cash directors’ compensation expense$146,000 which were partially offset by a deferred gain on the sale of $162,000. The remaining non-cash items totaled absorbed $142,000.real estate in the amount of $10,000.
Changes in operatingOperating assets and liabilities usedprovided cash in the net amount of $2,487,000$1,183,000 consisting primarily of net decreases in accounts receivable and prepaid expense in the amounts of $2,206,000 and $19,000, respectively, and a net increase in accounts payable and accrued expenses of $146,000, which were partially offset by increases in inventory, deposits and other assets and prepaid expenses and other current assetstaxes in the amounts of $3,876,000, $74,000$623,000, $105,000 and $24,000,$1,000, respectively, and decreases in operating lease liabilities and customer deposits of $504,000 and $179,000, respectively, partially offset by a decrease in accounts receivabledeferred revenue in the amountamounts of $1,917,000, an increase in accounts payable$186,000 and accrued expenses in the amount of $117,000 and an increase in other current liabilities of $139,000.$273,000, respectively.
Cash Used in Investing Activities
Cash used in investing activities consists of cash used for capital expenditures for property and equipment.
For the ninethree months ended September 30, 2022,March 31, 2023, cash used in investing activities was $1,980,000.$973,000 This was primarily for the purchase of state-of-the art machinery.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities consists of the borrowing and repayments under our credit facilities with our senior lender, Webster, increases in and repayments of finance obligations and other notes payable.
For the ninethree months ended September 30, 2022,March 31, 2023, cash provided by financing activities consistedwas $379,000. This was comprised of increased borrowings on our Webster term loan of $740,000, partially offset by net proceeds from the Webster re-financing of $1,945,000 and net advancespayments on our Webster revolving loan in the amount of $1,641,000, partially offset by repayments of $1,430,000 on ourand Webster term note $263,000in the amounts of $132,000 and $208,000, respectively, and payments of $20,000 and $1,000 on our financedfinancing lease obligations $250,000 on our subordinated notesand loan payable – related party and $5,000 on our financed asset note payable.asset.
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OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet arrangements as of September 30, 2022.March 31, 2023.
Critical Accounting Policies and Estimates
A critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and all. All applicable U.S. GAAP accounting standards effective as of September 30, 2022March 31, 2023 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation of condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our condensed consolidated financial statements:
| ● |
| ● | Income |
We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our estimates.
Recently Issued Accounting Pronouncements
See Note 2 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our senior managementManagement is responsible for establishing and maintaining a system of disclosureadequate internal controls and procedures,over financial reporting. Internal controls over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, (the “Exchange Act”) designedrefers to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controlsthose policies and procedures include, without limitation, controls and procedures designed to ensureprocesses that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicatedpertain to the issuer’s management, including its principal executive officer or officersmaintenance of records that accurately and principalfairly reflect transactions with respect to our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial officer or officers, or persons performing similar functions, as appropriatestatements in accordance with generally accepted accounting principles and that receipts and expenditures are made only in accordance with authorization of our management; and provide reasonable assurance regarding the prevention and timely detection of unauthorized transactions with respect to allow timely decisions regarding required disclosure.our assets that could have a material effect on our financial statements.
We have evaluatedBecause of inherent limitation, 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 effectivenessrisk 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 design and operationTreadway Commission (2013 framework) in designing a system intended to meet the needs of our disclosureCompany and provide reasonable assurance for its assessment.
In connection with their review of our internal controls and procedures as ofover financial reporting for the end of the period covered by this Report under the supervision of and with the participation of management, includingthree months ended March 31, 2023, our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our internal controls over financial reporting were not effective as of March 31, 2023. As reported in our 2022 Form 10-K, in connection with their review of our internal controls as of and for the endyear ended December 31, 2022, our management identified certain material weaknesses in our internal controls over financial reporting which have yet to be remediated. These weaknesses related to design flaws in our IT systems, the effectiveness of management’s review controls over the determination of the period covered by this report,methodology used in determining the appropriate reserves to be taken with respect to certain excess quantities and slow moving inventory and the effectiveness of management’s review controls over the income tax provision in our disclosurefinancial footnotes. We are continuing to assess the actions that need to be taken to remedy each of these material weaknesses. Each of the material weaknesses noted will only be deemed to have been remediated after the new controls and procedures were effective.have been in place for a sufficient period and management has concluded through appropriate testing that the controls are operating effectively. For more information, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K.
During 2023, the Company intends to implement new controls designed to remediate the aforementioned material weaknesses.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter which is the subject of this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1A. Risk Factors.
Prospective investorsInvestors are encouraged to consider the risks described in our 20212022 Form 10-K, our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Report and other information publicly disclosed or contained in documents we file with the Securities and Exchange Commission before purchasing our securities.
Item 6. Exhibits
| XBRL Presentation | ||
| 101.INS | Inline XBRL Instance | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith |
| ** | Furnished herewith |
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: November 14, 2022August 11, 2023
| AIR INDUSTRIES GROUP | ||
| By: | /s/ Michael Recca | |
| Michael Recca Chief Financial Officer (principal financial and accounting officer) | ||
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