Air Industries Group (NYSE:AIRI) Q1 2022 Earnings Conference Call May 3, 2022 11:00 AM ET Company Participants Luciano Melluzzo - CEO Michael Recca - CFO Conference Call Participants Operator Good day and welcome to the Air Industries First Quarter Earnings Conference Call. Today’s conference is being recorded. Except for the historical information contained herein the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements for the period ended September 30, 2021, reflect increased revenue, improved profitability, and positive operating cash flow Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | Sep 30, 2021 ($) | Dec 31, 2020 ($) | Change ($) | | :--- | :--- | :--- | :--- | | **Total Current Assets** | $40,944,000 | $43,611,000 | -$2,667,000 | | **Total Assets** | $53,521,000 | $57,777,000 | -$4,256,000 | | **Total Current Liabilities** | $23,942,000 | $27,327,000 | -$3,385,000 | | **Total Liabilities** | $37,874,000 | $42,668,000 | -$4,794,000 | | **Total Stockholders' Equity** | $15,647,000 | $15,109,000 | +$538,000 | Condensed Consolidated Statements of Operations Statement of Operations Summary (Unaudited) | Metric | Three Months Ended Sep 30, 2021 ($) | Three Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2021 ($) | Nine Months Ended Sep 30, 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $14,354,000 | $13,662,000 | $43,519,000 | $35,603,000 | | **Gross Profit** | $2,014,000 | $1,656,000 | $6,414,000 | $4,451,000 | | **Income (Loss) from Operations** | $177,000 | $(240,000) | $644,000 | $(1,613,000) | | **Net (Loss) Income** | $(66,000) | $(477,000) | $21,000 | $(1,003,000) | | **Net (Loss) Income per share - Basic** | $(0.00) | $(0.02) | $0.00 | $(0.03) | Condensed Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from **$15,109,000** at the beginning of 2021 to **$15,647,000** as of September 30, 2021, driven by stock compensation, common stock issued for director fees, and a small net income for the nine-month period[17](index=17&type=chunk) Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Nine Months Ended September 30 (Unaudited) | Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | **Net Cash Provided By (Used In) Operating Activities** | $2,514,000 | $(3,184,000) | | **Net Cash Used In Investing Activities** | $(983,000) | $(1,471,000) | | **Net Cash (Used In) Provided By Financing Activities** | $(3,344,000) | $4,821,000 | | **Net (Decrease) Increase in Cash** | $(1,813,000) | $166,000 | | **Cash and Cash Equivalents at End of Period** | $692,000 | $1,460,000 | - The significant improvement in cash from operations in 2021 was primarily driven by a decrease in inventory and positive net income, compared to a net loss and inventory increase in the prior year period[19](index=19&type=chunk) Notes to Condensed Consolidated Financial Statements - Management believes the company has adequate cash to support operations through at least November 30, 2022, citing improved operating income, sales forecasts, and existing backlog[28](index=28&type=chunk) - The company has significant customer concentration risk, with three customers accounting for **75.5%** of total sales for the nine months ended September 30, 2021[33](index=33&type=chunk) - As of September 30, 2021, total debt to Sterling National Bank (SNB) was **$17.87 million**, consisting of a **$13.46 million** revolving line of credit and a **$4.41 million** term loan[74](index=74&type=chunk) - The company is involved in a lawsuit with Contract Pharmacal Corp., which is seeking damages of **$700,000**, though management disputes the claims and has not accrued a loss as the outcome is not currently estimable[91](index=91&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes sales growth to increased production and improved business conditions, leading to higher gross profit, net income, and enhanced liquidity Business Overview - The company is an aerospace and defense manufacturer specializing in flight safety structural parts (landing gear, engine mounts) and turbine engine components[102](index=102&type=chunk) - Key products are used on high-profile military and commercial aircraft such as the UH-60 Blackhawk, F-35, F-18, F-16, and Boeing 777[102](index=102&type=chunk) - The company's current focus is on maintaining profitability, achieving positive cash flows, and meeting customer needs, supported by recent capital investments in new equipment[104](index=104&type=chunk) Results of Operations Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 ($) | Q3 2020 ($) | Change | | :--- | :--- | :--- | :--- | | **Net Sales** | $14,354,000 | $13,662,000 | +5.1% | | **Gross Profit** | $2,014,000 | $1,656,000 | +21.6% | | **Net Loss** | $(66,000) | $(477,000) | +86.2% | Nine Months 2021 vs 2020 Performance | Metric | 9M 2021 ($) | 9M 2020 ($) | Change | | :--- | :--- | :--- | :--- | | **Net Sales** | $43,519,000 | $35,603,000 | +22.2% | | **Gross Profit** | $6,414,000 | $4,451,000 | +44.1% | | **Net Income (Loss)** | $21,000 | $(1,003,000) | N/A | - The increase in gross profit margin for both the three and nine-month periods was attributed to better absorption of manufacturing overhead resulting from higher sales volumes[119](index=119&type=chunk)[126](index=126&type=chunk) Liquidity and Capital Resources - In 2020, the company improved liquidity through government programs, including receiving and subsequently having **$2.4 million** in SBA loans forgiven, deferring **$627,000** in payroll taxes, and receiving a **$1.4 million** NOL tax refund[130](index=130&type=chunk)[131](index=131&type=chunk)[133](index=133&type=chunk) - Cash from operating activities for the nine months ended Sep 30, 2021, was **$2.51 million**, a significant turnaround from a use of **$3.18 million** in the same period of 2020[142](index=142&type=chunk) - Cash used in financing activities was **$3.34 million**, primarily due to net repayments on the SNB revolving loan (**$2.19 million**) and term note (**$1.15 million**)[147](index=147&type=chunk) Critical Accounting Policies and Estimates - The company identifies several critical accounting policies requiring significant management judgment, including liquidity, inventory valuation, revenue recognition, income taxes, stock-based compensation, and goodwill[150](index=150&type=chunk) [Item 4. Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[155](index=155&type=chunk) - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[155](index=155&type=chunk) PART II. OTHER INFORMATION [Item 1A. Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) The company highlights ongoing uncertainty from the COVID-19 pandemic and other macroeconomic events, which could materially impact its business and financial position - The primary supplemental risk factor discussed is the continued uncertainty surrounding the COVID-19 pandemic and its potential to disrupt business operations, supply chains, and overall financial performance[158](index=158&type=chunk) [Item 6. Exhibits](index=35&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, Sarbanes-Oxley certifications, and XBRL data - The report lists various exhibits filed, including CEO and CFO certifications under Sarbanes-Oxley (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL interactive data files[160](index=160&type=chunk)

Air Industries Group (NYSE:AIRI) Q3 2021 Earnings Conference Call November 3, 2021 4:30 PM ET Company Participants Luciano Melluzzo - Chief Executive Officer Michael Recca - Chief Financial Officer Conference Call Participants John Nobile - Taglich Brothers, Inc. Operator Good day, and welcome to the Air Industries conference call. Today's conference is being recorded. Air Industries Group safe harbor statement. Except for the historical information contained herein, the matters discussed in this presentati ...

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, and an evaluation of internal controls and procedures [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section provides the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with their accompanying notes [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2021, total assets slightly decreased to $56.25 million, driven by lower cash and inventory, while total liabilities decreased and stockholders' equity increased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 (Unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $515 | $2,505 | | Accounts Receivable, Net | $12,210 | $8,798 | | Inventory | $30,209 | $32,120 | | Total Current Assets | $43,171 | $43,611 | | Total Assets | $56,250 | $57,777 | | Total Current Liabilities | $26,424 | $27,327 | | Total Liabilities | $40,736 | $42,668 | | Total Stockholders' Equity | $15,514 | $15,109 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company achieved a significant profitability turnaround, with Q2 2021 net sales growing 81.9% to $15.45 million and H1 2021 sales up 32.9% to $29.17 million, both periods returning to net income Three Months Ended June 30, (in thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $15,453 | $8,494 | 81.9% | | Gross Profit | $2,603 | $614 | 323.9% | | Income (Loss) from Operations | $440 | $(1,292) | N/A | | Net Income (Loss) | $239 | $(1,584) | N/A | | EPS - Diluted | $0.01 | $(0.05) | N/A | Six Months Ended June 30, (in thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $29,165 | $21,941 | 32.9% | | Gross Profit | $4,400 | $2,795 | 57.4% | | Income (Loss) from Operations | $467 | $(1,373) | N/A | | Net Income (Loss) | $87 | $(526) | N/A | | EPS - Diluted | $0.01 | $(0.02) | N/A | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased from $15.11 million to $15.51 million by June 30, 2021, primarily due to net income, stock compensation, and common stock issued for directors' fees - Total stockholders' equity increased by approximately **$405,000** during the first six months of 2021, from **$15,109,000** to **$15,514,000**[16](index=16&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2021, the company experienced a net cash outflow of $1.99 million, driven by uses in operating, investing, and financing activities Cash Flow Summary for Six Months Ended June 30, (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(181) | $(1,043) | | Net Cash Used in Investing Activities | $(631) | $(309) | | Net Cash (Used in) Provided by Financing Activities | $(1,178) | $2,126 | | **Net (Decrease) Increase in Cash** | **$(1,990)** | **$774** | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies and financial statement items, covering liquidity, customer concentration, debt, leases, and segment reporting, with management projecting adequate cash through August 2022 - Management believes operations substantially returned to normal in fiscal 2021 and projects adequate cash to support operations through at least **August 31, 2022**[28](index=28&type=chunk) - For the six months ended June 30, 2021, **three customers** represented **77.0%** of total net sales, indicating significant customer concentration risk[33](index=33&type=chunk)[34](index=34&type=chunk) - The company operates in two segments: Complex Machining, generating **$25.9 million** in sales, and Turbine Engine Components, generating **$3.2 million** in sales for the first six months of 2021[94](index=94&type=chunk)[97](index=97&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant financial performance improvement for Q2 and H1 2021, highlighting sales recovery, return to profitability, and enhanced liquidity measures - The company is an aerospace firm primarily serving the defense industry, manufacturing flight safety components for military aircraft like the **F-35, F-18, and UH-60 Blackhawk**[100](index=100&type=chunk) - Recent capital investments in new equipment and expansion of the Connecticut facility are expected to increase production volume, efficiency, and service offerings[102](index=102&type=chunk) Consolidated Financial Performance Summary (in thousands) | Period | Net Sales | Gross Profit | Net Income (Loss) | | :--- | :--- | :--- | :--- | | **Three Months Ended June 30, 2021** | $15,453 | $2,603 | $239 | | **Three Months Ended June 30, 2020** | $8,494 | $614 | $(1,584) | | **Six Months Ended June 30, 2021** | $29,165 | $4,400 | $87 | | **Six Months Ended June 30, 2020** | $21,941 | $2,795 | $(526) | [Results of Operations](index=26&type=section&id=Results%20of%20Operations) The company demonstrated strong year-over-year recovery, with Q2 2021 net sales surging 81.9% to $15.45 million and H1 2021 sales up 32.9%, both periods returning to net income Q2 2021 vs Q2 2020 Performance (in thousands) | Metric | Q2 2021 | Q2 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $15,453 | $8,494 | 81.9% | | Gross Profit | $2,603 | $614 | 323.9% | | Net Income (Loss) | $239 | $(1,584) | N/A | H1 2021 vs H1 2020 Performance (in thousands) | Metric | H1 2021 | H1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $29,165 | $21,941 | 32.9% | | Gross Profit | $4,400 | $2,795 | 57.4% | | Net Income (Loss) | $87 | $(526) | N/A | - Increased profitability was driven by higher sales volumes, improving fixed factory overhead absorption and leading to higher gross margins of **16.8% in Q2 2021** compared to **7.2% in Q2 2020**[115](index=115&type=chunk)[104](index=104&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company enhanced liquidity in 2020 through CARES Act programs, including $2.4 million in SBA loan forgiveness, and secured a new financing facility with Sterling National Bank, remaining compliant with all loan covenants - In 2020, the company received full forgiveness for **$2.4 million** in SBA loans and deferred **$627,000** in employer Social Security taxes under the CARES Act[127](index=127&type=chunk)[128](index=128&type=chunk) - The company entered a new loan facility with Sterling National Bank (SNB) expiring in December 2022, including a **$16 million** revolving line of credit and a term loan[130](index=130&type=chunk) - As of June 30, 2021, total debt to SNB was **$20.05 million**, and the company was in compliance with all loan covenants, including the Fixed Charge Coverage Ratio[136](index=136&type=chunk)[134](index=134&type=chunk) [Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of **June 30, 2021**, the company's disclosure controls and procedures were effective[150](index=150&type=chunk) - No material changes were made to the company's internal control over financial reporting during the most recently completed fiscal quarter[150](index=150&type=chunk) [PART II. OTHER INFORMATION](index=34&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information, including updates on risk factors, unregistered equity sales, and a list of exhibits filed with the report [Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) This section supplements prior risk factors, specifically addressing the ongoing uncertainty of the COVID-19 pandemic and its potential material impact on the business - The company highlights the ongoing risk from the COVID-19 pandemic, noting that while operations have substantially normalized, its future impact remains uncertain and could materially affect the business[153](index=153&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=34&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company confirms no unregistered equity securities were issued or sold during the quarter, beyond those previously disclosed - No unregistered equity securities were issued or sold during the quarter, other than those previously reported[154](index=154&type=chunk) [Exhibits](index=35&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, loan agreements, and officer certifications - A key exhibit filed with this report is the Second Amendment to the Loan and Security Agreement with Sterling National Bank[155](index=155&type=chunk) - The filing includes certifications from the principal executive officer and principal financial officer as required by the Sarbanes-Oxley Act of 2002[155](index=155&type=chunk)

[FORM 10-Q General Information](index=1&type=section&id=FORM%2010-Q%20General%20Information) This section provides general filing details for the Quarterly Report on Form 10-Q, including registrant classification and outstanding common stock [Filing Details](index=1&type=section&id=Filing%20Details) This section details the Form 10-Q filing, identifying AIR INDUSTRIES GROUP as a Smaller Reporting Company with 31.7 million shares outstanding - The registrant is a **Smaller Reporting Company**[3](index=3&type=chunk) - Total of **31,729,755 shares of common stock outstanding** as of November 4, 2020[3](index=3&type=chunk) [INDEX](index=2&type=section&id=INDEX) This section provides a comprehensive table of contents for the Form 10-Q report [SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS](index=3&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section cautions investors that forward-looking statements are subject to uncertainties and actual results may differ materially - Forward-looking statements are predictive and subject to uncertainties, and actual results may differ materially[5](index=5&type=chunk)[6](index=6&type=chunk) - Factors that could cause actual results to differ materially are discussed under 'Risk Factors' in the Annual Report on Form 10-K and other SEC filings[6](index=6&type=chunk) [PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements and related notes for the periods ended September 30, 2020 and 2019 [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheets show an increase in total assets and liabilities from December 2019 to September 2020, driven by current assets and liabilities Condensed Consolidated Balance Sheet Highlights | Metric | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | |:---|:---|:---| | Total Current Assets | $44,448,000 | $38,245,000 | | Total Assets | $58,764,000 | $51,090,000 | | Total Current Liabilities | $35,363,000 | $32,622,000 | | Total Liabilities | $47,412,000 | $40,884,000 | | Total Stockholders' Equity | $11,352,000 | $10,206,000 | - Cash and Cash Equivalents increased from **$1,294,000** at December 31, 2019, to **$1,460,000** at September 30, 2020[10](index=10&type=chunk) - Inventory increased significantly from **$28,646,000** to **$32,840,000**, and Accounts Receivable, Net, rose from **$7,858,000** to **$9,748,000**[10](index=10&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported a net loss for both the three and nine months ended September 30, 2020, due to decreased sales and gross profit Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |:---|:---|:---|:---|:---|\ | Net Sales | $13,662,000 | $13,997,000 | $35,603,000 | $41,243,000 | | Gross Profit | $1,656,000 | $2,963,000 | $4,451,000 | $7,428,000 | | Income (Loss) from Operations | $(240,000) | $1,155,000 | $(1,613,000) | $1,311,000 | | Net Income (Loss) | $(477,000) | $187,000 | $(1,003,000) | $(1,471,000) | | Net Income (Loss) per share – Basic (Continuing Operations) | $(0.02) | $0.01 | $(0.03) | $(0.05) | - Net sales decreased by **2.4%** for the three months and **13.7%** for the nine months ended September 30, 2020, compared to the prior year[11](index=11&type=chunk) - Gross profit declined by **44.1%** for the three months and **40.1%** for the nine months, reflecting operational inefficiencies and increased safety costs due to COVID-19[11](index=11&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity increased from January to September 2020, primarily due to common stock issuance, partially offset by net losses Stockholders' Equity Changes (Jan 1 - Sep 30, 2020) | Item | Amount ($) | |:---|:---|\ | Balance, January 1, 2020 | 10,206,000 | | Common stock issued for directors' fees | 159,000 | | Costs related to issuance of stock | (145,000) | | Issuance of Common Stock | 984,000 | | Common Stock Issued for Convertible Notes | 885,000 | | Stock Compensation Expense | 266,000 | | Net Loss | (1,003,000) | | Balance, September 30, 2020 | 11,352,000 | - Common stock issued for directors' fees totaled **$159,000** for the nine months ended September 30, 2020[13](index=13&type=chunk) - The company issued common stock for **$984,000** and for convertible notes totaling **$885,000** during the nine months ended September 30, 2020[13](index=13&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents increased for the nine months ended September 30, 2020, driven by financing activities offsetting operating and investing uses Condensed Consolidated Statements of Cash Flows Highlights | Activity Type | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |:---|:---|:---|\ | Net Cash Provided by (Used in) Operating Activities | $(3,184,000) | $270,000 | | Net Cash Used in Investing Activities | $(1,471,000) | $(397,000) | | Net Cash Provided by (Used in) Financing Activities | $4,821,000 | $(1,552,000) | | Net Increase (Decrease) in Cash and Cash Equivalents | $166,000 | $(1,679,000) | | Cash and Cash Equivalents at End of Period | $1,460,000 | $333,000 | - Operating activities used **$3,184,000** in cash for the nine months ended September 30, 2020, a significant change from **$270,000** provided in the prior year[14](index=14&type=chunk) - Financing activities provided **$4,821,000** in cash, largely due to SBA loans (**$2,414,000**), SNB revolving loan (**$3,340,000**), and common stock issuance (**$984,000**)[14](index=14&type=chunk)[191](index=191&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed disclosures on accounting policies, COVID-19 impact, debt, equity, and segment reporting, contextualizing the financial statements [Note 1. FORMATION AND BASIS OF PRESENTATION](index=11&type=section&id=Note%201.%20FORMATION%20AND%20BASIS%20OF%20PRESENTATION) This note outlines the company's aerospace defense business, financial statement basis, and the significant impact of the COVID-19 pandemic - Air Industries Group (AIRI) is a Nevada corporation primarily engaged in manufacturing aircraft structural parts and assemblies for prime defense contractors in the aerospace industry[17](index=17&type=chunk)[18](index=18&type=chunk) - The company was deemed an essential business during the COVID-19 pandemic and continued operations, but experienced reduced capacity and productivity in Q2 2020 due to safety procedures, absenteeism, and supplier disruptions[21](index=21&type=chunk)[23](index=23&type=chunk) - The company deferred **$429,000** in payroll taxes under the CARES Act and received a **$1,416,000** tax refund from a net operating loss carryback claim[28](index=28&type=chunk)[29](index=29&type=chunk) [Note 2. DISCONTINUED OPERATIONS](index=13&type=section&id=Note%202.%20DISCONTINUED%20OPERATIONS) This note details the disposal of EPC and ECC subsidiaries in March 2019, with their results recast as discontinued operations - The company disposed of its EPC and ECC subsidiaries in March 2019, and their results are reported as discontinued operations[17](index=17&type=chunk)[32](index=32&type=chunk) Loss from Discontinued Operations (Net of Income Tax) | Period | Loss from Discontinued Operations, Net of Income Tax | |:---|:---|\ | Three Months Ended Sep 30, 2019 | $(211,000) | | Nine Months Ended Sep 30, 2019 | $(139,000) | [Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=13&type=section&id=Note%203.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines key accounting policies including inventory, credit risk, leases, earnings per share, stock compensation, and goodwill impairment - Inventory is valued at the lower of cost (FIFO) or estimated net realizable value, with interim estimates based on gross profit percentages[34](index=34&type=chunk) Customer Concentration (Percentage of Total Net Sales) | Customer | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |:---|:---|:---|:---|:---|\ | Customer 1 | 25.8% | 35.0% | 32.1% | 31.1% | | Customer 2 | 23.2% | 26.7% | 28.2% | 31.0% | | Customer 3 | 21.6% | <10% | 13.9% | <10% | - The company performed a qualitative assessment for goodwill impairment due to COVID-19 and determined that fair value exceeds carrying value as of September 30, 2020[53](index=53&type=chunk) [Note 4. PROPERTY AND EQUIPMENT](index=17&type=section&id=Note%204.%20PROPERTY%20AND%20EQUIPMENT) This note details the composition and increase of property and equipment, net, primarily due to machinery additions, and related depreciation expense Property and Equipment, Net | Category | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | |:---|:---|:---|\ | Total Property and Equipment (Gross) | $36,373,000 | $33,139,000 | | Less: Accumulated Depreciation | $(27,466,000) | $(25,561,000) | | Property and Equipment, Net | $8,907,000 | $7,578,000 | - Depreciation expense for the nine months ended September 30, 2020, was **$1,920,000**, down from **$2,085,000** in the prior year[57](index=57&type=chunk) [Note 5. LEASES](index=17&type=section&id=Note%205.%20LEASES) This note details the company's operating and finance leases under ASC 842, including weighted-average terms, discount rates, and rent expense - The company leases office, manufacturing facilities, and equipment under operating and finance leases, with terms ranging from one to six years[59](index=59&type=chunk) Lease Metrics (September 30, 2020) | Metric | Value | |:---|:---|\ | Weighted Average Remaining Lease Term | 5.77 years | | Weighted Average Discount Rate | 8.88% | - Rent expense for the nine months ended September 30, 2020, was **$892,000**, a decrease from **$936,000** in the prior year[61](index=61&type=chunk) [Note 6. NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS](index=18&type=section&id=Note%206.%20NOTES%20PAYABLE%2C%20RELATED%20PARTY%20NOTES%20PAYABLE%20AND%20FINANCE%20LEASE%20OBLIGATIONS) This note details significant debt obligations, including SNB facilities, related party notes, convertible notes, and SBA loans, noting covenant non-compliance Notes Payable and Finance Lease Obligations (Net of Current Portion) | Category | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | |:---|:---|:---|\ | Revolving credit note payable to SNB | $15,883,000 | $12,543,000 | | Term loan, SNB | $3,386,000 | $3,800,000 | | Related party notes payable, net | $6,018,000 | $6,862,000 | | Convertible notes payable-third parties, net | $1,440,000 | $2,338,000 | | SBA loans | $2,414,000 | $- | | Total long-term portion | $7,139,000 | $3,406,000 | - As of September 30, 2020, the company was not in compliance with all SNB loan covenants, resulting in the reclassification of the full term note balance as a current liability. A waiver for these defaults was obtained post-period[72](index=72&type=chunk) - The company received **$2,414,000** in SBA Loans in May 2020, which are expected to be forgiven, and has applied for forgiveness[99](index=99&type=chunk)[102](index=102&type=chunk) [NOTE 7. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY](index=23&type=section&id=NOTE%207.%20LIABILITY%20RELATED%20TO%20THE%20SALE%20OF%20FUTURE%20PROCEEDS%20FROM%20DISPOSITION%20OF%20SUBSIDIARY) This note explains the accounting for the sale of future proceeds from a subsidiary disposition, recorded as a liability with an 18% effective interest rate - The company assigned rights to **$1,137,000** in future payments from the AMK Welding subsidiary sale for an immediate **$800,000**, recording this as a liability[106](index=106&type=chunk)[108](index=108&type=chunk) - The liability is amortized into income as payments are received, with an estimated effective annual interest rate of approximately **18%**[109](index=109&type=chunk) Liability Related to Sale of Future Proceeds Activity (Nine Months Ended Sep 30, 2020) | Item | Amount ($) | |:---|:---|\ | Balance, December 31, 2019 | 603,000 | | Non-Cash other income recognized | (302,000) | | Non-Cash interest expense recognized | 90,000 | | Balance, September 30, 2020 (net) | 388,000 | [Note 8. STOCKHOLDERS' EQUITY](index=24&type=section&id=Note%208.%20STOCKHOLDERS'%20EQUITY) This note details changes in stockholders' equity, including common stock issuance for cash and directors' fees in January 2020 - In January 2020, the company issued **419,597 shares of common stock** for gross proceeds of **$984,000**[113](index=113&type=chunk) - The company issued common stock in lieu of cash payments for directors' fees, totaling **41,915 shares** for the three months and **132,812 shares** for the nine months ended September 30, 2020[114](index=114&type=chunk) [Note 9. CONTINGENCIES](index=24&type=section&id=Note%209.%20CONTINGENCIES) The company is involved in legal actions, including disputes over a subsidiary sale and a sublease, with uncertain outcomes and no loss accruals - The company is in a dispute with CPI Aerostructures over an alleged **$4.1 million** working capital deficit from the sale of Welding Metallurgy, Inc., with the court denying CPI's motion on procedural grounds[117](index=117&type=chunk)[118](index=118&type=chunk)[119](index=119&type=chunk) - Contract Pharmacal Corp. is seeking over **$1,000,000** in damages related to a sublease, which the company disputes[120](index=120&type=chunk) [Note 10. INCOME TAXES](index=25&type=section&id=Note%2010.%20INCOME%20TAXES) No federal income tax expense or benefit was recorded due to a full valuation allowance, and a $1.4 million CARES Act refund was received - No federal income tax expense or benefit was recorded for the three and nine months ended September 30, 2020 and 2019[122](index=122&type=chunk)[124](index=124&type=chunk) - The company maintains a full valuation allowance against its net deferred tax assets, believing they are not likely to be realized[125](index=125&type=chunk) - A **$1,416,000** tax refund was received from a net operating loss carryback claim under the CARES Act[124](index=124&type=chunk) [Note 11. SEGMENT REPORTING](index=26&type=section&id=Note%2011.%20SEGMENT%20REPORTING) The company operates in Complex Machining and Turbine Engine Components segments, with performance evaluated by revenue, gross profit, and assets - The company has two operating segments: Complex Machining (AIM and NTW) and Turbine Engine Components (Sterling), plus a corporate division[128](index=128&type=chunk) Segment Net Sales and Gross Profit (Three Months Ended Sep 30) | Segment | Net Sales 2020 | Net Sales 2019 | Gross Profit 2020 | Gross Profit 2019 | |:---|:---|:---|:---|:---|\ | Complex Machining | $12,423,000 | $12,283,000 | $1,735,000 | $2,762,000 | | Turbine Engine Components | $1,239,000 | $1,714,000 | $(79,000) | $201,000 | | Corporate | $- | $- | $- | $- | | Consolidated | $13,662,000 | $13,997,000 | $1,656,000 | $2,963,000 | Segment Net Sales and Gross Profit (Nine Months Ended Sep 30) | Segment | Net Sales 2020 | Net Sales 2019 | Gross Profit 2020 | Gross Profit 2019 | |:---|:---|:---|:---|:---|\ | Complex Machining | $31,795,000 | $36,402,000 | $4,584,000 | $7,070,000 | | Turbine Engine Components | $3,808,000 | $4,841,000 | $(133,000) | $358,000 | | Corporate | $- | $- | $- | $- | | Consolidated | $35,603,000 | $41,243,000 | $4,451,000 | $7,428,000 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on financial condition, operational results, COVID-19 impact, and liquidity strategies [Business Overview](index=28&type=section&id=Business%20Overview) Air Industries Group is an aerospace defense company manufacturing structural parts, focusing on profitability, cash flow, and capital investments - The company operates primarily in the defense aerospace industry, manufacturing structural parts and assemblies for military and commercial aircraft[134](index=134&type=chunk) - Products are deployed on high-profile military aircraft (e.g., UH-60 Blackhawk, F-35, F-18, F-16) and commercial airliners (e.g., Boeing 777, Airbus 380)[134](index=134&type=chunk) - Significant capital investments were made in new equipment and expanded operations in Connecticut in fiscal 2020 to increase production volume, efficiency, and product size[136](index=136&type=chunk) [COVID -19](index=29&type=section&id=COVID%20-19) The COVID-19 pandemic significantly impacted operations, leading to reduced productivity, increased costs, and supply chain challenges, with uncertain future effects - The company was deemed an essential business and continued operations, but experienced reduced capacity and productivity in Q2 2020 due to enhanced safety procedures, increased employee absenteeism, and intermittent supplier closures[140](index=140&type=chunk)[142](index=142&type=chunk) - Implementation of employee safety procedures (cleaning, physical distancing) resulted in increased operating costs[144](index=144&type=chunk) - By September 30, 2020, most employees had returned to facilities, and supplier challenges were largely ameliorated, but the overall economic impact remains dynamic and unpredictable[142](index=142&type=chunk)[143](index=143&type=chunk)[144](index=144&type=chunk) [Segment Data](index=29&type=section&id=Segment%20Data) The company's operations are divided into Complex Machining and Turbine Engine Components segments, with EPC and ECC classified as discontinued - Operations are divided into Complex Machining and Turbine Engine Components segments, plus a corporate office[146](index=146&type=chunk) - EPC and ECC were closed on March 31, 2019, and are classified as discontinued operations[146](index=146&type=chunk) [RESULTS OF OPERATIONS](index=30&type=section&id=RESULTS%20OF%20OPERATIONS) Consolidated net sales decreased for both the three and nine months ended September 30, 2020, resulting in a net loss Selected Financial Information (Continuing Operations) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |:---|:---|:---|:---|:---|\ | Net Sales | $13,662,000 | $13,997,000 | $35,603,000 | $41,243,000 | | Gross Profit | $1,656,000 | $2,963,000 | $4,451,000 | $7,428,000 | | Income (Loss) from continuing operations | $(477,000) | $398,000 | $(1,003,000) | $(1,332,000) | - Consolidated net sales decreased by **2.4%** for the three months and **13.7%** for the nine months ended September 30, 2020, primarily due to COVID-19 impacts on the Turbine Engine Components segment[153](index=153&type=chunk)[160](index=160&type=chunk) - Gross profit percentage declined from **21.2%** to **12.1%** for the three months and from **18.0%** to **12.5%** for the nine months, attributed to COVID-19 related operating inefficiencies and increased safety costs[156](index=156&type=chunk)[164](index=164&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=33&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Liquidity was bolstered by government aid and a new SNB financing facility, with capital investments aimed at improving future cash flows and efficiency - COVID-19 negatively impacted liquidity, but the company utilized US government incentive programs, including **$2.4 million** in SBA Loans and a **$1,416,000** net operating loss carryback refund under the CARES Act[172](index=172&type=chunk)[173](index=173&type=chunk)[176](index=176&type=chunk) - The company entered into a new, lower-cost financing facility with Sterling National Bank (SNB) on December 31, 2019, providing a **$16,000,000** revolving loan and a term loan[177](index=177&type=chunk) - Capital investments of **$2.5 million** were made for four state-of-the-art machines, with one operational and the rest expected by December 31, 2020, to increase production volume and efficiency[170](index=170&type=chunk) [OFF-BALANCE SHEET ARRANGEMENTS](index=36&type=section&id=OFF-BALANCE%20SHEET%20ARRANGEMENTS) As of September 30, 2020, the company did not have any off-balance sheet arrangements - The company did not have any off-balance sheet arrangements as of September 30, 2020[192](index=192&type=chunk) [Critical Accounting Policies and Estimates](index=36&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section identifies critical accounting policies and estimates requiring significant management judgment, where actual results may differ from assumptions - Key critical accounting policies and estimates include Revenue recognition, Inventory valuation, Lease accounting, Legal contingencies, Stock-based compensation, and Goodwill[194](index=194&type=chunk) - These policies involve subjective and complex judgments, and actual results may differ from management's estimates[194](index=194&type=chunk)[196](index=196&type=chunk) [Recently Issued Accounting Pronouncements](index=37&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) The company is evaluating the impact of ASU 2020-06 and ASU 2019-12 on its financial statements, effective for fiscal years after December 2021 and 2020, respectively - The company is evaluating ASU No. 2020-06, effective for fiscal years beginning after December 15, 2021, which addresses accounting for financial instruments with liability and equity characteristics[197](index=197&type=chunk) - The company is evaluating ASU No. 2019-12, effective for fiscal years beginning after December 15, 2020, which simplifies accounting for income taxes[198](index=198&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls were effective as of September 30, 2020, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were effective as of September 30, 2020[202](index=202&type=chunk) - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[203](index=203&type=chunk) [PART II. OTHER INFORMATION](index=39&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part addresses other important information, including risk factors and exhibits, providing additional context to the financial report [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) This section highlights key risks, primarily the uncertain impact of COVID-19 on operations and the terms and potential forgiveness of SBA loans - The COVID-19 pandemic's macroeconomic disruption has affected operations, customers, and suppliers, with its duration and extent of impact on future results remaining uncertain[206](index=206&type=chunk)[208](index=208&type=chunk)[210](index=210&type=chunk) - The company's **$2.4 million** in SBA Loans are subject to terms and conditions, and while forgiveness is expected, there's no assurance it will be granted in whole or in part. The company will also be subject to an audit due to receiving over **$2.0 million**[212](index=212&type=chunk)[213](index=213&type=chunk)[215](index=215&type=chunk) - Default on SBA Loans or other SNB loans could lead to acceleration of debt, potentially impacting cash flows and financial condition[214](index=214&type=chunk) [Item 6. Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including agreements, articles of incorporation, promissory notes, and certifications - Exhibits include merger agreements, articles of incorporation, promissory notes (e.g., SBA loans, SNB facility amendment), and certifications (e.g., CEO/CFO certifications)[217](index=217&type=chunk) [SIGNATURES](index=42&type=section&id=SIGNATURES) This section contains the required signatures, certifying the accuracy and completeness of the Form 10-Q report

Air Industries Group (NYSE:AIRI) Q3 2020 Earnings Conference Call October 30, 2020 8:30 AM ET Company Participants Lou Melluzzo – Chief Executive Officer Mike Recca – Chief Financial Officer Conference Call Participants Operator Good day, and welcome to the Air Industries Conference Call. Today's conference is being recorded. Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to si ...