Air Industries (AIRI) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis of operations and liquidity, and assessment of internal controls Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, accompanied by notes detailing accounting policies, debt, and a going concern warning Condensed Consolidated Financial Statements The financial statements reflect increased net sales and a shift to net income for Q3 2019, alongside balance sheet changes and improved operating cash flow for the nine-month period Financial Metric (in thousands USD) | Financial Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $14,000 | $10,700 | $41,200 | $33,600 | | Gross Profit | $3,000 | $1,400 | $7,400 | $4,900 | | Income (Loss) from Operations | $1,200 | ($800) | $1,300 | ($2,000) | | Net Income (Loss) | $200 | ($3,100) | ($1,500) | ($4,400) | | EPS (Diluted) | $0.01 (Continuing Ops) | ($0.06) (Continuing Ops) | ($0.05) (Continuing Ops) | ($0.16) (Continuing Ops) | Balance Sheet Item (in thousands USD) | Balance Sheet Item | September 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $37,700 | $38,000 | | Total Assets | $50,800 | $47,800 | | Total Current Liabilities | $33,000 | $29,000 | | Total Liabilities | $40,200 | $36,200 | | Total Stockholders' Equity | $10,600 | $11,600 | Cash Flow Activity (Nine Months Ended Sep 30, in thousands USD) | Cash Flow Activity (Nine Months Ended Sep 30) | 2019 (Unaudited) | 2018 (Unaudited) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $300 | ($2,900) | | Net Cash used in Investing Activities | ($400) | ($1,000) | | Net Cash (used in) provided by Financing Activities | ($1,600) | $4,200 | | Net (Decrease) Increase in Cash | ($1,700) | $300 | Notes to Condensed Consolidated Financial Statements These notes provide critical context to the financial statements, detailing significant accounting policies, debt, customer concentration, and a going concern warning - The company's ability to continue as a going concern is in substantial doubt due to a history of operating losses, negative cash flows, and significant reliance on debt and equity infusions to maintain operations[16][17] - On January 1, 2019, the company adopted the new lease accounting standard, ASC 842, which resulted in the recognition of $4.4 million in operating lease right-of-use assets and corresponding lease liabilities on the balance sheet[24][25][27] - The company faces significant customer concentration risk, with three customers (Sikorsky Aircraft, Goodrich Landing Gear Systems, and Rohr) accounting for 73.4% of total sales for the nine months ended September 30, 2019[50][51] - The company is involved in a significant legal dispute with CPI Aerostructures regarding a working capital adjustment from the 2018 sale of the WMI Group, with CPI seeking approximately $4.2 million[113] Segment Performance (Nine Months Ended Sep 30, 2019, in thousands USD) | Segment Performance (Nine Months Ended Sep 30, 2019) | Net Sales | Gross Profit | Pretax Income (Loss) | | :--- | :--- | :--- | :--- | | Complex Machining | $36,400 | $7,100 | $4,800 | | Turbine Engine Components | $4,800 | $400 | ($300) | | Corporate | — | — | ($5,800) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses operational repositioning, highlighting significant sales growth and improved gross margins, while acknowledging high leverage and ongoing going concern risks Results of Operations The company achieved significant net sales and gross profit growth for both the third quarter and nine-month period, driven by increased sales volume and cost reduction efforts Metric (Three Months Ended Sep 30, in thousands USD) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $14,000 | $10,700 | +30.4% | | Gross Profit | $3,000 | $1,400 | +116.8% | | Gross Margin | 21.2% | 12.7% | +8.5 p.p. | | Net Income (Loss) | $200 | ($3,100) | N/A | Metric (Nine Months Ended Sep 30, in thousands USD) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $41,200 | $33,600 | +22.7% | | Gross Profit | $7,400 | $4,900 | +52.7% | | Gross Margin | 18.0% | 14.5% | +3.5 p.p. | | Net Loss | ($1,500) | ($4,400) | N/A | - Consolidated operating expenses decreased by 17.2% in Q3 2019 and 14.5% in the nine-month period year-over-year, primarily due to cost reduction efforts, including the consolidation of corporate offices and NTW operations into the Bay Shore location[148][156] Liquidity and Capital Resources The company's liquidity remains constrained by high leverage and reliance on its PNC Bank facility and related-party financing, despite recent liquidity-enhancing transactions and covenant compliance - The company is highly leveraged and relies on its Loan Facility with PNC Bank and debt/equity from principal stockholders to support operations, with the PNC facility maturing on December 31, 2019[158][164] - As of September 30, 2019, the company was in compliance with the minimum EBITDA covenants required by its PNC Loan Facility[165] - In January 2019, the company raised $2.0 million by issuing 7% senior subordinated convertible notes to directors Michael and Robert Taglich to meet conditions for extending its PNC loan maturity[172] - The company sold its rights to $1.1 million in future payments from the sale of its AMK subsidiary for an immediate cash payment of $0.8 million in January 2019 to increase liquidity[178] - Management explicitly states that historical losses and reliance on external financing raise substantial doubt about the company's ability to continue as a going concern[189][190] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in inventory, financial closing, and accounting personnel, with remediation plans contingent on financial ability - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of the end of the reporting period[219] - Material weaknesses were identified in several areas, including: inventory control systems, the quarterly closing process, accounting for complex or non-standard transactions, and a lack of sufficient accounting personnel[219] - Planned remediation efforts include supplementing the accounting staff with experienced professionals and using third-party consultants, contingent on the company's financial ability[220] PART II. OTHER INFORMATION This section details legal proceedings, risk factors, equity security sales, and a comprehensive list of exhibits Legal Proceedings This section details an ongoing legal dispute with CPI Aerostructures regarding a working capital adjustment from a prior sale, where CPI seeks approximately $4.2 million - The company is in a legal dispute with CPI Aerostructures over the final working capital adjustment from the sale of the WMI Group[222] - An independent expert determined the working capital deficit to be approximately $4.1 million, and CPI has filed a motion seeking a judgment of about $4.2 million, with $2.0 million to be satisfied from funds in escrow[223][224] - The company believes the expert's determination is void and intends to "contest vigorously" CPI's claim, though it has agreed to release $0.6 million from the escrow for undisputed items[225] Risk Factors This section does not introduce any new risk factors, instead incorporating by reference the risks and uncertainties previously disclosed in the company's 2018 Annual Report on Form 10-K - The report refers to the risk factors disclosed in the company's 2018 Annual Report on Form 10-K and does not present any new or updated risks[226] Sales of Unregistered Equity Securities The company reports that it did not issue or sell any unregistered equity securities during the third quarter of 2019, other than what may have been previously disclosed in its other SEC filings - No unregistered equity securities were sold during the period covered by this report, except as previously disclosed in other Exchange Act reports[227] Exhibits This section provides a list of all exhibits filed with the Form 10-Q, including corporate governance documents, certifications by officers, and interactive data files - The report includes standard exhibits such as CEO and CFO certifications pursuant to Rule 13a-14 and Section 906 of the Sarbanes-Oxley Act, as well as XBRL data files[227]