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Air Industries (AIRI) - 2019 Q4 - Annual Report

Part I Business Air Industries Group is an aerospace and defense company designing and manufacturing flight-critical structural parts for military and commercial aircraft - The company manufactures and designs structural parts for high-profile military and commercial aircraft, including the UH-60 Black Hawk, F-35 Joint Strike Fighter, Boeing 777, and Airbus A38013 - Operations are conducted through two segments: Complex Machining and Turbine Engine Components15 - The company has recently repositioned its business by selling non-core assets and consolidating operations in Bay Shore, New York to focus on core competencies14 - As of February 29, 2020, the company's 18-month firm funded backlog was approximately $114.5 million25 - As of March 15, 2020, the company employed approximately 159 people, with 101 in manufacturing29 Risk Factors The company faces significant business, indebtedness, and common stock-related risks, including pandemic impacts, customer concentration, and high leverage Risks Related to Our Business - The COVID-19 pandemic is expected to have a highly negative impact on the general economy and may force the company to reduce or close operations3940 - The company has a high customer concentration, with three customers accounting for approximately 76% of total sales in 201946 - A significant portion of revenue is derived from components for a few specific aircraft platforms, including the Sikorsky BlackHawk helicopter and the F-16 and F-18 fighter jets48 - A large percentage of revenue is derived from products for U.S. military aviation, making the company vulnerable to reductions in government defense spending44 - The company faces a potential liability of approximately $3.6 million in a dispute with CPI Aerostructures, Inc6162 Risks Related to Our Indebtedness - The company has substantial indebtedness, with approximately $16,343,000 outstanding under its Loan Facility as of December 31, 2019, secured by substantially all of its assets67 - A significant amount of subordinated convertible notes are payable on December 31, 2020, and an inability to pay or refinance this debt could materially and adversely affect operations68 Risks Related to our common stock - Ownership is highly concentrated, with two directors and their affiliates owning a significant number of shares, giving them substantial influence over corporate actions73 - The common stock is listed on the NYSE American, but trading volume has been limited, which may impair a stockholder's ability to sell shares76 - Failure to comply with the continuing listing standards of the NYSE American could result in the delisting of the company's common stock7475 Unresolved Staff Comments The company reports no unresolved staff comments - The company reports no unresolved staff comments84 Properties The company consolidated its operations at its 5.4-acre corporate campus in Bay Shore, New York, while its Sterling subsidiary operates in Connecticut - The company's executive offices and the operations of NTW and AIM are located at a 5.4-acre corporate campus in Bay Shore, New York85 - The Sterling subsidiary operates in a 74,923 square foot facility in Barkhamsted, Connecticut86 Legal Proceedings The company is involved in several legal proceedings, most notably a dispute with CPI Aerostructures seeking approximately $4.2 million - The company is in a legal dispute with CPI Aerostructures regarding the sale of its subsidiary, Welding Metallurgy, Inc, with CPI seeking a judgment of around $4,200,00091 - Contract Pharmacal Corp has filed an action seeking damages in excess of $1,000,000 related to a sublease for a property formerly occupied by Welding Metallurgy, Inc90 Mine Safety Disclosures This section is not applicable to the company - The company has no mine safety disclosures to report93 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (AIRI) is listed on the NYSE American with 247 stockholders of record as of March 20, 2020 - The company's common stock is listed on the NYSE American under the symbol "AIRI"94 - As of March 20, 2020, there were 247 stockholders of record94 Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2019 | Plan Category | Number of Securities to Be Issued Upon Exercise | Weighted Average Exercise Price | Number of Remaining Shares Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,369,649 | $2.01 | 1,130,649 | | Equity compensation plans not approved by security holders | 2,182,902 | $2.90 | None | | Total | 3,552,551 | | 1,130,649 | Selected Financial Data This item is not required as the company is a smaller reporting company - This item is not required for smaller reporting companies97 Management's Discussion and Analysis of Financial Condition and Results of Operation Financial performance improved in 2019 with a 22.6% increase in net sales and a narrowed operating loss, driven by restructuring and cost reductions Results of Operations Consolidated Results of Operations (Continuing Operations) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $54,573,000 | $44,530,000 | | Gross Profit | $9,142,000 | $5,445,000 | | Loss from continuing operations | $(2,598,000) | $(8,551,000) | Segment Net Sales (2019 vs 2018) | Segment | 2019 Net Sales | 2018 Net Sales | % Change | | :--- | :--- | :--- | :--- | | Complex Machining | $48,226,000 | $39,745,000 | +21.3% | | Turbine Engine Components | $6,347,000 | $4,785,000 | +32.6% | - The increase in gross profit and margin was primarily due to cost reduction measures, operational consolidation, and better absorption of fixed charges over greater revenues119 - The loss from continuing operations in 2018 was negatively impacted by a $2,043,000 write-off of capitalized engineering costs due to a change in accounting policy123 Liquidity and Capital Resources - On December 31, 2019, the company entered into a new loan facility with Sterling National Bank (SNB), which provides a $16 million revolving loan and a $3.8 million term loan126127130 - The company has financed operations in part through private placements of debt and equity securities, with substantial investments from directors Michael and Robert Taglich133 - In January 2019, Michael and Robert Taglich each purchased $1,000,000 of 7% senior subordinated convertible promissory notes due December 31, 2020136 Summary of Cash Flows (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Cash used in Operating Activities | $(888) | $(2,336) | | Cash (used in) provided by Investing Activities | $(764) | $3,685 | | Cash provided by Financing Activities | $934 | $33 | Critical Accounting Policies - Management has evaluated conditions and believes that projected positive cash flows for 2020 alleviate substantial doubt about the company's ability to continue as a going concern163243 - As of December 31, 2018, the company changed its policy to expense pre-production engineering costs as incurred, writing off the entire capitalized balance of $2,043,000 in 2018169 - The company adopted FASB ASC 606 "Revenue from Contracts with Customers" using the modified retrospective approach, which did not have a material impact on revenue recognition timing171172 - Goodwill is tested for impairment annually; no impairment was recorded for continuing operations in 2019183310311 Quantitative and Qualitative Disclosure About Market Risk Disclosure for this item is not required for smaller reporting companies - Disclosure for this item is not required for smaller reporting companies188 Financial Statements and Supplementary Data This section refers to the Consolidated Financial Statements which begin on page F-1 of the report - The financial statements required by this item begin on page F-1 of the report188 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - The company reports no changes in or disagreements with accountants on accounting and financial disclosure188 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019189 - Management concluded that the company's internal controls over financial reporting were effective as of December 31, 2019195 - In 2019, changes to internal controls included disposing of certain subsidiaries, acquiring new consolidation software, and hiring a new Chief Accounting Officer to address previously identified deficiencies197 Other Information The company reports no other information - The company reports no other information198 Part III Directors, Executive Officers, and Corporate Governance This section lists key personnel, with most other required information incorporated by reference from the company's forthcoming proxy statement - Most information required by this item is incorporated by reference from the company's definitive proxy statement199 Directors and Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Luciano (Lou) Melluzzo | 55 | President and Chief Executive Officer | | Michael E. Recca | 69 | Chief Financial Officer | | Michael N. Taglich | 54 | Chairman of the Board | | Robert F. Taglich | 53 | Director | | David J. Buonanno | 64 | Director | | Peter D. Rettaliata | 69 | Director | | Robert C. Schroeder | 53 | Director | | Michael Brand | 62 | Director | | Michael D. Porcelain | 51 | Director | Executive Compensation Information required by this Item is incorporated by reference from the company's definitive proxy statement - Information regarding executive compensation is incorporated by reference from the company's proxy statement213 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this Item is incorporated by reference from the company's definitive proxy statement - Information regarding security ownership is incorporated by reference from the company's proxy statement214 Certain Relationships and Related Transactions and Director Independence Information required by this Item is incorporated by reference from the company's definitive proxy statement - Information regarding related transactions and director independence is incorporated by reference from the company's proxy statement215 Principal Accountant Fees and Services Information required by this Item is incorporated by reference from the company's definitive proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the company's proxy statement216 Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the annual report, including key agreements, corporate documents, and required certifications - The report includes a comprehensive list of exhibits, such as the Loan and Security Agreement with Sterling National Bank, the Stock Purchase Agreement with CPI Aerostructures, and various convertible note agreements with related parties218219220 Consolidated Financial Statements The audited financial statements for 2019 and 2018 show a net loss of $2.7 million in 2019, an improvement from an $11.0 million loss in 2018 Report of Independent Registered Public Accounting Firm - The auditor, Rotenberg Meril Solomon Bertiger & Guttilla, P.C., issued an unqualified opinion, stating that the financial statements present fairly the financial position of the company226 Financial Statement Tables Consolidated Balance Sheet Data (as of December 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Current Assets | $38,245,000 | $38,048,000 | | Total Assets | $51,090,000 | $47,756,000 | | Total Current Liabilities | $32,622,000 | $29,007,000 | | Total Liabilities | $40,884,000 | $36,150,000 | | Total Stockholders' Equity | $10,206,000 | $11,606,000 | Consolidated Statement of Operations Data (for the year ended December 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $54,573,000 | $44,530,000 | | Gross Profit | $9,142,000 | $5,445,000 | | Loss from Continuing Operations | $(2,598,000) | $(8,551,000) | | Net Loss | $(2,732,000) | $(10,992,000) | | Net Loss per share - basic | $(0.09) | $(0.32) | Notes to Consolidated Financial Statements - Management believes that improved financial performance and a new credit facility have alleviated substantial doubt about the company's ability to continue as a going concern242243244 - The results of the sold WMI Group and closed EPC and ECC subsidiaries are reported as discontinued operations, with a loss from discontinued operations of $134,000 in 2019 and $2,441,000 in 2018263265 - On January 1, 2019, the company adopted the new lease accounting standard, ASC 842, resulting in the recognition of operating lease right-of-use assets of $4.4 million and related lease liabilities248251 - As of December 31, 2019, related party notes payable, primarily to directors Michael and Robert Taglich and their affiliates, totaled $6.9 million330361