
FORM 10-Q General Information This section provides general filing details for the Quarterly Report on Form 10-Q, including registrant classification and outstanding common stock Filing Details 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 Company3 - Total of 31,729,755 shares of common stock outstanding as of November 4, 20203 INDEX This section provides a comprehensive table of contents for the Form 10-Q report SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 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 materially56 - 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 filings6 PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements 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 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, 202010 - Inventory increased significantly from $28,646,000 to $32,840,000, and Accounts Receivable, Net, rose from $7,858,000 to $9,748,00010 Condensed Consolidated Statements of Operations 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) | $(0.05) | - Net sales decreased by 2.4% for the three months and 13.7% for the nine months ended September 30, 2020, compared to the prior year11 - Gross profit declined by 44.1% for the three months and 40.1% for the nine months, reflecting operational inefficiencies and increased safety costs due to COVID-1911 Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased from January to September 2020, primarily due to common stock issuance, partially offset by net losses Stockholders' Equity Changes (Jan 1 - Sep 30, 2020) | Item | Amount ($) | |:---|:---|\ | 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, 202013 - The company issued common stock for $984,000 and for convertible notes totaling $885,000 during the nine months ended September 30, 202013 Condensed Consolidated Statements of Cash Flows 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 year14 - 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)14191 Notes to Condensed Consolidated Financial Statements 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 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 industry1718 - 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 disruptions2123 - 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 claim2829 Note 2. DISCONTINUED OPERATIONS 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 operations1732 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 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 percentages34 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, 202053 Note 4. PROPERTY AND EQUIPMENT 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 year57 Note 5. LEASES 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 years59 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 year61 Note 6. NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS 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-period72 - The company received $2,414,000 in SBA Loans in May 2020, which are expected to be forgiven, and has applied for forgiveness99102 NOTE 7. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY 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 $800,000, recording this as a liability106108 - The liability is amortized into income as payments are received, with an estimated effective annual interest rate of approximately 18%109 Liability Related to Sale of Future Proceeds Activity (Nine Months Ended Sep 30, 2020) | Item | Amount ($) | |:---|:---|\ | 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 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 $984,000113 - 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, 2020114 Note 9. CONTINGENCIES 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 grounds117118119 - Contract Pharmacal Corp. is seeking over $1,000,000 in damages related to a sublease, which the company disputes120 Note 10. INCOME TAXES 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 2019122124 - The company maintains a full valuation allowance against its net deferred tax assets, believing they are not likely to be realized125 - A $1,416,000 tax refund was received from a net operating loss carryback claim under the CARES Act124 Note 11. SEGMENT REPORTING 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 division128 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 This section provides management's perspective on financial condition, operational results, COVID-19 impact, and liquidity strategies Business Overview 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 aircraft134 - 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 - Significant capital investments were made in new equipment and expanded operations in Connecticut in fiscal 2020 to increase production volume, efficiency, and product size136 COVID -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 closures140142 - Implementation of employee safety procedures (cleaning, physical distancing) resulted in increased operating costs144 - By September 30, 2020, most employees had returned to facilities, and supplier challenges were largely ameliorated, but the overall economic impact remains dynamic and unpredictable142143144 Segment Data 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 office146 - EPC and ECC were closed on March 31, 2019, and are classified as discontinued operations146 RESULTS OF OPERATIONS 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 segment153160 - 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 costs156164 LIQUIDITY AND CAPITAL RESOURCES 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 Act172173176 - 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 loan177 - 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 efficiency170 OFF-BALANCE SHEET ARRANGEMENTS 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, 2020192 Critical Accounting Policies and Estimates 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 Goodwill194 - These policies involve subjective and complex judgments, and actual results may differ from management's estimates194196 Recently Issued Accounting Pronouncements 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 characteristics197 - The company is evaluating ASU No. 2019-12, effective for fiscal years beginning after December 15, 2020, which simplifies accounting for income taxes198 Item 4. Controls and Procedures 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, 2020202 - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter203 PART II. OTHER INFORMATION This part addresses other important information, including risk factors and exhibits, providing additional context to the financial report Item 1A. Risk Factors 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 uncertain206208210 - 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 million212213215 - Default on SBA Loans or other SNB loans could lead to acceleration of debt, potentially impacting cash flows and financial condition214 Item 6. Exhibits 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 SIGNATURES This section contains the required signatures, certifying the accuracy and completeness of the Form 10-Q report