Air Industries (AIRI) - 2023 Q4 - Annual Report

PART I Business Overview Air Industries Group manufactures precision components for aerospace and defense, aiming for profitable growth in 2024 - Air Industries Group is a leading manufacturer of precision components and assemblies for large aerospace and defense prime contractors. Its products include landing gears, flight controls, engine mounts, and components for aircraft jet engines, ground turbines, and other complex machines. The ultimate end-user for most products is the U.S. Government, international governments, and commercial global airlines[20] - The company operates as a 'Tier One' supplier directly to prime contractors or 'Tier Two' supplier, and sometimes directly to the U.S. Government, often becoming the exclusive or primary supplier for high-precision parts and assemblies[21] - All manufacturing facilities are strategically located within the United States (Long Island, New York, and Barkhamsted, Connecticut), spanning over 150,000 square feet, ensuring rigorous oversight and adherence to stringent quality standards. The company has an impeccable record with no known incidents of part failure leading to a fatality since 1941[22] 2023 Performance Highlights | Metric | 2023 Value | | :----------------------------- | :----------- | | Net Sales | $51.5 million | | Backlog (as of Dec 31, 2023) | $98.3 million | | Backlog Increase (YoY) | 14.7% | | Net Loss | $2.1 million | | Total Unfilled Contract Values | $191.9 million | - The business strategy for 2024 focuses on competing for and winning contracts to achieve sustainable and profitable growth, delivering high-quality reliable products, securing new contract awards, improving operations, and successful execution[25] Customer Profiles Military aircraft end-use accounted for approximately 82% of net sales in 2023, with key customers including RTX, Lockheed Martin, and the U.S. Government Net Sales by End-Use (2023 vs 2022) | Year | Military Aircraft End-Use | | :--- | :------------------------ | | 2023 | 82.3% | | 2022 | 82.6% | - Key customers include RTX Corporation (Collins Aerospace, Pratt Whitney), Lockheed Martin Corporation (Sikorsky), General Electric Aerospace, GE Verona, and the U.S. Government (Defense Logistics Agency)[28] - In 2023, the company secured an initial $700,000 order from a new foreign-based defense and aerospace prime customer, with initial deliveries slated to commence in the fourth quarter of 2024[26] Platform and Program Profiles The company's components are integral to high-profile platforms, with 85.2% of 2023 net sales from key programs like the F-18 Hornet Net Sales by Platform or Program (2023 vs 2022) | Platform or Program | 2023 Net Sales % | 2022 Net Sales % | | :------------------ | :--------------- | :--------------- | | F-18 Hornet | 24.3% | 13.3% | | E2-D Hawkeye | 18.9% | 15.6% | | UH-60 Black Hawk Helicopter | 18.1% | 16.5% | | GTF | 10.5% | 9.5% | | CH-53 Helicopter | 7.4% | 6.3% | | F-35 Lightning II | 4.0% | 18.6% | | F-15 Eagle Tactical Fighter | 2.1% | 3.8% | | All other platforms | 14.7% | 16.4% | - The company manufactures components for critical platforms including F-18 Hornet (landing gear), E-2D Hawkeye (main, nose, and arresting gear), UH-60 Black Hawk Helicopter (flight critical components), Pratt & Whitney Geared Turbo-Fan Engine (Thrust Struts), CH-53 Helicopter (Chaff Pods, Swashplates, Hubs), F-35 Lightning II (landing gear components), and F-15 Eagle Tactical Fighter (landing gear components)[29][31] - Suppliers often become the sole or single source for parts, especially for legacy aircraft, due to the complexity of replacing them once integrated into a platform or program[31] Our Market The aerospace and defense industry is dominated by prime contractors, with demand driven by new production and MRO - The aerospace and defense industry is dominated by a select few large prime contractors, including Airbus, Boeing, General Electric, Lockheed Martin, Northrop Grumman, and RTX[30] - Once a supplier is chosen and integrated into a platform or program, replacing them is complex, often leading to sole or single-source relationships, which can result in higher production volumes and lower average unit costs[31] - Demand for components is based on new production and subsequent maintenance, repair, and overhaul (MRO), with MRO demand continuing for many years, even decades, after new aircraft production lines cease[32] - Predicting period-to-period demand is challenging because most machine parts and assemblies are not explicitly identified in the U.S. Government budget, and the timing of contract awards is difficult to predict[33] Sales and Marketing Sales and marketing activities returned to normalcy in 2023, focusing on customer relationships and securing LTAs - Sales and marketing activities in 2023 returned to normalcy, with travel restrictions no longer hindering customer visits and increased employee willingness to attend trade shows[34] - The company focuses on cultivating customer relationships akin to partnerships, maintaining high ratings on quantitative criteria such as on-time delivery, defect rates, and cost performance[35] - The sales cycle varies significantly, and most orders stem from Long-Term Agreements (LTAs) secured through competitive bidding (RFQs) or, for defense products, sometimes without competitive bidding[36][37] - In 2023, the company secured an initial $700,000 order from a new foreign-based defense and aerospace prime, validating its sales and marketing strategy[38] Bookings and Backlog Bookings increased by 55% to $62.26 million in 2023, resulting in a 1.20x book-to-bill ratio and a $98.3 million backlog Bookings and Book-to-Bill Ratio (2023 vs 2022) | Metric | 2023 | 2022 | Change | % Change | | :----------- | :----------- | :----------- | :----------- | :------- | | Bookings | $62,262,000 | $40,166,000 | $22,096,000 | +55% | | Book-to-Bill Ratio | 1.20x | 0.75x | +0.45x | +60% | Funded Backlog (as of December 31) | Year | Value | | :--- | :---------- | | 2023 | $98.3 million | | 2022 | $85.7 million | - The backlog increased by 14.7% from December 31, 2022, to December 31, 2023. The bulk of the $98.3 million backlog is expected to ship over the next 24 months[40] - Total potential net sales under contracts actually awarded, including the funded backlog, amounted to $191.1 million as of December 31, 2023[40] Competition The market is highly competitive, requiring continuous investment in process improvements and capital equipment for quality and pricing - Winning new contracts is highly competitive, requiring capabilities to deliver superior quality products more quickly and with lower pricing than competitors, necessitating continuous investment in process improvements and capital equipment[41] Capital Investments in Property and Equipment | Year | Investment | | :--- | :----------- | | 2023 | $2,119,000 | | 2022 | $2,361,000 | - These investments have increased production efficiency and speed, maintained closer tolerances, and expanded the size of products that can be manufactured. The company plans to invest approximately $2,000,000 in 2024 for new or upgraded equipment[42] - Competitors include Monitor Aerospace (division of GKN Aerospace), Hydromil (division of Triumph Aerospace Group), Heroux Devetek, and Ellanef Manufacturing (division of Magellan Corporation)[43] Manufacturing, Raw Materials and Replacement Parts The production cycle can exceed a year, necessitating early raw material procurement and efficient subcontract management amid volatile prices - The production cycle, from ordering raw materials to delivering finished products, can vary from several weeks to over a year, requiring significant raw material procurement and efficient subcontract management[44] - Prices and availability of raw materials are susceptible to fluctuations in global markets and political conditions, and most suppliers are hesitant to commit to long-term contracts at fixed prices[45] - Many Long-Term Agreements (LTAs) provide pricing protection against large increases in raw material costs[45] Employees As of March 31, 2024, the company employed 180 people, with a collective bargaining agreement for its AIM subsidiary - As of March 31, 2024, the company employed 180 people: 101 in manufacturing and production, 25 in quality control, 45 in administration, and 9 in sales and procurement[46] - All employees are covered under a co-employment agreement with Insperity Services, LLC, which allows for comprehensive benefits at a lower cost[46] - The AIM subsidiary has a collective bargaining agreement with the United Service Workers, IUJAT, Local 355, effective until December 31, 2024, covering the majority of AIM's 125 personnel. This agreement includes a 'no-strike' clause and requires monthly contributions to a defined contribution pension benefit[48] Regulations The company complies with federal, state, and local environmental and safety regulations, as well as FAA and Federal Acquisition Regulations - The company is subject to regulations administered by the United States Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and various state and local authorities, imposing restrictions on air, soil, and water pollution, occupational chemical exposure, and hazardous substance reporting[49] - The company is regulated by the Federal Aviation Administration (FAA) under the Federal Aviation Act of 1958, which prescribes standards and licensing requirements for aircraft and components, with potential fines or production cessation orders for noncompliance[51] - U.S. government contracts and many customer LTAs are subject to Federal Acquisition Regulations, which may lead to audits, inquiries, and investigations, potentially resulting in fines or limitations on bidding for government contracts[52] More Information About Our Business and Where to Find It Company SEC filings, press releases, and other material information are available on its website and social media channels - The company's internet website (AirIndustriesGroup.com) provides SEC filings, press releases, annual/quarterly reports, and amendments. Social media channels like LinkedIn are also used to disseminate company developments and information[54] Risk Factors Investing in the company's common stock involves high risk, categorized into business, indebtedness, and public company status - The purchase of the company's common stock involves a very high degree of risk. Risks are categorized into three groups: (1) Risks related to the business, including risks specific to the defense and aerospace industry; (2) Risks arising from indebtedness; and (3) Risks related to the company's status as a public company and its common stock[55][58] - If any of the described risks occur, the company's financial condition or operating results may be materially and adversely affected, the price of its common stock may decline, and investors could lose all or part of their investment[56] Risks Related to Our Business Business risks include financing needs, defense spending cuts, customer concentration, competition, and compliance challenges - The company may need additional financing for investments in new or upgraded property or equipment, which could involve issuing debt or equity, potentially diluting existing stockholders or not being available on reasonable terms[57] - A reduction in budgeted or actual U.S. government defense spending or changes in the mix of defense products (e.g., shift from military aircraft to rockets and drones) could materially adversely impact the company's business strategy, revenues, operating results, and financial condition[59][60] - The company has a high degree of sales concentration among specific customers; in fiscal years 2023 and 2022, four and three customers, respectively, accounted for approximately 64.2% and 76.5% of net sales. The loss of any key customers could significantly harm the business[61][62] - A significant portion of net sales is derived from components for a few aircraft programs and platforms (e.g., F-18 Hornet, E-2D Hawkeye, UH-60 Black Hawk Helicopter, F-35 Lightning II); cancellation or reduction of funding for these programs would harm the business[63] - The defense and aerospace component manufacturing market is highly competitive, with larger prime customers and competitors often having greater technical, manufacturing, financial, and marketing resources. Changes in outsourcing strategies or increased competition could reduce revenues and market share[64] - Failure to timely meet customer specifications and requirements or disruptions from suppliers (especially sole or limited sources) could lead to lost sales, production delays, and harm the business[65][66] - Gross profit as a percentage of net sales is highly linked to sales volume due to a large percentage of fixed factory overhead. It will be difficult to materially improve gross profit margin without increasing sales volume, and any reduction in sales would cause margins to decline[67] - The bidding process for contracts is competitive and resource-intensive, with no assurance of award or profitability. Fixed contract pricing exposes the company to reduced profitability if costs increase unexpectedly[68][69] - Volatile raw material prices pose a risk, as some LTA agreements may not fully protect against price increases, potentially impacting financial results and customer demand[71] - Long product lead times result in slow inventory turns and tie up working capital (inventory was approximately 59% of assets as of December 31, 2023), creating a risk of write-downs due to obsolescence or price drops[72] - The company does not own the intellectual property rights to the products it produces, meaning customers are free to use other manufacturers, which could adversely affect the business[73] - New programs carry risks of design changes, funding issues, delays, and inaccurate cost estimates, potentially leading to low-margin or loss contracts. Offering new services also carries risks, with initial phases likely having low or negative margins[74][76] - Attracting and retaining executive talent and skilled machinists is challenging due to intense competition and wage inflation, which could materially adversely affect the business and financial condition[77][78] - The company is subject to strict governmental environmental regulations (federal, state, local) and FAA regulations, with non-compliance potentially resulting in substantial fines, remediation expenses, or disqualification from contracts[79][80][81] - Cybersecurity attacks, internal system failures, or unauthorized access to confidential data could harm the company's reputation, expose it to civil/criminal liability, disrupt production, and materially impact financial results. Despite increased investment, there is no assurance of sufficient protection[83][84] - An extensive and evolving regulatory landscape, including privacy, data governance, and cybersecurity laws, along with customer-imposed security requirements, could lead to significant fines, limitations on services, and reputational harm if not complied with[85] - Disruptive national or international events (e.g., public health crises, conflicts, banking crises) could significantly disrupt operations, impede inventory procurement, lead to shifts in product demand, and affect access to financing[87][88][89] - Geo-political tensions (e.g., Russia-Ukraine, Middle East, US-China) could alter supply chain reliance, disrupt raw material markets, and result in production delays or program cancellations[90][91] Risks Related to Our Indebtedness Total indebtedness was $23.311 million as of December 31, 2023, with refinancing risks and covenant non-compliance concerns - As of December 31, 2023, total indebtedness was approximately $23,311,000, with large portions requiring redemption or refinancing prior to December 30, 2025 (Current Credit Facility) and July 1, 2026 (Related Party Notes)[92] Key Indebtedness as of December 31, 2023 | Debt Type | Amount Outstanding | | :-------------------------- | :----------------- | | Current Credit Facility | $15,849,000 | | Subordinated Notes (Related Party) | $6,162,000 | | Finance Lease Obligations | $884,000 | | Vehicle Loan | $22,000 | | Solar Facility | $393,000 | - The average interest rate on the Current Credit Facility increased to 7.55% in 2023 from 4.50% in 2022, and may increase further if the Federal Reserve raises target rates[99] - The company was not in compliance with the required Fixed Charge Coverage Ratio (1.10x) as of March 31, 2024, despite meeting the 0.95x requirement as of December 31, 2023. Failure to obtain waivers or comply with future covenants could lead to increased interest rates or immediate repayment of outstanding debt, potentially resulting in insolvency[100][101][102] - Refinancing existing debt may require higher interest rates, more restrictive covenants, or the issuance of dilutive debt or equity securities, adversely affecting existing stockholders[97] Risks Related to our status as a public company and our common stock Risks include limited public market, high ownership concentration, stock price volatility, and internal control weaknesses - There is only a limited public market for the company's common stock, with limited trading volume, which may impair a stockholder's ability to sell shares and could lead to price declines[104][105] - Ownership of common stock is highly concentrated among related parties (two directors and their affiliates), who also hold subordinated notes. Their interests may conflict with other stockholders, potentially delaying or preventing a change in control[106] - The market price of the common stock is likely to be highly volatile due to factors such as operating results, covenant compliance, customer/program changes, management personnel, litigation, general economic factors, government budgeting, and disruptive national/international events[107][109] - Failure to meet NYSE American continued listing standards could result in delisting, impairing the ability to purchase or sell common stock and negatively affecting its price[110] - Future sales or issuances of common stock (e.g., upon conversion of notes, exercise of warrants/options, or as part of future financings/acquisitions) would be substantially dilutive to existing stockholders[113] - Operating as a public company incurs significant legal, accounting, and other compliance costs (e.g., Sarbanes-Oxley Act), requiring substantial management effort. These costs may increase with new regulations[114] - As of December 31, 2023, management concluded that internal control over financial reporting was not effective due to a material weakness identified in 2022 regarding appropriate segregation of duties and validation of data from certain financial IT systems. Remediation efforts are ongoing but not yet fully tested for effectiveness[116] Unresolved Staff Comments There are no unresolved staff comments - None[118] Cybersecurity The company regularly reviews its cybersecurity defenses with internal IT personnel and outside consultants, overseen by the Audit Committee - The company regularly reviews its cybersecurity defenses, relying on internal IT personnel and specialized outside security consultants. Measures include antivirus software, virtual private networks, email security, multi-factor authorization, software updates, mandatory employee training, review of third-party security procedures, and penetration testing[119][123] - Day-to-day management of cybersecurity threats is conducted by the IT department with outside service providers. Cybersecurity is reviewed quarterly by the Chief Executive Officer and Chief Financial Officer, who report to the Audit Committee of the Board of Directors[121][122] - The company is not aware of any weaknesses in its systems or malware embedded that are likely to materially affect operations[120] Properties The company operates two manufacturing facilities in the U.S.: an 81,000 sq ft leased facility and a 74,923 sq ft owned facility - The company leases an approximately 81,000 square foot manufacturing facility in Bay Shore, New York, which also serves as its corporate headquarters. The lease expires in September 2026[124] - The company owns a second 74,923 square foot manufacturing facility located in Barkhamsted, Connecticut[125] - A small warehouse is leased nearby in Bohemia, New York, with its lease term expiring in May 2025[124] Legal Proceedings The company is involved in an ongoing lawsuit with Contract Pharmacal Corp. since 2018 regarding a sublease, disputing claims - An action commenced on October 2, 2018, by Contract Pharmacal Corp. relates to a sublease, seeking damages initially over $1,000,000, later reduced to $700,000[126] - The company disputes the validity of the claims, believes it has a meritorious defense, and intends to contest them vigorously. The court has denied Contract Pharmacal's motions for summary judgment and to amend its complaint, which was upheld on appeal[126] - The company is not currently aware of any other legal proceedings whose ultimate outcome would have a material adverse effect on its business, financial condition, or operating results[127] Mine Safety Disclosures Not applicable - Not applicable[128] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock is listed on NYSE American, with 70 stockholders of record and 461,870 securities authorized under equity plans - The company's common stock is listed on the NYSE American under the symbol 'AIRI'[131] - As of April 11, 2024, there were 70 stockholders of record of the company's common stock[131] Securities Authorized for Issuance Under Equity Compensation Plans (as of Dec 31, 2023) | Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price Of Outstanding Options, Warrants and Rights | Number of Remaining Shares Available for Future Securities Issuance Under Equity Compensation Plans | | :------------------------------------------ | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 461,870 | $8.94 | 78,130 | | Equity compensation plans not approved by security holders | None | $0.00 | None | | Total | 461,870 | | 78,130 | - The company did not issue any unregistered equity securities during the fiscal year ended December 31, 2023, and no repurchases of common stock were made during the same period[133][134] Reserved This item is reserved and not required - Not required[135] Management's Discussion and Analysis of Financial Condition and Results of Operation This section provides management's perspective on financial condition and operating results for 2023 and 2022, including business overview, liquidity, and critical accounting estimates - This discussion covers the company's financial condition and results of operations for the years ended December 31, 2023 and 2022, and should be read in conjunction with the audited consolidated financial statements[136] - The discussion contains forward-looking statements that involve risks and uncertainties, and investors should consider the risk factors identified in the report[136] Business Overview Air Industries Group manufactures precision components for aerospace and defense, with strategic investments positioning it for growth and profitability in 2024 - Air Industries Group is a leading manufacturer of precision components and assemblies for large aerospace and defense contractors, with products used in mission-critical operations for the U.S. government, international governments, and commercial global airlines[137][138] - The company's net sales are generated across several high-profile platforms and programs, including the F-18 Hornet, E-2 Hawkeye, UH-60 Black Hawk Helicopters, Geared Turbo Engines, CH-53 Helicopter, F-35 Lighting II, and F-15 Eagle Tactical Fighter, often as the sole or single supplier[139] - Despite financial and operational challenges, the company made strategic investments in new capital equipment, tooling, and processes, and expanded sales and marketing efforts in fiscal 2023 to bolster its competitive position and cultivate new customer relationships[142] - With total unfilled contract values amounting to $191.9 million as of December 31, 2023, the company is confident in its ability to boost sales in 2024, attain profitability, and improve its financial position[143] Results of Operations Net sales decreased by 3.2% to $51.516 million in 2023, leading to a widened net loss of $2.131 million due to higher interest expense Selected Financial Information (Years Ended December 31, 2023 and 2022) | Metric | 2023 | 2022 | Change (2023 vs 2022) | % Change (2023 vs 2022) | | :-------------------------- | :----------- | :----------- | :-------------------- | :---------------------- | | Net sales | $51,516,000 | $53,238,000 | $(1,722,000) | -3.23% | | Cost of sales | $44,088,000 | $45,786,000 | $(1,698,000) | -3.71% | | Gross profit | $7,428,000 | $7,452,000 | $(24,000) | -0.32% | | Operating expenses | $7,723,000 | $7,646,000 | $77,000 | 1.01% | | Interest expense | $1,920,000 | $1,338,000 | $582,000 | 43.50% | | Other income, net | $84,000 | $139,000 | $(55,000) | -39.57% | | Gain on write-off of accounts payable | - | $317,000 | $(317,000) | -100.00% | | Net loss | $(2,131,000) | $(1,076,000) | $(1,055,000) | 98.05% | - The year-over-year decrease in net sales was primarily due to production delays associated with supply chain issues caused by one supplier failing to deliver raw materials for a key program, as well as overall changes in customer mix and production requirements[146] - Gross profit percentage increased to 14.4% in fiscal 2023 from 14.0% in 2022, attributable to changes in sales across major platforms, shifts in product mix, and overall operating efficiencies[149] - Operating expenses increased primarily due to higher professional fees and costs associated with the improvement of the information technology system and hardening cyber-security protection[150] - Interest expense increased by 43.5% due to an increase in the average interest rate on outstanding debt under the Current Credit Facility, which rose to 7.55% in 2023 from 4.50% in 2022[151] Composition of Net Sales by Customer (2023 vs 2022) | Customer | Percentage of Net Sales 2023 | Percentage of Net Sales 2022 | | :--------------- | :--------------------------- | :--------------------------- | | RTX | 27.3% | 40.6% | | Lockheed Martin | 24.7% | 21.4% | | Boeing | 12.2% | 0.0% | | United States Government | 3.6% | 14.3% | - Fiscal 2024 sales are expected to increase compared to 2023 levels, based on the significant easing of 2023 supply chain issues and expected delivery dates for products[148] Liquidity and Capital Resources The company had $15.849 million outstanding under its Current Credit Facility and $6.162 million in Related Party Notes as of December 31, 2023, facing going concern doubt due to covenant non-compliance - As of December 31, 2023, debt service requirements included $15,849,000 outstanding under the Current Credit Facility (maturing December 30, 2025) and approximately $6,162,000 in Related Party Notes (maturing July 1, 2026)[155] - The company achieved a Fixed Charge Coverage Ratio of 1.31x as of December 31, 2023, exceeding the required 0.95x. However, as of March 31, 2024, the company was not in compliance with the required ratio of 1.10x[153] - The potential failure to obtain a waiver for covenant non-compliance or to meet future covenants raises substantial doubt about the company's ability to continue as a going concern. Consequently, the term loan expiring December 30, 2025, has been classified as current debt[154][156] - The Current Credit Facility was amended multiple times in 2022 and 2023 to increase the Term Loan, establish a Capital Expenditure Line, waive defaults on the Fixed Charge Coverage Ratio, and revise covenant requirements[161][297] - As of December 31, 2023, the company had borrowing capacity of approximately $9,830,000 under the Revolving Loan (including $383,000 pursuant to the Capital Expenditure Line)[157][298] Cash Flow Operating cash flow significantly increased to $4.862 million in 2023, while cash used in financing activities shifted to $2.685 million Net Cash Flow Summary (Years Ended December 31, in thousands) | Activity | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Operating activities | $4,862 | $448 | | Investing activities | $(2,112) | $(2,361) | | Financing activities | $(2,685) | $1,567 | | Net increase (decrease) in cash | $65 | $(346) | | Cash at End of Year | $346 | $281 | - Cash flows from operations significantly increased in 2023, driven by a substantial reduction in working capital requirements, primarily from lower accounts receivable and inventory levels, and increased customer deposits[163][164] - Cash used in investing activities was primarily for new property and equipment, totaling $2,112,000 in 2023 and $2,361,000 in 2022, reflecting strategic investments to enhance competitiveness[165][166] - Cash used in financing activities in 2023 was $2,685,000, mainly due to a net reduction in Current Credit Facility borrowings ($2,921,000), partially offset by advances from the Solar Facility[167] Critical Accounting Estimates Key estimates include inventory valuation, impairment of long-lived assets, income taxes, and allowance for credit losses on accounts receivable - Critical accounting estimates include inventory valuation, useful lives and impairment of long-lived assets, income tax provision, and allowance for credit losses on accounts receivable[171][172] - Inventory is valued at the lower of cost or net realizable value, with periodic write-downs for excess quantities, slow-moving goods (no movement for two years), obsolescence, and other impairments[172] - Long-lived assets are reviewed for impairment when events indicate that the carrying value may not be realizable, requiring long-term forecasts of future revenues and costs, which involve significant judgment[172] - Income taxes are accounted for under the asset and liability method, requiring significant judgment in determining deferred tax assets and liabilities and any necessary valuation allowances. The allowance for credit losses on accounts receivable uses a forward-looking 'expected loss' model[172] Quantitative and Qualitative Disclosure About Market Risk No disclosure is required for this item - No disclosure is required in response to this Item[173] Financial Statements and Supplementary Data The consolidated financial statements required by this item begin on page F-1 (page 38 of the report) - The financial statements required by this item begin on page F-1[174] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[175] Controls and Procedures Disclosure controls and internal control over financial reporting were not effective as of December 31, 2023, due to an un-remediated material weakness - As of December 31, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were not effective[176] - Management assessed that internal controls over financial reporting were not effective as of December 31, 2023, due to a material weakness identified in 2022 that was not yet remediated because effectiveness testing had not been completed[182] - The material weakness identified in 2022 related to insufficient design and/or implementation of primary user access controls and program change management systems over key IT systems, and the inability to verify the effectiveness of a third-party IT vendor's control procedures (due to lack of a SOC 1 Report)[183] - New IT controls were implemented in the second half of fiscal 2023, requiring specific authorization and real-time monitoring for third-party vendor changes, but sufficient time for effectiveness testing had not yet passed as of December 31, 2023[184][186] Other Information No other information to disclose - None[187] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable - Not Applicable[187] PART III Directors, Executive Officers, and Corporate Governance Information required for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC - The information required by this Item is incorporated by reference from the definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the fiscal year[189] Executive Compensation Information required for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC - The information required by this Item is incorporated by reference from the definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the fiscal year[190] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by Item 403 of Regulation S-K is incorporated by reference from the definitive proxy statement to be filed with the SEC - The information required by Item 403 of Regulation S-K is incorporated by reference from the definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the fiscal year[191] Certain Relationships and Related Transactions and Director Independence Information required for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC - The information required by this Item is incorporated by reference from the definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the fiscal year[192] Principal Accountant Fees and Services Information required for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC - The information required by this Item is incorporated by reference from the definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the fiscal year[193] PART IV Exhibits and Financial Statement Schedules This item lists the exhibits and financial statement schedules filed as part of the report, including corporate documents, debt agreements, and certifications - The exhibits include Articles of Incorporation, Certificate of Amendment, Amended and Restated By-Laws, Description of Securities, Loan and Security Agreement and its amendments (First through Sixth Amendments with Sterling National Bank/Webster Bank), Equity Incentive Plans (2015, 2016, 2017, 2022), Code of Ethics, Subsidiaries list, Consent of Marcum LLP, Certifications of principal executive and financial officers, and various Inline XBRL documents[196][197][198] Consolidated Financial Statements This section presents the audited consolidated financial statements for 2023 and 2022, including the auditor's report and key financial statements Report of Independent Registered Public Accounting Firm Marcum LLP issued an opinion on the consolidated financial statements, highlighting a going concern uncertainty due to covenant non-compliance - Marcum LLP, the independent registered public accounting firm, issued an opinion stating that the consolidated financial statements for December 31, 2023 and 2022, present fairly, in all material respects, the financial position and results of operations in conformity with GAAP[205] - An explanatory paragraph highlights substantial doubt about the company's ability to continue as a going concern due to non-compliance with financial covenants of its current credit facility as of March 31, 2024, and the risk of the lender ceasing to make loans[206] - No critical audit matters were identified during the audit[210] Consolidated Balance Sheets Total assets decreased to $50.715 million in 2023, driven by reductions in accounts receivable and inventory, with a decrease in stockholders' equity Consolidated Balance Sheet Data (as of December 31) | Metric | 2023 | 2022 | Change | % Change | | :-------------------- | :----------- | :----------- | :----------- | :------- | | Cash | $346,000 | $281,000 | $65,000 | 23.13% | | Working capital | $12,117,000 | $18,600,000 | $(6,483,000) | -12.81% | | Total assets | $50,715,000 | $53,814,000 | $(3,098,000) | -5.76% | | Total stockholders' equity | $15,190,000 | $16,839,000 | $(1,649,000) | -9.79% | Selected Current Assets (as of December 31) | Current Asset | 2023 | 2022 | | :------------------------------------------------- | :----------- | :----------- | | Accounts Receivable, Net of Allowance for Credit Loss | $7,892,000 | $9,483,000 | | Inventory | $29,851,000 | $31,821,000 | | Total Current Assets | $38,719,000 | $42,216,000 | Selected Liabilities (as of December 31) | Liability | 2023 | 2022 | | :-------------------------------- | :----------- | :----------- | | Current Debt | $16,036,000 | $14,477,000 | | Accounts Payable and Accrued Expenses | $6,091,000 | $7,542,000 | | Customer Deposits | $3,557,000 | $781,000 | | Long Term Debt | $1,112,000 | $4,629,000 | | Subordinated Notes - Related Party | $6,162,000 | $6,162,000 | Consolidated Statements of Operations The company reported a net loss of $2.131 million in 2023, nearly double the prior year, due to decreased sales and higher interest expense Consolidated Statements of Operations (Years Ended December 31) | Metric | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Net Sales | $51,516,000 | $53,238,000 | | Cost of Sales | $44,088,000 | $45,786,000 | | Gross Profit | $7,428,000 | $7,452,000 | | Operating Expenses | $7,723,000 | $7,646,000 | | Loss from Operations | $(295,000) | $(194,000) | | Interest Expense | $(1,448,000) | $(851,000) | | Interest Expense - Related Parties | $(472,000) | $(487,000) | | Other Income, Net | $84,000 | $139,000 | | Gain on write-off of accounts payable | - | $317,000 | | Loss before Benefit From Income Taxes | $(2,131,000) | $(1,076,000) | | Provision for Income Taxes | - | - | | Net Loss | $(2,131,000) | $(1,076,000) | | Loss per share - Basic and diluted | $(0.65) | $(0.33) | | Weighted-Average Shares Outstanding - Basic and diluted | 3,278,513 | 3,227,116 | Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity decreased to $15.190 million in 2023 due to the net loss, partially offset by common stock issuances for fees and compensation Consolidated Statements of Changes in Stockholders' Equity (Years Ended December 31) | Item | 2023 Impact | 2022 Impact | | :-------------------------- | :---------- | :---------- | | Net Loss | $(2,131,000) | $(1,076,000) | | Common Stock issued for directors fees | $200,000 | $216,000 | | Stock-based-compensation-employees | $282,000 | $310,000 | | Balance, December 31 | $15,190,000 | $16,839,000 | - The number of common shares issued and outstanding increased from 3,247,937 at December 31, 2022, to 3,303,045 at December 31, 2023[218] Consolidated Statements of Cash Flows Operating cash flow significantly increased to $4.862 million in 2023, while financing activities shifted to a net use of $2.685 million Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Activity | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Operating activities | $4,862 | $448 | | Investing activities | $(2,112) | $(2,361) | | Financing activities | $(2,685) | $1,567 | | Net increase (decrease) in cash | $65 | $(346) | | Cash at End of Year | $346 | $281 | - The substantial increase in cash flows from operating activities in 2023 was driven by a significant reduction in working capital, primarily from lower accounts receivable and inventory levels, and increased customer deposits[163][164] - Cash used in investing activities was primarily for the purchase of property and equipment, amounting to $2,119,000 in 2023 and $2,361,000 in 2022[165][220] - Cash used in financing activities in 2023 was $2,685,000, mainly due to a net reduction in Current Credit Facility borrowings ($2,921,000), partially offset by advances from the Solar Facility[167][220] - Cash paid for interest was $1,913,000 in 2023, an increase from $1,295,000 in 2022[222] Notes to Consolidated Financial Statements This section provides detailed disclosures for the consolidated financial statements, covering accounting policies, debt, equity, and going concern status Note 1. ORGANIZATION AND BASIS OF PRESENTATION Air Industries Group is a Nevada corporation manufacturing precision assemblies for aerospace and defense, with going concern doubt due to covenant non-compliance - Air Industries Group (AIRI) is a Nevada corporation, and its consolidated financial statements include its wholly-owned subsidiaries: Air Industries Machining Corp. (AIM), Nassau Tool Works, Inc. (NTW), and Sterling Engineering Corporation (Sterling)[224] - The company is a leading manufacturer of precision assemblies and components for large aerospace and defense prime contractors, with products integral to high-profile platforms and programs for the U.S. Government, international governments, and commercial global airlines[225][226] - The financial statements are prepared in accordance with GAAP and report results as one integrated business segment, as all operations are integrated and share manufacturing facilities and sales/marketing functions[227][228] - Management has identified substantial doubt about the company's ability to continue as a going concern due to non-compliance with the Fixed Charge Coverage Ratio covenant as of March 31, 2024, and the reasonable possibility that a waiver will not be granted or future covenants may not be met, which could lead to the lender ceasing loans[232][234] - Management's plan to alleviate going concern doubt includes increasing net sales in fiscal 2024, supported by a $98.3 million backlog and anticipated additional funded orders, to generate sufficient cash flow for required principal payments[233] - A 1-for-10 reverse stock split was effective on October 18, 2022, with all share and per share amounts retroactively adjusted[236] Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines significant accounting policies including revenue recognition, inventory valuation, and impairment, noting no material effect from recent ASUs - The company's significant accounting policies include principles of consolidation, accounts receivable valuation (net of allowance for credit losses), inventory valuation (lower of cost or net realizable value), property and equipment depreciation, impairment of long-lived assets, and deferred financing costs[237][238][239][240][241][242] - Revenue is recognized at the point in time when the product has shipped and the customer obtains control, typically under fixed-price contracts[244][245][249] - Backlog represents the value of funded orders ($98.3 million as of December 31, 2023), with a substantial portion expected to be recognized as net sales over the next twenty-four months[254] - Key management estimates include inventory valuation, useful lives and impairment of long-lived assets, income tax provision, and the allowance for credit losses[255] Disaggregation of Revenue by Product (Years Ended December 31) | Product | 2023 | 2022 | | :-------- | :----------- | :----------- | | Military | $42,394,000 | $43,993,000 | | Commercial | $9,122,000 | $9,245,000 | | Total | $51,516,000 | $53,238,000 | - The company adopted ASU 2016-13 (Credit Losses) effective January 1, 2023, which did not have a material effect. ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024, is not expected to have a material impact[279][280] Note 3. ACCOUNTS RECEIVABLE Net accounts receivable decreased to $7.892 million in 2023, with the allowance for credit losses increasing to $344,000, and high customer concentration Accounts Receivable (as of December 31) | Metric | 2023 | 2022 | | :------------------------ | :----------- | :----------- | | Accounts Receivable Gross | $8,236,000 | $9,764,000 | | Allowance for Credit Losses | $(344,000) | $(281,000) | | Accounts Receivable Net | $7,892,000 | $9,483,000 | Allowance for Credit Losses Activity (Years Ended December 31) | Year | Balance at Beginning of Year | Charged to Costs and Expenses | Deductions from Reserves | Balance at End of Year | | :--- | :--------------------------- | :-------------------------- | :----------------------- | :--------------------- | | 2023 | $281,000 | $88,000 | $25,000 | $344,000 | | 2022 | $594,000 | $16,000 | $329,000 | $281,000 | Customer Concentration in Accounts Receivable (as of December 31) | Customer | Percentage of Net Receivables 2023 | Percentage of Net Receivables 2022 | | :--------------- | :--------------------------------- | :--------------------------------- | | RTX | 45.5% | 56.7% | | Boeing | 16.0% | 0.0% | | Lockheed Martin | 3.7% | 13.6% | Note 4. INVENTORY Total inventory decreased to $29.851 million in 2023, with raw materials and semi-finished goods increasing while work-in-progress decreased Inventory Components (as of December 31) | Component | 2023 | 2022 | | :------------------ | :----------- | :----------- | | Raw Materials | $5,213,000 | $4,198,000 | | Work In Progress | $13,502,000 | $20,488,000 | | Semi - Finished Goods | $12,590,000 | $9,642,000 | | Final – Finished Goods | $1,789,000 | $1,106,000 | | Reserve | $(3,243,000) | $(3,613,000) | | Total Inventory | $29,851,000 | $31,821,000 | Note 5. PROPERTY AND EQUIPMENT Net property and equipment decreased slightly to $8.048 million in 2023, with depreciation expense at $2.268 million Property and Equipment, Net (as of December 31) | Metric | 2023 | 2022 | | :------------------------ | :----------- | :----------- | | Total Property and Equipment | $43,567,000 | $41,500,000 | | Less: Accumulated Depreciation | $(35,519,000) | $(33,282,000) | | Property and Equipment, net | $8,048,000 | $8,218,000 | Depreciation Expense (Years Ended December 31) | Year | Amount | | :--- | :----------- | | 2023 | $2,268,000 | | 2022 | $2,522,000 | Note 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Total accounts payable and accrued expenses decreased to $6.091 million in 2023, primarily due to reductions in accounts payable and accrued payroll Accounts Payable and Accrued Expenses (as of December 31) | Component | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Accounts Payable | $5,461,000 | $6,442,000 | | Accrued Payroll | $373,000 | $674,000 | | Accrued Expenses – other | $257,000 | $426,000 | | Total | $6,091,000 | $7,542,000 | - During 2022, the company recognized a gain of approximately $317,000 from the write-off of aged accounts payable that were deemed no longer enforceable due to the statute of limitations[286] Note 7. SALE-LEASEBACK TRANSACTION The company completed a $6.2 million sale-leaseback of its Bay Shore property in 2006, with $105,000 unrecognized gain remaining as of 2023 - On October 24, 2006, the company consummated a sale-leaseback arrangement for its Bay Shore, New York property for $6,200,000, realizing a total gain on sale of $1,051,000[287] - The remaining unrecognized portion of the gain was $105,000 as of December 31, 2023, and $143,000 as of December 31, 2022, being recognized ratably over the 20-year lease term[287] - The lease for the Bay Shore property is a 20-year term expiring in September 2026, with an option to renew for an additional five years. The company is required to pay all operating costs associated with the facilities[288] Note 8. DEBT Total third-party indebtedness decreased to $17.148 million in 2023, with the Current Credit Facility term loan classified as short-term due to covenant non-compliance Indebtedness to Third Parties (as of December 31) | Debt Type | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Current Credit Facility – Revolving loan | $10,804,000 | $13,352,000 | | Current Credit Facility – Term loan | $5,045,000 | $5,396,000 | | Solar Credit Facility | $393,000 | - | | Finance lease obligations | $884,000 | $328,000 | | Loans Payable - financed assets | $22,000 | $30,000 | | Subtotal | $17,148,000 | $19,106,000 | | Less: Current portion | $(16,036,000) | $(14,477,000) | | Long-Term Portion | $1,112,000 | $4,629,000 | - The Current Credit Facility with Webster Bank expires on December 30, 2025, and includes a $20,000,000 revolving loan, a $5,000,000 term loan, and a $2,000,000 Equipment Line of Credit. As of December 31, 2023, $10,804,000 was outstanding under the Revolving Line of Credit and $5,045,000 under the Term Loan[290][293] - Due to non-compliance with a required covenant as of March 31, 2024, the entire term loan has been classified as short-term as of December 31, 2023[294] - The Solar Credit Facility, entered in August 2023, provided $393,233 in advances as of December 31, 2023, for solar energy systems. Upon project completion, it will convert to a 20-year term loan at 5.75% interest[299] - Finance lease obligations totaled $884,000 as of December 31, 2023, for manufacturing equipment, with an average imputed interest rate of 7.31%[300] Related Party Indebtedness (as of December 31, 2023) | Debt Type | Michael Taglich, Chairman | Robert Taglich, Director | Taglich Brothers, Inc. | Total | | :-------------------------- | :------------------------ | :----------------------- | :--------------------- | :----------- | | Convertible Subordinated Notes | $2,666,000 | $1,905,000 | $241,000 | $4,812,000 | | Subordinated Notes | $1,000,000 | $350,000 | - | $1,350,000 | | Total | $3,666,000 | $2,255,000 | $241,000 | $6,162,000 | - Related Party Notes are subordinate to the Current Credit Facility and mature on July 1, 2026. Interest expense for these notes was $472,000 in 2023[306][308] Note 9. OPERATING LEASE LIABILITIES Operating lease cost was $1.156 million in 2023, with a weighted average remaining lease term of 2.66 years and total long-term liabilities of $1.582 million Operating Lease Cost (Years Ended December 31) | Metric | 2023 | 2022 | | :---------------- | :----------- | :----------- | | Operating lease cost | $1,156,000 | $972,000 | Operating Lease Key Metrics (as of December 31) | Metric | 2023 | 2022 | | :---------------------------------- | :--------- | :--------- | | Weighted Average Remaining Lease Term | 2.66 years | 3.64 years | | Weighted Average Discount rate | 9.10% | 8.89% | Aggregate Undiscounted Operating Lease Payments (as of December 31, 2023) | Year Ending Dec 31 | Amount | | :----------------- | :----------- | | 2024 | $1,070,000 | | 2025 | $992,000 | | 2026 | $730,000 | | Total future minimum lease payments | $2,792,000 | - The total long-term portion of operating lease maturities was $1,582,000 as of December 31, 2023[310] Note 10. STOCKHOLDERS' EQUITY A 1-for-10 reverse stock split was effective October 18, 2022, and 55,108 shares were issued for directors' fees in 2023 - A 1-for-10 reverse stock split of common stock was effective on October 18, 2022, with all share and per share amounts retroactively adjusted[311] Common Stock Issued for Directors' Fees (Years Ended December 31) | Year | Shares Issued | Amount | | :--- | :------------ | :------- | | 2023 | 55,108 | $200,000 | | 2022 | 27,849 | $216,000 | - During the first quarter of 2024, the company issued an additional 12,323 shares of common stock in payment of directors' fees totaling $38,000[313] Note 11. EMPLOYEE BENEFITS PLANS The company provides employee benefits through union agreements and a co-employment agreement with Insperity, including defined contribution plans - The AIM subsidiary has a collective bargaining agreement with the United Service Workers, IUJAT, Local 355, effective until December 31, 2024. The company is obligated to make contributions to the Union's United Welfare Fund and the United Services Worker's Security Fund (a defined contribution plan)[315] Contributions to Union Security Fund (Years Ended December 31) | Year | Amount | | :--- | :----------- | | 2023 | $147,000 | | 2022 | $155,000 | - All employees, including union members, are covered under a co-employment agreement with Insperity Services, Inc., a professional employer organization that provides outsourced human resource services and medical benefits[316][317] - The company offers defined contribution plans under Section 401(k) of the Internal Revenue Code, but it does not match any employee contributions[317] Note 12. COMMITMENTS AND CONTINGENCIES The company is involved in an ongoing lawsuit with Contract Pharmacal Corp. since 2018, disputing claims for damages reduced to $700,000 - The company is involved in an ongoing lawsuit with Contract Pharmacal Corp. since October 2, 2018, relating to a sublease, where Contract Pharmacal sought damages, which were later reduced to $700,000[318] - The company disputes the validity of the claims, believes it has a meritorious defense, and intends to contest them vigorously. Motions for summary judgment and to amend the complaint by Contract Pharmacal have been denied and upheld on appeal[318] - The company is not currently aware of any other legal proceedings that, in its judgment, would have a material adverse effect on its business, financial condition, or operating results[320] Note 13. INCOME TAXES The company reported no income tax provision in 2023 or 2022, with a full valuation allowance of $7.903 million against deferred tax assets due to net losses Provision for Income Taxes (Years Ended December 31) | Type | 2023 | 2022 | | :----- | :--- | :--- | | Federal | $ - | $ - | | State | $ - | $ - | | Total | $ - | $ - | - The company accounts for income taxes using the asset and liability method, recognizing deferred tax liabilities and assets based on temporary differences between financial statement carrying amounts and tax bases[263] Net Deferred Tax Assets (as of December 31) | Component | 2023 | 2022 | | :------------------------------------------ | :----------- | :----------- | | Total deferred tax asset, before valuation allowance | $9,431,000 | $9,905,000 | | Valuation allowance | $(7,903,000) | $(7,701,000) | | Total deferred tax asset, net of valuation allowance | $1,528,000 | $2,204,000 | | Deferred tax liabilities | $(1,528,000) | $(2,204,000) | | Net deferred tax asset | $0 | $0 | - A full valuation allowance of $7,903,000 was recorded as of December 31, 2023, due to a recent history of