UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended:
or
For the transition period from ______ to_______
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act
| Title of Each Class | Trading Symbol(s) | Name of each Exchange on which Registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ☐ | |
| Accelerated Filer ☐ | Smaller Reporting Company |
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
There were
INDEX
| Page No. | |||
| PART I. | FINANCIAL INFORMATION | 1 | |
| Item 1. | Financial Statements | 2 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
| Item 4. | Controls and Procedures | 29 | |
| PART II. | OTHER INFORMATION | 30 | |
| Item 1A. | Risk Factors | 30 | |
| Item 6. | Exhibits | 30 | |
| SIGNATURES | 31 | ||
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. Forward-looking statements are predictive in nature and can be identified by the fact that they do not relate strictly to historical or current facts and generally include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions. Certain of the matters discussed herein concerning, among other items, our operations, cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and the effect of economic conditions, include forward-looking statements.
These statements and other projections contained herein expressing opinions about future outcomes and non-historical information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved. Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given these uncertainties, you should not place any reliance on these forward-looking statements which speak only as of the date hereof. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and elsewhere in this report and the risks discussed in our other filings with the Securities Exchange Commission.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under the securities laws of the United States.
ii
PART I
FINANCIAL INFORMATION
1
ITEM 1. FINANCIAL STATEMENTS
AIR INDUSTRIES GROUP
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable, Net of Allowance for Credit Losses of $ | ||||||||
| Inventory | ||||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Contract Costs Receivable | ||||||||
| Prepaid Taxes | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, Net | ||||||||
| Finance Lease Right-Of-Use-Assets | ||||||||
| Operating Lease Right-Of-Use-Assets | ||||||||
| Deferred Financing Costs, Net, Deposits and Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Debt | $ | $ | ||||||
| Accounts Payable and Accrued Expenses | ||||||||
| Operating Lease Liabilities | ||||||||
| Deferred Gain on Sale - Leaseback | ||||||||
| Customer Deposits | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Debt | ||||||||
| Subordinated Notes - Related Party | ||||||||
| Operating Lease Liabilities | ||||||||
| Deferred Gain on Sale - Leaseback | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (see Note 8) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock - par value $ | ||||||||
| Common Stock - Par Value $ | ||||||||
| Additional Paid-In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements.
2
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest Expense - Related Parties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income, Net | ||||||||||||||||
| Loss before Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for Income Taxes | ||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share - Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share - Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Shares Outstanding - Basic | ||||||||||||||||
| Weighted Average Shares Outstanding - Diluted | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2024 and 2023
(Unaudited)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance January 1, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock issued to directors | ||||||||||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock issued to directors | ||||||||||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Exercise of Stock Options | ||||||||||||||||||||
| Net Income | - | |||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock issued to directors | ||||||||||||||||||||
| Stock-Based Compensation | ||||||||||||||||||||
| Exercise of Stock Options | - | |||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | |||||||||||||||
| Common Stock issued to directors | ||||||||||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock issued to directors | ||||||||||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock issued to directors | ||||||||||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
4
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities | ||||||||
| Depreciation of property and equipment | ||||||||
| Stock-based compensation | ||||||||
| Amortization of Finance Lease Right-of-Use Assets | ||||||||
| Amortization of Operating Lease Right-of-Use Assets | ||||||||
| Deferred gain on sale - leaseback | ( | ) | ( | ) | ||||
| Gain on sale of equipment | ( | ) | ||||||
| Changes in allowance for credit losses | ( | ) | ||||||
| Amortization of deferred financing costs | ||||||||
| Changes in Operating Assets and Liabilities | ||||||||
| (Increase) Decrease in Operating Assets: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Prepaid taxes | ( | ) | - | |||||
| Deposits and other assets | ( | ) | ||||||
| Increase (Decrease) in Operating Liabilities: | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Customer deposits | ( | ) | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of equipment | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Note payable - revolver - net - Current Credit Facility | ( | ) | ||||||
| Proceeds from term loan - Current Credit Facility | ||||||||
| Proceeds from term loan - CT Green Bank | ||||||||
| Payments of term loan - Current Credit Facility | ( | ) | ( | ) | ||||
| Payments of deferred financing costs | ( | ) | ||||||
| Payments of finance lease obligations | ( | ) | ( | ) | ||||
| Payments of loan payable - financed asset | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH AT BEGINNING OF PERIOD | ||||||||
| CASH AT END OF PERIOD | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements.
5
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, (Continued)
(Unaudited)
| 2024 | 2023 | |||||||
| Supplemental cash flow information | ||||||||
| Cash paid during the nine month period for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Acquisition of financed lease asset | $ | $ | ||||||
| Financing from Solar Credit Facility directly to contractor | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements.
6
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Air Industries Group is a Nevada corporation (“AIRI”). The accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”) (together, the “Company”).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on April 15, 2024, from which the accompanying condensed consolidated balance sheet dated December 31, 2023 was derived.
Going Concern and Management’s Plan
At each reporting period, management evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. The Company is required to make certain additional disclosures if management concludes substantial doubt exists about the Company’s ability to continue as a going concern provided that such doubt is not alleviated by the Company’s plans or when the Company’s plans do not alleviate substantial doubt about its ability to continue as a going concern. This evaluation entails analyzing prospective operating budgets and forecasts for expectations regarding cash needs and comparing those needs to the current cash balance and expectations regarding cash to be generated over the following year.
For the nine months ended September 30, 2024,
the Company generated $
Management’s plans expect net sales to increase
in fiscal 2024 as compared to fiscal 2023 with increasing amounts into fiscal 2025 and thereafter. The Company believes that these plans
are supported by the Company’s existing backlog, which increased from $
7
The Company obtained a waiver of the requirement
to meet the Fixed Coverage Charge Ratio at March 31, 2024, and met its covenants as of both June 30 and September 30, 2024. Nevertheless,
the Company may fail to achieve the required covenants in the future. Therefore, the Company classified the term loan that expires on
The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable
Accounts receivable are carried at the original invoice amount less an estimate made for credit losses based on a review of all outstanding amounts on a quarterly basis. Management determines the allowance for credit losses by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, current economic conditions and other relevant factors, including specific reserves for certain accounts. Accounts receivable are written off when deemed uncollectible. Bad debt expenses are recorded in operating expenses on the condensed consolidated statements of operations.
| Balance at | Deductions | Balance at | ||||||||||||||
| Beginning of | Charged to | from the | End of | |||||||||||||
| Period | Expenses | Allowance | Period | |||||||||||||
| Nine Months ended September 30, 2024 Allowance for Credit Losses | $ | $ | $ | ( | ) | $ | ||||||||||
| Nine Months ended September 30, 2023 Allowance for Credit Losses | $ | $ | $ | $ | ||||||||||||
Inventory Valuation
The Company values inventory at the lower of cost or an estimated net realizable value. The Company periodically evaluates inventory items not secured by backlog and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods, obsolescence and for other impairments of value.
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Raw Materials | $ | $ | ||||||
| Work In Progress | ||||||||
| Semi-Finished Goods | ||||||||
| Final-Finished Goods | ||||||||
| Total Inventory | $ | $ | ||||||
8
Credit and Concentration Risks
A large percentage of the Company’s revenues are derived directly from large aerospace and defense prime contractors for which the ultimate end-user is the U.S. Government, other governments, or commercial airlines.
| Percentage of Net Sales | ||||||||
| Customer | 2024 | 2023 | ||||||
| RTX (a) | % | % | ||||||
| Lockheed | % | % | ||||||
| Northrop | % | |||||||
| Boeing | % | |||||||
| (a) |
| Percentage of Net Sales | ||||||||
| Customer | 2024 | 2023 | ||||||
| RTX (a) | % | % | ||||||
| Lockheed | % | % | ||||||
| Northrop | % | % | ||||||
| Ruag | % | % | ||||||
| Boeing | % | % | ||||||
| (a) | RTX includes Collins Landing Systems and Collins Aerostructures |
| Percentage of Net Receivables | ||||||||
| September 30, | December 31, | |||||||
| Customer | 2024 | 2023 | ||||||
| RTX (a) | % | % | ||||||
| Lockheed | % | % | ||||||
| Northrop | % | % | ||||||
| Boeing | % | |||||||
| (a) |
Disaggregation of Revenue
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Product | September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||
| Military | $ | $ | $ | $ | ||||||||||||
| Commercial | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
9
Cash
During the period ended September 30, 2024, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts.
Major Suppliers
The Company utilizes sole-source suppliers to supply raw materials or other parts used in production. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, the Company’s business would be severely harmed.
Customer Deposits
The Company receives advance payments on certain contracts with the remainder of the contract balance due upon shipment of the final product once the customer inspects and approves the product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s invoice.
At September 30, 2024 and December 31, 2023, customer
deposits were $
Backlog
Backlog represents the value of orders received
pursuant to our Long-Term Agreements (“LTA”) or spot orders pursuant to a purchase order. As of September 30, 2024, backlog
relating to remaining performance obligations on contracts was approximately $
Contract Costs Receivable
Contract costs receivable represent costs to be
reimbursed from a terminated contract. The Company expects to collect the receivable in the next twelve months. Contract costs receivable
totals $
Earnings (Loss) per share
Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.
For purposes of calculating diluted earnings (loss) per common share, the numerator includes net income (loss) plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options, restricted units and warrants using the treasury stock method and convertible notes payable using the if-converted method.
10
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock Options | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock Options | ||||||||||||||||
| Restricted Stock Units | ||||||||||||||||
| Convertible notes payable | ||||||||||||||||
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of
the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the
fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing
reported market value. Stock-based compensation expense for employees amounted to $
Recently Issued Accounting Pronouncements
In November 2023, Financial Accounting Standards Board (“FASB) issued Accounting Standards Updated (“ASU”) 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within the reported measure(s) of a segment’s profit or loss, the amount and composition of any other segment items, the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment’s profit or loss to assess performance and decide how to allocate resources. The amendments in this update are effective for fiscal years beginning after December 15, 2023. The adoption of this pronouncement is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, related to improvements to income tax disclosures. The amendments in this update require enhanced jurisdictional and other disaggregated disclosures for the effective tax rate reconciliation and income taxes paid. The amendments in this update are effective for fiscal years beginning after December 15, 2024. The adoption of this pronouncement is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures” to require more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation, amortization, and depletion) included in certain expense captions presented on the face of the income statement. This ASU is effective for fiscal years beginning after December 15, 2026 and for interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments may be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of this ASU or (2) retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements and related disclosures. The adoption of this pronouncement is not expected to have a material impact on the Company’s condensed consolidated financial statements.
11
The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.
Note 3. PROPERTY AND EQUIPMENT
| September 30, | December 31, | |||||||||||
| 2024 | 2023 | |||||||||||
| Land | $ | $ | ||||||||||
| Buildings and Improvements | ||||||||||||
| Machinery and Equipment | ||||||||||||
| Tools and Instruments | ||||||||||||
| Automotive Equipment | ||||||||||||
| Furniture and Fixtures | ||||||||||||
| Leasehold Improvements | ||||||||||||
| Computers and Software | ||||||||||||
| Total Property and Equipment | ||||||||||||
| Less: Accumulated Depreciation | ( | ) | ( | ) | ||||||||
| Property and Equipment, net | $ | $ | ||||||||||
Depreciation expense for the three months ended
September 30, 2024 and 2023 was $
Note 4. OPERATING LEASE LIABILITIES
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease cost: | $ | $ | $ | $ | ||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
| Other Information | ||||||||||||||||
| Cash paid for amounts included in the measurement lease liability: | ||||||||||||||||
| Operating cash flow from operating leases | $ | $ | $ | $ | ||||||||||||
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Weighted Average Remaining Lease Term - in years | ||||||||
| Weighted Average discount rate - % | % | % | ||||||
12
| Amount | ||||
| December 31, 2024 (remainder of year) | $ | |||
| December 31, 2025 | ||||
| December 31, 2026 | ||||
| Total future minimum lease payments | ||||
| Less: discount | ( | ) | ||
| Total operating lease maturities | ||||
| Less: current portion of operating lease liabilities | ( | ) | ||
Total long-term portion of operating lease maturities | $ | |||
Note 5. DEBT
Total debt outstanding as of September 30, 2024
is $
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Current Credit Facility - Revolver | $ | $ | ||||||
| Current Credit Facility - Term Loan | ||||||||
| Solar Credit Facility | ||||||||
| Finance lease obligations | ||||||||
| Loans Payable - financed assets | ||||||||
| Subtotal | ||||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| Long-Term Portion | $ | $ | ||||||
Current Credit Facility
The Company has a credit facility (“Current
Credit Facility”) with Webster Bank that expires on
As discussed in Note 1, the Company was in compliance with a required covenant as of September 30, 2024. However, there is no assurance that the Company will be able to meet its financial covenants in one of the upcoming fiscal quarters over the next twelve months, therefore, in accordance with the guidance in ASC 470-10-45, related to the classification of callable debt, the entire term loan has been classified as short term as of September 30, 2024.
| For the year ending | Amount | |||
| December 31, 2024 (remainder of year) | $ | |||
| December 31, 2025 | ||||
| Term Loan payable | ||||
| Less: debt issuance costs | ( | ) | ||
| Total Term Loan payable, net of debt issuance costs | ||||
| Less: Current portion of Term Loan payable | ( | ) | ||
| Total long-term portion of Term Loan payable | $ | |||
13
Interest expense related to the Current Credit
Facility amounted to approximately $
The below summarizes various terms of the Current Credit Facility (all of which are described in full in various SEC filings):
| ● | The Company is required to achieve a defined
EBITDA amount at the end of each Fiscal Quarter on a rolling basis. As of September 30, 2024, the Company achieved an EBITDA of $ |
| ● | For so long as the Term Loan remains outstanding,
if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay an amount equal to the lesser of (i) twenty-five
percent ( |
| ● | Both the Revolving Line of Credit and the Term
Loan will bear an interest rate equal to the greater of |
| ● | The Current Credit Facility limits the amount of capital expenditures and dividends the Company can pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral. |
The below summarizes certain historical amendments to the Current Credit Facility
| ● | On August 4, 2023, the Company entered into a
Fifth Amendment that waived a default caused by the failure by the Company to meet the required Fixed Charge Coverage Ratio for the fiscal
quarter ended March 31, 2023. Additionally, the amendment provided for a revised Fixed Charge Ratio for the fiscal quarters ending June
30, 2023, and September 30, 2023, and increased the amount of purchase money secured debt (such as finance leases) the Company is allowed
to have outstanding at any time to $ |
| ● | On November 20, 2023, the Company entered into
a Sixth Amendment that waived defaults caused by the Company’s failure to achieve the required Fixed Charge Coverage Ratio of the
Fifth Amendment and because we made capital expenditures (as defined) in excess of permitted amounts. This amendment further revised the
Fixed Charge Coverage Ratio by requiring it to be calculated on a rolling period basis and not be less than, (a) |
14
All amendment fees paid in connection with the Current Credit Facility that are for a future benefit of the Company are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying consolidated balance sheets and are amortized over the term of the loan.
As of September 30, 2024, the amount outstanding
under the Company’s Revolving Line of Credit was $
Solar Credit Facility
On August 16, 2023, the Company entered into a financing agreement
(“Solar Credit Facility”) with CT Green Bank, a quasi-public agency of the State of Connecticut, for the installation of solar
energy systems including replacing the existing roof (“Project”) at its Sterling facility. Advances are made by CT Green Bank
upon its approval of costs incurred on the Project up to $
On October 1, 2024, final disbursements were made on the financing
arrangement in the amount of $
Interest expense related to the Solar Credit Facility amounted to approximately
$
Finance Lease Obligations
The Company has entered into finance leases for
the purchase of additional manufacturing equipment.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Finance Lease cost: | ||||||||||||||||
| Amortization of Right-of-Use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total lease Costs | $ | $ | $ | $ | ||||||||||||
| Other Information: | ||||||||||||||||
| Cash Paid for amounts included in the measurement lease liabilities: | ||||||||||||||||
| Financing cash flow from finance lease obligations | $ | $ | $ | $ | ||||||||||||
| Supplemental disclosure of non-cash activity | ||||||||||||||||
| Acquisition of finance lease asset | $ | $ | $ | $ | ||||||||||||
15
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Weighted Average Remaining Lease Term - in years | ||||||||
| Weighted Average Discount rate - % | % | % | ||||||
| For the year ending | Amount | |||
| December 31, 2024 (remainder of year) | $ | |||
| December 31, 2025 | ||||
| December 31, 2026 | ||||
| December 31, 2027 | ||||
| December 31, 2028 | ||||
| Thereafter | ||||
| Total future minimum finance lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Less: Current portion | ( | ) | ||
| Long-term portion | $ | |||
Loan Payable – Financed Asset
The Company financed the purchase of a delivery
vehicle in July 2020. The loan obligation totaled $
| For the year ending | Amount | |||
| December 31, 2024 (remainder of year) | $ | |||
| December 31, 2025 | ||||
| December 31, 2026 | ||||
| Loans Payable - financed assets | ||||
| Less: Current portion | ( | ) | ||
| Long-term portion | $ | |||
Related Party Subordinated Notes Payable
Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich. Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received cash and equity compensation for their services.
From 2016 through 2020, the Company entered into
various subordinated notes payable and convertible subordinated notes payable (together referred to as “Related Party Notes”)
with Michael and Robert Taglich which generated proceeds to the Company totaling $
16
| Michael Taglich, Chairman | Robert Taglich, Director | Taglich Brothers, Inc. | Total | |||||||||||||
| Convertible Subordinated Notes | $ | $ | $ | $ | ||||||||||||
| Subordinated Notes | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Of the $
Approximately $
The Related Party Notes are subordinate to outstanding debt pursuant
to the Current Credit Facility and mature on July 1, 2026. The Company is allowed, subject to certain limitation, to make principal payments
of $
For the three and nine months ended September 30, 2024 and 2023, no principal payments have been made on these notes.
Note 6. STOCKHOLDERS’ EQUITY
Common Stock – Issuance of Securities
The Company issued
The Company issued
During the fourth quarter of 2024, the Company
issued
Note 7. STOCK OPTIONS AND RESTRICTED STOCK UNITS
Stock-Based Compensation
Stock Options
In September 2024, the shareholders of the Company
approved the amendment to the 2022 Equity Incentive Plan (“2022 Plan”) to increase the number of shares authorized to be used
under the plan by
In September 2023, the shareholders of the Company
approved the amendment to the 2022 Equity Incentive Plan (“2022 Plan”) to increase the number of shares authorized to be issued
under the plan by
17
During the three and nine months ended September
30, 2024, the Company granted options to purchase
The Company recorded stock-based compensation expense
for certain employees and members of the Company’s Board of Directors of $
| 2024 | 2023 | |||||||
| Risk-free interest rates | % | % | ||||||
| Expected life (in years) | ||||||||
| Expected volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
| Weighted-average grant date fair value per share | $ | $ | ||||||
The expected life is the number of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture. Expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin No. 107. In addition to the inputs referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based on the Company’s experience.
| Options | Wtd. Avg. Exercise Price | |||||||
| Balance, January 1, 2023 | $ | |||||||
| Granted during the period | ||||||||
| Exercised during the period | ||||||||
| Terminated/Expired during the period | ( | ) | ||||||
| Balance, December 31, 2023 | $ | |||||||
| Granted during the period | ||||||||
| Exercised during the period | ( | ) | ||||||
| Terminated/Expired during the period | ( | ) | ||||||
| Balance, September 30, 2024 | $ | |||||||
| Exercisable at September 30, 2024 | $ | |||||||
Issuance of Stock Options
Issued in 2024
On August 13, 2024, the Company granted to its
directors, stock options to purchase an aggregate of
18
Issued in 2023
On May 23, 2023, the Company granted options to
its directors and certain members of management and employees, stock options to purchase an aggregate of
On June 2, 2023, the Company granted to its directors,
stock options to purchase an aggregate of
On June 2, 2023, the Company granted to certain
members of management and employees, stock options to purchase an aggregate of
| Range of Exercise Price | Number Outstanding | Wtd. Avg, Life | Wtd. Avg. Exercise Price | |||||||
| $3.46 - $15.60 | $ | |||||||||
| Range of Exercise Price | Number Exercisable | Wtd. Avg, Life | Wtd. Avg. Exercise Price | |||||||
| $3.46 - $15.60 | $ | |||||||||
As of September 30, 2024, there was $
The aggregate intrinsic value at September 30,
2024 was based on the Company’s closing stock price of $
The weighted average fair value of options granted
during the periods ending September 30, 2024 and 2023 was $
19
Restricted Stock Units (“RSUs”)
During the three and nine months ended September
30, 2024 and 2023, the Company granted
| Number of Units | Wtd. Avg. Grant Date Fair Value per Unit | |||||||
| Unvested units as of January 1, 2024 | $ | |||||||
| Granted during the period | ||||||||
| Vested during the period | ||||||||
| Forfeited During the period | ||||||||
| Unvested Units as of September 30, 2024 | $ | |||||||
| Vested as of September 30, 2024 | $ | |||||||
The Company recorded stock-based compensation expense of $
As of September 30, 2024, there was $
20
Note 8. COMMITMENTS AND CONTINGENCIES
On October 2, 2018, Contract Pharmacal Corp. (“Contract
Pharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with
respect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York.
In the action, Contract Pharmacal sought damages for an amount in excess of $
From time to time the Company may be engaged in various lawsuits and legal proceedings in the ordinary course of business. The Company is currently not aware of any legal proceedings the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its business, financial condition or operating results. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse to our interest.
Note 9. INCOME TAXES
The Company recorded income tax expense for
the three and nine months ended September 30, 2024 and 2023 because the estimated annual effective tax rate was
As of September 30, 2024, and December 31, 2023, the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2023 (the “2023 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report and our 2023 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements.
Business Overview
We believe we are one of the leading manufacturers of precision components and assemblies for large aerospace and defense contractors. Our rich history dates to 1941, producing parts for World War II fighter aircraft. Since then, we have maintained an impeccable record with no known incidents of part failure leading to a fatal mission. We became a public company in 2005.
Our products include landing gear, flight controls, engine mounts and components for aircraft jet engines and ground turbines and other complex machines. The ultimate end-user for most of our products is the U.S. government, foreign governments, and commercial global airlines. Whether it is a small individual component for assembly by others or complete assemblies we manufacture ourselves, our high quality and extremely reliable products are used in mission critical operations that are essential for safety of military personnel and civilians.
Although our net sales are concentrated amongst a number of defense and aerospace prime contractors, we have cultivated long-standing relationships with a number of their subsidiaries and/or business units. Additionally, our net sales are generated across several high-profile platforms and programs including: the F-18 Hornet, the E-2 Hawkeye, the UH-60 Black Hawk Helicopters, Geared Turbo Engines (used on smaller aircraft such as the Airbus A220 and Embraer E2), the CH-53 Helicopter, the F-35 Lighting II and the F-15 Eagle Tactical Fighter. In many cases, we are the sole or single supplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment to us.
Winning a new contract award is highly competitive. Our ability to win new contract awards generally requires us to deliver superior quality products, more quickly and with lower pricing than our competitors. Accordingly, we must continually invest in process improvements and capital equipment. Recent investments in new equipment have improved the productive capacity of our employees, increased our efficiency and speed, and expanded the size of products we can manufacture. We strategically operate two state-of-the-art manufacturing centers in the U.S. This allows for rigorous oversight of production and the adherence to stringent quality standards. Although there is currently a shortage of skilled workers, we maintain a highly trained and close knit team of over 180 professionals committed to driving excellence and precision in every aspect of our operations.
Our period-to-period net sales and operating results are significantly impacted by timing. In addition, our gross profit is affected by a variety of factors, including the mix and complexity of products, production efficiencies, price competition and general business operating environments. In some cases, our gross profit is impacted by our ability to deliver replacement parts on short notice. Our operations have a large percentage of fixed factory overhead. As a result, our profit margins are highly variable with sales volumes.
For the past several years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes to bolster our competitive position. Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships with existing customers and cultivating new ones. Fiscal 2023 marked a year of overall progress and positioning for growth. During the first nine months of 2024 and looking forward, our business strategy is geared towards achieving sustainable and profitable business growth. We are firmly focused on securing new contract awards, improving operations and successful execution.
With total unfilled contract values amounting to $175.7 million (including our $105.2 million in backlog and all potential orders against LTA agreements previously awarded to us), as of September 30, 2024, we are confident in our ability to boost sales during the remainder of 2024, attain profitability and improve our financial position.
22
RESULTS OF OPERATIONS
Selected Financial Information:
| Three Months Ending September 30, 2024 | 2024 Percentage of Net Sales | Three Months Ending September 30, 2023 | 2023 Percentage of Net Sales | Change 2024 vs 2023 | Percent Change 2024 vs 2023 | |||||||||||||||||||
| Net sales | $ | 12,555,000 | 100.0 | % | $ | 12,293,000 | 100.0 | % | $ | 262,000 | 2.1 | % | ||||||||||||
| Cost of sales | 10,614,000 | 84.5 | % | 11,065,000 | 90.0 | % | (451,000 | ) | -4.1 | % | ||||||||||||||
| Gross profit | 1,941,000 | 15.5 | % | 1,228,000 | 10.0 | % | 713,000 | 58.1 | % | |||||||||||||||
| Operating expenses | 1,874,000 | 14.9 | % | 2,024,000 | 16.5 | % | (150,000 | ) | -7.4 | % | ||||||||||||||
| Interest expense | 482,000 | 3.8 | % | 516,000 | 4.2 | % | (34,000 | ) | -6.6 | % | ||||||||||||||
| Other income, net | 11,000 | 0.1 | % | 13,000 | 0.1 | % | (2,000 | ) | -15.4 | % | ||||||||||||||
| Provision for income taxes | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||
| Net loss | $ | (404,000 | ) | -3.2 | % | $ | (1,299,000 | ) | -10.6 | % | $ | 895,000 | -68.9 | % | ||||||||||
| Nine Months Ending September 30, 2024 | 2024 Percentage of Net Sales | Nine Months Ending September 30, 2023 | 2023 Percentage of Net Sales | Change 2024 vs 2023 | Percent Change 2024 vs 2023 | |||||||||||||||||||
| Net sales | $ | 40,188,000 | 100.0 | % | $ | 38,047,000 | 100.0 | % | $ | 2,141,000 | 5.6 | % | ||||||||||||
| Cost of sales | 33,697,000 | 83.8 | % | 32,769,000 | 86.1 | % | 928,000 | 2.8 | % | |||||||||||||||
| Gross profit | 6,491,000 | 16.2 | % | 5,278,000 | 13.9 | % | 1,213,000 | 23.0 | % | |||||||||||||||
| Operating expenses | 5,931,000 | 14.8 | % | 6,160,000 | 16.2 | % | (229,000 | ) | -3.7 | % | ||||||||||||||
| Interest expense | 1,418,000 | 3.5 | % | 1,472,000 | 3.9 | % | (54,000 | ) | -3.7 | % | ||||||||||||||
| Other income, net | 46,000 | 0.1 | % | 42,000 | 0.1 | % | 4,000 | 9.5 | % | |||||||||||||||
| Provision for income taxes | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||
| Net loss | $ | (812,000 | ) | -2.0 | % | $ | (2,312,000 | ) | -6.1 | % | $ | 1,500,000 | -64.9 | % | ||||||||||
Balance Sheet Data:
| September 30, | December 31, | Percent | ||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Cash | $ | 186,000 | $ | 346,000 | (160,000 | ) | -46.2 | % | ||||||||
| Working capital | $ | 11,807,000 | $ | 12,117,000 | (310,000 | ) | -2.6 | % | ||||||||
| Total assets | $ | 50,365,000 | $ | 50,715,000 | (350,000 | ) | -0.7 | % | ||||||||
| Total stockholders’ equity | $ | 14,680,000 | $ | 15,190,000 | (510,000 | ) | -3.4 | % | ||||||||
Results of Operations for the three months ended September 30, 2024
Net Sales: Net sales for the three months ended September 30, 2024 were $12,555,000, an increase of $262,000, or 2.1%, compared with $12,293,000 that we achieved in the three months ended September 30, 2023. The period-over-period increase in net sales was primarily due to overall changes in the mix of products requested by customers, which are discussed further below.
23
The composition of customers that exceeded 10% of our net sales for 2024 and 2023 are shown below:
| Percentage of Net Sales | ||||||||
| Customer | 2024 | 2023 | ||||||
| RTX (a) | 27.8 | % | 20.1 | % | ||||
| Lockheed | 23.9 | % | 31.9 | % | ||||
| Northrop | 18.3 | % | - | |||||
| Boeing | - | 18.0 | % | |||||
| (a) | RTX includes Collins Landing Systems and Collins Aerostructures |
The composition of our net sales by platform or program profiles for the three months ended September 30, 2024 and 2023 are shown below:
| Percentage of Net Sales | ||||||||
| Platform or Program | 2024 | 2023 | ||||||
| GTF | 27.2 | % | 10.9 | % | ||||
| E2-D Hawkeye | 24.5 | % | 9.6 | % | ||||
| UH-60 Black Hawk Helicopter | 21.2 | % | 22.8 | % | ||||
| CH-53 Helicopter | 5.8 | % | 6.5 | % | ||||
| F-35 Lightning II | 2.0 | % | 3.5 | % | ||||
| F-18 Hornet | 1.5 | % | 31.7 | % | ||||
| All other platforms | 17.8 | % | 15.0 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
Period-to-period changes in customer mix and related platforms and programs are largely attributable to customer requirements, availability of parts, production capacity and timing.
Gross Profit: Gross profit for the three months ended September 30, 2024, was $1,941,000 as compared to $1,228,000 for the three months ended September 30, 2023. Our gross profit percentage for the three months ended September 30, 2024 increased to 15.5% from the 10.0% for the three months ended September 30, 2023. The increase in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.
Operating Expenses: Operating expenses was $1,874,000, for the three months ended September 30, 2024, a decrease of $150,000, from $2,024,000 for the three months ended September 30, 2023. As a percentage of consolidated net sales, operating expenses decreased to 14.9%, compared to the 16.5% achieved during the three months ended September 30, 2023. The dollar decrease was primarily driven by reductions in stock compensation expense and our allowance for credit loss, offset by increases in costs associated with the continued improvement of our information technology system and hardening our cyber-security defenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.
Interest Expense: Interest expense (which includes amortization of deferred financing costs) was $482,000 during the three months ended September 30, 2024, a decrease of $34,000 or 6.6% from $516,000 during the three months ended September 30, 2023. The decrease is primarily attributable to lower borrowing levels during a portion of the period.
Net Loss: Net loss for the three months ended September 30, 2024 was $404,000, compared to a net loss of $1,299,000 for the three months ended September 30, 2023, for the reasons discussed above.
24
Results of Operations for the nine months ended September 30, 2024
Net Sales: Consolidated net sales for the nine months ended September 30, 2024 were $40,188,000, an increase of $2,141,000, or 5.6%, compared with $38,047,000 that we achieved in the nine months ended September 30, 2023. The period-over-period increase in net sales was primarily due to overall changes in the mix of products requested by customers, which are discussed further below.
The composition of customers that exceeded 10% of our net sales for 2024 and 2023 are shown below:
| Percentage of Net Sales | ||||||||
| Customer | 2024 | 2023 | ||||||
| RTX (a) | 27.0 | % | 26.6 | % | ||||
| Lockheed | 25.1 | % | 24.7 | % | ||||
| Northrop | 19.9 | % | 2.6 | % | ||||
| Ruag | 1.5 | % | 10.9 | % | ||||
| Boeing | 0.3 | % | 10.0 | % | ||||
| (a) | RTX includes Collins Landing Systems and Collins Aerostructures |
The composition of our net sales by platform or program profiles for the nine months ended September 30, 2024 and 2023 are shown below:
| Percentage of Net Sales | ||||||||
| Platform or Program | 2024 | 2023 | ||||||
| E2-D Hawkeye | 26.9 | % | 18.0 | % | ||||
| UH-60 Black Hawk Helicopter | 22.0 | % | 17.1 | % | ||||
| GTF | 22.0 | % | 9.3 | % | ||||
| CH-53 Helicopter | 4.4 | % | 8.9 | % | ||||
| F-35 Lightning II | 3.3 | % | 4.4 | % | ||||
| F-18 Hornet | 3.3 | % | 24.5 | % | ||||
| All other platforms | 18.1 | % | 17.8 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
Gross Profit: Gross profit for the nine months ended September 30, 2024, was $6,491,000 as compared to $5,278,000 for the nine months ended September 30, 2023. Our gross profit percentage for the nine months ended September 30, 2024 increased to 16.2% from the 13.9% for the nine months ended September 30, 2023. The increase in margin can be attributable to changes in sales across our major platforms, shifts in product mix, and overall operating efficiencies.
Operating Expenses: Operating expenses were $5,931,000, for the nine months ended September 30, 2024, a decrease of $229,000, from $6,160,000 for the nine months ended September 30, 2023. As a percentage of consolidated net sales, operating expenses decreased to 14.8%, compared to the 16.2% incurred during the nine months ended September 30, 2023. The dollar decrease was primarily driven by reductions in stock compensation expense and our allowance for credit loss, offset by costs associated with the continued improvement of our information technology system and hardening our cyber-security defenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.
Interest Expense: Interest expense (which includes amortization of deferred financing costs) was $1,418,000 during the nine months ended September 30, 2024, a decrease of $54,000 or 3.7% from $1,472,000 during the nine months ended September 30, 2023. The decrease is primarily attributable to lower borrowing levels during a portion of the period, partially offset by an increase in the average interest rate on outstanding debt pursuant to our Current Credit Facility which increased to 7.83% in 2024 as compared to 7.44% in 2023.
25
Net Loss: Net Loss for the nine months ended September 30, 2024 was $812,000, compared to a net loss of $2,312,000 for the nine months ended September 30, 2023, for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2024, we have debt service requirements related to:
| 1) | Outstanding indebtedness under our Current Credit Facility of $16,838,000 (consisting of a Revolving Loan of $11,437,000 and a Term Loan of $5,401,000). This debt matures on December 30, 2025, and requires us to make monthly payments on the term loan of approximately $68,000 until the loan matures. |
| 2) | Related Party Notes of approximately $6,162,000. This debt matures on July 1, 2026. Pursuant to the Current Credit Facility we are permitted to make principal payments against this debt in the amount of $250,000 per quarter, as long as certain conditions are met. |
| 3) | Various equipment leases and contractual obligations related to our business, including advances under our Solar Facility for the installation of solar energy systems including the replacement of the existing roof at our Sterling Facility. |
Under the terms of the Current Credit Facility, as amended, we are required to achieve EBITDA (as defined in the Current Credit Facility) at the end of each Fiscal Quarter on a rolling basis, for the Fiscal Quarters ending September 30, 2024 and December 31, 2024. Beginning with the Fiscal Quarter ending March 31, 2025 we are required to meet a Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and lease expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation and amortization. For the nine months cumulative period ending September 30, 2024, we achieved an EBITDA of $2,620,000 as compared to the $1,500,000.
We obtained a waiver of the requirement to meet the Fixed Charge Coverage Ratio at March 31, 2024, and met the financial covenants as of both June 30, 2024 and September 30, 2024. Nevertheless, we may fail to achieve the required covenants in the future. Therefore, we have classified the term loan that expires on December 30, 2025 as current as of September 30, 2024, in accordance with the guidance in ASC 470-10-45, “Debt – Other Presentation Matters”, related to the classification of callable debt. We are required to maintain a collection account with our lender into which substantially all of our cash receipts are remitted. If we were to default under our Current Credit Facility, our lender could choose to increase the rate of interest we pay or refuse to make loans under the revolving portion of the Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest we pay, it would adversely impact our operating results. If the lender were to cease making new loans under our revolving facility, we would lack the funds to continue our operations. The rights granted to our lender under the Current Credit Facility combined with the possibility that we might fail to meet covenants in the future raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the issuance of these condensed consolidated financial statements.
The following is a brief discussion of recent amendments to the Current Credit Facility (all of which have been filed with the SEC):
| ● | On August 4, 2023, we entered into a Fifth Amendment that waived a default caused by our failure to meet the required Fixed Coverage Charge Ratio for the fiscal quarter ended March 31, 2023. Additionally, the amendment provided for a revised Fixed Coverage Charge Ratio for the fiscal quarters ending June 30, 2023 and September 30, 2023 and increased the amount of purchase money secured debt (or finance leases) we are allowed to have outstanding at any time to $2,000,000. In connection with this amendment, we paid a fee of $10,000. |
26
| ● | On November 20, 2023, we entered into a Sixth Amendment that waived defaults caused by our failure to achieve the Fixed Charge Coverage Ratio of the Fifth Amendment and because we made capital expenditures (as defined) in excess of permitted amounts. This amendment further revised the Fixed Charge Coverage Ratio by requiring it to be calculated on a rolling period basis and not be less than, (a) 1.10x (as calculated on a six-months basis) for the fiscal quarter ending March 31, 2024, (b) 1.20x (as calculated on a nine-months basis) for the fiscal quarter ending June 30, 2024, and (c) 1.25 (as calculated on a twelve-months basis) for all fiscal quarters beginning with September 30, 2024, until the Current Credit Facility expires. This amendment also increased our ability to make additional capital expenditures up to a limit of $2,000,000 in any fiscal year. In connection with this amendment, we paid a fee of $20,000. |
| ● | On May 31, 2024, we entered into a Seventh Amendment that waived the default caused by our failure to achieve the required Fixed Charge Coverage Ratio of the Sixth Amendment. This amendment further revised our Financial Covenants. For the six months ending June 30, 2024 our EBITDA shall not be less than $740,000; for the nine months ending September 30, 2024 our EBITDA shall not be less than $1,500,000; for the twelve months ending December 31, 2024 our EBITDA shall not be less than $2,800,000. For the rolling twelve month period ending March 31, 2025, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x. Beginning with the rolling twelve month period ending June 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage Ratio of 1.25x. All other covenants remain unchanged. Additionally, this amendment increased the Term Loan by approximately $1,000,000 to $5,700,000, with monthly principal installments in the amount of $68,000. In connection with these changes, the Company paid an amendment fee of $20,000. |
In addition to required Term Loan payments of approximately $204,000 for the remainder of fiscal 2024, we may have to make additional payments. For so long as the Term Loan under the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal year, we are obligated to pay an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii) the outstanding principal balance of the Term Loan. Such payment shall be applied to the outstanding principal balance of the Term loan, on or prior to the April 15 immediately following such fiscal year. For the fiscal year ended December 31, 2023, based on the calculation there was no Excess Cash Flow payment required.
In addition to the outstanding indebtedness under the Current Credit Facility and Related Party Notes, we have various equipment leases and contractual obligations of an ongoing nature which we service in the ordinary course out of our cash flow from operations.
Our material cash requirements are for debt service, capital expenditures and working capital. We have historically met these requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions. Although navigating the current business landscape remains challenging and it is difficult to predict period-to-period financial performance, based on our current revenue visibility and the strength of our backlog, we believe we have sufficient liquidity to meet our financial obligations for the next twelve months from the date of issuance of our condensed consolidated financial statements included in this Quarterly Report. However, if we were to default under our Current Credit Facility and were unable to obtain a waiver from our lender and it was to cease lending we would not be able to meet our financial obligations. As of September 30, 2024, the amount outstanding under our Revolving Line of Credit was $11,437,000, leaving $8,563,000 of availability to support our growth, subject to having the requisite collateral and maintaining compliance with the terms of the Credit Facility.
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Cash Flow
The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):
| Nine months ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash provided by (used in) | ||||||||
| Operating activities | $ | 508 | $ | 7,093 | ||||
| Investing activities | (1,493 | ) | (1,867 | ) | ||||
| Financing activities | 825 | (4,767 | ) | |||||
| Net (decrease) increase in cash | $ | (160 | ) | $ | 459 | |||
Cash Provided by Operating Activities
For the nine months ended September 30, 2024, we generated $508,000 of cash flows from operations as compared to $7,093,000 for the nine months ended September 30, 2023. The reduction was due primarily to the use of a portion of customer deposits which had been advanced in 2023 for the procurement of long lead time raw materials expected to be utilized during 2024.
For the nine months ended September 30, 2023, we generated cash of $7,093,000 from operations which was mainly attributable to a substantial decrease in accounts receivable and an increase in customer deposits.
Cash Used in Investing Activities
During the first nine months of 2024, we continued to make investments to enhance our competitiveness and market position. Cash used in investing activities of $1,493,000 and $1,867,000, during the nine months ended September 30, 2024 and 2023, respectively, was for new property and equipment. Investments in 2024 and 2023 increased our production efficiency and speed, while enabling us to maintain closer tolerances. They also expanded the size of products we can manufacture.
During fiscal 2024, we expect to continue to make strategic investments in capital equipment to enhance our competitiveness. We expect to invest approximately an additional $750,000 during the remainder of 2024 for new or upgraded equipment.
Cash Provided by (Used in) Financing Activities
For the nine months ended September 30, 2024, cash provided by financing activities was $825,000. During this period, we increased borrowings under our Current Credit Facility by $974,000 (consisting of a net increase in Revolving Loan borrowings of $633,000 and a net increase in our Term Loan of $341,000). We also made payments of $143,000 pursuant to financing lease obligations and $6,000 on a loan payable.
For the nine months ended September 30, 2023, cash used in financing activities was $4,767,000. During this period, we decreased our borrowings under our Current Credit Facility by $5,784,000 (consisting of a net decrease in Revolving Loan borrowings of $ $4,908,000, and a net decrease of $876,000 in the Term Loan).We also made payments of $84,000 pursuant to financing lease obligations and $7,000 on a loan payable. Additionally, there were advances totaling $393,000 taken on our financing agreement from CT Green Bank.
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OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet arrangements as of September 30, 2024.
Critical Accounting Estimates
A critical accounting estimate is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based on currently available information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include, inventory valuation, useful lives and impairment of long-lived assets, income tax provision, and allowance for credit losses. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.
There have been no material changes to the Company’s critical accounting estimates as compared to the estimates described in the 2023 Annual Report which we believe are the most critical to our business and understanding of our results of operations and affect the more significant judgments and estimates that we use in preparation of our condensed consolidated financial statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting refers to those policies, procedures and processes that pertain to the maintenance of records that accurately and fairly reflect transactions with respect to our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are made only in accordance with authorizations of our management; and provide reasonable assurance regarding the prevention and timely detection of unauthorized transactions with respect to our assets that could have a material effect on our financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management relies upon the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in designing a system intended to meet the needs of our Company and provide reasonable assurance for its assessment.
In connection with their review of our internal controls over financial reporting as of the end of the nine months ended September 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls over financial reporting were not effective as of September 30, 2024. As reported in our 2023 Form 10-K, in connection with their review of our internal controls as of and for the year ended December 31, 2023, our management identified a material weakness in our internal controls over financial reporting related to our IT systems which has yet to be remediated. During fiscal 2023 and continuing in fiscal 2024, we implemented new controls and procedures to eliminate this weakness and are continuing to test their effectiveness. Tests of such controls and procedures are ongoing and the material weakness noted will only be deemed to have been remediated after the new controls and procedures have been in place for a sufficient period and management has concluded through appropriate testing that the controls are operating effectively. For more information, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
Except for the ongoing changes described above intended to remediate the material weakness with respect to our IT System, there have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter which is the subject of this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1A. Risk Factors.
Investors are encouraged to consider the risks described in our 2023 Form 10-K, our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Report and other information publicly disclosed or contained in documents we file with the Securities and Exchange Commission before purchasing our securities.
Item 6. Exhibits
| Exhibit No. | Description | |
| 31.1 | Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934. | |
| 31.2 | Certification of principal financial officer pursuant to Rule 13a-14 or Rule 15d-14 of the Exchange Act of 1934. | |
| 32.1 | Certification of principal executive officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). | |
| 32.2 | Certification of principal financial officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). | |
| XBRL Presentation | ||
| 101.INS | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 14, 2024
| AIR INDUSTRIES GROUP | ||
| By: | /s/ Scott Glassman | |
| Scott Glassman Chief Financial Officer (principal financial and accounting officer) | ||
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