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Item 2. Management’s Discussion and Analysis

2022-08-22 compared with 2022-05-11 · 156 added, 115 removed, 145 unchanged (65% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion

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Air Industries Group is a

holding company with three legal subsidiaries, AIM, NTW and SEC.

SEC began manufacturing aircraft components in 1941 – over 80-years

ago – for use in World War II.

holding company with three legal subsidiaries, Air Industries Machining Corp.

(“AIM”), Nassau Tool Works, Inc.

and the Sterling Engineering Company (“SEC”).

SEC began manufacturing aircraft components in 1941 – over 80-years ago

– for use in World War II.

NTW was formed in the early 1960’s and AIM has been in business since 1971.

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primarily for the defense industry.

Our Complex Machining Segment (“CMS”), which consists of AIM and NTW, manufactures structural

parts and assemblies focusing on flight safety, including aircraft landing gear, arresting gear, engine mounts, flight controls, throttle

quadrants, and other components.

Our Turbine and Engine Component segment (“TEC”) segment consists of SEC which makes components

and provides services for aircraft jet engines and ground-power turbines.

Products of CMS are currently

deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35

Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft, CMS also makes a critical

AIM and NTW, manufacture structural parts and assemblies focusing on flight safety, including aircraft

landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components.

SEC makes components and provides

services for aircraft jet engines and ground-power turbines.

Products of AIM and NTW are

currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin

F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft, and also makes a critical

component for the Pratt & Whitney Geared TurboFan (“GTF”) aircraft engine used on commercial airliners.

TEC makes products

SEC makes products

used in jet engines that are used on military and commercial aircraft including the USAF F-15 and F-16, the Airbus A-330 and the Boeing

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the skilled labor we require to operate our plants is highly competitive.

Changes in the available pool of laborers caused by Covid-19

have not materially adversely impacted our ability to meet our production schedules.

Nevertheless, as we seek to grow our business, there

can be no assurance that the skilled laborers we need to operate our machinery will be available to us or that the costs incurred to maintain

Changes in the available pool of labor caused by Covid-19 have

not materially adversely impacted our ability to meet our production schedules.

Nevertheless, as we seek to grow our business, there can

be no assurance that the skilled labor we need to operate our machinery will be available to us or that the costs incurred to maintain

our current labor force and those we seek to bring on will not increase.

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of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business and our revenue.

In this report, we follow

Financial Accounting Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes

standards for reporting information about operating segments in annual and interim financial statements, ASC 280 requires that companies

report financial and descriptive information about their reportable segments based on a management approach.

ASC 280 also establishes

standards for related disclosures about products and services, geographic areas and major customers.

Historically we have operated

our businesses and reported their results as two separate segments with AIM and NTW comprising our CMS segment and SEC as the TEC segment.

Our CMS segment specializes in flight critical components including flight controls and landing gear.

Our TEC segment focuses on manufacturing

components for jet engines.

Each segment having different customers.

In recent years we integrated

and consolidated the business of AIM and NTW into one facility on Long Island and the operations of our CMS and TEC segments have become

increasingly integrated.

We also made significant capital expenditures and all of our operations now share the same manufacturing facilities

and use most, if not all, of the same sales and marketing functions.

We made these changes to take advantage of the long-term growth opportunities

we see in the aerospace and defense market.

In early fiscal 2022, we further changed our management approach and are now making decisions

about resources to be allocated and assessing performance based on one integrated business rather than two reporting segments.

effective with our first quarter ended March 31, 2022, we are presenting our operations as one reportable operating segment.

RESULTS OF OPERATIONS

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Three Months Ended

Six Months Ended

Cost of sales

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Other income, net

Net (loss) income

Balance Sheet Data:

Cash and cash equivalents

Working capital

Total stockholders’ equity

Results of Operations for the three months

ended June 30, 2022

Consolidated net sales for

the three months ended March 31, 2022 were $12,062,000, a decrease of $1,650,000, or 12.0%, compared with $13,712,000 for the three months

ended March 31, 2021.

the three months ended June 30, 2022 were $14,008,000, a decrease of $1,445,000, or 9.4%, compared with $15,453,000 for the three months

ended June 30, 2021.

The decrease in sales resulted principally from the decline of approximately $115,000 in sales from two products

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As indicated in the table

below, three customers represented 70.8% and 77.9% of total net sales for the three months ended March 31, 2022 and March 31, 2021, respectively.

below, three customers represented 66.2% and three customers represented 76.2% of total sales for the three months ended June 30, 2022

and June 30, 2021, respectively.

Percentage of Sales

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United States Department of Defense

* Customer was less than 10% of sales for the three months ended June 30, 2021.

** Customer was less than 10% of sales for the three months ended June 30, 2022.

Gross Profit:

Consolidated gross profit

for the three months ended March 31, 2022 was $2,078,000, an increase of $281,000, or 15.6%, as compared to gross profit of $1,797,000

for the three months ended March 31, 2021.

Consolidated gross profit as a percentage of sales was 17.2% and 13.1% for the three months

ended March 31, 2022 and 2021, respectively.

Consolidated gross profit for the March 2022 quarter was positively impacted by lower sales

from the two products referred to above.

Margin on these two products was substantially less than the margin on our other products.

Operating Expense

from operations for the three months ended June 30, 2022 was $2,422,000, a decrease of $181,000, or 7.0%, as compared to gross profit

of $2,603,000 for the three months ended June 30, 2021.

Consolidated gross profit as a percentage of sales was 17.3% and 16.8% for the

three months ended June 30, 2022 and 2021, respectively.

For interim periods, substantially all of the inventory value has been estimated

using a gross profit percentage based on the annual gross profit percentage of the immediately preceding year as applied to the net sales

of the current period.

Operating Expenses:

Consolidated operating expenses

for the three months ended March 31, 2022 totaled $1,871,000 and increased by $101,000 or 5.7% compared to $1,770,000 for the three months

ended March 31, 2021.

for the three months ended June 30, 2022 totaled $2,172,000 and increased by $9,000 or 0.4% compared to $2,163,000 for the three months

ended June 30, 2021.

The increase was caused by increases in employment costs, including employee health benefits increases which were

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as Covid restrictions eased.

These increased costs were partially offset by reductions in stock compensation expense, information technology,

and bad debt expense.

These increased costs were partially offset by reductions in information technology and bad debt expense.

Interest and Financing Costs:

Interest and financing costs

for the three months ended March 31, 2022 were $323,000 an increase of $26,000 or 8.8% compared to $297,000 for the three months ended

March 31, 2021.

for the three months ended June 30, 2022 were $289,000 a decrease of $44,000 or 13.2% compared to $333,000 for the three months ended

June 30, 2021.

The primary reason for this was lower balances on our debt with Webster Bank.

Net (Loss) Income:

Net loss for the three months

ended March 31, 2022 was $28,000, an improvement of $124,000, compared to net loss of $152,000 for the three months ended March 31, 2021

due to the reasons stated above.

ended June 30, 2022 was $7,000, a decrease of $246,000, compared to net income of $239,000 for the three months ended June 30, 2021 due

to the reasons stated above.

Results of Operations for the six months ended June 30, 2022

Consolidated net sales for

the six months ended June 30, 2022 were $26,070,000, a decrease of $3,095,000, or 10.6%, compared with $29,165,000 for the six months

ended June 30, 2021.

The decrease in sales resulted principally from the decline of approximately $1,575,000 in sales from two products

whose contracts expired or were cancelled by the customer in 2021.

As indicated in the table

below, four customers represented 77.9% and three customers represented 77.0% of total sales for the six months ended June 30, 2022 and

June 30, 2021, respectively.

Percentage of Sales

Goodrich Landing Gear Systems

Sikorsky Aircraft

United States Department of Defense

* Customer was less than 10% of sales for the six months ended June 30, 2021.

Gross Profit:

Consolidated gross profit

from operations for the six months ended June 30, 2022 was $4,500,000, an increase of $100,000, or 2.3%, as compared to gross profit of

$4,400,000 for the six months ended June 30, 2020.

Consolidated gross profit as a percentage of sales was 17.3% and 15.1% for the six

months ended June 30, 2022 and 2021, respectively.

For interim periods, substantially all of the inventory value has been estimated using

a gross profit percentage based on the annual gross profit percentage of the immediately preceding year as applied to the net sales of

the current period.

Operating Expenses:

Consolidated operating expenses

for the six months ended June 30, 2022 totaled $4,043,000 and increased by $110,000 or 2.8% compared to $3,933,000 for the six months

ended June 30, 2021.

The increase was caused by increases in employment costs, including employee health benefits increases which were

not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel to customers

as Covid restrictions eased.

These increased costs were partially offset by reductions in information technology and bad debt expense.

Interest and Financing Costs:

Interest and financing costs

for the six months ended June 30, 2022 were $612,000 a decrease of $18,000 or 2.9% compared to $630,000 for the six months ended June

The primary reason for this was lower balances on our debt with Webster Bank.

Net (Loss) Income:

Net loss for the six months

ended June 30, 2022 was $35,000, a decrease of $122,000 compared to net income of $87,000 for the six months ended June 30, 2021, for

the reasons stated above.

LIQUIDITY AND CAPITAL RESOURCES

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are for debt service, capital expenditures and funding working capital/operating costs.

As of March 31, 2022, we have debt service requirements

Our Webster Facility of $15,554,000 consisting of a Revolving Line of Credit of $11,555,000 and a term loan in the amount of $3,999,000.

During the remainder of our fiscal 2022, we are required to pay $1,463,000 of this amount plus an amount of Excess Cash Flow we generate.

2) Related party debt consisting of a convertible subordinated note payable of $6,412,000.

This debt is not

due until July 1, 2026.

3) Various equipment leases and contractual obligations related to our normal business.

We have historically met our cash requirements with funds provided

by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions.

our current revenue visibility and strength of our backlog, we believe that we have enough liquidity to meet our short-term cash requirements.

Although the Webster Facility does have certain restrictions on our ability to fund capital expenditures, we are currently in discussions

to amend the facility to provide us with the capability to spend up to an additional $2,500,000 for new equipment,

As of June 30, 2022, we have

debt service requirements related to:

Webster Facility of $18,222,000 consisting of a Revolving Loan of $13,343,000 and a term loan in the amount of $4,879,000.

remainder of our fiscal 2022, we are required to pay $357,000 of the principal due under the term loan.

party debt consisting of convertible subordinated note payables of $4,812,000 and subordinated note payables of $1,600,000.

is not due until July 1, 2026.

We are permitted to make principal payments in the amount of $250,000 per quarter pursuant to the Third

Amendment to the Loan and Security Agreement with Webster Bank, as long as certain conditions are met.

On July 14, 2022, a principal

payment in the amount of $250,000 was made as the conditions for such payment were met for the first quarter of 2022.

equipment leases and contractual obligations related to our normal business.

We have historically met our

cash requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and

debt financing transactions.

Based on our current revenue visibility and strength of our backlog, we believe that we have enough liquidity

to meet our short-term cash requirements.

On May 17, 2022, we entered into the Fourth Amendment to the Loan and Security Agreement with

Webster Bank.

The purpose of the amendment was to increase the Term Loan to $5,000,000 and establish a capital expenditure line of credit

in the amount of $2,000,000 which we can draw upon from time to time to finance purchases of machinery and equipment, reduce the monthly

principal installments to be made in respect to the term loan and increase the amount of capital expenditures that the Company may make

Because we believe our fiscal

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increase from current levels.

Such increases are not expected to material impact our liquidity.

Our future liquidity may be adversely impacted by various risks and

uncertainties, including, but not limited to future and current impacts of global events such as COVID-19 and the war in the Ukraine,

increases in inflation, disruptions in the labor market and other risks detailed in Part1, Item 1A of our 2021 Annual Report on Form 10K.

Should our cash requirements change beyond our current expectations due to general economic conditions or a strategic decision, we may

choose to raise additional funds through equity and debt financing transactions.

We believe that we have sufficient access to credit and/or

financing from public and private debt and equity markets.

Changes in our cash flow are discussed

further below.

Such increases are not expected to materially impact our liquidity.

Our future liquidity may

be adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such

as COVID-19 and the war in the Ukraine, increases in inflation, disruptions in the labor market and other risks detailed in Part1, Item

1A of our 2021 Annual Report on Form 10-K.

Should our cash requirements change beyond our current expectations due to general economic

conditions or a strategic decision, we may choose to raise additional funds through equity and debt financing transactions.

that we have sufficient access to credit and/or financing from public and private debt and equity markets.

Changes in our cash flow are

discussed further below.

The following table summarizes

our net cash flow from operating, investing and financing activities for the periods indicated:

Three Months Ended

our net cash flow from operating, investing and financing activities for the periods indicated below:

Six Months Ended

Cash provided by (used in)

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Financing activities

Net decrease in cash and cash equivalents

Cash Provided by Operating Activities

Cash provided by operating

activities primarily consists of our net loss adjusted for certain non-cash items and changes to operating assets and liabilities.

For the three months ended

March 31, 2022, the net loss as adjusted for non-cash items provided cash of $686,000.

Net increase (decrease) in cash

$ (1,990,000 )

Cash Provided by (Used in) Operating Activities

Cash used in operating activities

primarily consists of our net loss adjusted for certain non-cash items and changes to working capital items.

For the six months ended June

30, 2022, the net loss as adjusted for non-cash items provided cash of $1,653,000.

This was a result of our net loss of $35,000, offset

by $714,000 of non-cash items consisting primarily of depreciation of property and equipment of $665,000, non-cash employee stock compensation

expense of $66,000, amortization of right-of-use assets of $131,000 and non-cash directors’ compensation expense of $54,000.

remaining non-cash items totaled $(202,000).

by $1,688,000 of non-cash items consisting primarily of depreciation of property and equipment of $1,308,000, non-cash employee stock

compensation expense of $207,000, amortization of right-of-use assets of $265,000 and non-cash directors’ compensation expense of

The remaining non-cash items totaled $(200,000).

Changes in operating assets

and liabilities provided cash in the net amount of $599,000 consisting primarily of a decrease in accounts receivable in the amount of

$3,033,000 and an increase in accounts payable and accrued expenses of $354,000, partially offset by increases in inventory, prepaid expenses

and other current assets and deposits and other assets in the amounts of $2,467,000, $32,000 and $70,000, respectively, and decreases

in operating lease liabilities and deferred revenue in the amounts of $164,000 and $55,000, respectively.

and liabilities used cash in the net amount of $1,338,000 consisting primarily of increases in inventory, deposits and prepaid taxes in

the amounts of $3,456,000, $99,000 and $5,000, respectively, and decreases in operating lease liabilities and customer deposits of $331,000

and $53,000, respectively, partially offset by a decrease in accounts receivable in the amount of $1,513,000, and an increase in accounts

payable and accrued expenses in the amount of $1,093,000.

Cash Used in Investing Activities

For the three months ended

March 31, 2022, cash used in investing activities was $430,000 used for the purchase of property and equipment.

Cash used in investing activities

consists of capital expenditures for property and equipment.

For the six months ended June

30, 2022, cash used in investing activities was $1,327,000.

This was for the purchase of property and equipment.

Cash Used In Financing Activities

For the three months ended

March 31, 2022, cash used in financing activities consisted of net payments on our Webster revolving loan and term note in the amounts

of $901,000 and $203,000, respectively and payments of $9,000 and $5,000 on our financing lease obligations and loan payable – financed

For the six months ended June

30, 2022, cash provided by financing activities consisted of net proceeds from the Webster re-financing of $1,945,000 and net advances

on our Webster revolving loan in the amount of $888,000, partially offset by repayments of $1,251,000 on our Webster term note, $263,000

on our financed lease obligations and $4,000 on our financed asset note payable.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance

sheet arrangements as of March 31, 2022.

sheet arrangements as of June 30, 2022.

Critical Accounting Policies and Estimates

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Our condensed consolidated

financial statements are presented in accordance with U.S.

financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”), and all applicable U.S.

GAAP accounting standards effective as of March

31, 2022 have been taken into consideration in preparing the condensed consolidated financial statements.

The preparation of condensed

consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,

expenses and related disclosures.

Some of those estimates are subjective and complex, and, consequently, actual results could differ from

those estimates.

The following accounting policies and estimates have been highlighted as significant because changes to certain judgments

and assumptions inherent in these policies could affect our condensed consolidated financial statements:

● Stock-based

compensation;

GAAP accounting standards effective as of June 30, 2022 have been taken into consideration in preparing

the condensed consolidated financial statements.

The preparation of condensed consolidated financial statements requires estimates and

assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Some of those estimates

are subjective and complex, and, consequently, actual results could differ from those estimates.

The following accounting policies and

estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect

our condensed consolidated financial statements:

Inventory valuation;

Revenue recognition;

Income taxes;

Stock-based compensation;

We base our estimates, to

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis