What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-18 compared with 2023-08-11 · 136 added, 95 removed, 182 unchanged (56% 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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You should specifically consider the various

risk factors identified in this report and our 2022 Form 10-K that could cause actual results to differ materially from those anticipated

in these forward-looking statements.

risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking

Business Overview

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 subsidiaries, AIM, NTW and 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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as under-absorption of factory overhead decreases profits.

Our revenues are principally

determined by orders from our customers for the delivery of product – which we call releases – against LTA’s with those

These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact

of inflation, though over the term of LTAs prices often increase and not all of the increase is covered b agreed upon price protection

clauses in our agreements.

Our revenues are principally determined

by orders from our customers for the delivery of product – which we call releases – against LTA’s with those customers.

These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact of inflation,

though over the term of LTAs prices often increase and not all of the increase is covered by agreed upon price protection clauses in our

Our direct costs of production include costs for material, labor, and significant factory overhead;

these costs may vary based on the efficiency of our factory operations.

Our gross profit is highly variable due to the mix of products

sold, and by sales volume, which can lead to the over absorption or under absorption of factory overhead costs.

all of these costs may

vary based on the efficiency of our factory operations.

Our gross profit is highly variable due to the mix of products sold, and by sales

volume, which can lead to the over absorption or under absorption of factory overhead costs.

Beyond these direct costs

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Three Months Ended

Six Months Ended

Cost of sales

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Provision/(Benefit) from income taxes

$ (1,013,000 )

Balance Sheet Data:

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Total stockholders’ equity

Consolidated net sales for

the three months ended March 31, 2023 were $12,549,000, an increase of $487,000, or 4.0%, compared with $12,062,000 for the three months

ended March 31, 2022.

Results of Operations for the three months

ended June 30, 2023

Consolidated net sales for the

three months ended June 30, 2023 were $13,205,000, a decrease of $803,000, or 5.7%, compared with $14,008,000 for the three months ended

June 30, 2022.

The decrease in net sales was primarily due to the timing of shipment of certain larger components.

As indicated in the table

below, four customers represented 57.1% and 70.8% of total net sales for the three months ended March 31, 2023 and March 31, 2022, respectively.

below, three customers represented 62.7% and 66.2% of total sales for the three months ended June 30, 2023 and June 30, 2022, respectively.

Percentage of Sales

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Goodrich Landing Gear Systems

United States Department of Defense

Customer was less than 10% of sales for the three months March 31, 2023

Customer was less than 10% of sales for the three months March 31, 2022

Gross Profit:

Consolidated gross profit from operations for the three months ended

March 31, 2023 was $1,880,000, a decrease of $198,000, or 9.5%, as compared to gross profit of $2,078,000 for the three months ended March

Consolidated gross profit as a percentage of sales was 15.0% and 17.2% for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2022, substantially all of the inventory value was estimated using a gross profit percentage based

on the annual gross profit percentage of the immediately preceding year.

Inventory value and gross profit margin for the first quarter

of 2022 was estimated using the gross profit percentage in 2021.

Consolidated gross profit

for the March 2023 quarter was negatively impacted by sales of several lower margin products due to increased costs in processing these

Operating Expense

For the three months ended June

30, 2022, substantially all of the inventory value was estimated using a gross profit percentage based on the annual gross profit percentage

Adjustments to reconcile the Company’s books to the annual physical inventory were recorded in the fourth quarter of 2022.

For the three months ended June 30, 2023 inventory and gross profit percentage were determined by the Company’s perpetual inventory

Consolidated gross profit for

the three months ended June 30, 2023 was $2,170,000, a decrease of $252,000, or 10.4%, as compared to gross profit of $2,422,000 for the

three months ended June 30, 2022.

Consolidated gross profit as a percentage of sales was 16.4% and 17.3% for the three months ended June

30, 2023 and 2022, respectively.

The decrease in the gross profit percentage was attributable to lower sales and the mix of products sold

Operating Expenses:

Consolidated operating expenses

for the three months ended March 31, 2023 totaled $2,038,000 and increased by $167,000 or 8.9% compared to $1,871,000 for the three months

ended March 31, 2022.

The increase was caused by increases in professional fees and information technology.

These increased costs were

partially offset by reductions in stock compensation expense and shipping expense.

for the three months ended June 30, 2023 totaled $2,098,000 and decreased $74,000 or 2.3% compared to $2,172,000 for the three months

ended June 30, 2022.

The decrease was caused by reductions in compensation and shipping expense.

These decreased costs were partially

offset by increases in stock compensation expense and an increase in amounts spent on information technology.

Interest and Financing Costs:

Interest and financing costs

for the three months ended March 31, 2023 were $476,000 an increase of $153,000 or 47.4% compared to $323,000 for the three months ended

March 31, 2022.

The average interest rate charged was 7.04% and 3.5% for the three month periods ended March 31, 2023 and 2022, respectively.

for the three months ended June 30, 2023 were $480,000 an increase of $191,000 or 66.1% compared to $289,000 for the three months ended

June 30, 2022.

This increase was related to increase in debt related to new equipment and higher interest rates charged during the period.

The average interest rate charges were 7.51% and 3.60% for the three month periods ended June 30, 2023 and 2022, respectively.

Net (Loss) Income:

Net loss for the three months

ended March 31, 2023 was $618,000, compared to net loss of $28,000 for the three months ended March 31, 2022 due to the reasons stated

ended June 30, 2023 was $395,000, compared a to net loss of $7,000 for the three months ended June 30, 2022 due to the reasons stated

Results of Operations for the six months ended June 30, 2023

Consolidated net sales for the

six months ended June 30, 2023 were $25,754,000, a decrease of $316,000, or 1.2%, compared with $26,070,000 for the six months ended June

The decrease in net sales was primarily due to the timing of shipment of certain larger components.

As indicated in the table

below, three customers represented 54.5% and four customers represented 77.9% of total sales for the six months ended June 30, 2023 and

June 30, 2022, respectively.

Percentage of Sales

Sikorsky Aircraft

Goodrich Landing Gear Systems

United States Department of Defense

was less than 10% of sales for the six months June 30, 2023

Customer was less than 10% of sales for the six months June 30, 2022

Gross Profit:

For the six months ended June

30, 2022, substantially all of the inventory value was estimated using a gross profit percentage based on the annual gross profit percentage

Adjustments to reconcile the Company’s books to the annual physical inventory were recorded in the fourth quarter of 2022.

For the six months ended June 30, 2023 inventory and gross profit percentage were determined by the Company’s perpetual inventory

Consolidated gross profit for the six months ended June 30, 2023 was $4,050,000,

a decrease of $450,000, or 10.0%, as compared to gross profit of $4,500,000 for the six months ended June 30, 2022.

Consolidated gross

profit as a percentage of sales was 15.7% and 17.3% for the six months ended June 30, 2023 and 2022, respectively Consolidated gross profit

for the first six months of 2023 was negatively impacted by sales of several lower margin products due to increased costs in processing

these products in the first quarter of 2023.

Operating Expenses:

Consolidated operating expenses

for the six months ended June 30, 2023 totaled $4,136,000 and increased by $93,000 or 2.3% compared to $4,043,000 for the six months ended

June 30, 2022.

The increase was caused by increases in stock compensation expense and an increase in amounts spent on information technology.

These increased costs were partially offset by decreases in compensation and shipping expense.

Interest and Financing Costs:

Interest and financing costs

for the six months ended June 30, 2023 were $956,000 an increase of $344,000 or 56.2% compared to $612,000 for the six months ended June

This increase was related to increase in debt related to new equipment and higher interest rates charged during the period.

The average interest rate was 7.27% and 3.55% for the six month periods ending June 30, 2023 and 2022, respectively.

Net loss for the six months

ended June 30, 2023 was $1,013,000, compared to net loss of $35,000 for the six months ended June 30, 2022, 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, 2023, we have

As of June 30, 2023, we have

debt service requirements related to:

Our Webster Facility of $19,344,000 consisting of a Revolving Loan of $13,837,000 and a term loan in the amount of $5,507,000.

During the remainder of our fiscal 2023, we are required to pay $709,000 of this amount plus an Excess Cash Flow payment of $195,000 (paid in June 2023) as defined in the Webster Facility for Fiscal year 2022.

Related party debt consisting of convertible subordinated notes payable of $4,812,000 and subordinated notes payable of $1,350,000.

During the remainder of our fiscal 2023, we are required to pay $473,000 of the principal due under the term loan.

Related party debt consisting of convertible subordinated note payables of $4,812,000 and subordinated note payables of $1,350,000.

This debt is not due until July 1, 2026.

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On May 17, 2022, we entered into

the Fourth Amendment to the Loan and Security Agreement with Webster.

The purpose of the amendment was to increase the Term Loan to $5,000,000,

reduce the monthly principal installments to be made in respect to the term loan 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, thereby increasing

the amount of capital expenditures we may make each year.

During December 2022 we borrowed $878,000 for a capital expenditure and again

in January 2023 we borrowed $739,500 for an additional capital expenditure.

the Fourth Amendment to the Loan and Security Agreement with Webster Bank (“Webster”).

The purpose of the amendment was to

increase the Term Loan to $5,000,000, reduce the monthly principal installments to be made in respect to the term loan 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, thereby increasing the amount of capital expenditures we may make each year.

During December 2022 we borrowed $878,000

for a capital expenditure and again in January 2023 we borrowed $739,500 for an additional capital expenditure.

For so long as the Webster

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On June 13, 2023, Webster applied this payment to the term loan.

On August 4, 2023, we entered into the Fifth Amendment to the Webster

Facility (“Fifth Amendment”).

The purpose of the amendment was to waive the default caused by the failure to achieve the required

Fixed Coverage Charge Ratio for the Fiscal Quarter ended March 31, 2023 and decrease the required Fixed Coverage Charge Ratio to 0.95

to 1.00 for the Fiscal Quarters ending June 30, 2023 and September 30, 2023.

Additionally, the Fifth Amendment increased the amount of

purchase money secured debt the Company is allowed to have outstanding at any time to $2,000,000.

In connection with these changes, we

paid an amendment fee of $10,000.

On August 4, 2023, we entered

into the Fifth Amendment to the Webster Facility (“Fifth Amendment”).

The purpose of the amendment was to waive the default

caused by the failure to achieve the required Fixed Coverage Charge Ratio for the Fiscal Quarter ended March 31, 2023 and decrease the

required Fixed Coverage Charge Ratio to 0.95 to 1.00 for the Fiscal Quarters ending June 30, 2023 and September 30, 2023.

Additionally,

the Fifth Amendment increased the amount of purchase money secured debt the Company is allowed to have outstanding at any time to $2,000,000.

In connection with these changes, we paid an amendment fee of $10,000.

Because we believe that our

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1A of our 2022 Annual Report on Form 10-K.

In addition to our loan with Webster and Subordinated

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.

Substantially all of these obligations are described in the notes to our financial statements included

in this report.

In addition to our loan with

Webster and Subordinated 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.

Substantially all of these obligations are described in the notes to our financial

statements included in this report.

Changes in our cash flow are

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The following table summarizes

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

Three months ended

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

Six months ended

Cash provided by (used in)

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Financing activities

Net increase (decrease) in cash

Net increase in cash

Cash Provided by Operating Activities

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

For the three months ended

March 31, 2023, our net loss of $(618,000) was offset by $873,000 of non-cash items consisting primarily of depreciation of property and

For the six months ended June

30, 2023, our net loss of $(1,013,000) was offset by $1,910,000 of non-cash items consisting primarily of depreciation of property and

equipment of $1,239,000, employee and director stock compensation expense of $340,000 and amortization of right-of-use assets of $295,000

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Operating assets and liabilities

provided cash in the net amount of $1,183,000 consisting primarily of net decreases in accounts receivable and prepaid expense in the

amounts of $2,206,000 and $19,000, respectively, and a net increase in accounts payable and accrued expenses of $146,000, which were partially

offset by increases in inventory, deposits and other assets and prepaid taxes in the amounts of $623,000, $105,000 and $1,000, respectively,

and decreases in operating lease liabilities and deferred revenue in the amounts of $186,000 and $273,000, respectively.

provided cash in the net amount of $509,000 consisting primarily of net decreases in accounts receivable, prepaid expense and deposits

in the amounts of $1,303,000, $85,000 and $33,000, respectively, and a net increase in accounts payable and accrued expense in the amount

of $726,000, which were partially offset by an increase in inventory in the amount of $946,000, and decreases in operating lease liabilities

and customer deposits in the amounts of $377,000 and $314,000, respectively.

Cash Used in Investing Activities

Cash used in investing activities consists of cash

used for capital expenditures for property and equipment.

For the three months ended

March 31, 2023, cash used in investing activities was $973,000 This was primarily for the purchase of state-of-the art machinery.

Cash used in investing activities

consists of capital expenditures for property and equipment.

For the six months ended June

30, 2023, cash used in investing activities was $1,383,000.

This was for the purchase of state-of-the-art machinery.

Cash Provided by Financing Activities

Cash provided by financing activities consists

of the borrowing and repayments under our credit facilities with our senior lender, Webster, increases in and repayments of finance obligations

and other notes payable.

For the three months ended

March 31, 2023, cash provided by financing activities was $379,000.

This was comprised of increased borrowings on our Webster term loan

of $740,000, partially offset by net payments on our Webster revolving loan and Webster term note in the amounts of $132,000 and $208,000,

respectively, and payments of $20,000 and $1,000 on our financing lease obligations and loan payable – financed asset.

Cash provided by financing

activities consists of the borrowing and repayments under our credit facilities with our senior lender, Webster, increases in and repayments

of finance obligations and other notes payable.

For the six months ended June

30, 2023, cash provided by financing activities was $533,000.

This was comprised of increased borrowings on our Webster term loan and

our Webster revolving loan in the amounts of $740,000 and $486,000, respectively, partially offset by net payments on our Webster term

loan in the amount of $640,000, and payments of $49,000 and $4,000 on our financing lease obligations and loan payable – financed

asset, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance

sheet arrangements as of March 31, 2023.

sheet arrangements as of June 30, 2023.

Critical Accounting Policies and Estimates

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

All applicable U.S.

GAAP accounting standards effective as of March 31, 2023 have been taken into consideration in preparing

GAAP”), and all applicable U.S.

GAAP accounting standards effective as of June 30, 2023 have been taken into consideration in preparing

the condensed consolidated financial statements.

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Income Taxes, which includes the determination of the valuation allowance for deferred tax assets.

We base our estimates, to the extent possible,

on historical experience.

Historical information is modified as appropriate based on current business factors and various assumptions

that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities.

We evaluate our

estimates on an on-going basis and make changes when necessary.

We base our estimates, to

the extent possible, on historical experience.

Historical information is modified as appropriate based on current business factors and

various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities.

We evaluate our estimates on an on-going basis and make changes when necessary.

Actual results could differ from our estimates.

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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