AIR INDUSTRIES GROUP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2024 and 2023 and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report 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, international 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 184 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 2024 marked a year of overall progress and positioning for growth. Looking forward to fiscal 2025, 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 $271.3 million (including our $117.9 million in backlog and all potential orders against LTA agreements previously awarded to us), as of December 31, 2024, we are confident in our ability to boost sales in 2025, attain profitability and improve our financial position. 21 RESULTS OF OPERATIONS Years ended December 31, 2024 and 2023: Selected Financial Information: 2024 2024 Percentage of Net Sales 2023 2023 Percentage of Net Sales Change 2024 vs 2023 Percent Change 2024 vs 2023 Net sales $ 55,108,000 100.0 % $ 51,516,000 100.0 % $ 3,592,000 6.97 % Cost of sales 46,176,000 83.8 % 44,088,000 85.6 % 2,088,000 4.74 % Gross profit 8,932,000 16.2 % 7,428,000 14.4 % 1,504,000 20.25 % Operating expenses 8,473,000 15.4 % 7,723,000 15.0 % 750,000 9.71 % Interest expense 1,893,000 3.4 % 1,920,000 3.7 % (27,000 ) -1.41 % Other income, net 68,000 0.1 % 84,000 0.2 % (16,000 ) -19.05 % Provision for income taxes - 0.0 % - 0.0 % - Net loss $ (1,366,000 ) -2.5 % $ (2,131,000 ) -4.1 % $ 765,000 -35.90 % Balance Sheet Data: December 31, 2024 December 31, 2023 Change Percent Change Cash $ 753,000 $ 346,000 407,000 117.63 % Working capital $ 11,776,000 $ 12,117,000 (341,000 ) -2.81 % Total assets $ 51,011,000 $ 50,715,000 296,000 0.58 % Total stockholders’ equity $ 14,948,000 $ 15,190,000 (242,000 ) -1.59 % Comparison of Fiscal 2024 to 2023 Net Sales: Net sales in 2024 were $55,108,000, an increase of $3,592,000 or 7.0%, compared with $51,516,000 that we achieved in 2023. The year-over-year increase in net sales was primarily driven by the impact of the Company’s enhanced sales and marketing initiatives which contributed to higher shipment volumes against our expanding backlog. Additionally, there have been changes in customer mix and production requirements for other key platforms and programs. The composition of customers that exceeded 10% of our net sales in either 2024 or 2023 are shown below: Percentage of Net Sales Customer 2024 2023 RTX (A) 29.3 % 29.3 % Lockheed Martin 25.1 % 24.7 % Northrop 18.3 % 3.6 % Boeing 0.7 % 12.2 % (A) RTX includes Collins Landing Systems and Collins Aerostructures 22 The composition of our net sales by platform or program profiles for the years ended December 31, 2024 and 2023 are shown below: Percentage of Net Sales Platform or Program 2024 2023 E2-D Hawkeye 24.0 % 18.9 % UH-60 Black Hawk Helicopter 23.1 % 18.1 % GTF 22.0 % 10.5 % F-35 Lightning II 3.7 % 4.0 % CH-53 Helicopter 3.4 % 7.4 % F-18 Hornet 2.9 % 24.3 % All other platforms 20.9 % 16.8 % 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 year ended December 31, 2024, amounted to $8,932,000, an increase from the $7,428,000 achieved in 2023. Our gross profit percentage in fiscal 2024 increased to 16.2% from the 14.4% we achieved in 2023. This improvement can be attributed to our increase in sales, changes in sales across our major platforms, shifts in product mix, and overall operating efficiencies. Operating Expenses : In fiscal 2024, operating expenses totaled $8,473,000, higher than the $7,723,000 recorded in 2023. As a percentage of consolidated net sales, operating expenses rose to 15.4%, compared to the 15.0% achieved in fiscal 2023. The increase in both dollars and percentage was primarily driven by higher professional fees and costs associated with the improvement of our information technology system and hardening our cyber-security protection. 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 $1,893,000 in fiscal 2024, a decrease of $27,000 or 1.4% from $1,920,000 in 2023. The decrease is primarily attributable to a decrease in the average amount outstanding under our Current Credit Facility. The average interest rate on our Current Credit Facility increased to 7.66% in 2024 as compared to 7.55% in 2023. Net Loss: Net loss for the year ended December 31, 2024 was $1,366,000, compared to a net loss of $2,131,000 for the year ended December 31, 2023, for the reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2024, we have debt service requirements related to: 1) Outstanding indebtedness under our Current Credit Facility of $18,130,000 (consisting of a Revolving Loan of $12,905,000 and a Term Loan in the amount of $5,225,000). This debt matures on December 30, 2025, and requires us to make monthly payments of approximately $68,000 in 2025. 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 with money raised pursuant to the sale of our securities under our Registration Statement on Form S-3 declared effective December 19, 2024. Subsequent to December 31, 2024 we repaid approximately $1,291,000 of this debt out of proceeds of such sales. 3) Various equipment leases and contractual obligations related to our normal 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. 23 Under the terms of the Current Credit Facility, as amended, we are required to achieve prescribed levels of 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 prescribed 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 twelve months cumulative period ending December 31, 2024, we achieved an EBITDA of $3,640,000 as compared to the required $2,800,000. As of December 31, 2024, we met all the financial and business covenants required under the terms of the Current Credit Facility which included a minimum EBITDA on a twelve-month basis of $2.8 million. In the past, we have not met our financial and business covenants, most recently as of March 31, 2024, and therefore historically classified the term loan at December 31, 2023 in accordance with the guidance in Accounting Standards Codification (“ASC”) 470-10-45. “Debt – Other Presentation Matters”, related to the classification of callable debt. The Current Credit Facility expires on December 30, 2025. In addition, we are required to maintain a collection account with our lender into which substantially all cash receipts are remitted. If we were to default under the Current Credit Facility, our lender could choose to increase the rate of interest or refuse to make loans under the revolving portion of the Current Credit Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest, it would adversely impact our operating results. If the lender were to cease making new loans under the revolving facility, we would lack the funds to continue operations. The Current Credit Facility expiration date and the rights granted to the lender, combined with the reasonable possibility that the 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 date of filing this report. 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. ● On November 20, 2023, we entered into a Sixth Amendment that waived defaults caused by the failure by us to achieve the Fixed Charge Coverage Ratio of the Fifth Amendment and because we purchased 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 $2,500,000 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. ● On January 30, 2025, we entered into an Eighth Amendment to provide for an additional Term Loan in the amount of $1,640,000 for the acquisition of additional equipment. The monthly principal installments on this additional Term Loan are $19,524 This amendment further revised our Financial Covenants. For the rolling twelve-month period ending March 31, 2025 and June 30, 2035, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x. Beginning with the rolling twelve-month period ending September 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage Ratio of 1.25x. All other covenants remain unchanged. In connection with these changes, the Company paid an amendment fee of $20,000. 24 Although navigating the current business landscape remains challenging and it is difficult to predict period-to-period financial performance, we believe we will be able to meet our financial obligations for the foreseeable future. However, if we are unable to obtain a waiver from our lender and they were to cease lending, we would not be able meet our financial obligations. As of December 31, 2024, we have borrowing capacity of approximately $7,095,000 under the Revolving Loan. In addition to required Term Loan payments of approximately $1,011,000 in fiscal 2025, 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, 2024, based on the calculation there is a $43,500 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 funding 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. Based on our current revenue visibility and strength of our backlog, we believe that we have sufficient liquidity to meet our cash requirements for our operations. However, we must pay or refinance large portions of our indebtedness prior to December 30, 2025, and July 1, 2026. Further, as a condition to refinancing our Current Credit Facility prior to December 31, 2025, our lender may require that the holders of our Related Party Notes extend or otherwise modify the subordination agreements they have given in favor of the lender. Since it is not likely that we will be able to pay this debt, we have initiated steps to satisfy portions and refinance the balance. These steps included entering an At The Market Offering Agreement dated December 13, 2024, with Craig-Hallum Capital Group LLC pursuant to which, as of March 31, 2025, we have sold 326,791 shares of our common stock for gross proceeds of $1,412,000 of which $1,291,000 has been used to satisfy portions of the Related Party Notes. We expect to engage in discussions during 2025 with our lender under the Current Credit Facility and related party note holders to explore potential extensions or refinancing of our obligations. Refinancing our indebtedness may require us to pay higher interest rates than we currently pay, agree to more restrictive business or financial covenants or involve the issuance of debt, equity and/or new securities convertible into or exercisable or exchangeable for our common stock. Any failure to refinance our existing debt or obtain additional working capital when required would have a material adverse effect on our business and financial condition. 25 Cash Flow The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated (in thousands): Year Ended December 31, 2024 2023 Cash provided by (used in) Operating activities $ 324 $ 4,862 Investing activities (2,285 ) (2,112 ) Financing activities 2,368 (2,685 ) Net increase (decrease) in cash $ 407 $ 65 Cash Provided By Operating Activities For the year ended December 31, 2024, we generated cash flows from operations of $324,000 as compared to $4,862,000 for fiscal 2023. The decrease in cash flows was primarily due to the use of a portion, $2,442,000, of customer deposits which had been advanced prior to 2024 for the procurement of long lead time raw materials expected to be utilized in 2024. Cash Used In Investing Activities We continue to make significant investments to enhance our competitiveness and market position. Cash used in investing activities of $2,285,000 and $2,112,000, in 2024 and 2023, respectively, was for new property and equipment. We continue to make strategic investments in capital equipment to enhance our competitiveness. The investments in 2024 and 2023 increased production efficiency and speed, while maintaining closer tolerances. They also expanded the size of products we can manufacture. We expect to invest approximately $1,600,000 in 2025 for new or upgraded equipment. Cash Provided by (Used In) Financing Activities For the year ended December 31, 2024, cash provided by financing activities was $2,368,000. During fiscal 2024, we increased borrowings under our Current Credit Facility by $2,238,000 (consisting of a net increase in Revolving Loan borrowings of $2,101,000 and a net increase of $137,000 against the Term Loan) and received advances of $533,000 against the Solar Facility. We also made payments of $196,000 pursuant to financing lease obligations and $9,000 on a loan payable. For the year ended December 31, 2023, cash used in financing activities was $2,685,000. During fiscal 2023, we reduced borrowings under our Current Credit Facility by $2,921,000 (consisting of net reduction in Revolving Loan borrowings of $2,548,000 and a net decrease of $373,000 against the Term Loan). We also made payments of $123,000 pursuant to financing lease obligations and $9,000 on a loan payable. During fiscal 2023, we also took advances of $393,000 against the Solar Facility including origination fees of $25,000. 26 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 and income tax provision. 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. Below is a description of our critical accounting estimates: ● Inventory Valuation, which includes the estimates and methodology used in accounting for the transition of production costs to inventory costs. In our consolidated financial statements, inventory is reflected at the lower of cost or 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 (defined as goods which do not have an open order and have not had movement for two years), obsolescence and for other impairments of value. ● Income Taxes. We account for income taxes under the asset and liability method, based on the income tax laws in the United States. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company has recorded a valuation allowance in the current and prior years to reduce deferred tax assets to zero. If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK No disclosure is required in response to this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements The financial statements required by this item begin on page F-1 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.