UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly
Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the quarterly period ended: September 30, 2024
or
☐ Transition
Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the transition period from ______ to_______
Commission
File No. 001-35927
AIR
INDUSTRIES GROUP
(Exact
name of registrant as specified in its charter)
| Nevada | | 80-0948413 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
1460 Fifth Avenue, Bay Shore, New York 11706
(Address of principal executive offices)
(631) 968-5000
(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 |
| Common Stock | | AIRI | | NYSE-American |
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. Yes ☒ No ☐
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). Yes ☒ No ☐
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 ☐ | Non-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
3,358,119 shares of the registrant’s common stock outstanding as of November 12, 2024.
INDEX
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.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIR INDUSTRIES GROUP
Condensed Consolidated Balance Sheets
| | |
September 30, | | |
December 31, | |
| | |
2024 | | |
2023 | |
| | |
(unaudited) | | |
| |
| ASSETS | |
| | |
| |
| Current Assets | |
| | |
| |
| Cash | |
$ | 186,000 | | |
$ | 346,000 | |
| Accounts Receivable, Net of Allowance for Credit Losses of $237,000 and $344,000 | |
| 7,259,000 | | |
| 7,892,000 | |
| Inventory | |
| 30,509,000 | | |
| 29,851,000 | |
| Prepaid Expenses and Other Current Assets | |
| 314,000 | | |
| 297,000 | |
| Contract Costs Receivable | |
| 296,000 | | |
| 296,000 | |
| Prepaid Taxes | |
| 55,000 | | |
| 37,000 | |
| Total Current Assets | |
| 38,619,000 | | |
| 38,719,000 | |
| | |
| | | |
| | |
| Property and Equipment, Net | |
| 8,521,000 | | |
| 8,048,000 | |
| Finance Lease Right-Of-Use-Assets | |
| 1,161,000 | | |
| 970,000 | |
| Operating Lease Right-Of-Use-Assets | |
| 1,366,000 | | |
| 1,866,000 | |
| Deferred Financing Costs, Net, Deposits and Other Assets | |
| 698,000 | | |
| 1,112,000 | |
| | |
| | | |
| | |
| TOTAL ASSETS | |
$ | 50,365,000 | | |
$ | 50,715,000 | |
| | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Debt | |
$ | 17,066,000 | | |
$ | 16,036,000 | |
| Accounts Payable and Accrued Expenses | |
| 7,101,000 | | |
| 6,091,000 | |
| Operating Lease Liabilities | |
| 890,000 | | |
| 880,000 | |
| Deferred Gain on Sale - Leaseback | |
| 38,000 | | |
| 38,000 | |
| Customer Deposits | |
| 1,717,000 | | |
| 3,557,000 | |
| Total Current Liabilities | |
| 26,812,000 | | |
| 26,602,000 | |
| | |
| | | |
| | |
| Long Term Liabilities | |
| | | |
| | |
| Debt | |
| 1,748,000 | | |
| 1,112,000 | |
| Subordinated Notes - Related Party | |
| 6,162,000 | | |
| 6,162,000 | |
| Operating Lease Liabilities | |
| 925,000 | | |
| 1,582,000 | |
| Deferred Gain on Sale - Leaseback | |
| 38,000 | | |
| 67,000 | |
| TOTAL LIABILITIES | |
| 35,685,000 | | |
| 35,525,000 | |
| | |
| | | |
| | |
| Commitments and Contingencies (see Note 8) | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ Equity | |
| | | |
| | |
| Preferred Stock - par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both September 30, 2024 and December 31, 2023. | |
| - | | |
| - | |
| Common Stock - Par Value $.001 - Authorized 6,000,000 shares, 3,350,791 and 3,303,045 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | |
| 3,000 | | |
| 3,000 | |
| Additional Paid-In Capital | |
| 83,230,000 | | |
| 82,928,000 | |
| Accumulated Deficit | |
| (68,553,000 | ) | |
| (67,741,000 | ) |
| TOTAL STOCKHOLDERS’ EQUITY | |
| 14,680,000 | | |
| 15,190,000 | |
| | |
| | | |
| | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 50,365,000 | | |
$ | 50,715,000 | |
See Notes to Condensed Consolidated Financial Statements.
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 | |
$ | 12,555,000 | | |
$ | 12,293,000 | | |
$ | 40,188,000 | | |
$ | 38,047,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of Sales | |
| 10,614,000 | | |
| 11,065,000 | | |
| 33,697,000 | | |
| 32,769,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Gross Profit | |
| 1,941,000 | | |
| 1,228,000 | | |
| 6,491,000 | | |
| 5,278,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating Expenses | |
| 1,874,000 | | |
| 2,024,000 | | |
| 5,931,000 | | |
| 6,160,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income (Loss) from Operations | |
| 67,000 | | |
| (796,000 | ) | |
| 560,000 | | |
| (882,000 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Interest Expense | |
| (364,000 | ) | |
| (398,000 | ) | |
| (1,064,000 | ) | |
| (1,118,000 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Interest Expense - Related Parties | |
| (118,000 | ) | |
| (118,000 | ) | |
| (354,000 | ) | |
| (354,000 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other Income, Net | |
| 11,000 | | |
| 13,000 | | |
| 46,000 | | |
| 42,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss before Income Taxes | |
| (404,000 | ) | |
| (1,299,000 | ) | |
| (812,000 | ) | |
| (2,312,000 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Provision for Income Taxes | |
| - | | |
| - | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | |
| Net Loss | |
$ | (404,000 | ) | |
$ | (1,299,000 | ) | |
$ | (812,000 | ) | |
$ | (2,312,000 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Loss per share - Basic | |
$ | (0.12 | ) | |
$ | (0.40 | ) | |
$ | (0.24 | ) | |
$ | (0.71 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Loss per share - Diluted | |
$ | (0.12 | ) | |
$ | (0.40 | ) | |
$ | (0.24 | ) | |
$ | (0.71 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted Average Shares Outstanding - Basic | |
| 3,338,705 | | |
| 3,286,682 | | |
| 3,326,245 | | |
| 3,270,399 | |
| Weighted Average Shares Outstanding - Diluted | |
| 3,338,705 | | |
| 3,286,682 | | |
| 3,326,245 | | |
| 3,270,399 | |
See Notes to Condensed Consolidated Financial
Statements.
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 | |
| 3,303,045 | | |
$ | 3,000 | | |
$ | 82,928,000 | | |
$ | (67,741,000 | ) | |
$ | 15,190,000 | |
| Common Stock issued to directors | |
| 12,323 | | |
| - | | |
| 38,000 | | |
| - | | |
| 38,000 | |
| Stock-Based Compensation | |
| - | | |
| - | | |
| 24,000 | | |
| - | | |
| 24,000 | |
| Net Loss | |
| - | | |
| - | | |
| - | | |
| (706,000 | ) | |
| (706,000 | ) |
| Balance, March 31, 2024 | |
| 3,315,368 | | |
$ | 3,000 | | |
$ | 82,990,000 | | |
$ | (68,447,000 | ) | |
$ | 14,546,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common Stock issued to directors | |
| 7,942 | | |
| - | | |
| 38,000 | | |
| - | | |
| 38,000 | |
| Stock-Based Compensation | |
| - | | |
| - | | |
| 12,000 | | |
| - | | |
| 12,000 | |
| Exercise of Stock Options | |
| 1,475 | | |
| - | | |
| - | | |
| - | | |
| - | |
| Net Income | |
| - | | |
| - | | |
| - | | |
| 298,000 | | |
| 298,000 | |
| Balance, June 30, 2024 | |
| 3,324,785 | | |
$ | 3,000 | | |
$ | 83,040,000 | | |
$ | (68,149,000 | ) | |
$ | 14,894,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common Stock issued to directors | |
| 12,252 | | |
| | | |
| 40,000 | | |
| | | |
| 40,000 | |
| Stock-Based Compensation | |
| | | |
| | | |
| 150,000 | | |
| | | |
| 150,000 | |
| Exercise of Stock Options | |
| 13,754 | | |
| | | |
| | | |
| | | |
| - | |
| Net Loss | |
| | | |
| | | |
| | | |
| (404,000 | ) | |
| (404,000 | ) |
| Balance, September 30, 2024 | |
| 3,350,791 | | |
$ | 3,000 | | |
$ | 83,230,000 | | |
$ | (68,553,000 | ) | |
$ | 14,680,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance, January 1, 2023 | |
| 3,247,930 | | |
$ | 3,000 | | |
$ | 82,446,000 | | |
$ | (65,610,000 | ) | |
| 16,839,000 | |
| Common Stock issued to directors | |
| 11,430 | | |
| - | | |
| 54,000 | | |
| - | | |
| 54,000 | |
| Stock-Based Compensation | |
| - | | |
| - | | |
| 45,000 | | |
| - | | |
| 45,000 | |
| Net Loss | |
| - | | |
| - | | |
| - | | |
| (618,000 | ) | |
| (618,000 | ) |
| Balance, March 31, 2023 | |
| 3,259,360 | | |
$ | 3,000 | | |
$ | 82,545,000 | | |
$ | (66,228,000 | ) | |
$ | 16,320,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common Stock issued to directors | |
| 15,230 | | |
| - | | |
| 54,000 | | |
| - | | |
| 54,000 | |
| Stock-Based Compensation | |
| - | | |
| - | | |
| 187,000 | | |
| - | | |
| 187,000 | |
| Net Loss | |
| - | | |
| - | | |
| - | | |
| (395,000 | ) | |
| (395,000 | ) |
| Balance, June 30, 2023 | |
| 3,274,590 | | |
$ | 3,000 | | |
$ | 82,786,000 | | |
$ | (66,623,000 | ) | |
$ | 16,166,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common Stock issued to directors | |
| 15,230 | | |
| - | | |
| 54,000 | | |
| - | | |
| 54,000 | |
| Stock-Based Compensation | |
| - | | |
| - | | |
| 28,000 | | |
| - | | |
| 28,000 | |
| Net Loss | |
| - | | |
| - | | |
| - | | |
| (1,299,000 | ) | |
| (1,299,000 | ) |
| Balance, September 30, 2023 | |
| 3,289,820 | | |
$ | 3,000 | | |
$ | 82,868,000 | | |
$ | (67,922,000 | ) | |
$ | 14,949,000 | |
See Notes to Condensed Consolidated Financial Statements.
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 | |
$ | (812,000 | ) | |
$ | (2,312,000 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities | |
| | | |
| | |
| Depreciation of property and equipment | |
| 1,533,000 | | |
| 1,807,000 | |
| Stock-based compensation | |
| 302,000 | | |
| 422,000 | |
| Amortization of Finance Lease Right-of-Use Assets | |
| 128,000 | | |
| 46,000 | |
| Amortization of Operating Lease Right-of-Use Assets | |
| 500,000 | | |
| 449,000 | |
| Deferred gain on sale - leaseback | |
| (29,000 | ) | |
| (29,000 | ) |
| Gain on sale of equipment | |
| (7,000 | ) | |
| - | |
| Changes in allowance for credit losses | |
| (106,000 | ) | |
| 38,000 | |
| Amortization of deferred financing costs | |
| 51,000 | | |
| 51,000 | |
| Changes in Operating Assets and Liabilities | |
| | | |
| | |
| (Increase) Decrease in Operating Assets: | |
| | | |
| | |
| Accounts receivable | |
| 739,000 | | |
| 4,224,000 | |
| Inventory | |
| (658,000 | ) | |
| 473,000 | |
| Prepaid expenses and other current assets | |
| (17,000 | ) | |
| 72,000 | |
| Prepaid taxes | |
| (18,000 | ) | |
| - | |
| Deposits and other assets | |
| 379,000 | | |
| (20,000 | ) |
| Increase (Decrease) in Operating Liabilities: | |
| | | |
| | |
| Accounts payable and accrued expenses | |
| 1,010,000 | | |
| (251,000 | ) |
| Operating lease liabilities | |
| (647,000 | ) | |
| (572,000 | ) |
| Customer deposits | |
| (1,840,000 | ) | |
| 2,695,000 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | |
| 508,000 | | |
| 7,093,000 | |
| | |
| | | |
| | |
| CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
| Purchase of property and equipment | |
| (1,500,000 | ) | |
| (1,867,000 | ) |
| Proceeds from sale of equipment | |
| 7,000 | | |
| - | |
| NET CASH USED IN INVESTING ACTIVITIES | |
| (1,493,000 | ) | |
| (1,867,000 | ) |
| | |
| | | |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
| Note payable - revolver - net - Current Credit Facility | |
| 633,000 | | |
| (4,908,000 | ) |
| Proceeds from term loan - Current Credit Facility | |
| 1,006,000 | | |
| 740,000 | |
| Proceeds from term loan - CT Green Bank | |
| - | | |
| 393,000 | |
| Payments of term loan - Current Credit Facility | |
| (665,000 | ) | |
| (876,000 | ) |
| Payments of deferred financing costs | |
| - | | |
| (25,000 | ) |
| Payments of finance lease obligations | |
| (143,000 | ) | |
| (84,000 | ) |
| Payments of loan payable - financed asset | |
| (6,000 | ) | |
| (7,000 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | |
| 825,000 | | |
| (4,767,000 | ) |
| | |
| | | |
| | |
| NET (DECREASE) INCREASE IN CASH | |
| (160,000 | ) | |
| 459,000 | |
| CASH AT BEGINNING OF PERIOD | |
| 346,000 | | |
| 281,000 | |
| CASH AT END OF PERIOD | |
$ | 186,000 | | |
$ | 740,000 | |
See Notes to Condensed Consolidated Financial
Statements.
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 | |
$ | 1,387,000 | | |
$ | 1,472,000 | |
| | |
| | | |
| | |
| Supplemental disclosure of non-cash investing and financing activities | |
| | | |
| | |
| Acquisition of financed lease asset | |
$ | 319,000 | | |
$ | 679,000 | |
| Financing from Solar Credit Facility directly to contractor | |
$ | 506,000 | | |
$ | - | |
See Notes to Condensed Consolidated Financial Statements.
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 $508,000 of cash from operating activities, compared to $7,093,000 for the same period in 2023. The debt under the
Current Credit Facility as of September 30, 2024, amounted to approximately $16,838,000, reflecting an increase of $989,000 since December
31, 2023. The Company received a Waiver and entered into the Seventh Amendment to the Loan and Security Agreement under the Current Credit
Facility on May 31, 2024. As of September 30, 2024, the Company is in compliance with the terms of the Current Credit Facility. See Note
5. Debt for the terms of the Seventh Amendment. As of September 30, 2024, total outstanding debt was $24,976,000, with the nature and
terms of such debt further discussed in Note 5. Debt.
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 $98.1 million as of December 31, 2023 to $105.2 million at
September 30, 2024. Further, it anticipates receiving additional funded orders during 2024 and 2025 pursuant to Long-Term Agreements (“LTA”)
agreements from its key customers as well as from new customers. With this visibility, the Company expects that it will generate sufficient
cash flow to make required principal payments (exclusive of any potential debt payment acceleration should the lender under the Current
Credit Facility choose to accelerate it) pursuant to the Current Credit Facility of approximately $814,000 over the next twelve months.
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
December 30, 2025 in the amount of $5,401,000 and $5,045,000 as current as of September 30, 2024 and December 31, 2023, respectively,
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 Company is required to maintain a collection account with its lender
into which substantially all cash receipts are remitted. If it were to default under the Current Credit Facility, the Company’s
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 the
Company’s operating results. If the lender were to cease making new loans under the revolving facility, the Company would lack the
funds to continue operations. The rights granted to the lender under the Current Credit Facility combined with the reasonable possibility
that the Company might fail to meet covenants in the future raise substantial doubt about its ability to continue as a going concern for
the one year commencing as of the date of filing these interim condensed consolidated financial statements.
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.
The activity for the allowance for credit losses
during the nine months ended September 30, 2024 and 2023 is set forth in the table below
| | |
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 | |
$ | 344,000 | | |
$ | 26,000 | | |
$ | (133,000 | ) | |
$ | 237,000 | |
| Nine Months ended September 30, 2023 Allowance for Credit Losses | |
$ | 281,000 | | |
$ | 67,000 | | |
$ | - | | |
$ | 348,000 | |
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.
Inventories consist of the following at:
| | |
September 30, | | |
December 31, | |
| | |
2024 | | |
2023 | |
| Raw Materials | |
$ | 6,497,000 | | |
$ | 4,968,000 | |
| Work In Progress | |
| 13,514,000 | | |
| 12,798,000 | |
| Semi-Finished Goods | |
| 9,288,000 | | |
| 10,296,000 | |
| Final-Finished Goods | |
| 1,210,000 | | |
| 1,789,000 | |
| Total Inventory | |
$ | 30,509,000 | | |
$ | 29,851,000 | |
| | |
| | | |
| | |
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.
The composition of customers that exceeded 10%
of net sales for the three months ended September 30, 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 | % |
The composition of customers that exceeded 10%
of net sales for the nine months ended September 30, 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 customers that exceed 10% of
accounts receivable at September 30, 2024 and December 31, 2023 are shown below:
| |
Percentage of Net Receivables | |
| | |
September 30, | | |
December 31, | |
| Customer | |
2024 | | |
2023 | |
| RTX (a) | |
| 43.5 | % | |
| 45.5 | % |
| Lockheed | |
| 13.9 | % | |
| 3.7 | % |
| Northrop | |
| 13.7 | % | |
| 8.2 | % |
| Boeing | |
| - | | |
| 16.0 | % |
Disaggregation of Revenue
The following table summarizes revenue from contracts
with customers for the three and nine month periods ending September 30, 2024 and 2023:
| | |
Three Months Ended | | |
Nine Months Ended | |
| Product | |
September 30,
2024 | | |
September 30,
2023 | | |
September 30,
2024 | | |
September 30,
2023 | |
| Military | |
$ | 7,968,000 | | |
$ | 10,144,000 | | |
$ | 28,272,000 | | |
$ | 31,513,000 | |
| Commercial | |
| 4,587,000 | | |
| 2,149,000 | | |
| 11,916,000 | | |
| 6,534,000 | |
| Total | |
$ | 12,555,000 | | |
$ | 12,293,000 | | |
$ | 40,188,000 | | |
$ | 38,047,000 | |
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 $1,717,000 and $3,557,000 respectively. The Company recognized revenue of $544,000 and $1,840,000 during the three and nine
months ended September 30, 2024, respectively, that was included in the customer deposits balance as of December 31, 2023. The Company
recognized revenue of $147,000 and $461,000 during the three and nine months ended September 30, 2023, respectively, that was included
in the customer deposits balance as of December 31, 2022.
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 $105.2 million. The Company estimates that a substantial
portion of this backlog will be recognized as net sales during the next twenty-four-months, with the rest thereafter. This expectation
assumes that raw material supplies and outsourced processing is completed and delivered on time and that the Company’s customers
will accept delivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales from expected
new orders that are not included in backlog.
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 $296,000 at both September 30, 2024 and December 31, 2023.
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.
The following securities have been excluded from
the calculation as the exercise price was greater than the average market price of the common shares:
| | |
Three Months Ended | | |
Nine Months Ended | |
| | |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| Stock Options | |
| 236,753 | | |
| 462,870 | | |
| 236,753 | | |
| 462,870 | |
| | |
| 236,753 | | |
| 462,870 | | |
| 236,753 | | |
| 462,870 | |
The following securities have been excluded from
the calculation because the effect of including these potential shares was anti-dilutive due to the net loss incurred during these periods:
| | |
Three Months Ended | | |
Nine Months Ended | |
| | |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| Stock Options | |
| 154,250 | | |
| - | | |
| 154,250 | | |
| - | |
| Restricted Stock Units | |
| 282,628 | | |
| - | | |
| 282,628 | | |
| - | |
| Convertible notes payable | |
| 405,800 | | |
| 405,800 | | |
| 405,800 | | |
| 405,800 | |
| | |
| 842,678 | | |
| 405,800 | | |
| 842,678 | | |
| 405,800 | |
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 $150,000 and $28,000 for the three months ended September
30, 2024 and 2023, respectively, and $186,000 and $260,000 for the nine months ended September 30, 2024 and 2023, respectively. Stock
compensation expense for directors amounted to $40,000 and $54,000 for the three months ended September 30, 2024 and 2023, respectively,
and $116,000 and $162,000 for the nine months ended September 30, 2024 and 2023, respectively. Stock compensation expenses for employees
and directors were included in operating expenses in the accompanying condensed consolidated statements of operations.
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.
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
The components of property and equipment at September
30, 2024 and December 31, 2023 consisted of the following:
| | |
September 30, | | |
December 31, | | |
| |
| | |
2024 | | |
2023 | | |
| |
| | |
| | |
| | |
| |
| Land | |
$ | 300,000 | | |
$ | 300,000 | | |
| | |
| Buildings and Improvements | |
| 2,712,000 | | |
| 2,206,000 | | |
| 31.5 years | |
| Machinery and Equipment | |
| 25,416,000 | | |
| 24,552,000 | | |
| 5 - 8 years | |
| Tools and Instruments | |
| 14,805,000 | | |
| 14,314,000 | | |
| 1.5 - 7 years | |
| Automotive Equipment | |
| 266,000 | | |
| 266,000 | | |
| 5 years | |
| Furniture and Fixtures | |
| 299,000 | | |
| 299,000 | | |
| 5 - 8 years | |
| Leasehold Improvements | |
| 1,126,000 | | |
| 1,025,000 | | |
| Term of lease | |
| Computers and Software | |
| 605,000 | | |
| 605,000 | | |
| 4 - 6 years | |
| Total Property and Equipment | |
| 45,529,000 | | |
| 43,567,000 | | |
| | |
| Less: Accumulated Depreciation | |
| (37,008,000 | ) | |
| (35,519,000 | ) | |
| | |
| Property and Equipment, net | |
$ | 8,521,000 | | |
$ | 8,048,000 | | |
| | |
Depreciation expense for the three months ended
September 30, 2024 and 2023 was $511,000 and $614,000, respectively. Depreciation expense for the nine months ended September 30, 2024
and 2023 was $1,533,000 and $1,807,000, respectively. Assets held under financed lease obligations are depreciated over the shorter of
their related lease terms or their estimated productive lives.
Note 4. OPERATING LEASE LIABILITIES
The Company has operating leases for leased office
and manufacturing facilities. The leases have remaining lease terms of one to three years, some of which include options to extend or terminate
the leases.
| | |
Three Months Ended | | |
Nine Months Ended | |
| | |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| | |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| Operating lease cost: | |
$ | 326,000 | | |
$ | 295,000 | | |
$ | 966,000 | | |
$ | 839,000 | |
| Total lease cost | |
$ | 326,000 | | |
$ | 295,000 | | |
$ | 966,000 | | |
$ | 839,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Other Information | |
| | | |
| | | |
| | | |
| | |
| Cash paid for amounts included in the measurement lease liability: | |
| 266,000 | | |
| 258,000 | | |
| 797,000 | | |
| 773,000 | |
| Operating cash flow from operating leases | |
$ | 266,000 | | |
$ | 258,000 | | |
$ | 797,000 | | |
$ | 773,000 | |
| | | September 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| Weighted Average Remaining Lease Term - in years | | | 1.95 | | | | 2.66 | |
| Weighted Average discount rate - % | | | 9.27 | % | | | 9.10 | % |
The aggregate undiscounted cash flows of operating lease payments
as of September 30, 2024, with remaining terms greater than one year are as follows:
| | |
Amount | |
| December 31, 2024 (remainder of year) | |
$ | 273,000 | |
| December 31, 2025 | |
| 992,000 | |
| December 31, 2026 | |
| 729,000 | |
| Total future minimum lease payments | |
| 1,994,000 | |
| Less: discount | |
| (179,000 | ) |
| Total operating lease maturities | |
| 1,815,000 | |
| Less: current portion of operating lease liabilities | |
| (890,000 | ) |
Total long-term portion of operating lease maturities | |
$ | 925,000 | |
Note 5. DEBT
Total debt outstanding as of September 30, 2024
is $24,976,000 and was $23,310,000 at December 31, 2023.
Current credit facilities and finance lease obligations
consist of the following:
| | |
September 30, | | |
December 31, | |
| | |
2024 | | |
2023 | |
| | |
| | |
| |
| Current Credit Facility - Revolver | |
$ | 11,437,000 | | |
$ | 10,804,000 | |
| Current Credit Facility - Term Loan | |
| 5,401,000 | | |
| 5,045,000 | |
| Solar Credit Facility | |
| 899,000 | | |
| 393,000 | |
| Finance lease obligations | |
| 1,061,000 | | |
| 884,000 | |
| Loans Payable - financed assets | |
| 16,000 | | |
| 22,000 | |
| Subtotal | |
| 18,814,000 | | |
| 17,148,000 | |
| Less: Current portion | |
| (17,066,000 | ) | |
| (16,036,000 | ) |
| Long-Term Portion | |
$ | 1,748,000 | | |
$ | 1,112,000 | |
Current Credit Facility
The Company has a credit facility (“Current
Credit Facility”) with Webster Bank that expires on December 30, 2025. This facility, which was entered into on December 31, 2019,
was amended several times (see summary of amendments below), and now provides for a $20,000,000 revolving loan (“Revolving Line
of Credit”) and a $5,700,000 term loan (“Term Loan”). The loan is secured by a lien on substantially all of the assets
of the Company.
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.
The below table shows the timing of payments
due under the Term Loan:
| For the year ending | |
Amount | |
| December 31, 2024 (remainder of year) | |
$ | 203,000 | |
| December 31, 2025 | |
| 5,225,000 | |
| Term Loan payable | |
| 5,428,000 | |
| Less: debt issuance costs | |
| (27,000 | ) |
| Total Term Loan payable, net of debt issuance costs | |
| 5,401,000 | |
| Less: Current portion of Term Loan payable | |
| (5,401,000 | ) |
| Total long-term portion of Term Loan payable | |
$ | - | |
Interest expense related to the Current Credit
Facility amounted to approximately $332,000 and $380,000 for the three months ended September 30, 2024 and 2023, respectively, and $980,000
and $1,084,000 for the nine months ended September 30, 2024 and 2023, respectively. Interest expense includes the amortization of deferred
finance costs of $17,000 and $17,000 for the three months ending September 30, 2024 and 2023, respectively, and $51,000 and $51,000 for
the nine months ending September 30, 2024 and 2023, respectively.
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 $2,620,000
as compared to $1,500,000 that was required for the cumulative nine months period ending September 30, 2024. |
| ● | 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 (25%) of the Excess Cash Flow for such fiscal year 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. |
| ● | Both the Revolving Line of Credit and the Term
Loan will bear an interest rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from
time to time in the “Money Rates” table of the Wall Street Journal (or such other presentation within The Wall Street Journal
as may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial
bank, less sixty-five hundredths (-0.65%) of one percent per annum. The average interest rate charged was 7.78% for both the three months
ended September 30, 2024 and 2023, and 7.83% and 7.44% for the nine months ended September 30, 2024 and 2023, respectively. |
| ● | 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 $2,000,000. In connection with this amendment, the Company paid an amendment fee of $10,000. |
| ● | 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)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 (iv)1.25 (as calculated on a twelve-months basis) for all other fiscal quarters. This amendment also increased
the Capital Expenditure limit to $2,500,000 in any fiscal year. In connection with these changes, the Company paid an amendment fee of
$20,000. |
| ● | On May 31, 2024, the Company entered into a Seventh
Amendment that waived the default caused by the Company’s failure to achieve the Fixed Charge Coverage Ratio required by the Sixth
Amendment. This amendment further revised the Financial Covenants. For the six months ending June30, 2024 EBITDA shall not be less than
$740,000; for the nine months ending September 30, 2024 EBITDA shall not be less than $1,500,000; for the twelve months ending December
31, 2024 EBITDA shall not be less than $2,800,000. For the rolling twelve-month period ending March 31, 2025, the Company is required
to achieve a Fixed Charge Coverage Ratio of 1.05x. Beginning with the rolling twelve-month period ending June 30, 2025 and 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. |
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 $11,437,000, leaving $8,563,000 of availability to support the Company’s
growth, subject to having the requisite collateral and maintaining compliance with the terms of the Credit Facility.
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 $934,000. As of September 30, 2024, cumulative advances totaling $899,000 had
been made including the payment of CT Green Bank’s closing costs of $25,000. Interest accrues at the rate of 5% on advances and
is added to the loan upon conversion to a term loan.
On October 1, 2024, final disbursements were made on the financing
arrangement in the amount of $35,000, bringing the cumulative advances to $934,000. The total cumulative advances along with the total
accrued interest in the amount of $36,000 as of October 1, 2024 was converted by CT Green Bank, in accordance with the financing agreement,
to a 20-year level payment term loan in the amount of $970,000 with interest accruing at the rate of 5.75%. Semi-annual payments in the
amount of $42,000 are due commencing on July 1, 2025. The first semi-annual payment will be for interest only, subsequent semi-annual
payments beginning with the payment due on January 1, 2026 will include both principal and interest. As of September 30, 2024, the amount
classified as long term is $899,000 and the amount classified as current is $0.
Interest expense related to the Solar Credit Facility amounted to approximately
$11,000 and $1,000 for the three months ended September 30, 2024 and 2023, respectively, and $30,000 and $1,000 for the nine months ended
September 30, 2024 and 2023, respectively.
Finance Lease Obligations
The Company has entered into finance leases for
the purchase of additional manufacturing equipment. The obligations for the finance leases totaled $1,061,000 and $884,000 as of September
30, 2024 and December 31, 2023, respectively. The leases have an average imputed interest rate of 7.44% per annum and are payable monthly
with the final payments due between September of 2026 and May of 2030.
| | |
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 | |
$ | 49,000 | | |
$ | 21,000 | | |
$ | 128,000 | | |
$ | 46,000 | |
| Interest on lease liabilities | |
| 20,000 | | |
| 17,000 | | |
| 53,000 | | |
| 33,000 | |
| Total lease Costs | |
$ | 69,000 | | |
$ | 38,000 | | |
$ | 181,000 | | |
$ | 79,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Other Information: | |
| | | |
| | | |
| | | |
| | |
| Cash Paid for amounts included in the measurement lease liabilities: | |
| | | |
| | | |
| | | |
| | |
| Financing cash flow from finance lease obligations | |
$ | 51,000 | | |
$ | 39,000 | | |
$ | 143,000 | | |
$ | 84,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Supplemental disclosure of non-cash activity | |
| | | |
| | | |
| | | |
| | |
| Acquisition of finance lease asset | |
$ | - | | |
$ | 679,000 | | |
$ | 319,000 | | |
$ | 679,000 | |
| | | September 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | | | | | |
| Weighted Average Remaining Lease Term - in years | | | 5.0 | | | | 5.4 | |
| Weighted Average Discount rate - % | | | 7.44 | % | | | 7.31 | % |
As of September 30, 2024, the aggregate future
minimum finance lease payments, including imputed interest are as follows:
| For the year ending | |
Amount | |
| December 31, 2024 (remainder of year) | |
$ | 73,000 | |
| December 31, 2025 | |
| 291,000 | |
| December 31, 2026 | |
| 266,000 | |
| December 31, 2027 | |
| 190,000 | |
| December 31, 2028 | |
| 190,000 | |
| Thereafter | |
| 264,000 | |
| Total future minimum finance lease payments | |
| 1,274,000 | |
| Less: imputed interest | |
| (213,000 | ) |
| Less: Current portion | |
| (219,000 | ) |
| Long-term portion | |
$ | 842,000 | |
Loan Payable – Financed Asset
The Company financed the purchase of a delivery
vehicle in July 2020. The loan obligation totaled $16,000 and $22,000 as of September 30, 2024 and December 31, 2023, respectively. The
loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.
The future minimum loan payments are as follows:
| For the year ending | |
Amount | |
| December 31, 2024 (remainder of year) | |
$ | 3,000 | |
| December 31, 2025 | |
| 9,000 | |
| December 31, 2026 | |
| 4,000 | |
| Loans Payable - financed assets | |
| 16,000 | |
| Less: Current portion | |
| (9,000 | ) |
| Long-term portion | |
$ | 7,000 | |
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 $6,550,000. In connection with these notes, Michael and
Robert were issued a total of 35,508 shares of common stock and Taglich Brothers Inc. was issued promissory notes totaling $554,000 for
placement agency fees.
The Related Party Notes outstanding as of the
notes of September 30, 2024 and December 31, 2023 consist of:
| | |
Michael Taglich, Chairman | | |
Robert Taglich, Director | | |
Taglich Brothers, Inc. | | |
Total | |
| Convertible Subordinated Notes | |
$ | 2,666,000 | | |
$ | 1,905,000 | | |
$ | 241,000 | | |
$ | 4,812,000 | |
| Subordinated Notes | |
| 1,000,000 | | |
| 350,000 | | |
| - | | |
| 1,350,000 | |
| Total | |
$ | 3,666,000 | | |
$ | 2,255,000 | | |
$ | 241,000 | | |
$ | 6,162,000 | |
Of the $6,162,000, approximately $2,732,000 bears an annual rate of
interest of 6%, $2,080,000 bears an annual rate of 7% and $1,350,000 bears an annual interest rate of 12%. Interest expense for the three
months ended September 30, 2024 and 2023 on all related party subordinated notes payable was $118,000 and $118,000, respectively, and
$354,000 and $354,000 for the nine months ended September 30, 2024 and 2023, respectively.
Approximately $2,732,000 of the convertible subordinated notes can
be converted at the option of the holder into Common Stock of the Company at $15.00 per share, while the remaining $2,080,000 of the convertible
subordinated notes can be converted at the option of the holder into common stock of the Company at $9.30 per share. The remaining $1,350,000
is not convertible. There are no principal payments due prior to July 1, 2026.
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 $250,000 to reduce the principal of the outstanding Related Party Subordinated Notes.
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 12,252 and 15,230 shares of
common stock in payment of director fees totaling $40,000 and $54,000 for the three months ended September 30, 2024 and 2023, respectively,
and 32,517 and 41,890 shares totaling $116,000 and $162,000 for the nine months ended September 30, 2024 and 2023, respectively.
The Company issued 13,754 and 15,229 shares, of
common stock to net settle the exercise of stock options for three and nine months ended September 30, 2024, respectively. There were
no issuances of common stock due to the exercise of stock options for the three and nine months ended September 30, 2023.
During the fourth quarter of 2024, the Company
issued 7,328 shares of common stock in payment of directors’ fees totaling $39,000.
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 300,000 shares, from 350,000 shares to 650,000 shares.
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 250,000 shares, from 100,000 shares to 350,000 shares. Additionally, this amendment to the 2022 Plan specified that
the Company may grant Restricted Stock Units under the 2022 Plan.
During the three and nine months ended September
30, 2024, the Company granted options to purchase 80,000 shares of common stock to its directors. During the three and nine months ended
September 30, 2023, the Company granted options to purchase 0 and 190,000 shares of common stock, respectively, to certain of its employees
and directors.
The Company recorded stock-based compensation expense
for certain employees and members of the Company’s Board of Directors of $87,000 and $28,000 for the three months ended September
30, 2024 and 2023, respectively and $122,000 and $260,000 for the nine months ended September 30, 2024 and 2023, respectively in its condensed
consolidated statements of operations, and such amounts were included as a component of operating expenses.
The fair values of stock options granted were
estimated using the Black-Sholes option-pricing model with the following assumptions for the nine months ended September 30:
| | | 2024 | | | 2023 | |
| Risk-free interest rates | | | 3.80 | % | | | 3.90 | % |
| Expected life (in years) | | | 2.7 | | | | 2.7 | |
| Expected volatility | | | 63.6 | % | | | 61.0 | % |
| Dividend yield | | | 0.00 | % | | | 0.00 | % |
| | | | | | | | | |
| Weighted-average grant date fair value per share | | $ | 3.75 | | | $ | 3.46 | |
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.
A summary of the status of the Company’s
stock options as of September 30, 2024 and December 31, 2023, and changes during the periods then ended are presented below.
| | |
Options | | |
Wtd. Avg. Exercise Price | |
| Balance, January 1, 2023 | |
| 303,050 | | |
$ | 11.70 | |
| Granted during the period | |
| 189,620 | | |
| 3.46 | |
| Exercised during the period | |
| - | | |
| - | |
| Terminated/Expired during the period | |
| (30,800 | ) | |
| 13.60 | |
| Balance, December 31, 2023 | |
| 461,870 | | |
$ | 8.34 | |
| Granted during the period | |
| 80,000 | | |
| 3.75 | |
| Exercised during the period | |
| (32,867 | ) | |
| 3.45 | |
| Terminated/Expired during the period | |
| (91,000 | ) | |
| 9.84 | |
| Balance, September 30, 2024 | |
| 418,003 | | |
$ | 7.01 | |
| | |
| | | |
| | |
| Exercisable at September 30, 2024 | |
| 353,005 | | |
$ | 7.63 | |
Issuance of Stock Options
Issued in 2024
On August 13, 2024, the Company granted to its
directors, stock options to purchase an aggregate of 80,000 shares of the Company’s common stock at a price of $3.75 per share.
The options expire on the fifth anniversary of the grant date and vest over a term of one year.
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 108,620 shares of the Company’s
common stock at a price of $3.43 per share. The options expire on the June 30, 2028 and vested immediately.
On June 2, 2023, the Company granted to its directors,
stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $3.50 per share. The options
expire on the fifth anniversary of the grant date and vest over a term of one year.
On June 2, 2023, the Company granted to certain
members of management and employees, stock options to purchase an aggregate of 75,000 shares of the Company’s common stock at a
price of $3.50 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three year.
The following table summarizes information about
outstanding stock options at September 30, 2024:
Range of
Exercise Price | | | Number
Outstanding | | | Wtd. Avg, Life | | Wtd. Avg.
Exercise Price | |
| $3.46 - $15.60 | | | | 418,003 | | | 2.8 Years | | $ 7.63 | |
The following table summarizes information about
outstanding stock options at December 31, 2023:
Range of
Exercise Price | | | Number Exercisable | | | Wtd. Avg, Life | | Wtd. Avg.
Exercise Price | |
| $3.46 - $15.60 | | | | 461,870 | | | 2.9 Years | | $ 8.34 | |
As of September 30, 2024, there was $60,000 of
unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average
vesting period of 0.75 years.
The aggregate intrinsic value at September 30,
2024 was based on the Company’s closing stock price of $5.50 was $478,000. The aggregate intrinsic value at December 31, 2023 was
based on the Company’s closing stock price of $3.25 was approximately $0. The aggregate intrinsic value was calculated based on
the positive difference between the closing market price of the Company’s Common Stock and the exercise prices of the underlying
options.
The weighted average fair value of options granted
during the periods ending September 30, 2024 and 2023 was $3.75 and $3.46 per share, respectively. The total intrinsic value of options
exercised during the three months ended September 30, 2024 and 2023 was $87,500 and $0, respectively. The total intrinsic value of options
exercised during the nine months ended September 30, 2024 and 2023 was $98,000 and $0, respectively. The total fair value of shares vested
during the three months ended September 30, 2024 and 2023 was $63,000 and $70,000, respectively. The total fair value of shares vested
during the nine months ended September 30, 2024 and 2023 was $181,000 and $415,000, respectively.
Restricted Stock Units (“RSUs”)
During the three and nine months ended September
30, 2024 and 2023, the Company granted 282,628 and 0 RSUs to certain employees. These Restricted Stock Units vest solely on the passage
of times and continued service through the vesting dates.
A summary of the status of the Company’s
RSUs as of September 30, 2024 is presented below.
| | |
Number of
Units | | |
Wtd. Avg. Grant Date
Fair Value
per Unit | |
| Unvested units as of January 1, 2024 | |
| - | | |
$ | - | |
| Granted during the period | |
| 282,628 | | |
| 6.06 | |
| Vested during the period | |
| - | | |
| - | |
| Forfeited During the period | |
| - | | |
| - | |
| Unvested Units as of September 30, 2024 | |
| 282,628 | | |
$ | 6.06 | |
| | |
| | | |
| | |
| Vested as of September 30, 2024 | |
| - | | |
$ | - | |
The Company recorded stock-based compensation expense of $63,000
and $0 for the three and nine months ended September 30, 2024 and 2023, respectively, in its condensed consolidated statements of operations,
and such amounts were included as a component of operating expenses.
As of September 30, 2024, there was $1,649,000
of unrecognized compensation cost related to non-vested RSUs, which is to be recognized over the remaining weighted average vesting period
of 2.5 years.
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 $1,000,000 for the Company’s alleged violation of the
terms of the subject sublease, specifically the failure to make the entire premises available by the Sublease commencement date. The validity
of the action is extremely suspect in that the subject sublease had no specific commencement date and Contract Pharmacal ultimately received
all the space. Discovery was conducted and the Plaintiff moved for summary judgement and to amend its complaint to add a new cause of
action all of which the company opposed. On July 8, 2021, the Court denied Contract Phamacal’s motion for summary judgement
and to add an additional cause of action. In the Order, the Court granted Contract Pharmacal’s Motions to drop its claim for specific
performance and to amend its Complaint to reduce its claim for damages to $700,000 both of which benefit the Company. Following the Court’s
decision, Contract Pharmacal filed a Motion to reargue its original motion which the Company again opposed. The Court denied that
motion on November 30, 2021 and then on March 10, 2022, Contract Pharmacal filed an appeal of the Court’s decision with the Appellate
Division of the State of New York. Once again, the Company opposed that action. The Company was again successful as the Appellate
Division upheld the lower court’s denial of Contract Pharmacal’s motion for summary judgement and its motion to amend its
Complaint. Contract Pharmacal has now submitted a motion to the Appellate Division requesting leave to reargue the court’s
denial of its original appeal. The Company will oppose that motion to reargue. The Company continues to dispute the validity
of the claims asserted by Contract Pharmacal and intends to contest them vigorously. We anticipate that due to this newest action by Contract
Pharmacal nothing of consequence will happen over the next twelve months.
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 no income tax expense for
the three and nine months ended September 30, 2024 and 2023 because the estimated annual effective tax rate was zero. In determining the
estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual
earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to
use tax credits and net operating loss carry forwards, and available tax planning alternatives.
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.
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.
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.
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.
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.
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. |
| ● | 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.
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.
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.
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
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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In connection with the Quarterly
Report of Air Industries Group, a Nevada corporation (the “Company”), on Form 10-Q for the period ended September 30, 2024,
as filed with the Securities and Exchange Commission (the “Report”), Luciano Melluzzo, Chief Executive Officer of the Company,
does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), that:
In connection with the
Quarterly Report of Air Industries Group, a Nevada corporation (the “Company”), on Form 10-Q for the period ended
September 30, 2024, as filed with the Securities and Exchange Commission (the “Report”), Scott Glassman, Chief Financial
Officer of the Company, does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350),
that:
[A signed original of this written statement required
by Section 906 has been provided to Air Industries Group and will be retained by Air Industries Group and furnished to the Securities
and Exchange Commission or its staff upon request.]