SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2007
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________
Commission file number 000-29245
AIR INDUSTRIES GROUP, INC.
(Formerly Gales Industries Incorporated).
(Exact name of small business as specified in its charter)
Delaware 20-4458244
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1479 Clinton Avenue, Bay Shore, New York 11706
(Address of principal executive offices)
(631) 968-5000
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 69,122,227 shares of Common
Stock, $.001 per share, as of November 9, 2007.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
AIR INDUSTRIES GROUP INC.
(formerly Gales Industries Incorporated)
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements........................ 3
Condensed Consolidated Balance Sheet as of September 30, 2007
(unaudited) and December 31, 2006.................................. 3
Condensed Consolidated Statement of Operations for the three
month and nine month periods ended September 30, 2007 (unaudited)
and 2006 (unaudited)............................................... 4
Condensed Consolidated Statement of Cash Flows for the nine month
periods ended September 30, 2007 (unaudited) and 2006 (unaudited) . 5
Notes to Condensed Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 11
Item 3. Controls and Procedures............................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 21
Item 6. Exhibits and Reports on Form 8-K................................... 22
SIGNATURES................................................................... 24
2
PART I. FINANCIAL INFORMATION
AIR INDUSTRIES GROUP, INC.
(formerly Gales Industries Incorporated)
Condensed Consolidated Balance Sheet
September 30, December 31,
2007 2006
(unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 760,912 $ --
Accounts Receivable, Net of Allowance for Doubtful
Accounts of $304,451 and $176,458 6,760,328 3,508,957
Inventory 21,457,096 15,257,641
Prepaid Expenses and Other Current Assets 139,308 232,749
Deposits 338,694 180,456
------------ ------------
Total Current Assets 29,456,338 19,179,803
Property and Equipment, net 4,385,643 3,565,316
Deferred Financing Costs 587,203 369,048
Other Assets 406,581 63,522
Goodwill 11,553,546 1,265,963
Income Taxes Receivable 127,613 --
Deposits 471,119 448,530
------------ ------------
TOTAL ASSETS $ 46,988,043 $ 24,892,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Expenses $ 5,579,317 $ 7,648,426
Notes Payable - Revolver 10,942,980 5,027,463
Notes Payable - Current Portion 4,627,776 127,776
Notes Payable - Sellers - Current Portion 1,066,671 192,400
Capital Lease Obligations - Current Portion 283,551 407,228
Due to Sellers -- 53,694
Dividends Payable 120,003 120,003
Deferred Gain on Sale - Current Portion 38,033 38,033
Income Taxes Payable -- 653,426
------------ ------------
Total current liabilities 22,658,331 14,268,449
Long term liabilities
Notes Payable - Net of Current Portion 677,126 645,458
Notes Payable - Sellers - Net of Current Portion 2,825,221 1,290,562
Capital Lease Obligations - Net of Current Portion 1,265,094 552,589
Deferred Tax Liability 862,208 512,937
Deferred Gain on Sale - Net of Current Portion 684,591 713,118
Deferred Rent 182,045 39,371
------------ ------------
Total liabilities 29,154,616 18,022,484
------------ ------------
Commitments and contingencies
Stockholders' Equity
Preferred Stock - Authorized 8,003,716
Series A Convertible Preferred - $0.001 Par Value, 1,000 Shares Authorized
0 shares issued and Outstanding as of September 30, 2007
and December 31, 2006 respectively -- --
Series B Convertible Preferred - $0.001 Par Value, 2,000,000 Shares
Authorized 802,300 and 0 Shares Issued and Outstanding as of September 30, 2007
and December 31, 2006 respectively 802 --
Common Stock - $0.001 Par, 120,055,746 Shares Authorized
69,122,227 and 57,269,301 Shares Issued and Outstanding
as of September 30, 2007 and December 31, 2006 respectively 69,122 57,269
Additional Paid-In Capital 18,814,113 7,898,702
Accumulated Deficit (1,050,610) (1,086,273)
------------ ------------
Total Stockholders' Equity 17,833,427 6,869,698
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,988,043 $ 24,892,182
============ ============
See notes to condensed consolidated financial statements
3
AIR INDUSTRIES GROUP INC.
(formerly Gales Industries Incorporated)
Condensed Consolidated Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
Net sales $ 12,845,821 $ 7,883,485 $ 31,323,487 $ 26,001,922
Cost of Sales 9,254,338 6,362,076 24,110,520 21,214,968
------------- ------------- ------------- -------------
Gross profit 3,591,483 1,521,409 7,212,967 4,786,954
Operating costs and expenses:
Selling and marketing 384,453 175,515 1,005,331 473,760
General and administrative 2,232,681 1,108,651 5,069,093 2,982,584
------------- ------------- ------------- -------------
Income from operations 974,349 237,243 1,138,543 1,330,610
Interest and financing costs 478,920 290,853 890,743 978,029
Gain on sale of life insurance policy -- -- -- (53,047)
Gain on Sale of Real Estate (9,509) -- (28,527)
Other Income (15,125) -- (25,012) (803)
Other Expenses 50,708 -- 76,012 --
------------- ------------- ------------- -------------
Income (loss) before income taxes 469,355 (53,610) 225,327 406,431
(Provision) benefit for income taxes (46,761) 21,455 (189,664) (162,654)
------------- ------------- ------------- -------------
Net income (loss) 422,594 (32,155) 35,663 243,777
Less: Dividend attributable to
Preferred stockholders 136,578 100,000 247,542 460,000
------------- ------------- ------------- -------------
Net income (loss) attributable
to common stockholders $ 286,016 $ (132,155) $ (211,879) $ (216,223)
============= ============= ============= =============
Income (loss) per share (basic) $ 0.00 $ (0.00) $ (0.00) $ (0.00)
============= ============= ============= =============
Income (loss) per share (diluted) $ 0.00 $ (0.00) $ (0.00) $ (0.00)
============= ============= ============= =============
Weighted average shares outstanding (basic) 67,838,959 41,545,824 64,149,247 23,762,472
============= ============= ============= =============
Weighted average shares outstanding (diluted) 70,734,615 41,545,824 64,149,247 23,762,472
============= ============= ============= =============
See notes to condensed consolidated financial statements
4
AIR INDUSTRIES GROUP INC.
(formerly Gales Industries Incorporated)
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-----------------------------
2007 2006
Net Income $ 35,663 $ 243,777
Adjustments to Reconcile Net Income to Net
Cash Used in Operating Activities, net of effects of acquisitions:
Depreciation and amortization of property and equipment 568,595 409,361
Bad Debt Expense 129,111 --
Non-Cash Compensation Expense 329,330 108,271
Warrants issued for services 31,303 41,345
Accrued Interest on Notes Payable-Sellers 16,604 --
Amortization of deferred financing costs 99,345 86,405
Gain on Sale of Officer's life insurance policy -- (53,047)
Gain on Sale of Real Estate (28,527) --
Deferred Taxes 349,271 --
Changes in Assets and Liabilities
(Increase) Decrease in Assets:
Accounts receivable (326,626) (575,592)
Income Taxes Receivable (127,613) --
Inventory (2,959,777) (980,867)
Prepaid expenses and Other Current Assets 138,545 138,804
Deposits (156,787) (82,206)
Cash surrender value - officer's life insurance -- (2,110)
Other assets (320,297) 84
Increase (Decrease) in Liabilities:
Accounts payable and accrued expenses (4,074,252) (45,794)
Income Taxes Payable (653,426) --
Deferred Rent 142,674 --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (6,806,864) (711,569)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, including transaction costs
of $486,200, net of cash acquired of $94,448 (7,952,547) --
Cash Paid for Deposit on Leasehold Improvements (24,040) --
Purchase of property and equipment (187,926) (211,815)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (8,164,513) (211,815)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Private Placement 8,023,000 --
Proceeds from sale of officer's life insurance -- 86,000
Payment of Issuance Costs of Private Placement (698,840) --
Principal payments on capital lease obligations (84,172) (267,840)
Repayment of notes payable to Officers and Sellers (336,913) (161,222)
Proceeds from notes payable, net 3,231,197 503,100
Proceeds from Notes Payable-Revolver 5,915,517 --
Cash paid for Deferred Financing Costs (317,500) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,732,289 160,038
------------ ------------
Net increase in cash and cash equivalents 760,912 (763,346)
Cash and cash equivalents at the beginning of period -- 1,058,416
------------ ------------
Cash and cash equivalents at the end of period $ 760,912 $ 295,070
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 646,665 $ 788,409
============ ============
Cash paid during the period for taxes $ 678,729 $ --
============ ============
Supplemental schedule of noncash financing and investing activities
Property and Equipment acquired under capital leases $ 673,000
============
Conversion of Preferred to Common Stock $ 40,909
============
Conversion of PIK Dividend to Common Shares $ 360,000
============
See notes to condensed consolidated financial statements
5
AIR INDUSTRIES GROUP INC.
(formerly Gales Industries Incorporated)
Condensed Consolidated Statement of Cash Flows (Continued)
(Unaudited)
Note Payable-Seller and accrued interest
converted to common stock $ 719,773 --
=========== ===========
Purchase of all capital stock of Sigma Metals, Inc and assumption of
liabilities in the acquisition as follows:
Fair Value of Tangible Assets acquired $ 5,691,777
Goodwill 5,168,319
Cash paid (includes transaction costs of $280,500) (4,341,296)
Notes payable issued to Sellers (1,497,411)
Common stock issued (1,957,000)
-----------
Liabilities assumed $ 3,064,389
===========
Purchase of all capital stock of Welding Metallurgy, Inc and assumption of
liabilities in the acquisition as follows:
Fair Value of Tangible Assets acquired $ 1,292,067
Goodwill 5,119,265
Cash paid (includes transaction costs of $205,700) (3,705,700)
Notes payable issued to Sellers (net of accredited
value of $140,000) (1,860,000)
Common stock issued (566,500)
-----------
Liabilities assumed $ 279,132
===========
See notes to condensed consolidated financial statements
6
Note 1. FORMATION AND BASIS OF PRESENTATION
On June 26, 2007, we changed our name from Gales Industries Incorporated
to Air Industries Group, Inc.
On April 16, 2007, we acquired all of the issued and outstanding capital
stock of Sigma Metals, Inc. ("Sigma"), pursuant to a certain Stock
Purchase Agreement, dated as of January 2, 2007, from the three
shareholders of Sigma (the "Sellers"), in exchange for, $4,060,796 in
cash, three promissory notes, one in favor of each Seller, in the total
principal amount of $1,497,411, and 7,416,082 shares of our Common Stock
at $0.2563 per share equaling $1,957,000. Soft costs incurred as a result
of this acquisition amounted to $280,500.
Sigma Metals is a specialty distributor of strategic metals, primarily
aluminum, stainless steels of various grades, titanium and other exotic
end user specified metals. Sigma's products are sold to both
aerospace/defense contractors as well as commercial accounts throughout
the U.S. and numerous international markets. Customers include the world's
largest aircraft manufacturers, subcontractors, original equipment
manufacturers and various government agencies.
On August 26, 2007, we acquired all of the issued and outstanding capital
stock of Welding Metallurgy, Inc ("Welding Met") pursuant to a certain
Stock Purchase Agreement, dated as of March 9, 2007 from the two
shareholders of Welding Met (the "Sellers") in exchange for, $3,500,000 in
cash, a promissory note in the principal amount of $2,000,000 (this note
is recorded at $1,860,000 to reflect the fact that no interest accrues for
the first year)(see Note 9) and 2,035,529 shares of our Common Stock at
$0.2702 per share equaling $566,500. One-half of these shares are held in
escrow, as secondary collateral for representations and warranties
pursuant to the aforementioned Stock Purchase Agreement. The amount paid
to the shareholders of Welding Met is subject to an adjustment for Welding
Met's working capital as of the closing date such amount has not yet been
finalized. Soft costs incurred as a result of this acquisition amounted to
$205,700.
Welding Metallurgy is a specialty welding and products provider whose
significant relationships include the world's largest aircraft
manufacturers, subcontractors, and original equipment manufacturers.
Our operating results for the period ended September 30, 2007, include the
results of the operations of Sigma beginning on April 17, 2007 and Welding
Metallurgy beginning on August 27, 2007. In accordance with Statement of
Financial Accounting Standards ("SFAS") 141, Business Combinations, the
acquisitions of Sigma and Welding were accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to
assets acquired and liabilities assumed based on SFAS No. 141 and are
reflected in the balance sheet of the Company as of September 30, 2007
included herein. The Company is in the process of finalizing the
allocation of the purchase price to the assets and liabilities based on
their relative fair values.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures are
adequate to make the financial information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2006, filed with the Securities and Exchange Commission on
April 2, 2007. All adjustments were of a normal recurring nature unless
otherwise disclosed. In the opinion of management, all adjustments
necessary for a fair statement of the results of operations for the
interim period have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full
year.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and various
contingencies. Actual results could differ from those estimates. Changes
in facts and circumstances may result in revised estimates, which are
recorded in the period in which they become known.
7
Note 1. FORMATION AND BASIS OF PRESENTATION (Continued)
Share-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 123(R) "Share Based
Payments" which is a revision of SFAS No. 123 "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board Opinion No. 25.
SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the statement of
operations based on their fair values at the date of grant. The Company
recorded in the accompanying statement of operations an expense of $62,827
and $42,866 for the three month period ended September 30, 2007 and 2006,
respectively and an expense of $329,330 and $108,271 for the nine month
period ended September 30, 2007 and 2006, respectively, in accordance with
the measurement requirements under SFAS No. 123(R) (See Note 4). The
Company adopted SFAS No. 123(R), effective in 2005.
Taxes
Effective January 1, 2007, the Company adopted the provisions of the
Financial Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"). There were no unrecognized tax benefits as
of January 1, 2007 and as of September 30, 2007. FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by
taxing authorities. Management is currently unaware of any issues under
review that could result in significant payments, accruals or material
deviations from its position. The adoption of the provisions of FIN 48 did
not have an impact on the Company's financial position, results of
operations and cash flows.
Note 2. CASH SURRENDER VALUE - LIFE INSURANCE
During the quarter ended March 31, 2006, the Company sold one of its
key-man life insurance policies. Proceeds from the sale of the insurance
policy were $86,000 which was offset by the cash surrender value of
$32,953. The resulting gain of $53,047 was recognized as Other
Non-Operating Income in the accompanying Statement of Operations for the
nine month period ended September 30, 2006.
Note 3. CONVERSION OF NOTES PAYABLE
On January 26, 2007, two executive officers exercised their right to
convert $665,262 principal amount of our notes plus accrued interest of
$54,511 into an aggregate of 1,799,432 shares of common stock at a
conversion price of $0.40 per share.
Note 4. SHARE-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option plan
and reserved 10,000,000 shares of its Common Stock for issuance under the
plan. The stock option plan permits the Company to grant non-qualified and
incentive stock options to employees, directors, and consultants. Awards
granted under the Company's plans vest over three, four, five and seven
years.
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment ("SFAS 123R"). The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model. During the nine months ended September 30, 2007,
2,380,000 stock options were granted. No options were granted during the
nine months ended September 30, 2006.
Certain of the Company's stock options contain features which include
variability in grant prices. A portion of the currently issued stock
options will be exercisable based on average trading prices of the
Company's Common Stock at the end of a given future period. Due to this
variable feature, these stock options are not deemed to be granted for
purposes of applying SFAS 123(R) and accordingly, their fair value will be
calculated and expensed in future periods.
8
Note 4. SHARE-BASED COMPENSATION ARRANGEMENTS (Continued)
At September 30, 2007 and 2006, 2,496,666 and 1,580,000 options are vested
and exercisable, respectively. The weighted average exercise price of
exercisable options at September 30, 2007 was $0.43 per share.
During the quarter ended March 31, 2007, the Company issued warrants to
purchase an aggregate of 20,833 shares to a consultant for services
rendered. These warrants have a term of five years and an exercise price
equal to 120% of the average closing price of the Company's Common Stock
during the month immediately preceding the date of issuance. These
warrants have a cashless exercise feature. The warrants were valued using
the Black-Scholes model and the Company recorded an expense of $5,514 in
its consolidated statement of operations for the nine months ended
September 30, 2007. The Company's agreement with this consultant was
terminated during the first week of September 2006.
In addition, warrants to acquire 125,000 shares with a grant date of March
16, 2007 were issued to another consulting firm. These warrants are
exercisable at a per share price of $0.28 the average closing price of the
Company's common stock for the 20 days preceding the date of grant, and
have a cashless exercise feature and vested on the grant date. The
warrants were valued using the Black-Scholes model and the Company
recorded an expense of $25,789 in its consolidated statement of operations
for the quarter ended March 31, 2007.
The Company issued to Taglich Brothers, Inc., placement agent for the
private offering of the Company's Series B Convertible Preferred Stock
described in Note 5, warrants to purchase 2,900,578 shares of Common Stock
at a per share exercise price of $0.305 in addition to other
consideration. These warrants have a term of five-years and a cashless
exercise feature. These warrants were valued at $32,000 using the
Black-Scholes model and the value of such warrants was deducted from the
additional paid in capital resulting from the offering.
Note 5. ISSUANCE OF SERIES B PREFERRED STOCK
To finance the acquisition of Sigma and provide us with additional working
capital, we completed a private placement of our Series B Convertible
Preferred Stock, par value $0.001 per share ("Series B Preferred Stock")
in which we raised gross proceeds of $8,023,000.
The Company issued to Taglich Brothers, Inc. placement agent for the
private offering of the Company's Series B Convertible Preferred Stock:
(i) a sales commission of $641,840 or 8% of the gross proceeds of the
offering, (ii) $25,000 as reimbursement of its actual and reasonable
out-of-pocket expenses incurred in connection with offering, including
fees and expenses of its counsel, and (iii) warrants to purchase 2,900,578
shares of Common Stock at a per share exercise price of $0.305. These
warrants have a term of five-years and a "cashless exercise" feature. The
preferred stock contains a 7% cumulative non-declared dividend which
amounted to $247,542 for the nine months ended September 30, 2007.
Note 6. AMENDMENT OF CREDIT FACILITY
On April 19, 2007, in connection with the acquisition of Sigma Metals, the
Company entered into a Third Amendment to the Revolving Credit, Term Loan,
Equipment Line of Credit and Security Agreement with PNC Bank. The
amendment cost $42,500 and modified the terms of the Loan Facility with
PNC to allow for Sigma to become a borrower under the Loan Facility. This
cost is being amortized over the remaining term of the credit facility. As
a result of Sigma becoming a borrower under the Loan Facility, Sigma
pledged all of its assets and properties to PNC to secure its obligations
under the Loan Facility. In addition, the termination date of the Loan
Facility was extended to April 30, 2010 and the maximum revolving advance
amount was increased by $2,000,000, from $9,000,000 to $11,000,000. The
Company remains in compliance with its Debt covenants.
In connection with the acquisition of Welding Metallurgy, we also amended
and modified the terms of the Loan Facility with PNC to allow for Welding
Metallurgy, Inc., and Air Industries Group, Inc., to become parties to the
Loan Facility. In connection with such amendment, Welding Metallurgy
pledged all of its assets to secure amounts due under the Loan Facility.
The maximum revolving advance amount was increased by $3,000,000 from
$11,000,000 to $14,000,000.
9
Note 6. AMENDMENT OF CREDIT FACILITY (Continued)
In order to finance the acquisition of Welding Metallurgy, Steel City
Capital Funding LLC("SCCF")("Term B Lender") provided a Term Loan to the
Company of $4,500,000. The Term Loan is be payable on August 24, 2010.
Borrowings under the SCCF Loan Agreement bear interest, payable monthly,
generally at a rate of 6% over the base commercial lending rate of PNC
Bank as publicly announced from time to time. Under the terms of our loan
agreements these amounts are not due to be repaid until August 24, 2010,
but have been included in current liabilities due to the right of the
banks to demand immediate repayment upon the occurrence of certain events
(subjective acceleration clause) which management believes are not likely
to occur, combined with the existence of a lockbox arrangement. In
addition to secure the obligations due SCCF, we pledged to SCCF the
capital stock of Air Industries Machining Corp, Sigma Metals, and Welding
Metallurgy, and each of such entities granted to SCCF a security interest
on all of their assets.
Note 7. CASHLESS EXERCISE OF OPTIONS TO FORMER CHARIMAN
On May 17, 2007, the former Executive Chairman converted 250,000 of his
options into 90,580 shares of Company Common Stock pursuant to the
cashless exercise feature contained in his option agreement.
Note 8. CONTINGENCIES
We are a defendant in an action by our former investor relations firm
filed on September 18, 2007 in the Supreme Court of the State of New York,
New York County captioned Porter, Levay & Rose, Inc. against Air
Industries Group, Inc. et al. (Index No. 003104/07). The complaint alleges
breach of contract and seeks compensatory damages of approximately
$211,347 for services rendered and an order directing us to deliver to
plaintiff warrants to purchase 125,000 shares of our common stock,
containing a cashless exercise feature. The complaint also seeks punitive
damages unspecified in amount. The case is in its early stages. We
previously issued approximately 41,668 of the warrants sought by the
plaintiff. We anticipate this action will be settled for approximately
$30,000 and have accrued an expense in such amount.
Note 9. SELLERS NOTES
In connection with the acquisition of Sigma Metals, we incurred notes
payable obligations to the former shareholders of Sigma Metals in the
aggregate principal amount of $1,497,411. The principal balance of the
remaining balance is $1,346,826 and is repayable by us in equal monthly
installments of $43,446 principal, plus interest.
In connection with the acquisition of Welding Metallurgy, we incurred
notes payable obligations to the former shareholders of Welding Metallurgy
in the aggregate principal amount of $2,000,000, which bear no interest
until August 24, 2008, and bear interest thereafter at 7% per annum. To
reflect that fact that this note does not bear interest for the first
year, we have discounted the value of the note in our accompanying balance
sheet to $1,860,000, and will expense the imputed interest on a monthly
basis and accrete up the value of the note to its face value of
$2,000,000. The indebtedness evidenced by this note is subordinate to our
indebtedness to PNC and SCCF and is payable in one installment in the
principal amount of $500,000 due on August 24, 2008 and twelve consecutive
quarterly installments of principal in the amount of one-hundred
twenty-five thousand dollars, plus accrued interest commencing on November
30, 2008 and continuing through August 31, 2011.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion of our results of operations constitutes
management's review of the factors that affected our financial and operating
performance for the three and nine months ended September 30, 2007 and 2006.
This discussion should be read in conjunction with the financial statements and
notes thereto contained elsewhere in this report and in our Form 10-KSB, for the
year ended December 31, 2006.
General
We manufacture aircraft structural parts and assemblies principally for
prime defense contractors in the aerospace industry. During 2006, approximately
85% of our revenues were derived from sales of parts and assemblies directed
toward military applications, although direct sales to the military (U.S. and
NATO) constituted less than 8.5% of our revenues. We have evolved from being an
individual parts manufacturer to being a manufacturer of subassemblies (i.e.
being an assembly constructor) and being an engineering integrator. We currently
produce over 2,400 individual products (SKU's) that are assembled by a skilled
labor force into electromechanical devices, mixer assemblies, rotor-hub
components, rocket launching systems, arresting gear, vibration absorbing
assemblies, landing gear components and many other subassembly packages.
As a result of acquisitions we completed in the second and third quarters
as part of our plan to capitalize on our relationships in the aerospace
industry, we have become a specialty distributor of strategic metals, primarily
aluminum, stainless steels of various grades, titanium and other exotic end user
specified materials sourced from suppliers throughout the world, and a provider
of specialty welding services and metal products. Our metals products are sold
throughout the world to prime contractors in the defense and commercial
aerospace industries, aerospace engine manufacturers and various subcontractors
to aerospace manufacturers. Our welding services and products are provided to
similar customers in the United States.
Sales of parts and services to one customer accounted for approximately
41.7% of our consolidated revenue in the third quarter of 2007, and 49.2% of our
consolidated revenue in the nine months ended September 30, 2007 and are subject
to General Ordering Agreements which extend through 2013.
Results of Operations
We completed the acquisition of our metals distribution operations on
April 16, 2007, and the acquisition of our welding operations on August 26,
2007, consequently, the results of such operations from April 17, 2007, and
August 27, 2007, respectively, are included in our financial statements for the
period ended September 30, 2007, and reflected in the discussion below.
Results of Operations
Three months ended September 30, 2007 compared with three months ended September
30, 2006
Net Sales. Net sales were $12,845,821 for the three months ended September
30, 2007 ("Third Quarter 2007"), increased by $4,962,336 or 62.95% from net
sales of $7,883,485 for the three months ended September 30, 2006 ("Third
Quarter 2006"). The increase in net sales was attributable primarily to the
acquisition of our metals distribution and welding operations which generated
net sales during the quarter of $3,905,260 supplemented by an increase in net
sales of our preexisting operations of $1,057,076 over net sales for such
operations during the Third Quarter 2006.
Gross Profit. In the Third Quarter 2007, gross profit increased by
$2,070,074 or 136.1%, to $3,591,483 or 27.95% of net sales, compared to gross
profit of $1,521,409 or 19.6% of net sales in Third Quarter 2006. This increase
in gross profit reflects the contribution of $1,402,493 from our newly acquired
metals distribution and welding operations, and the $667,581 increase in the
gross profit of our pre-existing operations from the gross profit recorded in
the Third Quarter 2006. The increase in gross profit margin reflects the higher
margins of our metals distributions and welding operations which generated gross
profit margins of 34.4% and 46.0%, respectively, during the Third Quarter 2007,
as compared to our pre-existing operations which generated gross profit margins
of 24.48% during the Third Quarter 2007. The year over year improvement in the
gross profit margin of our pre-existing operations was primarily attributable to
a shift in production to higher margin products.
11
Selling and Marketing Expenses. Selling and marketing expenses were
$384,453 in Third Quarter 2007, an increase of $208,938 or 119.04% from selling
and marketing expenses of $175,515 in Third Quarter 2006. The increase in
selling and marketing expenses is attributable to expenses associated with our
recently acquired metals distribution and welding operations slightly offset by
a reduction of $29,189 in selling and marketing expenses of our pre-existing
operations.
General and Administrative Expenses. General and administrative expenses
were $2,232,681 in Third Quarter 2007, an increase of $1,124,030 or 101.4% from
general and administrative expenses of $1,108,651 in Third Quarter 2006. The
increase reflects the general and administrative expenses of our metals
distribution and welding operations, costs related to the integration of the
operating and financial systems of our metals distribution and welding
operations into our general systems, costs of upgrading our financial reporting
systems to accommodate future acquisitions, and the expense of preparing to
comply with Section 404 of the Sarbanes-Oxley Act of 2002.
Interest and Financing Costs. Interest and financing costs were $478,920
in Third Quarter 2007, an increase of $188,067 or 64.7% from interest and
financing costs of $290,853 in Third Quarter 2006. The increase in interest and
financing costs resulted from the incurrence of debt during 2007 to acquire our
metals distribution and welding operations which offset the savings from the
sale and leaseback of our headquarters in October 2006
Gain on sale of real estate. We are required to defer recognition of a
portion of the gain on the sale of our headquarters in the fourth quarter of
2006. This gain is being recognized ratably over the twenty year term of our
lease for this real estate. Accordingly, we recognized $9,509 during the Third
Quarter of 2007.
Income (Loss) before Income Taxes. Income before the impact of income
taxes was $469,355 in Third Quarter 2007 compared to a loss before the provision
for income taxes of ($53,610) in Third Quarter 2006, an increase of $522,965.
The increase in income resulted primarily from the contributions of our metals
distribution and welding operations, which generated income before taxes during
the Third Quarter 2007 of $368,495 and $150,407, respectively, offset by a loss
at our pre-existing operations as we continued to recover from the disruption
caused by a decision in the Third Quarter 2006 of our major customer to defer
shipments in order to recover from its operating difficulties.
Net Income (Loss). Net income for the Third Quarter of 2007 was $422,594,
as compared to a net loss of ($32,155) for the Third Quarter 2006. This increase
was primarily attributable to the contributions from our metals distribution and
welding operation and the improved performance of our pre-existing operations as
described above.
Net Income (Loss) Attributable to Common Stockholders. The dividend
payable on the our Series A preferred stock in the Third Quarter 2006 exceeded
our net loss during such period, resulting in a net loss attributable to common
stockholders of ($132,155). Our Series A preferred stock was converted into
common stock in August 2006. In April and May of 2007, we issued shares of our
Series B Preferred Stock. The dividend attributable to our Series B Preferred
Stock during the Third Quarter 2007 reduced our net income attributable to
common stockholders for the quarter to $286,016.
Nine months ended September 30, 2007 compared with nine months ended September
30, 2006
Net Sales. Net sales were $31,323,487 for the nine months ended September
30, 2007, increased by $5,321,565 or 20.5% from net sales of $26,001,922 for the
nine months ended September 30, 2006. The increase in net sales was attributable
to the consolidation of $6,689,684 of net sales from the metals distribution and
welding operations acquired on April 16, 2007 and August 27, 2007, respectively,
offset in part by a reduction in net sales of our pre-existing operations during
the period of approximately $1,368,119. The reduction in sales at our
pre-existing operations during the period reflects the lower sales during the
first six months of 2007 as a result of a decision in the third quarter of 2006
of our largest customer to delay acceptance of products manufactured as it
attempted to recover from its operating difficulties. Management believes that
we have now adjusted our manufacturing schedules and, absent further
disruptions, should no longer be adversely impacted by the disruption to our
largest customer's operations during 2006.
12
Gross Profit. In the nine months ended September 30, 2007, gross profit
increased by $2,426,013 or 50.68%, to $7,212,967 or 23.03% of net sales,
compared to gross profit of $4,786,954 or 18.41% of net sales in nine months
ended September 30, 2006. This increase in gross profit reflects the
contribution of our metals distribution and welding operations supplemented by
the improvement in the gross profit at our pre-existing operations during 2007.
The increase in gross profit margin reflects the higher margins of our metals
distributions and welding operations which generated gross profit margins of
29.0% and 46.0%, respectively, since the acquisition of those operations, as
compared to our pre-existing operations which generated gross profit margins of
21.1% during the first nine months of 2007.
Selling and Marketing Expenses. Selling and marketing expenses were
$1,005,331 in the nine months ended September 30, 2007, an increase of $531,571
or 112.20% from selling and marketing expenses of $473,760 in the nine months
ended 2006. The increase in selling and marketing expenses is attributable to
expenses of our metals distribution and welding operations. Our pre-existing
operations selling and marketing expenses decreased year over year for the
period by $115,533, or 24.4%, due to lower sales and a reduction in market
efforts.
General and Administrative Expenses. General and administrative expenses
were $5,069,093 in the first nine months of 2007, an increase of $2,086,509 or
69.96% from general and administrative expenses of $2,982,584 in the nine months
ended September 30, 2006. The increase primarily reflects the effects of the
expenses for our metals distribution and welding operations of $831,755 during
the period coupled with the general and administrative expenses incurred to
acquire such operations and integrate them into our pre-existing operations. In
addition, we incurred costs related to upgrading our financial reporting systems
to accommodate future acquisitions and preparing to comply with Section 404 of
the Sarbanes-Oxley Act of 2002.
Interest and Financing Costs. Interest and financing costs were $890,743 in the
nine months ended September 30, 2007, a decrease of $87,286 or 8.92% from
interest and financing costs of $978,029 for the nine months ended 2006. The
decrease in interest and financing costs resulted from the decrease in the
levels of our outstanding debt as a result of the sale leaseback of our
headquarters in October 2006, partially offset by the increase in debt
associated with the acquisitions of our metals distribution and welding
operations.
Gain on sale of real estate. We were required to defer recognition of a
portion of the gain on the sale of our headquarters in the fourth quarter of
2006. This gain is being recognized ratably over the twenty year term of the
lease for this real estate. Accordingly, we recognized $28,527 during the nine
months ended September 30, 2007.
Income before Income Taxes. Income before the impact of income taxes was
$225,327 in the nine months ended September 30, 2007 as compared to pre-tax
income in the same period for the prior year of $406,431, a decrease of
$181,104. This was a function of lower sales primarily during the first six
months of 2007 at our pre-existing operations. Sales at our pre-existing
operations for the nine months ended September 30, 2007, were down by $1,368,119
or 5.3% from the prior year's $26,001,922, primarily for the reasons discussed
above, after having been down by $2,425,195 or 13% in the first six months of
2007 as compared to the first six months of 2006. This decrease in income at our
pre-existing operations was partially offset by the contributions of our metals
distributions and welding operations, which generated income before taxes of
$482,326 during the nine months ended September 30, 2007. Management believes
that we have now adjusted our manufacturing schedules and overcome the
difficulties caused by the disruption to our largest customer's operations
during 2006.
Net Income. Net income decreased from $243,777 in the nine months ended
September 30, 2006 to net income of $35,663 in the first nine months of 2007.
The decrease in net income was attributable to the factors discussed above as
well as the effect of the FAS 109, income tax expense.
Net (Loss) Attributable to Common Stockholders. The dividend payable on
our Series A preferred stock in the nine months ended September 30, 2006
exceeded our net income during such period, resulting in a net loss attributable
to common stockholders of ($216,223). Our Series A preferred stock was converted
into common stock in August 2006. Similarly, the dividend related to our Series
B preferred stock during the nine months ended September 30, 2007 exceeded our
net income during the period resulting in a net loss attributable to common
stockholders of ($211,879). Our Series B preferred stock accrues dividends at a
rate of 7% per annum.
13
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Liquidity and Capital Resources
At September 30, 2007, we had cash or cash equivalents of $760,912 as
compared to $0 at December 31, 2006. The Loan Facility provided by PNC requires
that all cash at our operating subsidiaries be swept on a daily basis to our
loan accounts. The $760,912 currently on hand represents the portion of the
proceeds of our private placement completed in the second quarter of 2007, that
has yet to be applied to operations. At September 30, 2007, we had working
capital of $6,798,007 as compared to working capital of $4,911,354 as of
December 31, 2006. This increase in working capital reflects the proceeds of the
placement of our Series B Preferred Stock, offset by the cost of acquiring our
metals distribution and welding operations and our negative cash flows from
operations during the first nine months of 2007. It should be noted that
included in current liabilities is an aggregate of $15,570,756 due PNC
($10,942,980) and SCCF ($4,500,000). Under the terms of our loan agreements
these amounts are not due to be repaid until April 30, 2010 and August 24, 2010,
but have been included in current liabilities due to the right of the banks to
demand immediate repayment upon the occurrence of certain events which
management believes are not likely to occur, combined with the existence of a
lockbox arrangement. We believe that our cash requirements for operations in
the next twelve months will be met by revenues from operations, cash reserves,
and amounts available under the Loan Facility.
We used $6,806,864 in operations during the nine months ended September
30, 2007. The use of cash in operations reflects an increase in inventory of
$2,959,777 at our pre-existing operations, an increase in our deposits with
vendors of $156,787, a decrease in prepaid expenses of $138,545, a decrease in
our accounts payable and accrued expenses of $4,039,254, and an increase in the
accounts receivable associated with our pre-existing operations of $454,618. The
increase in our inventory and decrease in our accounts payable noted above are
those associated with our pre-existing operations and do not reflect the changes
resulting from the acquisitions of our metals distribution and welding
operations. The increase in inventory reflected on our balance sheets included
herein resulted primarily from the acquisition of our metals and welding
operations and, in part, from work flow disruptions at our principal customer
which prevented us from shipping all of the inventory originally anticipated.
The increase in deposits with vendors and decrease in accounts payable are due
to advanced payment requirements imposed by certain suppliers of our
pre-existing operations. As a result of efforts to reduce amounts due these
suppliers, we anticipate that they may not require prepayments in the immediate
future.
In connection with the acquisition of Air Industries Machining Corp., we
incurred notes payable obligations to the sellers in the aggregate principal
amount of $1,627,262, of which $665,262 were in the form of convertible
promissory notes which were converted by the holders into 1,799,432 shares of
common stock at a conversion price of $0.40 per share on January 26, 2007. The
remaining principal amount, $673,400, and payable in equal quarterly
installments of $48,100 principal, plus interest.
In connection with the acquisition of Sigma Metals, in addition to the
issuance of Preferred Stock and incurrence of debt discussed below, we incurred
notes payable obligations to the former shareholders of Sigma Metals in the
aggregate principal amount of $1,497,411. The remaining principal balance,
$1,346,826, is payable in equal monthly installments of $43,446 of principal
plus interest.
In connection with the acquisition of Welding Metallurgy, we incurred a
notes payable obligation to the former shareholders of Welding Metallurgy in the
aggregate principal amount of $2,000,000, which bears no interest until August
24, 2008, and bears interest thereafter at 7% per annum. To reflect the fact
that this note does not bear interest for the first year, we have discounted the
value of the note in our accompanying balance sheet to $1,860,000, and will
expense the imputed interest on a monthly basis and accrete up the value of the
note to its face value of $2,000,000. The indebtedness evidenced by this note is
subordinate to our indebtedness to PNC and SCCF and is payable in one
installment in the principal amount of $500,000 due on August 24, 2008 and
twelve consecutive quarterly installments of principal in the amount of
one-hundred twenty-five thousand dollars, plus accrued interest commencing on
November 30, 2008 and continuing through August 31, 2011.
14
The terms of the PNC Loan Facility are set forth in our Consolidated
Financial Statements included in our Annual Report on Form 10-KSB for the year
ended December 31, 2006 and the amendments there have been discussed in on our
previously filed reports on Form 8-K. Under the PNC Loan Facility, as of
September 30, 2007, we had revolving loan balances of $10,942,980, a term loan
balance of $266,402, an equipment loan balance of $411,200, and an outstanding
stand-by letter of credit in the amount of $127,500. In addition, as of
September 30, 2007 we had capital lease obligations to other parties totaling
$1,548,645.
To finance the acquisition of Sigma and provide us with additional working
capital,we completed a private placement of our Series B Convertible Preferred
Stock, par value $0.001 per share ("Series B Preferred Stock") in which we
raised gross proceeds of $8,023,000. A first closing, in which we received gross
proceeds of $4,955,000 occurred simultaneously with the acquisition of Sigma and
was entirely devoted to the acquisition. A second closing occurred on May
3,2007, in which we received gross proceeds of $3,068,000. The holders of the
Series B Preferred Stock are entitled to a cumulative annual dividend of 7% per
annum which under certain circumstances, is payable in shares of the Company's
stock. The shares of Series B Preferred Stock issued in the offering are
initially convertible into approximately 29,005,785 shares of the Company's
common stock.
In connection with the acquisition of Sigma, we also amended and modified
the terms of the Loan Facility with PNC to allow for Sigma to become a borrower
under the Loan Facility. The cost of this amendment was $42,500 and is being
amortized over the remaining term of the Credit Facility. As part of the
amendment, Sigma Metals' pledged all of its assets and to PNC to secure the
payment of its obligations under the Loan Facility. In addition to the foregoing
the termination date of the Loan Facility was extended to April 30, 2010 and the
maximum revolving advance amount was increased by $2,000,000, from $9,000,000 to
$11,000,000.
In connection with the acquisition of Welding Metallurgy, we amended and
modified the terms of the Loan Facility with PNC to allow Welding Metallurgy and
Air Industries Group to be added as guarantors of amounts due under the Loan
Facility. In connection with such amendment Welding Metallurgy pledged all of
its assets and properties to PNC to secure its obligations under the Loan
Facility. The maximum revolving advance amount was increased by an additional
$3,000,000 from $11,000,000 to $14,000,000.
Additionally, in connection with the Welding Metallurgy acquisition, Steel
City Capital Funding LLC ("SCCF") ("Term B Lender") provided a Term Loan of
$4,500,000. The Term Loan is payable on August 24, 2010. Borrowings under the
SCCF Loan Agreement bear interest, payable monthly, generally at a rate of 6%
over the base commercial lending rate of PNC Bank as publicly announced to be in
effect from time to time. Under the terms of our loan agreements these amounts
are not due to be repaid until August 24, 2010, but have been included in
current liabilities due to the right of the banks to demand immediate repayment
upon the occurrence of certain events (subjective acceleration clause) which
management believes are not likely to occur, combined with the existence of a
lockbox arrangement. In addition, to secure the obligations due SCCF, we pledged
to SCCF the capital stock of Air Industries Machining Corp, Sigma Metals, and
Welding Metallurgy, and each of those entities granted to SCCF a security
interest on all of their assets.
As of September 30, 2007, one customer accounted for approximately 22.1%
of our accounts receivable. In addition, this customer accounted for
approximately 41.7% of net sales for the quarter ended September 30, 2007, and
49.2% of our Consolidated revenue in the nine months ended September 30, 2007.
In the event such customer is unable or unwilling to pay amounts due or in the
event our relationship with such customer is severed or negatively affected, our
results of operations will be materially adversely affected and we may not have
the resources to meet our capital obligations.
15
Cautionary Note Regarding Forward-Looking Statements
Our disclosure and analysis in this report contains some forward-looking
statements. Certain of the matters discussed concerning our operations, cash
flows, financial position, economic performance and financial condition,
including, in particular, future sales, product demand, competition and the
effect of economic conditions include forward-looking statements within the
meaning of section 27A of the Securities Act and Section 21E of the Securities
Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, these statements
and other projections and statements contained herein expressing general
optimism about future operating results and non-historical information, are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and actual results or developments may differ
materially from the expectations expressed in the forward-looking statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this report. These are factors that we think could cause our
actual results to differ materially from expected results. Other factors besides
those listed here could also adversely affect us. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
Risk Factors
The purchase of our common stock involves a high degree of risk. Before
you invest you should carefully consider the risks and uncertainties described
below, as well as in
o the section of our prospectus dated July 27, 2007 captioned "Risk
Factors"
o our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2006, or our "2006 Form 10-KSB," under the caption "Risk
Factors"
o our Management's Discussion and Analysis of Financial Condition and
results of Operations set forth in Item 2 of Part I of this report
o our consolidated financial statements and related notes included in
Item 1 of Part I of this report
o our consolidated financial statements and related notes, our
Management's Discussion and Analysis of Financial Condition and
Results of Operations and the other information in our 2006 Form
10-KSB.
If any of the events described below or in the portions of this report or our
2006 Form 10-KSB referred to above actually occurs, our financial condition or
operating results may be materially and adversely affected, our business may be
severely impaired, and the price of our common stock may decline, perhaps
significantly. This means you could lose all or a part of your investment.
We cannot assure you that any business we acquire will benefit from its
acquisition by us.
16
We cannot assure you that any benefits to the business of AIM, Sigma
Metals, Welding Metallurgy or any other entities that we acquire will be
achieved from their acquisition by us or by our status as a public company, or
that the results of operations of AIM, Sigma Metals, Welding Metallurgy or such
other acquired entities will not be adversely impacted by their acquisition by
us. The process of combining the organizations of private companies into a
public company such as ours may cause fundamental changes to their businesses or
in their operations.
The past performance and results of operations of AIM, Sigma Metals,
Welding Metallurgy or any other entity that we acquire are not necessarily
indicative of our future performance or results of operations. Future
performance may be adversely affected as a result of the integration of the
acquired business into our organization and the significant increase in expenses
relating to financial statement preparation and compliance with controls and
procedures standards established by the Sarbanes-Oxley Act of 2002.
Our inability to successfully manage the growth of our business may have a
material adverse effect on our business, results of operations and financial
condition.
We expect to experience growth in the number of employees and the scope of
our operations as a result of internal growth and acquisitions. These activities
could result in increased responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. We may not succeed in our efforts to identify, attract and retain
experienced accounting and financial personnel.
Our future success also depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be
adversely affected.
The unsuccessful integration of a business or business segment we acquire could
have a material adverse effect on our results.
As part of our business strategy, we expect to acquire assets and
businesses relating to or complementary to our operations. These acquisitions
will involve risks commonly encountered in acquisitions. These risks include,
among other things, exposure to unknown liabilities of the acquired companies,
additional acquisition costs and unanticipated expenses. Our quarterly and
annual operating results will fluctuate due to the costs and expenses of
acquiring and integrating new businesses. We may also experience difficulties in
assimilating the operations and personnel of acquired businesses. Our ongoing
business may be disrupted and our management's time and attention diverted from
existing operations. Our acquisition strategy will likely require additional
debt or equity financing, resulting in additional leverage or dilution of
ownership. We cannot assure you that any future acquisition will be consummated,
or that if consummated, that we will be able to integrate such acquisition
successfully.
Any reduction in government spending on defense could materially adversely
impact our revenues, results of operations and financial condition.
There are risks associated with programs that are subject to appropriation
by Congress, which could be potential targets for reductions in funding to pay
for other programs. Future reductions in United States Government spending on
defense or future changes in the kind of defense products required by United
States Government agencies could limit demand for our products, which would have
a materially adverse effect on our operating results and financial condition.
In addition, potential shifts in responsibilities and functions within the
defense and intelligence communities could result in a reduction of orders for
defense products by segments of the defense industry that have historically been
our major customers. As a result, demand for our products could decline,
resulting in a decrease in revenues and materially adversely affecting our
operating results and financial condition.
17
We depend on revenues from a few significant relationships, in particular with
Sikorsky Aircraft, and any loss, cancellation, reduction, or interruption in
these relationships could harm our business.
In general, we have derived a material portion of our revenues from one or
a limited number of customers. We expect that in future periods we may enter
into contracts with customers which represent a significant concentration of our
revenues. If such contracts were terminated, our revenues and net income could
significantly decline. Our success will depend on our continued ability to
develop and manage relationships with significant customers. One customer
accounted for approximately 49.2% of our consolidated sales during the nine
months ended September 30, 2007. Any adverse change in our relationship with
Sikorsky could have a material adverse effect on our business. Although we are
attempting to expand our customer base, we expect that our customer
concentration will not change significantly in the near future. The markets in
which we sell our products are dominated by a relatively small number of
customers who have contracts with United States governmental agencies, thereby
limiting the number of potential customers. We cannot be sure that we will be
able to retain our largest customers or that we will be able to attract
additional customers, or that our customers will continue to buy our products in
the same amounts as in prior years. The loss of one or more of our largest
customers, any reduction or interruption in sales to these customers, our
inability to successfully develop relationships with additional customers or
future price concessions that we may have to make, could significantly harm our
business.
Continued competition in our markets may lead to a reduction in our revenues and
market share.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will continue to increase. Current
competitors have significantly greater technical, manufacturing, financial and
marketing resources than we do. We expect that more companies will enter the
defense and aerospace component manufacturing market. We may not be able to
compete successfully against either current or future competitors. Increased
competition could result in reduced revenue, lower margins or loss of market
share, any of which could significantly harm our business.
Our future revenues are inherently unpredictable, our operating results are
likely to fluctuate from period to period and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.
Our quarterly and annual operating results are likely to fluctuate
significantly due to a variety of factors, some of which are outside our
control. Accordingly, we believe that period-to-period comparisons of our
results of operations are not meaningful and should not be relied upon as
indications of performance. Some of the factors that could cause quarterly or
annual operating results to fluctuate include conditions inherent in government
contracting and our business such as the timing of cost and expense recognition
for contracts, the United States Government contracting and budget cycles,
introduction of new government regulations and standards, contract closeouts,
variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic
conditions and economic conditions specific to the defense market. Because we
base our operating expenses on anticipated revenue trends and a high percentage
of our expenses are fixed in the short term, any delay in generating or
recognizing forecasted revenues could significantly harm our business.
Fluctuations in quarterly results, competition or announcements of
extraordinary events such as acquisitions or litigation may cause earnings to
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock could significantly decline. In addition,
we cannot assure you that an active trading market will develop or be sustained
for our common stock. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of our common stock, as
well as our overall operating results.
We may lose sales if our suppliers fail to meet our needs.
Although we procure most of our parts and components from multiple sources
or believe that these components are readily available from numerous sources,
certain components are available only from sole sources or from a limited number
or sources. While we believe that substitute components or assemblies could be
obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of
our products and could have a materially adverse effect on our operating results
and financial condition.
18
Attracting and retaining key personnel is an essential element of our future
success.
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
Our indebtedness may affect operations.
As described under the caption "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources", we have significant
indebtedness. We are significantly leveraged and our indebtedness is substantial
in relation to our stockholders' equity. Our ability to make principal and
interest payments will depend on future performance, which is subject to many
factors, some of which are outside our control. In addition, our Loan Facility
is secured by substantially all of our assets. In the case of a continuing
default under our Loan Facility, the lender will have the right to foreclose on
our assets, which would have a material adverse effect on our business. Payment
of principal and interest on the Loan Facility may limit our ability to pay cash
dividends to our stockholders and the documents governing the Loan Facility
prohibit the payment of cash dividends in certain situations. Our leverage may
also adversely affect our ability to finance future operations and capital
needs, may limit our ability to pursue business opportunities and may make our
results of operations more susceptible to adverse economic conditions.
We may issue shares of our capital stock or debt securities to complete an
acquisition, which would reduce the equity interest of our stockholders.
We may issue our securities to acquire companies or businesses. Most
likely, we will issue additional shares of our common stock or preferred stock,
or both, to complete acquisitions. If we issue additional shares of our common
stock or shares of our preferred stock, the equity interest of our existing
stockholders may be reduced significantly, and the market price of our common
stock may decrease. The shares of preferred stock we issue are likely to provide
holders with dividend, liquidation and voting rights, and may include
participation rights, senior to, and more favorable than, the rights and powers
of holders of our common stock.
If we issue debt securities as part of an acquisition, and we are unable
to generate sufficient operating revenues to pay the principal amount and
accrued interest on that debt, we may be forced to sell all or a significant
portion of our assets to satisfy our debt service obligations, unless we are
able to refinance or negotiate an extension of our payment obligation. Even if
we are able to meet our debt service obligations as they become due, the holders
of that debt may accelerate payment if we fail to comply with, and/or are unable
to obtain waivers of, covenants that require us to maintain certain financial
ratios or reserves or satisfy certain other financial restrictions. In addition,
the covenants in the loan agreements may restrict our ability to obtain
additional financing and our flexibility in operating our business.
We have a limited number of shares available for future issuance and will need
approval by our current shareholders to authorize more shares for issuance.
We are authorized to issue 120,055,746 shares of common stock. As of
November 9, 2007, we had outstanding or commitments to issue 112,126,835 shares
of common stock after giving effect to the conversion of our series B
convertible preferred stock and the exercise of all outstanding options and
warrants. Restrictions in our credit facility require that we pay dividends on
our series B convertible preferred stock by issuing shares of our common stock.
We are authorized to issue 8,003,716 shares of blank check preferred stock of
which 2,000,000 shares have been designated series B convertible preferred
stock. To facilitate the raising of additional capital or the completion of
acquisitions, it is likely that we will seek shareholder approval to increase
the number of shares of common stock we are authorized to issue.
19
Because of our limited resources and the significant competition for
acquisitions, we may not be able to consummate an acquisition with growth
potential, if at all.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds and operating businesses competing for acquisitions. Many of these
entities are well established and have extensive experience in identifying and
effecting business combinations. Many of these competitors possess greater
technical, human and other resources than we do and our financial resources will
be relatively limited when contrasted with those of many of these competitors.
While we believe that there are numerous potential target businesses that we
could acquire, our ability to compete in acquiring certain target businesses
will be limited by our available financial resources. This inherent competitive
limitation gives others an advantage in pursuing the acquisition of certain
target businesses.
We may be unable to obtain financing, if required, to complete an
acquisition or to fund the operations and growth of any business acquired, which
could compel us to abandon a particular prospective acquisition.
If we require financing to complete an acquisition, that financing may not
be available in amounts and on terms acceptable to us, if at all. To the extent
that financing proves to be unavailable when needed to consummate a particular
acquisition, we would be compelled to restructure the transaction or abandon
that particular acquisition. In addition, if we consummate an acquisition, we
may require financing to fund the operations or growth of the business acquired.
Our inability to secure additional financing could have a material adverse
effect on the continued development or growth of our business.
Item 3. Controls and Procedures
SEC Release 33-8760 provides that non-accelerated filers such as us are
not required to include management's evaluation of controls and procedures under
this Item until our Annual Report for the fiscal year ended December 31, 2007.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At the time we acquired our metals distribution business it was a
defendant in an action by a former employee filed on November 3, 2006 in the
Supreme Court of the State of New York, Nassau County captioned Philip Karmel
against Sigma Metals, Inc. (Index No. 06-018054)seeking damages as a result of
the termination of employment. This litigation was settled on or about September
20, 2007 for the amount of $18,846.
We are a defendant in an action by our former investor relations firm
filed on September 18, 2007 in the Supreme Court of the State of New York, New
York County captioned Porter, Levay & Rose, Inc. against Air Industries Group,
Inc. et al. (Index No. 003104/07). The complaint alleges breach of contract and
seeks compensatory damages of approximately $211,347 for services rendered and
an order directing us to deliver to plaintiff warrants to purchase 125,000
shares of our common stock, containing a cashless exercise feature. The
complaint also seeks punitive damages unspecified in amount. The case is in its
early stages. We previously issued approximately 41,668 of the warrants sought
by the plaintiff. We anticipate this action will be settled for approximately
$30,000 and have accrued an expense in such amount.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On or about October 1, 2007, the Company issued to the former shareholders of
Sigma Metals, Inc. the 7,416,082 shares of the Company's Common Stock, $.001 par
value per share (the "Shares") due as a result of our acquisition of Sigma as
previously reported. The issuance and sale of the shares to the former
shareholders of Sigma Metals, Inc. was exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. No underwriting discounts or commissions
were paid in connection with the issuance of these shares.
Except as stated above, information concerning unregistered sales of our equity
securities during the fiscal quarter ended September 30, 2007 has previously
been disclosed in our Current Reports on Form 8-K.
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Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of Registrant's Form 8-K report, filed
February 15, 2006).
3.2 Certificate of Amendment to Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K
report, filed July 2, 2007).
3.3 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2
of the Registrant's Form 8-K report, filed February 15, 2006).
4.1 Certificate of Designation (incorporated by reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed with the
SEC on April 18, 2007).
4.2 Convertible Promissory Note, dated November 30, 2005, in the amount
of $332,631, from Gales Industries Incorporated (and assumed by the
Registrant) to Dario Peragallo (incorporated by reference to
Exhibit 4.2 of the Registrant's Form 8-K report, filed December 6,
2005).
4.3 Form of Warrant issued by the Registrant to GunnAllen Financial,
Inc. (incorporated by reference to Exhibit 4.3 of the Registrant's
Form 8-K report, filed December 6, 2005).
4.4 Form of Warrant issued by Original Gales to Atlas Private Equity,
LLC (and assumed by the Registrant) (Incorporated by reference to
Exhibit 4.4 of the Registrants Form 10-KSB, filed April 17, 2006).
4.5 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $45,000 Bridge
Financing in or about August 2005 (incorporated by reference to
Exhibit 4.5 of the Registrant's Form 8-K report, filed December 6,
2005).
4.6 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $105,000 Bridge
Financing in or about September, 2005 (incorporated by reference to
Exhibit 4.6 of the Registrant's Form 8-K report, filed December 6,
2005).
4.7 Form of Warrant issued to Porter, LeVay & Rose, Inc. (incorporated
herein by reference to Exhibit 4.7 to Registrant's Amendment No. 1
on Form SB-2/A, filed June 16, 2006).
10.1 Form of Subscription Agreement for series B convertible preferred
stock (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed with the SEC on April
18, 2007).
10.2 Stock Purchase Agreement, dated January 2, 2007, between the
Registrant, Sigma Metals, Inc. and the shareholders of Sigma
Metals, Inc. (incorporated by reference from Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed on January 3, 2007).
10.3 Form of Promissory Note issued to the former shareholders of Sigma
Metals, Inc. (incorporated by reference from Exhibit 10.2 to the
Registrant's Current report on Form 8-K filed on April 18, 2007).
10.4 Employment Agreement by and between the Registrant and George
Elkins, dated as of April 12, 2007 (incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed
with the SEC on April 18, 2007).
10.5 Employment Agreement by and between the Registrant and Carole Tate,
dated as of April 12, 2007 (incorporated by reference to Exhibit
10.4 to the Registrant's Current Report on Form 8-K filed with the
SEC on April 18, 2007).
10.6 Employment Agreement by and between the Registrant and Joseph
Coonan, dated as of April 12, 2007 (incorporated by reference to
Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed
with the SEC on April 18, 2007).
10.7 Letter of Clarification between the Registrant and Michael A. Gales
dated May 11, 2007 (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 2007).
10.8 Stock Purchase Agreement, dated March 9, 2007, between the
Registrant and the shareholders of Welding Metallurgy, Inc.
(incorporated by reference from Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed on March 15, 2007).
10.9 Amendment No 1. to Stock Purchase Agreement, dated August 2, 2007,
between the Registrant and the shareholders of Welding Metallurgy,
Inc. (incorporated by reference from Exhibit 10.1 to the
Registrant's Current Report on Form 8- K/A filed on August 3,
2007).
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10.10 7% Promissory Note of Registrant in the principal amount of
$2,000,000 in favor of John and Lugenia Gantt (incorporated by
reference from Exhibit 10.1 to the Registrant's Form 8-K report,
filed August 28, 2007).
10.11 Consulting Agreement by and among Welding Metallurgy, Inc., Gantt
Associates Ltd. And John Gantt, dated as of August 24, 2007
(incorporated by reference from Exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed on August 24, 2007).
10.12 Escrow Agreement dated as of August 24,2007 by and among the
Registrant John Gantt and Eaton & Van Winkle LLp, as escrow agent
(incorporated by reference from Exhibit 10.3 to the Registrant's
Current Report on Form 8-K filed on August 24, 2007).
10.13 Registration Rights Agreement dated as of August 24, 2007 by and
among the Registrant and John and Lugenia Gantt (incorporated by
reference from Exhibit 10.4 to the Registrant's Current Report on
Form 8-K filed on August 24, 2007).
10.14 Fourth Amendment to the Revolving Credit, Term Loan and Security
Agreement dated as of November 10, 2005 (the "PNC Bank Credit
Facility") with the financial institutions named therein (the
"Lenders") and PNC Bank N.A., as agent for the Lenders, as amended,
dated as of August 24, 2007 (incorporated by reference from Exhibit
10.5 to the Registrant's Current Report on Form 8-K filed on August
24, 2007).
10.15 Loan and Security Agreement dated as of August 24, 2007 by and
among Air Industries Machining, Corp., Sigma Metals, Inc., Welding
Metallurgy, Inc. and Steel City Capital Funding LLC (incorporated
by reference from Exhibit 10.6 to the Registrant's Current Report
on Form 8-K filed on August 24, 2007).
10.16 Pledge Agreement dated as of August 24, 2007 by and among Air
Industries Machining, Corp., Sigma Metals, Inc., as pledgors, and
Steel City Capital Funding LLC, as pledge (incorporated by
reference from Exhibit 10.7 to the Registrant's Current Report on
Form 8-K filed on August 24, 2007).
10.17 Pledge Agreement dated as of August 24, 2007 by and among Air
Industries Machining, Corp., Sigma Metals, Inc. as pledgors and
John and Lugenia Gantt, as pledges (incorporated by reference from
Exhibit 10.8 to the Registrant's Current Report on Form 8-K filed
on August 24, 2007).
10.18 Pledge Agreement dated as of August 24, 2007 by and between Air
Industries Group, Inc., as pledgor, and Steel City Capital Funding
LLC, as pledge (incorporated by reference from Exhibit 10.9 to the
Registrant's Current Report on Form 8-K filed on August 24, 2007).
10.19 Guarantor Suretyship Agreement dated as of August 24, 2007 between
the Registrant and Steel City Capital Fundung LLC(incorporated by
reference from Exhibit 10.10 to the Registrant's Current Report on
Form 8-K filed on August 24, 2007).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 14, 2007
AIR INDUSTRIES GROUP INC.
(formerly Gales Industries Incorporated)
By: /s/ Peter D. Rettaliata
--------------------------------------
Peter D. Rettaliata
President and Chief Executive Officer
/s/ Louis A. Giusto
--------------------------------------
Louis A. Giusto
Vice Chairman, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
24