U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2009
|_| 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.
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(Exact name of Registrant as specified in its charter)
New York 20-4458244
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1479 N. Clinton Avenue Bay Shore, New York 11706
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(Address of principal executive offices)
(631) 968-5000
---------------------------
(Issuer's telephone number)
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) Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer or a smaller reporting
company. See definitions of "accelerated filer." "large accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer (do not check if smaller reporting company) |_|
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of October 16, 2009, the registrant had outstanding 71,698,174 shares of
common stock.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of June 30, 2009
(unaudited) and December 31, 2008 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2009 and 2008 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2009 and 2008 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
ITEM 4T. Controls and Procedures 28
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 30
ITEM 1A. Risk Factors 30
ITEM 6. Exhibits 31
SIGNATURES 31
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Balance Sheets
June 30, December 31,
2009 2008
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ -- $ 164,000
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $198,000 and $135,000 4,742,000 5,279,000
Inventory 21,746,000 21,099,000
Assets Held for Sale 683,000 1,556,000
Prepaid Expenses and Other Current Assets 231,000 147,000
Taxes Receivable 49,000 53,000
Deposits - Customers 77,000 100,000
------------ ------------
Total Current Assets 27,528,000 28,398,000
Property and Equipment, net 5,160,000 5,507,000
Capitalized Engineering Costs - net of
Accumulated Amortization of $982,000 and $562,000 1,804,000 2,033,000
Deferred Financing Costs, net, deposit and other assets 723,000 994,000
Intangible Assets, net of accumulated amortization of $376,000 and $277,000 2,027,000 2,126,000
Goodwill 291,000 291,000
------------ ------------
TOTAL ASSETS $ 37,533,000 $ 39,349,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current Portion Notes Payable and Capital Lease Obligations $ 20,661,000 $ 16,904,000
Accounts Payable and Accrued Expenses 4,116,000 5,167,000
Dividends Payable 436,000 366,000
Deferred Gain on Sale - Current Portion 38,000 38,000
------------ ------------
Liabilities Held for Sale 2,317,000 2,878,000
------------ ------------
Total current liabilities 27,568,000 25,353,000
------------ ------------
Long term liabilities
Notes Payable and Capital Lease Obligations - Net of Current Portion 2,154,000 5,973,000
Deferred Tax Liability 1,194,000 1,364,000
Deferred Gain on Sale - Net of Current Portion 618,000 637,000
Deferred Rent 515,000 420,000
------------ ------------
Total liabilities 32,049,000 33,747,000
------------ ------------
Contingencies
Stockholders' Equity
Preferred Stock Par Value $.001-Authorized 8,003,716 shares
Designated as Series "A" Convertible Preferred -$.001 par Value,
1,000 Shares Authorized 0 Shares issued and outstanding as of
June 30, 2009 and December 31, 2008, respectively. -- --
Designated as Series "B" Convertible Preferred -$.001 Par Value,
2,000,000 shares authorized, 1,813,071 and 1,387,205 shares issued
and outstanding as of June 30, 2009 and December 31, 2008,
respectively; Liquidation Value, $18,130,000 1,000 1,000
Common Stock - $.001 Par, 250,000,000 Shares Authorized,
71,698,174 and 71,524,481 Shares Issued and Outstanding as of
June 30, 2009 and December 31, 2008, respectively. 72,000 72,000
Additional Paid-In Capital 23,984,000 22,957,000
Accumulated Deficit (18,573,000) (17,428,000)
------------ ------------
Total Stockholders' Equity 5,484,000 5,602,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,533,000 $ 39,349,000
============ ============
See notes to financial statements
1
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
3-months ended June 30, 6-months ended June 30,
2009 2008 2009 2008
------------ ------------ ------------ ------------
Net sales $ 11,096,000 $ 9,223,000 $ 22,279,000 $ 18,472,000
Cost of Sales 9,037,000 6,277,000 17,720,000 12,849,000
------------ ------------ ------------ ------------
Gross profit 2,059,000 2,946,000 4,559,000 5,623,000
Operating costs and expenses:
Selling and marketing 146,000 155,000 272,000 297,000
General and administrative 1,279,000 1,910,000 2,830,000 4,175,000
------------ ------------ ------------ ------------
Total operating costs and expenses 1,425,000 2,065,000 3,102,000 4,472,000
------------ ------------ ------------ ------------
Income from operations 634,000 881,000 1,457,000 1,151,000
Interest and financing costs (1,251,000) (582,000) (2,564,000) (876,000)
Other (Loss) or Income (23,000) 10,000 (78,000) 12,000
------------ ------------ ------------ ------------
(Loss) income before provision for (640,000) 309,000 (1,185,000) 287,000
income taxes (tax benefits)
Provision for income taxes (tax benefits) (80,000) 7,000 (166,000) 7,000
------------ ------------ ------------ ------------
(Loss) Income From Continuing Operations (560,000) 302,000 (1,019,000) 294,000
Loss From Discontinued Operations (163,000) (322,000) (126,000) (327,000)
------------ ------------ ------------ ------------
Net Loss (723,000) (20,000) (1,145,000) (33,000)
Dividend attributable to preferred stockholders 316,000 151,000 583,000 299,000
------------ ------------ ------------ ------------
Net Loss attributable to common stockholders $ (1,039,000) $ (171,000) $ (1,728,000) $ (332,000)
============ ============ ============ ============
Loss per share (basic and diluted)-Continuing Ops $ (0.01) $ 0.00 $ (0.02) $ (0.00)
Loss per share (basic and diluted)- Discontinued ops (0.00) (0.00) (0.00) (0.01)
------------ ------------ ------------ ------------
Loss per share (basic and diluted) $ (0.01) $ (0.00) $ (0.02) $ (0.01)
============ ============ ============ ============
Weighted average shares outstanding (basic and diluted) 71,562,000 69,340,000 71,544,000 62,241,000
============ ============ ============ ============
See notes to financial statements
2
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
2009 2008
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,145,000) $ (33,000)
Adjustments to Reconcile Net Loss to Net
Cash provided by (used in) Operating Activities, net of effect of
acquisitions:
Depreciation and amortization of property and equipment 926,000 608,000
Amortization of Intangible Assets 99,000 111,000
Amortization of Capitalized Engineering Costs 420,000 174,000
Bad Debt Expense 71,000 134,000
Non-Cash Compensation Expense 70,000 207,000
Non-Cash Interest Expense 1,331,000 90,000
Non-Cash Share Payment -- 40,000
Amortization of Deferred Financing costs 120,000 --
Gain on Sale of Real Estate (19,000) (19,000)
Deferred Taxes (170,000) 4,000
Deferred Rent 95,000 95,000
Changes in Assets and Liabilities
(Increase) Decrease in Operating Assets:
Accounts Receivable 466,000 154,000
Assets Held for Sale 873,000 (342,000)
Inventory (647,000) (3,258,000)
Prepaid Expenses and Other Current Assets (84,000) 55,000
Deposits 23,000 177,000
Other Assets 78,000 (562,000)
Increase (Decrease) in Operating Liabilities
Accounts payable and accrued expenses (854,000) (532,000)
Income Taxes payable 4,000 19,000
Liabilities Held For Sale (561,000) 1,485,000
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,096,000 (1,393,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Assets Held for Sale -- (182,000)
Cash paid for Capitalized Engineering costs (191,000) (641,000)
Purchase of property and equipment (528,000) (882,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (719,000) (1,705,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable - Sellers (138,000) (722,000)
Proceeds from Private Placement -- 195,000
Capital lease obligations (79,000) 453,000
Notes Payable-Jr. Subordinated Debt 445,000 2,775,000
Notes Payable-Revolver (705,000) 491,000
Notes Payable-Bank (64,000) (74,000)
Cash Paid for Deferred Financing Costs -- (20,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (541,000) 3,098,000
----------- -----------
Net decrease in cash and cash equivalents (164,000) --
Cash and cash equivalents at beginning of period 164,000 --
----------- -----------
Cash and cash equivalents at end of period $ -- $ --
=========== ===========
Supplemental cash flow information
Cash paid during the period for interest $ 1,046,000 $ 748,000
=========== ===========
Supplemental schedule of non cash investing and financing activities
Property and Equipment acquired under capital leases $ 51,000 $ 468,000
=========== ===========
Non-cash Dividends on Preferred Stock $ 583,000 $ 299,000
=========== ===========
Issuances of common stock in settlement of vendor payables $ 169,000 $ --
=========== ===========
See notes to financial statements
3
AIR INDUSTRIES GROUP INC.
Notes to Condensed Consolidated Financial Statements
Note 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Air Industries Group, Inc. ("AIRI") and its wholly-owned
subsidiaries Air Industries Machining Corporation ("AIM"), Sigma Metals, Inc.
("Sigma") and Welding Metallurgy, Inc. ("Welding"), (together, the "Company").
These condensed consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. All intercompany
accounts and transactions have been eliminated. These unaudited interim
condensed consolidated financial statements, which, in the opinion of
management, reflect all adjustments (including normal recurring adjustments)
necessary for a fair presentation, should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008. Operating
results for the three and six months ended June 30, 2009 are not necessarily
indicative of the results that may be expected for any future interim period or
for the entire fiscal year.
As a result of management's decision to cease the operations of the
Company's metal distribution business, Sigma, as discussed in Note 10, the
Company's financial statements reflect Sigma as discontinued operations. Its
results of operations are treated as income (loss) from discontinued operations,
net of tax, and separately stated on the Condensed Consolidated Statements of
Operations after income (loss) from continuing operations.
The amounts in the accompanying condensed consolidated financial
statements have been rounded to the nearest thousand dollars. Certain
reclassifications have been made to prior period presentation to conform to the
current year presentation.
Liquidity Concerns: The Company is highly leveraged and will need to
generate substantial cash flow from operations to satisfy its debt service
obligations. As of June 30, 2009, the Company's indebtedness was approximately
$32,000,000, including approximately $15,100,000 payable to its bank lenders
secured by substantially all its assets. The Company was in default of certain
covenants in the agreements with its bank lenders as of the end of June 2009.
These defaults continued into September 2009. In September 2009, the Company
successfully negotiated amendments to the loan agreements with its bank lenders,
in which the bank lenders waived prior events of covenant defaults. These
amendments also modified the bank covenants for the period beginning September
30, 2009. However, the loan agreements include clauses that permit the lenders
to demand payment at any time, and as the Company is required to maintain a
"lock box" account with PNC Bank into which substantially all of the Company's
cash receipts are paid, if its bank lenders were to demand repayment and cease
lending, the Company would lack the funds to continue its operations.
4
The Company received gross proceeds from the sale of its junior
subordinated notes and equity securities of $5,990,000 between May 2008 and the
end of March 2009.
A significant portion of the Company's bank debt matures as early as April
2010, there can be no assurance that the Company's lenders will agree to extend
their loans and, in the absence of significant improvement in the Company's
results of operations, it is not likely that the Company will be able to
refinance its bank indebtedness with another lender.
To alleviate its liquidity difficulties, the Company has liquidated some
of the assets and the operations of its Sigma business and has extended the
payment terms of its indebtedness to the former owners of Welding. In addition,
due to its liquidity difficulties, the Company has issued, and will likely
continue to issue, additional shares of its Series B Convertible Preferred Stock
("Series B Preferred Stock") in lieu of payment of cash dividends on its Series
B Preferred Stock, which will dilute the equity ownership and voting power of
holders of its Common Stock. Nevertheless, the ability of the Company to
maintain its current level of operations is subject to the cooperation of its
bank lenders and other parties which hold its notes. If the Company's bank
lenders were to reduce the amounts loaned to the Company, the Company would have
no choice other than to reduce its operations and seek to liquidate certain
assets. Any forced liquidation of assets would likely yield less than the
amounts at which such assets are valued by the Company.
We have evaluated subsequent events, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 165 "Subsequent Events," through the date that
the financial statements were issued on October 21, 2009.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings per share
Basic earnings per share is computed by dividing the net income applicable
to common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Potentially dilutive shares, using the treasury
stock method, are included in the diluted per-share calculations for all periods
when the effect of their inclusion is dilutive.
The Company did not include 12,931,100 warrants and 6,494,764 options to
purchase the Company's common stock for the six months ended June 30, 2009 and
7,846,256 warrants and 6,740,824 options to purchase the Company's common stock
for the six months ended June 30, 2008 in the calculation of diluted earnings
per share because the effects of their inclusion would have been anti-dilutive.
The shares of Series B Preferred that are convertible into 76,376,751 and
31,463,795 shares of common stock at June 30, 2009 and 2008 are not included in
the calculation of diluted earnings per shares because the effect of the
inclusion would have been anti-dilutive.
5
Recently Issued Accounting Standards
Effective January 1, 2009, the Company adopted Financial Accounting
Standards Board ("FASB") Staff Position 157-2, "Effective Date of FASB Statement
No. 157," which delays the effective date of SFAS No. 157 until January 1, 2009
for all nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The adoption of the delayed items of SFAS
No. 157 did not have a material impact on the Company's consolidated financial
statements as of and for the six months ended June 30, 2009.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles"
("SFAS 168"). SFAS 168 identifies the FASB Accounting Standards Codification as
the authoritative source of generally accepted accounting principles in the
United States. Rules and interpretive releases of the Securities and Exchange
Commission under federal securities laws are also sources of authoritative GAAP
for SEC registrants. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Company does not
expect adoption to have a material impact on our consolidated financial
statements.
Effective January 1, 2009, the Company adopted FASB Staff Position No.
142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3").
FSP 142-3 amends FASB Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141R and other U.S. GAAP. The
adoption did not have a material impact on the Company's consolidated financial
statements.
Management does not believe that any other recently issued, but not yet
effective, accounting standard if currently adopted would have a material effect
on the accompanying financial statements.
Note 3. DISPOSITION
On April 16, 2007, the Company acquired all of the issued and outstanding
capital stock of Sigma pursuant to a Stock Purchase Agreement dated January 2,
2007.
Sigma's results in 2008 began to deteriorate and the Company concluded
that to revive the business would require a significant investment. Therefore,
in the third quarter of 2008, the Board of Directors decided to discontinue the
operations of Sigma. Operations were discontinued on October 31, 2008. The
Company's financial statements reflect Sigma as discontinued operations. The
results of operations of this entity is treated as income (loss) from
discontinued operations, net of tax and separately stated on the Consolidated
Statements of Operations below loss from continuing operations. Sigma's assets
and liabilities have been classified as held for sale on the Company's
consolidated balance sheet for all periods presented.
6
In January 2009, the Company sold certain assets including certain
accounts receivable, property and equipment, customer list and the rights, title
and interest in the name Sigma Metals, Inc. and the domain name
Sigmametalsinc.com, to Sigma Aerospace LLC, itself owned by the former
stockholders of Sigma. In connection with the sale, the Company and the former
stockholders of Sigma consummated a Settlement Agreement in which the balances
due under the notes issued for the Company's acquisition of Sigma were converted
into 58,500 shares of the Company's Series B Preferred. See Note 6 Stockholders'
Equity. In addition, the employment agreements entered into by the former
stockholders of Sigma were terminated.
Note 4. INVENTORY
The components of inventory consisted of the following:
June 30, December 31,
2009 2008
------------ ------------
(Unaudited)
Raw Materials 5,850,000 $ 6,809,000
Work In Progress 9,971,000 9,633,000
Finished Goods 6,212,000 5,224,000
Inventory Reserve (287,000) (567,000)
-----------------------------------
Total Inventory $ 21,746,000 $ 21,099,000
===================================
Inventory for Welding is computed based on a "gross profit" method in the
first and third quarters and are adjusted to physical inventories as of June and
December. Inventory for AIM is stated at the lower of cost or market determined
on the first-in, first-out method as determined by its perpetual system. AIM
performs a physical inventory as of December 31.
7
Note 5. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital leases obligations consist of the following
June 30, December 31,
2009 2008
----------- -----------
(Unaudited)
Revolving credit notes payable to PNC Bank N.A. ("PNC") and
secured by substantially all assets $10,074,000 $10,779,000
Term loan, subject to acceleration, secured 4,500,000 4,500,000
Junior subordinated notes 6,500,000 6,055,000
Notes payable to sellers of acquired businesses 2,337,000 3,071,000
Capital lease obligations 1,932,000 1,960,000
Other notes payable to PNC, secured 454,000 518,000
---------------------------------
Subtotal 25,797,000 26,883,000
Less: Current portion of notes and capital obligations 20,661,000 16,904,000
Unamortized debt discount on junior subordinated notes 2,982,000 4,006,000
---------------------------------
Notes payable and capital lease obligations, net of current portion $ 2,154,000 $ 5,973,000
=================================
PNC Bank N.A. ("PNC") On November 30, 2005, the Company executed a credit
facility with PNC (the "Loan Facility"), secured by substantially all of its
assets. The Loan Facility provided for maximum borrowings of $19,000,000
consisting of the following:
(i) a $14,000,000 revolving loan
(ii) a $3,500,000 term loan,
(iii) a $1,500,000 equipment financing loan
The revolving loans bear interest, at the option of the Company, that is
based on (i) the higher of (A) PNC's base commercial lending rate as published
from time to time ("PNC Rate") plus 0.25% or (B) the Federal Funds rate plus
0.5%, or (ii) the Eurodollar Rate for the Interest Period selected by the
Company plus 2.5%. The revolving loans had an interest rate of 5.5% and 6.5% per
annum at June 30, 2009 and December 31, 2008, respectively, and an outstanding
balance of $10,074,000 and $10,779,000, respectively. The revolving loans are
payable in full in April 2010. The interest rates were amended as part of the
Ninth Amendment to the Loan Facility (see discussion below).
Each day, the Company's cash collections (except for Welding) are swept
directly by the bank to reduce the revolving loans and we then borrow according
to a borrowing base. As such, the Company generally has no cash on hand. Because
the revolving loans contain a subjective acceleration clause which could permit
PNC to require repayment prior to maturity, the loans are classified with
current portion of notes and capital lease obligations.
8
The term loan was for a period of four (4) years and bears interest, at
the option of the Company, at the (i) PNC Rate plus 0.50% per annum or (ii) the
Eurodollar Rate for the interest period selected by the Company plus 2.75 %. In
October 2006, the Term Note was reduced by a payment of $2,800,000 and an
Amended and Restated Term Note in the amount of $383,330 was issued providing
for principal payments of $10,648 per month. The maturity date was extended to
become the first business day of October 2009 and later extended again to April
30, 2010. At June 30, 2009 and December 31, 2008, the balance of the term loan
was $43,000 and $107,000, respectively.
In addition to the foregoing, the Loan Facility was further amended to
allow the Company to borrow or to obtain the issuance, renewal, extension and
increase of standby letters of credit, up to an aggregate availability of
$500,000, for its account until November 30, 2009. At December 31, 2008 and at
June 30, 2009 the Company had an outstanding letter of credit in the amount of
$127,500.
The equipment loans bear interest, at the option of the Company, that is
based on (i) the PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate for
the interest period selected plus 2.75% per annum. The equipment loan had an
interest rate of 6.1% per annum at June 30, 2009. Such equipment financing is
limited to an aggregate of $750,000 in any fiscal year and amortized in equal
installments of sixty months following the close of each "borrowing period", the
second of which ended December 31, 2008. Each subsequent "borrowing period" ends
on each December 31 thereafter. All equipment loans are due and payable on
November 30, 2010. At June 30, 2009 and December 31, 2008, the equipment
financing loan had a balance of $411,000. The equipment financing loan was
repaid in October 2009 as part of the renegotiation of the Company's loan
covenants with PNC.
To the extent that the Company may dispose of collateral used to secure
the Loan Facility, other than inventory, the Company must promptly repay the
draws on the credit facility in amount equal to the net proceeds of such sale.
The terms of the Loan Facility require that, among other things, the
Company maintain certain financial ratios and levels of working capital. As of
December 31, 2008 and June 30, 2009, the Company had not met these terms and was
in default of these covenants. Such defaults were waived as part of the Ninth
Amendment to the Loan Facility (see discussion below).
On October 9, 2009, the Ninth Amendment to the Loan Facility was signed.
The terms of the Ninth Amendment included the following:
o Waived prior defaults
o Amended the financial ratios and now includes all entities,
including the parent company, in the calculations
9
o Amended the formula to determine the amounts of revolving advances
permitted to be borrowed under the Loan Facility.
o Reduced the availability reserve so that the excess availability
created by the reduction will be utilized to payoff in full the term
loan and equipment loans.
o Amended the revolving interest rate to (a) the sum of PNC Rate plus
2.25% or (b) the greater of (i) the sum of the Eurodollar rate plus
3.5% and (ii) 5.5%.
The Company paid an amendment fee of $20,000.
Under the terms of the Loan Facility, the amounts owed under the revolving
loan and equipment loan are not due to be repaid until April 30, 2010, but have
been included in current liabilities due to the right of PNC to demand immediate
repayment.
Steel City Capital Funding LLC ("SCCF")
In connection with the Welding acquisition, SCCF provided a Term Loan (the
"SCCF Loan Agreement") of $4,500,000, which 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 as
publicly announced to be in effect from time to time. The interest rate on the
outstanding indebtedness under the SCCF Loan Agreement was approximately 9.25%
for the year ended December 31, 2008 and the six months ended June 30, 2009,
respectively. At each of June 30, 2009 and December 31, 2008, the balance owed
on the SCCF Loan Agreement amounted to $4,500,000.
On January 29, 2009, SCCF notified the Company of a default of covenants under
the SCCF Loan Agreement, and subsequently imposed a default rate of interest of
13.25 as of April 6, 2009. Such defaults were waived as part of the Fourth
Amendment to the SCCF Loan Agreement (see discussion below).
On September 24, 2009 the Fourth Amendment to the Term Loan was signed.
The terms of the Fourth Amendment included the following:
o Waived prior defaults
o Amended the financial ratios and now includes all entities,
including the parent company, in the calculations
o Amended the interest rate to (a) the sum of (i) the greater of (1)
PNC Rate or (2) 4.75% plus (ii) 6% for domestic loans and (b) the
sum of (i) the greater of (1) the Eurodollar Rate or (2) 2.25% plus
(ii) 8.5% for Eurodollar Rate loans.
o Make cash payments to vendors of Sigma in excess of $150,000 in the
aggregate during each of (i) the period September 1, 2009 through
December 31, 2009, and (ii) each calendar year commencing January 1,
2010.
10
The Company paid an amendment fee of $50,000.
To secure payment of the indebtedness under the SCCF Loan Agreement, AIRI
pledged all of the outstanding shares of AIM and Sigma, which, in turn, pledged
all of the outstanding shares of Welding. Such security, though, is subordinate
to PNC.
Under the terms of the SCCF Loan Agreement, the amounts are not due to be
repaid until August 24, 2010, but have been included in current liabilities due
to the right of SCCF to demand immediate repayment
Interest expense related to these credit facilities amounted to
approximately $270,000 and $333,000 for the three months ended June 30, 2009 and
2008, respectively and approximately $559,000 and $679,000 for the six months
ended June 30, 2009 and 2008.
Capital Leases Payable - Equipment
The Company is committed under several capital leases for manufacturing
and computer equipment. All leases have bargain purchase options exercisable at
the termination of each lease. Capital lease obligations totaled $1,932,000 and
$1,960,000 and as of June 30, 2009 and December 31, 2008, respectively with
various interest rates ranging from 5% to 10%.
On April 28, 2009, the Company refinanced and consolidated its existing
capital leases into one new five-year capital lease. The monthly payment was
reduced to $38,000 from an average of $52,000 under the existing leases.
Notes Payable - Sellers
As of June 30, 2009 and December 31, 2008, the balances owed to the
sellers by acquisition are:
June 30, December 31,
2009 2008
---------- ----------
(Unaudited)
AIM $ 337,000 $ 433,000
Sigma -- 638,000
Welding 2,000,000 2,000,000
------------------------------
Subtotal 2,337,000 $3,071,000
Less: Current Portion 2,192,000 1,053,000
------------------------------
Total long-term portion $ 145,000 $2,018,000
==============================
11
AIM
The balance owed at June 30, 2009 and December 31, 2008 amounted to
$337,000 and $433,000, respectively, and matures on September 30, 2010. The
remaining balance is subordinated to all of the Company's senior debt and is
payable in twenty consecutive calendar quarters of equal installments of $48,100
principal plus accrued interest The interest rate on this note is equal to Prime
Rate plus 0.5% per annum. Interest on outstanding balances at September 30,
2010, in the event of nonpayment, shall accrue at a floating rate equal to the
Prime Rate plus 7% per annum.
These notes are subordinated to all of the Company's PNC senior debt.
Sigma
In connection with the acquisition of Sigma, the Company incurred notes
payable obligations to the former stockholders of Sigma. At December 31, 2008,
the remaining principal balance totaled $638,000. This amount was classified as
part of Liabilities Held for Sale on the Consolidated Balance Sheet. These notes
were subordinated to all of the Company's indebtedness to PNC and SCCF.
In January 2009, as part of the sale of Sigma to its former stockholders, such
stockholders and the Company consummated a Settlement Agreement in which these
notes were converted into 58,500 shares of Series B Preferred. See Note 6
Stockholders' Equity and Note 10 Discontinued Operations.
Welding
In connection with the acquisition of Welding Metallurgy, we paid the
sellers $3,500,000 in cash and incurred a notes payable obligation to the former
stockholders of Welding Metallurgy in the aggregate principal amount of
$2,000,000, which bore no interest until August 24, 2008, and then at 7% per
annum thereafter ("Old Note"). To reflect the fact that this note did not bear
interest for the first year, we discounted the value of the note and expensed
the imputed interest monthly accreting up the value of the note to its face
value of $2,000,000 in August 2008.
In August 2008, the Company and the former owners reached an agreement
restructuring the Company's obligation under this note by executing an Amended
and Restated Subordinated Promissory Note, the "New Note". The principal balance
of this New Note is $ 2,050,000 (consisting of $2,000,000 principal amount of
the promissory note dated August 25, 2007, plus an unpaid working capital
adjustment in the amount of $50,000), Payments due under the New Note are:
$25,000 on each of October 31, 2008 and December 31, 2008, an additional $50,000
12
on March 31, 2009, followed by 19 equal consecutive quarterly installments of
$100,000, commencing on June 30, 2009 and continuing through December 31, 2013,
payable on the last business day of each March, June, September and December,
commencing June 30, 2009, and continuing through and including December 31,
2013, with one final payment of $50,000 on March 31, 2014, plus accrued interest
thereon at the rate of 7% per annum from August 24, 2008. As additional
consideration the former owners were granted a warrant exercisable for 5 years
to purchase 100,000 shares of common stock at $0.109 per share. The warrant
expires on August 24, 2014.
The Company has made the payments due on September 30 and December 31,
2008, leaving a principal balance due of $2,000,000 at December 31, 2008.
Our obligation under both the Old Note and New Note are subordinate to our
indebtedness to PNC and SCCF. In March 2009, the Company received a notice from
SCCF, exercising their right to block payments under the New Note. Accordingly,
the payment due on March 31 was not made. In April 2009, the Company received a
notice from the holders of the New Note that an event of default had occurred,
and accordingly, interest under the New Note would now accrue at 11% per annum.
Per the terms of the fourth amendment to the SCCF Loan, all payments have been
blocked until April 30, 2010. As a result of this, the Company has entered into
a modification agreement with the holder of the New Note to amend the payment
terms. The Company has paid a fee to the holder of $50,000 to modify the loan
agreement to block the payments until April 30, 2010 and accrue interest at a
rate of 9% per annum.
Interest expense on the Seller Notes amounted to approximately $53,000 and
$24,000 for the three months ended June 30, 2009 and 2008, respectively.
Interest expense on the Seller Notes amounted to approximately $97,000 and
$55,000 for the six months ended June 30, 2009 and 2008, respectively
Amortization of debt accretion for the three months ended June 30, 2009 and 2008
amounted to $0 and $35,000, respectively. Amortization of debt accretion for the
six months ended June 30, 2009 and 2008 amounted to $0 and $70,000, respectively
Junior Subordinated Notes
In 2008, the Company raised gross proceeds of $5,545,000 in private
placements through the issuance of notes. The notes bear interest at 1% per
month (12% per year) and are payable on May 31, 2010, or earlier upon completion
of one or a series of financings resulting in aggregate gross proceeds of at
least $10 million.
For the three months ended March 31, 2009, we sold in a private placement
to accredited investors, an additional $445,000 principal amount of notes
together with 35,600 shares of our Series B Preferred for a total purchase price
of $445,000. For financial reporting purposes, the Company recorded a discount
of $239,000 to reflect the value of the Series B Preferred issued. See Note 6
Stockholders' Equity.
13
The New Notes are subordinated to the Company's senior indebtedness.
In connection with the 2008 private placement offerings, the Company
issued to Taglich Brothers, Inc. ("Taglich"), as placement agent, a note in the
principal amount of $510,000. The terms of the note issued to Taglich are
identical to the other notes issued.
In connection with the 2009 offerings, the Company issued to Taglich 3,560
shares of Series B Preferred and will pay Taglich a commission of $44,500. Such
commission has been accrued and included in accounts payable and accrued
expenses on the consolidated balance sheet. For financial reporting purposes,
the Company recorded a discount of $68,000 to reflect the commission and the
value of the Series B Preferred issued. See Note 6 Stockholders' Equity and Note
11 Related Party Transactions.
Amortization of debt discount for the three months ended June 30, 2009 and
2008 amounted to $708,000 and $0, respectively. Amortization of debt discount
for the six months ended June 30, 2009 and 2008 amounted to $1,331,000 and $0,
respectively Interest expense amounted to $196,000 and $20,000 for the three
months ended June 30, 2009 and 2008, respectively. Interest expense amounted to
$389,000 and $20,000 for the six months ended June 30, 2009 and 2008,
respectively.
Note 6. STOCKHOLDERS EQUITY
Common Stock Issuances
In June 2009, the Company issued 173,693 shares of Common Stock valued at
$43,423 to two vendors of Sigma as per settlement agreements signed with each.
Preferred Stock Issuances
For the three months ended March 31, 2009, the Company issued 76,381
shares of Series B Preferred as dividends in lieu of cash payments.
In January 2009, as part of the sale of Sigma to its former stockholders,
such stockholders and the Company consummated a Settlement Agreement in which
these notes were converted into 58,500 shares of Series B Preferred. See Note 3
Disposition.
The Company issued 35,600 shares of Series B Preferred to note holders in
connection with the Company's placement of junior subordinated notes in the
first quarter of 2009. In addition, the Company issued to Taglich 3,560 shares
of Series B Preferred as a partial sales commission. See Note 5 Notes Payable
and Capital Lease Obligations.
In March 2009, the Company issued 4,211 shares of Series B Preferred
valued at $25,000 to a vendor for services rendered in 2008.
14
In April 2009, the Company issued 236,814 shares of Series B Preferred as
dividends in lieu of cash payments.
In June 2009, the Company issued 10,000 shares of the Series B Preferred
to Blair-HSM Companies in accordance with the settlement agreement. See Note 12
Litigation.
As of June 30, 2009, there were outstanding 1,813,071 shares of Series B
Preferred. The shares of Series B Preferred outstanding at June 30, 2009 are
convertible into 65,905,889 shares of common stock.
In July 2009, the Company issued 288,053 shares of Series B Preferred as
dividends in lieu of cash payments.
On October 16, 2009, the Company filed a Certificate of Amendment of the
Certificate of Designation of its Series B Preferred to change the authorized
issuance of shares from 2,000,000 to 4,000,000 shares.
As of October 21, 2009, there were outstanding 2,101,124 shares of Series
B Preferred. The shares of Series B Preferred outstanding are convertible into
76,376,751 shares of common stock.
Dividends
Dividends amounted to $316,000 and $583,000 for the three and six months
ended June 30, 2009 and $151,000 and $299,000 for the three and six months ended
June 30, 2008.
Note 7. SHARE-BASED COMPENSATION ARRANGEMENTS
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R),
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 three months ended June 30, 2008 and 2007, no options were granted.
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 is calculated and expensed in the period that
the price is known.
During the three and six months ended June 30, 2009 and 2008, an expense
of $33,410, $70,364, $57,000 and $117,000, respectively, the cost associated
with options previously granted was recorded and is included as a component of
general and administrative expenses.
15
Note 8. SIGNIFICANT CUSTOMERS
Three customers accounted for approximately 77% and 71% of net sales for
the three months ended June 30, 2009 and 2008, respectively. These three
customers accounted for approximately 75% and 73% for the six months ending June
30, 2009 and 2008, respectively. Accounts receivable from these three customers
at June 30, 2009 were approximately $3,437,000 or 65% of net receivables.
Amounts receivable from these three customers at December 31, 2008 were
approximately $3,096,000 or 59% of net receivables.
Note 9. Business Segments
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", the Company discloses financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available and regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
Financial information about the Company's operating segments for the three
and six months ended June 30, 2009 and 2008 is as follows:
For Three Months Ended June 30
------------------------------
2009 2008
------------ ------------
Air Industries Machining
Net Sales $ 9,788,000 $ 7,851,000
Gross Profit 1,601,000 2,301,000
Pre Tax Income 500,000 1,189,000
Assets 29,525,000 34,254,000
Sigma Metals
Net Loss From Discontinued Operations (163,000) (322,000)
Assets Held for Sale 683,000 11,772,000
Welding Metallurgy
Net Sales 1,308,000 1,372,000
Gross Profit 458,000 645,000
Pre Tax Income 38,000 203,000
Assets 6,556,000 9,027,000
Corporate
Net Sales
Gross Profit
Pre Tax Loss (1,231,000) (1,084,000)
Assets 13,558,000 23,105,000
16
Consolidated
Net Sales 11,096,000 9,223,000
Gross Profit 2,059,000 2,946,000
Net Loss from Discontinued Ops (162,000) (321,000)
Pre Tax (Loss) Income (693,000) 309,000
Provision (Benefit) for Taxes (80,000) (7,000)
Net (Loss) Income (1,092,000) 171,000)
Elimination of Assets (12,789,000) (15,169,000)
Assets $ 37,533,000 $ 39,349,000
For Six Months Ended June 30
----------------------------
2009 2008
------------ ------------
Air Industries Machining
Net Sales $ 19,708,000 $ 16,455,000
Gross Profit 3,660,000 4,695,000
Pre Tax Income 1,288,000 2,375,000
Assets 29,525,000 34,254,000
Sigma Metals
Net (Loss) Income From Discontinued Operations (130,000) (327,000)
Assets Held for Sale 683,000 11,772,000
Welding Metallurgy
Net Sales 2,571,000 2,017,000
Gross Profit 900,000 928,000
Pre Tax Income 108,000 75,000
Assets 6,556,000 9,027,000
Corporate
Net Sales
Gross Profit
Pre Tax Loss (2,581,000) (2,164,000)
Assets 13,558,000 23,105,000
Consolidated
Net Sales 22,279,000 18,472,000
Gross Profit 4,560,000 5,623,000
Net (Loss) Income from Discontinued Ops (130,000) (327,000)
Pre Tax (Loss) Income (1,185,000) 287,000
(Benefit) Provision for Taxes (166,000) 299,000
Net (Loss) Income (1,753,000) (322,000)
Elimination of Assets (12,789,000) (15,169,000)
Assets $ 37,533,000 $ 39,349,000
17
Note 10. DISCONTINUED OPERATIONS
During the quarter ended September 30, 2008, the Company's Board of
Directors decided to discontinue the operations at Sigma. Operations were
discontinued on October 31, 2008. Accordingly, Sigma's results of operations
have been reported as discontinued operations for all periods presented. Sigma's
assets and liabilities have been classified as held for sale on the Company's
consolidated balance sheet for all periods presented.
The table below indicates the results of operations for Sigma for the three and
six months ended June 30, 2009 and 2008.
Three Months Ending
June 30, June 30,
2009 2008
Revenue $ 39,000 $ 3,515,000
Cost of Goods Sold 328,000 2,972,000
------------------------------
Gross (Loss) Profit (289,000) 543,000
Operating Expenses (138,000) 841,000
Interest 12,000 24,000
Provision for Taxes -- --
------------------------------
Net Income Before Taxes $ (163,000) $ (322,000)
==============================
Six Months Ending
June 30, June 30,
2009 2008
Revenue $ 202,000 $ 7,555,000
Cost of Goods Sold 747,000 6,104,000
------------------------------
Gross (Loss) Profit (545,000) 1,451,000
Operating Expenses (436,000) 1,736,000
Interest 21,000 42,000
Provision for Taxes (4,000) --
------------------------------
Net Loss $ (126,000) $ (327,000)
==============================
Note 11. RELATED PARTY TRANSACTIONS
In connection with the 2009 offerings, the Company issued to Taglich 3,560
shares of Series B Preferred and will pay Taglich a commission of $44,500. Such
commission has been accrued and included in accounts payable and accrued
expenses on the consolidated balance sheet. See Note 5 Notes Payable and Capital
Lease Obligations.
18
Note 12. LITIGATION
Blair - HSM Companies: During the first half of 2008, and continuing into the
third quarter of 2008, the Company attempted to acquire Blair Industries, Inc.
and certain of its affiliated companies ("Blair-HSM"). During the third quarter
of 2008, management determined to cease its efforts to acquire Blair-HSM. On
November 3, 2008, we were served with an Information Request and Restraining
Notice by the Blair-HSM as part of their efforts to collect on the $350,000
Confession of Judgment issued by us to secure our agreement to reimburse the
stockholders of Blair-HSM for certain expenses incurred in connection with the
acquisition.
On November 28, 2008, we entered into a settlement agreement with the
former stockholders of Blair-HSM under which we agreed to pay Blair-HSM $350,000
in full and complete satisfaction of amounts payable under the stock purchase
agreement as follows: $50,000 on each of February 12, 2009, March 12, 2009 and
April 12, 2009, $100,000 on May 12, 2009, with the balance payable by delivery
of 10,000 shares of our Series B Preferred having a face value of $100,000. Such
amount has been accrued and included as part of Accounts Payable and Accrued
Expenses on the Consolidated Balance Sheet. These payments have been made and we
have issued the shares in June 2009. See Note 6 Stockholders' Equity.
In connection with the settlement, the former shareholders of Blair-HSM
and Blair-HSM agreed to file a Satisfaction of Judgment with the Supreme Court
of the State of New York, Suffolk County.
Sigma Metals, Inc: Several former vendors to Sigma have commenced legal
action against Sigma seeking to recover amounts owed to them totaling
approximately $400,000. While Sigma has no significant assets remaining, we have
been attempting to negotiate settlements of these claims. One former vendor has
been awarded a judgment against Sigma in the amount of approximately $107,000.
Another former vendor has commenced litigation under various legal theories
against AIRI and others in addition to Sigma, attempting to establish liability.
In March 2009, the Company signed settlement agreements with two vendors for
payables totaling approximately $75,000. The Company will pay cash and issued
173,693 shares of its Common Stock in June 2009. See Note 9 Stockholders'
Equity.
Note 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, accounts receivable, accounts payable and accrued
liabilities, approximates carrying value due to the immediate or short-term
maturity associated with these instruments and that the notes payable
approximate fair value in that they carry market-based interest rates.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Air Industries Machining Corp. ("AIM") manufactures aircraft structural
parts and assemblies principally for prime defense contractors in the aerospace
industry. During the first six months of 2009, approximately 85% of our revenues
were derived from sales of parts and assemblies for military applications, but
the majority of our sales are to other military contractors and not directly to
the military (U.S. and NATO).
We currently produce over 2,400 individual products (SKU's). These
products are produced and assembled by a skilled labor force into
electromechanical devices, mixer assemblies, rotor-hub components, flight
controls, arresting gears, vibration absorbing assemblies, landing gear
components and many other subassembly packages.
In fiscal 2007 we completed two acquisitions as part of our plan to
capitalize on our relationships in the aerospace industry. Through our Sigma
Metals subsidiary we became a specialty distributor of strategic metals,
primarily aluminum, stainless steel, titanium and other exotic end user
specified materials sourced from suppliers throughout the world, and through
Welding a provider of specialty welding services. 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.
During 2008 Sigma's results began to deteriorate and we concluded that to
revive the business would require a significant investment. As discussed in more
detail below, our working capital and liquidity were constrained during fiscal
2007 and remain constrained during the first half of fiscal 2009 and beyond.
During the third quarter of 2008 we made the decision to discontinue the
operations of Sigma.
We are engaged in an ongoing effort to position ourselves to win large,
long-term and higher margin contracts, and we have devoted substantial funds and
efforts to engineering costs and manpower as part of an ongoing effort to
participate in several significant long-term, higher margin projects, including
the production of subassemblies for the Joint Strike Fighter ("JSF") landing
gear and the A380 drag strut assemblies in the future.
Liquidity Concerns.
The Company continues to experience liquidity difficulties. The Company is
highly leveraged and will need to generate substantial cash flow from operations
to satisfy its debt service obligations.
20
To supplement our working capital, in June 2008 we sold $2,950,000
principal amount of our junior subordinated notes (the "Old Notes"), together
with 983,324 shares of our common stock, to accredited investors for total cash
consideration of $2,950,000 in a private placement. When the junior subordinated
notes were issued, Steel City Capital Funding LLC ("SCCF") requested and PNC
acquiesced to block our ability to utilize certain collateral in the amount of
$900,000. Because of the nature of the line of credit, it is classified with
current liabilities. This blocking had the effect of reducing the availability
of cash resulting from the issuance of the junior subordinated notes.
Beginning in September and continuing through December 2008, to further
address our liquidity concerns and to provide additional working capital, we
sold an additional $ 2,595,000 of principal amount of junior subordinated notes,
(the "New Notes") together with 156,400 shares of our Series B Preferred, in a
private placement for a total purchase price of $ 2,595,000. The New Notes,
which are payable on May 31, 2010, or earlier upon completion of one or a series
of financings resulting in aggregate gross proceeds of at least $10 million,
bear interest at the rate of 1% per month (or 12% per annum).
Subsequent to December 31, 2008, we sold an additional $445,000 principal
amount of New Notes, together with 35,600 shares of Series B Preferred for a
total purchase price of $445,000.
In addition, in October 2008, holders of an aggregate of $2,950,000
principal amount of our outstanding Old Notes exchanged their Old Notes for an
equal principal amount of New Notes, plus 236,000 shares of Series B Preferred.
The terms of the New Notes and the Old Notes are identical, except that the rate
of interest on the Old Notes was adjusted to 1% per month (12% per year).
As of June 30, 2009 there was a total of $5,990,000 in New Notes
outstanding.
As of September 30, 2009, the Company had issued 601,248 shares of Series
B Preferred dividends in lieu of cash payments.
As of October 21, 2009, there were outstanding 2,101,124 shares of Series
B Preferred. The shares of Series B Preferred outstanding at October 21, 2009
are convertible into 76,376,751 shares of common stock.
Nevertheless, we remain highly leveraged and dependent on our bank lenders
for additional financing and are continuing to experience liquidity constraints.
Discontinued Operations:
During the quarter ended September 30, 2008, the Company's Board of
Directors approved the discontinuance of operations at Sigma Metals Inc., a
wholly-owned subsidiary. (See note 10 to the condensed consolidated financial
statements included elsewhere in this report). During the fourth fiscal quarter
of 2008 the Company reached an agreement to sell certain assets of Sigma to the
former owners, and this sale was completed in January 2009. Accordingly, Sigma's
21
results of operations have been reported as discontinued operations for all
periods presented. Sigma's assets and liabilities have been classified as held
for sale on the Company's consolidated balance sheet for all periods presented.
Three and six months ended June 30, 2009 compared with three and six months
ended June 30, 2008
For the Three Months Ending
June 30, June 30,
2009 2008 Change
Revenue $ 39,000 $ 3,515,000 $(3,476,000)
Cost of Goods Sold 328,000 2,972,000 (2,644,000)
-------------------------------------------
Gross (Loss) Profit (289,000) 543,000 (832,000)
Operating Expenses (138,000) 922,000 (1,060,000)
Interest 12,000 (55,000) 67,000
Provision for Taxes -- -- --
-------------------------------------------
Net (Loss) Income $ (163,000) $ (322,000) $ 161,000
===========================================
For the Six Months Ending
Revenue $ 202,000 $ 7,555,000 $(7,353,000)
Cost of Goods Sold 747,000 6,104,000 (5,357,000)
-------------------------------------------
Gross (Loss) Profit (545,000) 1,451,000 (1,996,000)
Operating Expenses (436,000) 1,736,000 (2,172,000)
Interest 21,000 42,000 (21,000)
Provision for Taxes (4,000) -- (4,000)
-------------------------------------------
Net (Loss) Income $ (126,000) $ (327,000) $ 201,000
===========================================
Sigma operations were discontinued on October 31, 2008. Net sales at Sigma
decreased by $3,476,000 to $39,000 for the three months ended June 30, 2009
compared to the same period in 2008. Net sales at Sigma decreased by $7,353,000
to $202,000 for the six months ended June 30, 2009 compared to the same period
in 2008.
Net loss at Sigma decreased by $161,000 to $(162,000) for the three months
ending June 30, 2009 compared to the same period in 2008. Net loss at Sigma
decreased by $201,000 to $(126,000) for the six months ended June 30, 2009
compared to the same period in 2008.
Continuing Operations
Three and six months ended June 30, 2009 compared with three and six months
ended June 30, 2008
22
Consolidated net sales for the three months ended June 30, 2009 increased
by $1,873,000 or 20% to $11,096,000 as compared to $9,223,000, for the three
months ended June 30, 2008.
Net Sales 2009 2008 Change %
AIM $ 9,788,000 $ 7,851,000 $ 1,937,000 24.67%
Welding 1,308,000 1,372,000 (64,000) (4.66%)
---------------------------------------------------------
Consolidated $11,096,000 $ 9,223,000 $ 1,873,000 20.31%
=========================================================
Consolidated net sales for the six months ended June 30, 2009 increased by
$3,807,000 or 22% to $ 22,279,000 as compared to $ 18,472,000, for the six
months ended June 30, 2008.
Net Sales 2009 2008 Change %
AIM $19,708,000 $16,455,000 $ 3,253,000 19.77%
Welding 2,571,000 2,017,000 554,000 27.47%
---------------------------------------------------------
Consolidated $22,279,000 $18,472,000 $ 3,807,000 20.61%
=========================================================
As of June 15, 2009, AIM's 18-month "firm backlog" was approximately $49
million as compared to $54.3 million at June 30, 2008. Our "projected backlog"
as of June 30, 2009 for the same 18-month period which includes both the firm
backlog as well as anticipated order releases against long term agreements with
our prime aerospace contractors is approximately $60 million. Because of the
nature of the products and services provided, Welding Metallurgy does not have a
significant backlog and its backlog is not included in the numbers reported
herein.
Three customers accounted for approximately 77% and 71% of net sales for
the three months ended June 30, 2009 and 2008, respectively. These three
customers accounted for approximately 75% and 73% for the six months ending June
30, 2009 and 2008, respectively. Accounts receivable from these three customer
at June 30, 2009 and 2008 were approximately $3,437,000 or 65% of net
receivables and $2,824,000 or 60% of net receivables, respectively. Amounts
receivable from the largest of these three customers (a different customer in
each year) at June 30, 2009 and 2008 were approximately $1,713,000 or 34% of net
receivables and $1,270,000 or 26% of net receivables, respectively.
Consolidated gross profit for the three months ended June 30, 2009
declined by $887,000 or 30% to $2,059,000 from $2,946,000 for the three months
ended June 30, 2008. Gross profit as a percentage of revenue totaled 19% of
sales for the three months ended June 2009 as compared with 32% for the prior
year. Consolidated gross profit for the six months ended June 30, 2009 decreased
23
by $1,064,000 or (19%) to $4,559,000 from $5,623,000. Gross profit as a
percentage of revenue totaled 20.46% of sales for the three months ended June
2009 as compared with 30.44% for the prior year.
For the Three Months Ended June 30,
Gross profit 2009 2008 Change %
AIM $1,601,000 $2,301,000 $ (700,000) (30)%
Welding 458,000 645,000 (187,000) (29)%
--------------------------------------------------
Consolidated $2,059,000 $2,946,000 $ (887,000) (30)%
==================================================
For the Six Months Ended June 30,
Gross profit 2009 2008 Change %
AIM $ 3,659,000 $ 4,695,000 $(1,036,000) (22%)
Welding 900,000 928,000 (28,000) (3%)
--------------------------------------------------
Consolidated $ 4,559,000 $ 5,623,000 $(1,064,000) (19%)
==================================================
As a result of the above factors, income from operations decreased by
$247,000 to $634,000 in the three months ended June 30, 2009 as compared to
income of approximately $881,000 for the three months ended June 30, 2008.
Income from operations increased by $306,000 to $1,457,000 in the six months
ended June 30, 2009 as compared to income of approximately $1,151,000 for the
six months ended June 30, 2008.
Operating costs decreased by $640,000, or (31%) to $1,425,000 in the three
months ended June 30, 2009 compared to $2,065,000 in the three months ended June
30, 2008. The principal components of the decrease include:
For the Three Months Ended June 30,
Operating Cost 2009 2008 Change %
AIRI $ 251,000 $ 857,000 $ (606,000) (71%)
AIM 903,000 915,000 (12,000) (1%)
Welding 271,000 293,000 (22,000) (8%)
-------------------------------------------------
Consolidated $1,425,000 $2,065,000 $ (640,000) (31%)
=================================================
Operating costs at Welding Metallurgy were relatively constant and decreased by
just $22,000 or 8% to $271,000 for the three months ended June 30, 2009 and
2008, respectively.
24
o Operating costs at AIM decreased by $12,000, or 1% to $903,000 from
$915,000 for the three months ended June 30, 2009 and 2008,
respectively.
o Operating costs at AIRI decreased by $606,000 or 71% to $251,000
from $857,000 for the three months ended June 30, 2009 and 2008,
respectively.
Operating costs decreased by $1,370,000 or 31% to $3,102,000 for the six months
ended June 30, 2009 compared to $4,472,000 in the six months ended June 30,
2008. The principal components of the decrease include:
For the Six Months Ended June 30,
Operating Cost 2009 2008 Change %
AIRI $ 712,000 $ 1,922,000 $(1,210,000) (63%)
AIM 1,850,000 1,984,000 (134,000) (7%)
Welding 540,000 566,000 (26,000) (5%)
-------------------------------------------------
Consolidated $ 3,102,000 $ 4,472,000 $(1,370,000) (31%)
=================================================
o Operating costs at Welding Metallurgy were reduced by $26,000 or 5%
to $540,000 from $566,000 for the six months ended June 30, 2009 and
2008, respectively.
o Operating costs at AIM decreased by $134,000 or 7% to $1,850,000
from $1,984,000 for the six months ended June 30, 2009 and 2008,
respectively.
o Operating costs at AIRI decreased by $1,210,000 or 63% to $712,000
from $1,922,000 for the six months ended June 30, 2009 and 2008,
respectively. This reduction was primarily related to reduction in
consulting and legal costs.
Interest and financing costs consist of interest paid and accrued as well
as the accretion to face value resulting from recording of debt obligations at
fair value which is less than face value. Interest and financing costs increased
by approximately $669,000 to $1,251,000 in the three months ended June 30, 2009
compared to $582,000 for the three months ended June 30, 2008. Interest and
financing costs increased by approximately $1,688,000 to $2,564,000 in the six
months ended June 30, 2009 compared to $876,000 for the six months ended June
30, 2008. Accretion of debt discount and amortization of other non-cash finance
charges accounted for approximately $708,000 or 101% of the increase for the
three months ending June 30, 2009. Accretion of debt discount and amortization
of other non-cash finance charges accounted for approximately $1,331,000 or 79%
of the increase for the six months ending June 30, 2009.
The loss from continuing operations for the three months ended June 30,
2009 was $(560,000) an increase of $862,000 compared to income of $302,000 for
the three months ended June 30, 2008. The loss from continuing operations for
the six months ended June 30, 2009 was $(1,019,000) an increase of $1,413,000
compared to income of $294,000 for the six months ended June 30, 2008.
25
The benefit for income taxes was approximately $80,000 in the three months
ended June 30, 2009 compared to a provision of approximately $7,000 in the three
months ended June 30, 2008. The benefit for income taxes was approximately
$166,000 in the six months ended June 30, 2009 compared to an provision of
approximately $7,000 in the six months ended June 30, 2008.The Company computes
its income tax provision or benefit according to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income taxes" which uses
the asset and liability approach to financial reporting for income taxes. The
substantial difference from income taxes expected at the statutory rate and
actual income tax provisions results primarily from expenses which will never be
deductable due to basis differences at the acquired companies and stock
compensation and other charges that are not deductable.
Liquidity and Capital Resources
The Company continues to suffer from a lack of liquidity. The Company is
highly leveraged and will need to generate substantial cash flow from operations
to satisfy its debt service obligations. As of June 30, 2009 the Company had
negative working capital in the amount of approximately $40,000.
As of June 30, 2009, the Company's indebtedness was approximately $32.0
million, including approximately $15.1 million payable to its bank lenders and
secured by substantially all its assets. The Company was in default of certain
covenants in the agreements with its bank lenders as of the end of June 2009,
and these defaults continued through September 30, 2009. In September 2009, the
Company successfully negotiated amendments to the loan agreements with its bank
lenders, in which the bank lenders waived prior events of covenant defaults.
These amendments also modified the bank covenants for the period beginning
September 30, 2009. However, the loan agreements include clauses that permit the
lenders to demand payment at any time, and as the Company is required to
maintain a "lock box" account with PNC Bank into which substantially all of the
Company's cash receipts are paid, if its bank lenders were to demand repayment
and cease lending, the Company would lack the funds to continue its operations.
The Company received gross proceeds from the sale of its junior
subordinated notes and equity securities of $5,545,000 during 2008 and an
additional $445,000 during the three months ended March 31, 2009. The receipt of
these gross proceeds did ameliorate, to some degree, the Company's liquidity
constraints but this was partially offset by the Company's bank lenders imposing
a reduction in availability of $900,000 in June 2008. The Company's senior bank
debt matures in May 2010, and its subordinated bank debt in August 2010. There
can be no assurance that the Company's lenders will agree to extend their loans.
Absent significant improvement in results of operations; it is not likely that
the Company will be able to refinance its bank indebtedness with another lender.
26
To alleviate its liquidity difficulties, during 2008, the Company agreed
to sell certain assets of its Sigma business, which sale was completed in
January 2009, renegotiated and extended the payment terms of its indebtedness to
the former owners of Welding, and also has ceased its efforts to acquire
Blair-HSM. To further address liquidity difficulties, the Company has issued,
and will likely continue to issue, additional shares of its Series B Preferred
in lieu of payment of cash dividends on its Series B Preferred. This will dilute
the equity ownership and voting power of holders of its Common Stock.
The ability of the Company to maintain its current level of operations is
subject to the cooperation of its bank lenders and other parties which hold its
notes. If the Company's bank lenders were to reduce the amounts loaned to the
Company, the Company would have no choice other than to reduce it operations and
perhaps seek to liquidate certain assets. Any forced liquidation of assets would
likely yield less than the amounts at which such assets are valued by the
Company.
Our credit facility with PNC requires that all cash receipts (except those
at Welding) be swept on a daily basis to our loan accounts reducing the loan
balance. Therefore, at any point in time our book cash balances are negligible.
The revolving loan portion of the credit facility with PNC Bank N.A.
("PNC") is for a maximum of $14,000,000 subject to periodic, usually monthly,
calculations of borrowing availability under a borrowing base calculation. Daily
cash collections of accounts receivable reduce the loan balance by 15% of the
amount collected - the difference between the cash actually collected and the
85% previously billed and against which the bank advanced funds - and daily
shipments to customers increase availability by 85% of the amount billed.
We have incurred debt financing and issued the preferred stock in part to
support our acquisitions of Sigma and Welding.
27
Inventories were as follows:
June 30, December 31,
2009 2008 Change %
Raw Materials $ 5,850,000 $ 6,809,000 $ (959,000) (14%)
Work In Progress 9,971,000 9,633,000 338,000 4%
Finished Goods 6,212,000 5,224,000 988,000 19%
Inventory Reserve (287,000) (567,000) 280,000 49%
-------------------------------------------------------
Total Inventory $ 21,746,000 $ 21,099,000 $ 647,000 3%
=======================================================
Inventory owned by Sigma is classified in assets held for sale on the
accompanying condensed consolidated balance sheet. At June 30, 2009 and December
31, 2008 the value of the inventory owned by Sigma was $288,000 and $954,000,
respectively.
The increase in our inventory levels, coupled with our decision to fund
engineering and other costs to secure future higher margin projects have
strained our working capital negatively impacting our liquidity and consequently
our ability to work on all of the projects in-house.
The debt service associated with the junior subordinated notes and our
other debt obligations is substantial and will impair our ability to operate our
business. Further, until our liquidity improves significantly we will continue
to pay the 7% dividend on the outstanding shares of Series B Preferred Stock in
additional shares of Series B Preferred Stock rather than cash. Issuing
additional shares of Series B Preferred Stock will dilute the equity and voting
interests of holders of our common stock.
In order to enhance our liquidity we are undertaking several initiatives.
In an effort to reduce our inventory levels at AIM we are focusing on projects
with immediate and confirmed delivery dates, and we have implemented a cost
reduction programs related to general and administrative expenses. We have
concluded the disposition of the majority of the Sigma assets, and reached
agreements to satisfy the notes payable and employment contract obligations
without cash payments, and we have concluded an agreement with the former
shareholders of Welding to restructure and extend the payments on the notes
payable to them. Steel City Capital Funding has continued to block the payments
on the notes payable to these former shareholders. This has eliminated the
immediate cash obligation, but these notes are now in default and accruing
interest at 11% per annum.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our senior management is
responsible for establishing and maintaining a system of disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e).
28
Under the Securities Exchange Act of 1934 (the "Exchange Act") designed to
ensure that the information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Our then Chief Financial Officer's employment was terminated in September
2008.
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and our Chief
Accounting Officer who have been performing the functions of a chief financial
officer until a successor is named. Based on that evaluation, our Chief
Executive Officer and our Chief Accounting Officer have concluded that as of the
end of the period covered by this report, our disclosure controls and procedures
were not effective.
Certain of the deficiencies that exist in our disclosure controls and
procedures as of June 30, 2009, are those that were initially noted in our
Annual Report on Form 10-K for the year ended December 31, 2007. Specifically,
as of June 30, 2009, there remained certain weaknesses in our staffing and our
internal controls over financial reporting that have prevented us from
accurately processing our accounts so as to be able to report our results on a
timely basis. Moreover, management believes that as a result of our weaknesses,
there exist deficiencies at AIM in measuring labor costs and properly allocating
such costs between work-in-progress (inventory) and current cost of sales.
Management is in the process of developing and implementing a plan to resolve
these issues in the most expedient manner possible.
These improvements are intended to ensure that information required to be
disclosed in our periodic filings under the Exchange Act is accumulated and
communicated to our management, to allow timely decisions regarding required
disclosure and that all transactions are recorded, accumulated and processed to
permit the preparation of financial statements in accordance with generally
accepted accounting principles on a timely basis to allow compliance with our
reporting obligations under the Exchange Act.
(b) 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.
29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Blair - HSM Companies: During the first half of 2008, and continuing into
the third quarter of 2008, the Company attempted to acquire Blair Industries,
Inc. and certain of its affiliated companies ("Blair-HSM"). During the third
quarter of 2008, management determined to cease its efforts to acquire
Blair-HSM. On November 3, 2008, we were served with an Information Request and
Restraining Notice by the Blair-HSM as part of their efforts to collect on the
$350,000 Confession of Judgment issued by us to secure our agreement to
reimburse the stockholders of Blair-HSM for certain expenses incurred in
connection with the acquisition.
On November 28, 2008, we entered into a settlement agreement with the
former stockholders of Blair-HSM under which we agreed to pay Blair-HSM $350,000
in full and complete satisfaction of amounts payable under the stock purchase
agreement as follows: $50,000 on each of February 12, 2009, March 12, 2009 and
April 12, 2009, $100,000 on May 12, 2009, with the balance payable by delivery
of 10,000 shares of our Series B Preferred having a face value of $100,000. Such
amount has been accrued and included as part of Accounts Payable and Accrued
Expenses on the Consolidated Balance Sheet. These payments have been made and we
have issued the shares in June 2009.
In connection with the settlement, the former shareholders of Blair-HSM
and Blair-HSM agreed to file a Satisfaction of Judgment with the Supreme Court
of the State of New York, Suffolk County.
Sigma Metals, Inc: Several former vendors to Sigma have commenced legal
action against Sigma seeking to recover amounts owed to them totaling
approximately $400,000. While Sigma has no significant assets remaining, we have
been attempting to negotiate settlements of these claims. One former vendor has
been awarded a judgment against Sigma in the amount of approximately $107,000.
Another former vendor has commenced litigation under various legal theories
against AIRI and others in addition to Sigma, attempting to establish liability.
In March 2009, the Company signed settlement agreements with two vendors for
payables totaling approximately $75,000. The Company will pay cash and issued
173,693 shares of its Common Stock in June 2009. See Note 9 Stockholders'
Equity.
30
Item 1A. 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
in our Annual Report on Form 10-K for the fiscal year ended December 31,2008
(the "2008 Form 10-K"), our Management's Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 2 of Part I of this
report, our condensed consolidated financial statements and related notes
included in Item 1 of Part I of this report and 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
2008 Form 10-K. Readers should carefully review those risks, as well as
additional risks described in other documents we file from time to time with the
Securities and Exchange Commission.
If any of the events described in the portions of this report, or our 2008
Form 10-K, 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.
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
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).
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: October 21, 2009
AIR INDUSTRIES GROUP INC.
By: /s/ Peter D. Rettaliata
-------------------------------------
Peter D. Rettaliata
President and Chief Executive Officer