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EX-31.2 - AIR INDUSTRIES GROUPe613979_ex31-2.htm
EX-32.2 - AIR INDUSTRIES GROUPe613979_ex32-2.htm
EX-32.1 - AIR INDUSTRIES GROUPe613979_ex32-1.htm
EX-10.2 - AIR INDUSTRIES GROUPe613979_ex10-2.htm
EX-31.1 - AIR INDUSTRIES GROUPe613979_ex31-1.htm
EX-10.1 - AIR INDUSTRIES GROUPe613979_ex10-1.htm

UNITED STATES
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, 2015

OR

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _______ TO ________.

Commission file number 001-35927

Air Industries Group
(Exact name of Registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)
80-0948413
(IRS Employer
Identification No.)

360 Motor Parkway, Suite 100, Hauppauge, New York 11788
(Address of principal executive offices)

(631) 881-4920
(Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 o           Accelerated filer o

      Non-accelerated filer (do not check if smaller reporting company) o       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). Yeso No x

As of August 3, 2015, the registrant had outstanding 7,559,501 shares of common stock.
 
 
 

 
 
   
 
Page No.
PART I.  FINANCIAL INFORMATION
 
   
Item 1.  Financial Statements
1
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
20
   
Item 4.  Controls and Procedures
32
   
PART II.  OTHER INFORMATION
 
   
Item 1A.  Risk Factors
33
   
Item 6.  Exhibits
33
   
SIGNATURES
34

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. Forward-looking statements are predictive in nature and can be identified by the fact that they do not relate strictly to historical or current facts and generally include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions. Certain of the matters discussed herein concerning, among other items, our operations, cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and the effect of economic conditions, include forward-looking statements.

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, and general economic conditions, these statements and other projections contained herein expressing opinions about future outcomes and non-historical information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved. Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given these uncertainties, you should not place any reliance on these forward-looking statements which speak only as of the date hereof. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014 and elsewhere in this report and the risks discussed in our other filings with the SEC.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under the securities laws of the United States.
 
 
PART I
 
FINANCIAL INFORMATION
   
Item 1. Financial statements
Page No.
   
Condensed Consolidated Financial Statements:
 
   
Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014
2
   
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014 (unaudited)
3
   
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)
4
   
Notes to Condensed Consolidated Financial Statements
6
 
 
AIR INDUSTRIES GROUP
Condensed Consolidated Balance Sheets
 
   
June 30, 2015
   
December 31, 2014
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
  Cash and Cash Equivalents
  $ 1,214,000     $ 1,418,000  
  Accounts Receivable, Net of Allowance for Doubtful Accounts
    of $1,002,000 and $1,566,000, respectively
    11,749,000       11,916,000  
  Inventory
    33,283,000       28,391,000  
  Deferred Tax Asset
    1,358,000       1,421,000  
  Prepaid Expenses and Other Current Assets
    761,000       875,000  
Total Current Assets
    48,365,000       44,021,000  
                 
Property and Equipment, Net
    14,494,000       9,557,000  
Capitalized Engineering Costs, Net of Accumulated Amortization
    of $4,405,000 and $4,184,000, respectively
    911,000       712,000  
Deferred Financing Costs, Net, Deposits and Other Assets
    1,153,000       825,000  
Intangible Assets, Net
    3,899,000       4,513,000  
Deferred Tax Asset
    1,038,000       858,000  
Goodwill
    8,719,000       5,434,000  
TOTAL ASSETS
  $ 78,579,000     $ 65,920,000  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
  Notes Payable and Capitalized Lease Obligations - Current Portion
  $ 34,676,000     $ 19,508,000  
  Accounts Payable and Accrued Expenses
    8,132,000       6,948,000  
  Lease Impairment - Current Portion
    25,000       56,000  
  Deferred Gain on Sale - Current Portion
    38,000       38,000  
  Deferred Revenue
    453,000       158,000  
  Dividends Payable
    1,134,000       1,066,000  
  Income Taxes Payable
    -       71,000  
Total Current Liabilities
    44,458,000       27,845,000  
                 
Long Term Liabilities
               
  Notes Payable and Capitalized Lease Obligations - Net of Current Portion
    2,768,000       8,213,000  
  Lease Impairment - Net of Current Portion
    4,000       4,000  
  Deferred Gain on Sale - Net of Current Portion
    390,000       409,000  
  Deferred Rent
    1,194,000       1,177,000  
TOTAL LIABILITIES
    48,814,000       37,648,000  
 
               
Commitments and Contingencies
               
                 
Stockholders' Equity
               
Common Stock - Par Value $.001 - Authorized 25,000,000 Shares, 7,559,501 and 7,108,677 Shares Issued and Outstanding as of June 30, 2015 and December 31, 2014, respectively
    7,000       7,000  
Additional Paid-In Capital
    44,780,000       42,790,000  
Accumulated Deficit
    (15,022,000 )     (14,525,000 )
TOTAL STOCKHOLDERS' EQUITY
    29,765,000       28,272,000  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 78,579,000     $ 65,920,000  
 
See Notes to Condensed Consolidated Financial Statements
 
 
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Income
(Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Net Sales
  $ 19,057,000     $ 13,360,000     $ 35,868,000     $ 28,813,000  
                                 
Cost of Sales
    15,160,000       10,007,000       27,602,000       21,415,000  
                                 
Gross Profit
    3,897,000       3,353,000       8,266,000       7,398,000  
                                 
Operating Expenses
    3,825,000       3,096,000       7,728,000       5,912,000  
                                 
Income from Operations
    72,000       257,000       538,000       1,486,000  
                                 
Interest and Financing Costs
    (544,000 )     (304,000 )     (890,000 )     (607,000 )
                                 
Other Income (Expense), Net
    54,000       (62,000 )     62,000       (63,000 )
                                 
Income (Loss) before Income Taxes
    (418,000 )     (109,000 )     (290,000 )     816,000  
                                 
(Provision for) Benefit from Income Taxes
    (183,000 )     725,000       (207,000 )     141,000  
                                 
Net Income (Loss)
  $ (601,000 )   $ 616,000     $ (497,000 )   $ 957,000  
                                 
Income (Loss) per share - basic
  $ (0.08 )   $ 0.10     $ (0.07 )   $ 0.16  
Income (Loss) per share - diluted
  $ (0.08 )   $ 0.09     $ (0.07 )   $ 0.15  
                                 
Weighted average shares outstanding - basic
    7,557,427       6,276,481       7,397,756       6,071,163  
Weighted average shares outstanding - diluted
    7,557,427       6,597,804       7,397,756       6,370,588  

See Notes to Condensed Consolidated Financial Statements
 
 
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30,
(Unaudited)
 
   
2015
   
2014
 
             
 CASH FLOWS FROM OPERATING ACTIVITIES
           
 Net Income (Loss)
  $ (497,000 )   $ 957,000  
   Adjustments to reconcile net income (loss) to net
               
     cash provided by (used in) operating activities
               
Depreciation of property and equipment
    1,634,000       1,168,000  
Amortization of intangible assets
    614,000       582,000  
Amortization of capitalized engineering costs
    151,000       214,000  
Bad debt expense
    55,000       189,000  
Non-cash compensation expense
    54,000       15,000  
Amortization of deferred financing costs
    83,000       23,000  
Gain on sale of real estate
    (19,000 )     (19,000 )
Deferred income taxes
    (17,000 )     (746,000 )
                 
Changes in Assets and Liabilities
               
 (Increase) Decrease in Operating Assets:
               
Accounts receivable
    1,921,000       (789,000 )
Inventory
    (4,435,000 )     (2,920,000 )
Prepaid expenses and other current assets
    70,000       72,000  
Deposits and other assets
    (45,000 )     (24,000 )
 Increase (Decrease) in Operating Liabilities:
               
Accounts payable and accrued expenses
    (34,000 )     659,000  
Deferred rent
    17,000       38,000  
Income taxes payable
    (71,000 )     274,000  
Deferred revenue
    295,000       (77,000 )
NET CASH USED IN OPERATING ACTIVITIES
    (224,000 )     (384,000 )
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
               
Cash paid for acquisitions
    (5,413,000 )     (4,190,000 )
Cash acquired in acquisitions
    588,000       -  
Capitalized engineering costs
    (350,000 )     (128,000 )
Purchase of property and equipment
    (371,000 )     (302,000 )
NET CASH USED IN INVESTING ACTIVITIES
    (5,546,000 )     (4,620,000 )
                 
 CASH FLOWS FROM FINANCING ACTIVITIES
               
Notes payable - sellers
    (41,000 )     (339,000 )
Capital lease obligations
    (267,000 )     (172,000 )
Note payable - revolver
    5,329,000       (1,422,000 )
Proceeds from note payable - term loans
    3,500,000       1,328,000  
Payments of note payable - term loans
    (903,000 )     (664,000 )
Deferred financing costs
    (322,000 )     (25,000 )
Payments related to lease impairment
    (30,000 )     (38,000 )
Dividends paid
    (2,200,000 )     (1,618,000 )
Proceeds from capital lease refinance
    500,000       -  
Proceeds from Registered Offering
    -       9,530,000  
Costs to raise capital
    -       (968,000 )
NET CASH PROVIDED BY FINANCING ACTIVITIES
    5,566,000       5,612,000  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (204,000 )     608,000  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    1,418,000       561,000  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 1,214,000     $ 1,169,000  
 
 
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, (Continued)
(Unaudited)
 
   
2015
   
2014
 
             
Supplemental cash flow information
           
Cash paid during the period for interest
  $ 727,000     $ 539,000  
                 
Supplemental cash flow information
               
Cash paid during the period for income taxes
  $ 445,000     $ 344,000  
                 
Supplemental schedule of non-cash investing and financing activities
               
Dividends payable
  $ 1,134,000     $ 1,064,000  
                 
Acquisition of property and equipment financed by capital lease
  $ 285,000     $ -  
                 
Conversion of Junior Subordinated Notes
  $ -     $ 1,000,000  
                 
Purchase of stock of The Sterling Engineering Corporation and assumption
               
  of liabilities in the acquisition as follows:
               
Fair Value of tangible assets acquired
  $ 8,281,000     $ -  
Goodwill
    3,285,000       -  
Cash acquired
    588,000       -  
Liabilities assumed
    (2,538,000 )     -  
Common stock issued
    (4,203,000 )     -  
Cash paid for acquisition
  $ 5,413,000     $ -  
                 
Purchase of stock of Woodbine Products and assumption
               
  of liabilities in the acquisition as follows:
               
Fair Value of tangible assets acquired
  $ -     $ 472,000  
Goodwill
    -       2,402,000  
Liabilities assumed
    -       (19,000 )
Common stock issued
    -       (290,000 )
Cash paid for acquisition
  $ -     $ 2,565,000  
                 
Purchase of stock of Eur-Pac Corporation and assumption
               
  of liabilities in the acquisition as follows:
               
Fair Value of tangible assets acquired
  $ -     $ 409,000  
Goodwill
    -       1,659,000  
Liabilities assumed
    -       (170,000 )
Due to seller
    -       (78,000 )
Common stock issued
    -       (195,000 )
Cash paid for acquisition
  $ -     $ 1,625,000  

See Notes to Condensed Consolidated Financial Statements
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. FORMATION AND BASIS OF PRESENTATION

Organization

On August 30, 2013, Air Industries Group, Inc. (“Air Industries Delaware”) changed its state of incorporation from Delaware to Nevada as a result of a merger with and into its recently formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation (“Air Industries Nevada” or “AIRI”) and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation was approved by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is deemed to be the successor.

The accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corporation (“AIM”), Welding Metallurgy, Inc. ("WMI" or “Welding”), Miller Stuart, Inc. (“Miller Stuart”), Nassau Tool Works, Inc. (“NTW”), Woodbine Products, Inc. (“Woodbine” or “WPI”) effective April 1, 2014, Eur-Pac Corporation (“Eur-Pac” or “EPC”) effective June 1, 2014, Electronic Connection Corporation (“ECC”), effective September 1, 2014, AMK Welding, Inc. (“AMK”) effective October 1, 2014, and The Sterling Engineering Company (“SEC” or "Sterling"), effective March 1, 2015 (together, the “Company”).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.

Note 2. ACQUISITIONS

The Company accounts for all business combinations in accordance with FASB ASC 805, “Business Combinations” (“ASC 805”), using the acquisition method of accounting. Under this method, assets and liabilities, including any remaining non-controlling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed, and non-controlling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or non-controlling interests made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Results of operations of the acquired entity are included in the Company’s results from the date of the acquisition onward and include amortization expense arising from acquired tangible and intangible assets. The Company expenses all costs as incurred related to an acquisition in the condensed consolidated statements of income.

Sterling
On March 1, 2015, the Company acquired all of the common stock of Sterling, for $5.4 million in cash and 425,005 shares of the common stock of AIRI. The common stock was valued at $9.89 per share, which was the closing share price on February 27, 2015. The cash consideration is subject to adjustment for working capital changes. The Company has also entered into employment and non-compete agreements for two and three year periods with three of the principals of Sterling. The Company financed the acquisition of Sterling with the proceeds from the issuance of Term Loan D (see Note 6).

At the time of acquisition, Sterling had capital lease obligations for equipment with a remaining balance of approximately $1.3 million. On April 21, 2015, the Company refinanced the $1.3 million capital lease obligation with the same financing company. This refinancing generated approximately $500,000 of cash for the Company. The Company is still in the process of finalizing the fair values of the Sterling acquisition transaction and is still in the measurement period as defined under ASC 805. Accordingly, during the three months ended June 30, 2015, the Company had a revision to the previously recorded purchase price allocation, and has increased the fair value of the goodwill acquired by $1.3 million with a corresponding increase in capital lease obligations. At the date of the capital lease refinancing transaction, the Company had approximately $1.8 million due under the refinanced obligation. This capital lease obligation has been accounted for and summarized with the remainder of the Company's capital leases as disclosed in Note 6.
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sterling founded in 1941 manufactures components for aircraft and ground turbine engines.

The acquisition of Sterling was accounted for under ASC 805. The provisional purchase price allocation is set forth below.

Fair value of tangible assets acquired
 
$
8,281,000
 
Goodwill
   
3,285,000
 
Cash acquired
   
588,000
 
Liabilities assumed
   
(2,538,000
)
Total
 
$
9,616,000
 

The below table sets forth selected proforma financial information as if AMK and Sterling were owned for the three and six months ended June 30, 2015 and 2014.
       Three Months Ended  
   
June 30, 2015
     
June 30, 2014
 
Net Sales
  $ 19,057,000       $ 16,871,000  
Income (loss) from operations
  $ 72,000       $ 394,000  
                   
 
      Six Months Ended  
   
June 30, 2015
     
June 30, 2014
 
Net Sales
  $ 37,707,000       $ 25,458,000  
Income (loss) from operations
  $ 685,000       $ (801,000 )
 
The below table sets forth selected financial information for the 2014 and 2015 acquisitions for the three and six months ended June 30, 2015 and 2014.

Three Months Ended June 30, 2015
                             
   
WPI
   
EPC
   
ECC
   
AMK
   
Sterling
 
Net Sales
  $ 211,000     $ 834,000     $ 208,000     $ 837,000     $ 2,413,000  
Income (loss) from operations
  $ 65,000     $ (21,000 )   $ 76,000     $ (576,000 )   $ (86,000 )
                                         
Three Months Ended June 30, 2014
                                       
   
WPI
   
EPC
   
ECC
   
AMK
   
Sterling
 
Net Sales
  $ 539,000     $ 277,000     $ -     $ -     $ -  
Income (loss) from operations
  $ 181,000     $ 92,000     $ -     $ -     $ -  
                                         
Six Months Ended June 30, 2015
                                       
   
WPI
   
EPC
   
ECC
   
AMK
   
Sterling
 
Net Sales
  $ 356,000     $ 1,905,000     $ 357,000     $ 1,914,000     $ 3,300,000  
Income (loss) from operations
  $ 105,000     $ 105,000     $ 108,000     $ (1,106,000 )   $ (15,000 )
                                         
Six Months Ended June 30, 2014
                                       
   
WPI
   
EPC
   
ECC
   
AMK
   
Sterling
 
Net Sales
  $ 539,000     $ 277,000     $ -     $  -     $ -  
Income (loss) from operations
  $ 181,000     $ 92,000     $ -     $  -     $ -  
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principal Business Activity

The Company through its AIM subsidiary is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter aircraft. Welding is a specialty welding and products provider whose significant customers include the world's largest aircraft manufacturers, subcontractors, and original equipment manufacturers. Miller Stuart is a manufacturer of aerospace components whose customers include major aircraft manufacturers and the US Military. Miller Stuart specializes in electromechanical systems, harness and cable assemblies, electronic equipment and printed circuit boards. Woodbine is a manufacturer of aerospace components whose customers include major aircraft component suppliers. Woodbine specializes in welded and brazed chassis structures housing electronics in aircraft. Eur-Pac specializes in military packaging and supplies. Eur-Pac’s primary business is “kitting” of supplies for all branches of the United States Defense Department including ordnance parts, hose assemblies, hydraulic, mechanical and electrical assemblies. AMK is a provider of sophisticated welding and machining services for diversified aerospace and industrial customers. Sterling manufactures components for aircraft and ground turbine engines. The Company’s customers consist mainly of publicly traded companies in the aerospace industry.

Inventory Valuation

Inventory at June 30, 2015 and 2014 was computed using the “gross profit” method.

The Company valued inventory at December 31, 2014 at the lower of cost on a first-in-first-out basis or market.

Credit and Concentration Risks

There were two customers that represented 29.9% and three customers that represented 58.3% of total sales for the three months ended June 30, 2015 and 2014, respectively. This is set forth in the table below.

Customer
   
Percentage of Sales
 
     
2015
   
2014
 
     
(unaudited)
   
(unaudited)
 
 
1
     
16.7
     
29.3
 
 
2
     
13.2
     
18.4
 
 
3
     
*
     
10.6
 

* Customer was less than 10% of sales for the three months ended June 30, 2015

There were three customers that represented 45.3% and three customers that represented 55.9% of total sales for the six months ended June 30, 2015 and 2014, respectively. This is set forth in the table below.

Customer
   
Percentage of Sales
 
     
2015
   
2014
 
     
(unaudited)
   
(unaudited)
 
 
1
     
19.8
     
30.8
 
 
2
     
15.5
     
12.8
 
 
3
     
10.0
     
**
 
 
4
     
*
     
12.3
 

* Customer was less than 10% of sales for the six months ended June 30, 2015
** Customer was less than 10% of sales for the six months ended June 30, 2014
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

There were three customers that represented 37.0% of gross accounts receivable and three customers that represented 50.4% of gross accounts receivable at June 30, 2015 and December 31, 2014, respectively. This is set forth in the table below.

Customer
   
Percentage of Receivables
 
     
June
   
December
 
     
2015
   
2014
 
     
(unaudited)
       
 
1
     
14.1
     
10.0
 
 
2
     
12.3
     
29.0
 
 
3
     
10.6
     
**
 
 
4
     
*
     
11.4
 

* Customer was less than 10% of Gross Accounts Receivable at June 30, 2015
** Customer was less than 10% of Gross Accounts Receivable at December 31, 2014

During the six months ended June 30, 2015 and 2014, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts.

The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed.

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 following is a reconciliation of the denominators of basic and diluted earnings per share computations:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Weighted average shares outstanding used to compute basic earnings per share
   
7,557,427
     
6,276,481
     
7,397,756
     
6,071,163
 
Effect of dilutive stock options and warrants
   
               -
     
   321,323
     
               -
     
   299,425
 
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share
   
7,557,427
     
6,597,804
     
7,397,756
     
6,370,588
 

The following table sets forth options and warrants which were excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

   
Three and Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
 
Stock Options
   
86,891
     
17,048
 
Warrants
   
46,800
     
46,800
 
     
133,691
     
63,848
 
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth options and warrants which were excluded from the diluted per share calculation even though the exercise price was less than the average market price of the common shares because the effect of including these potential shares was anti-dilutive due to the net losses:

   
Three and Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
 
Stock Options
   
494,175
     
-
 
Warrants
   
117,785
     
-
 
     
611,960
     
-
 

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC 718, "Compensation – Stock Compensation." Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation amounted to $17,000 and $12,000 for the three months ended June 30, 2015 and 2014, respectively, and $54,000 and $15,000 for the six months ended June 30, 2015 and 2014, respectively, and was included in operating expenses on the accompanying Condensed Consolidated Statements of Income.

Goodwill

Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $8,719,000 relates to the acquisitions of Welding ($291,000), NTW ($162,000), Woodbine ($2,565,000), Eur-PAC ($1,656,000), ECC ($109,000), AMK ($651,000), and Sterling ($3,285,000). Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.

The Company has determined that there has been no impairment of goodwill at June 30, 2015 and December 31, 2014.

Recently Issued Accounting Pronouncements

In January 2015, the Financial Accounting Standards Board (the "FASB") issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (“ASU 2015-01”). ASU 2015-01 eliminates the concept of an extraordinary item from accounting principles generally accepted in the United States of America. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 becomes effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the effects of Adopting ASU 2015-01 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued amended guidance to the consolidation standard which updates the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendment modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, among other provisions. This amended guidance will be effective for the Company beginning fiscal year 2016.  Early adoption is permitted. The Company is currently assessing the impact the adoption of the amended guidance will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In April 2015, the FASB issued amended guidance which requires debt issuance costs to be presented as a direct deduction from the carrying value of the associated debt liability rather than as separate assets on the balance sheet. The recognition and measurement guidance for debt issuance costs are not affected by this amendment.  This amended guidance will be effective for the Company beginning fiscal year 2016. Early adoption is permitted, and the new guidance will be applied on a retrospective basis. The Company does not expect the adoption of this amended guidance to have a significant impact on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value when the FIFO or average cost method is used. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively. Earlier adoption is permitted. The Company is currently assessing the impact the adoption of the amended guidance will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The amendments in ASU 2014-09 affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC 605, “Revenue Recognition” and most industry-specific guidance and creates ASC 606, “Revenue from Contracts with Customers.” On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year and the amendments are now effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently assessing the impact on its consolidated financial statements.

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
 
Reclassifications

Certain account balances in 2014 have been reclassified to conform to the current period presentation.

Subsequent Events

Management has evaluated subsequent events through the date of this filing.

Note 4. PROPERTY AND EQUIPMENT

The components of property and equipment at June 30, 2015 and December 31, 2014 consisted of the following:

   
June 30,
   
December 31,
   
   
2015
   
2014
   
   
(unaudited)
         
Land
 
$
500,000
   
$
                200,000
   
Buildings and Improvements
   
   3,353,000
     
             1,680,000
 
31.5 years
Machinery and Equipment
   
14,450,000
     
12,514,000
 
5 - 8 years
Capital Lease Machinery and Equipment
   
3,886,000
     
  1,800,000
 
5 - 8 years
Tools and Instruments
   
6,012,000
     
  5,566,000
 
1.5 - 7 years
Automotive Equipment
   
192,000
     
     162,000
 
5 years
Furniture and Fixtures
   
289,000
     
     275,000
 
5 - 8 years
Leasehold Improvements
   
687,000
     
     646,000
 
Term of Lease
Computers and Software
   
      402,000
     
   372,000
 
4-6 years
Total Property and Equipment
   
29,771,000
     
23,215,000
   
Less: Accumulated Depreciation
   
(15,277,000
)
   
(13,658,000
)
 
Property and Equipment, net
 
$
14,494,000
   
  $
9,557,000
   

Depreciation expense for the three months ended June 30, 2015 and 2014 was approximately $915,000 and $616,000, respectively. Depreciation expense for the six months ended June 30, 2015 and 2014 was approximately $1,634,000 and $1,168,000, respectively.
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5. INTANGIBLE ASSETS

The components of intangibles assets consisted of the following:

   
June 30,
   
December 31,
   
   
2015
   
2014
   
   
(unaudited)
         
Customer Relationships
 
$
6,255,000
   
$
6,255,000
 
       5 to 14 years
Trade Names
   
1,280,000
     
1,280,000
 
           20 years
Technical Know-how
   
660,000
     
660,000
 
           10 years
Non-Compete
   
50,000
     
50,000
 
             5 years
Professional Certifications
   
      15,000
     
      15,000
 
       .25 to 2 years
Total Intangible Assets
   
8,260,000
     
8,260,000
   
Less: Accumulated Amortization
   
(4,361,000
)
   
(3,747,000
)
 
Intangible Assets, net
 
$
3,899,000
   
$
4,513,000
   

Amortization expense for the three months ended June 30, 2015 and 2014 was approximately $307,000 and $291,000, respectively. Amortization expense for the six months ended June 30, 2015 and 2014 was approximately $614,000 and $582,000, respectively.

Note 6. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Notes payable and capital lease obligations consist of the following:
   
June 30,
   
December 31,
 
   
2015
   
2014
 
   
(unaudited)
       
Revolving credit note payable to PNC Bank N.A. ("PNC")
 
$
23,000,000
   
$
17,672,000
 
Term loans, PNC
   
10,960,000
     
8,363,000
 
Capital lease obligations
   
3,484,000
     
1,645,000
 
Notes payable to sellers of WMI
   
                  -
     
        41,000
 
Subtotal
   
37,444,000
     
27,721,000
 
Less: Current portion of notes and capital lease obligations
   
(34,676,000
)
   
(19,508,000
)
Notes payable and capital lease obligations, net of current portion
 
$
2,768,000
   
$
8,213,000
 
 
PNC Bank N.A. ("PNC")

The Company has a credit facility with PNC (the "Loan Facility") secured by substantially all of its assets. The Loan Facility has been amended many times during its term. The Company entered into the latest amendment to the Loan Facility in March 2015 and paid an amendment fee of $25,000. The Loan Facility now provides for maximum borrowings of approximately $34,000,000 consisting of the following at June 30, 2015:

 
(i)
a $23,000,000 revolving loan (includes inventory sub-limit of $15,000,000) and
 
(ii)
Four term loans (Term Loan A, Term Loan B, Term Loan C and Term Loan D).

Under the terms of the Loan Facility the revolving credit note now bears interest at (a) the sum of the Alternate Base Rate plus three quarters of one percent (0.75%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one half of one percent (2.50%) with respect to LIBOR Rate Loans. Prior to the amendment the revolving credit note bore interest at the sum of the Alternate Base Rate plus three quarters of one percent (0.75%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and three quarters of one percent (2.75%) with respect to Eurodollar Rate Loans. The revolving credit note had an interest rate of 4.00% per annum at June 30, 2015 and December 31, 2014, and an outstanding balance of $23,000,000 and $17,672,000, respectively. The maturity date of the revolving credit note is November 30, 2016.

Each day, the Company's cash collections are swept directly by the bank to reduce the revolving loans and we then borrow according to a borrowing base. Because the revolving loans contain a subjective acceleration clause which could permit PNC to require repayment prior to maturity, the loans are classified with the current portion of notes and capital lease obligations.
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The repayment terms of Term Loan A were amended in 2014. On April 1, 2014, the Company borrowed an additional $1,328,000 to partially fund the acquisition of Woodbine. The repayment terms of Term Loan A now consists of thirty-two consecutive monthly principal installments, the first thirty-one of which shall be in the amount of $31,859 commencing on the first business day of May 2014, and continuing on the first business day of each month thereafter, with a thirty-second and final payment of any unpaid balance of principal and interest on the last business day of November 2016. Term Loans A and B bear interest at (a) the sum of the Alternate Base Rate plus one and three quarters of one percent (1.75%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three percent (3.00%) with respect to LIBOR Rate Loans. At June 30, 2015 and December 31, 2014, the balance due under Term Loan A was $2,230,000 and $2,421,000, respectively.

On October 1, 2014, the Company borrowed $3,500,000 under Term Loan B for the acquisition of AMK. The repayment of Term Loan B consists of sixty consecutive monthly principal installments, the first fifty-nine of which shall be in the amount of $58,333 commencing on the first business day of December 2014, and continuing on the first business day of each month thereafter, with a sixtieth and final payment of any unpaid balance of principal and interest on the last business day of November 2019. At June 30, 2015 and December 31, 2014, the balance due under Term Loan B was $3,092,000 and $3,442,000, respectively.

On December 31, 2014, the Company borrowed $2,500,000 under Term Loan C to refinance the Seller Note and Mortgage of $2,500,000 issued as part of the acquisition of AMK. The maturity date of Term Loan C is the first business day of January 2021, and it is to be paid in seventy two consecutive monthly principal installments, which commenced on the first business day of February 2015, and continue on the first business day of each month thereafter. The first seventy-one of the installments shall be in the amount of $34,722 with a seventy second and final payment of any unpaid principal and interest on the first business day of January 2021. Term Loan C bears interest at (a) the sum of the Alternate Base Rate plus two percent (2.00%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three and one-quarter percent (3.25%) with respect to LIBOR Rate Loans. At June 30, 2015 and December 31, 2014, the balance due under Term Loan C was $2,326,000 and $2,500,000, respectively.

On March 9, 2015, the Company borrowed $3,500,000 under Term Loan D for the acquisition of Sterling. The repayment of Term Loan D consists of twenty consecutive monthly principal installments, the first nineteen of which shall be in the amount of $62,847 commencing on the first business day of April 2015, and continuing on the first business day of each month thereafter, with a twentieth and final payment of any unpaid balance of principal and interest on the last business day of November 2016. Term Loan D bears interest at (a) the sum of the Alternate Base Rate plus two and one quarter percent (2.25%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three and one-half percent (3.50%) with respect to LIBOR Rate Loans. At June 30, 2015, the balance due under Term Loan D was $3,312,000.

To the extent that the Company disposes of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws on the credit facility in the amount equal to the net proceeds of such sale.

The terms of the Loan Facility require that, among other things, the Company maintain a specified Fixed Charge Coverage Ratio. In addition, the Company is limited in the amount of Capital Expenditures it can make. The Company is also limited to the amount of Dividends it can pay its shareholders as defined in the Loan Facility. As of June 30, 2015, the Company was not in compliance with the Fixed Charge Coverage Ratio covenant. On August 10, 2015, PNC granted the Company a waiver of this covenant for the six months ended June 30, 2015. Since the waiver is for a term of less than one year, all of the Company's debt outstanding with PNC has been classified as current in the accompanying condensed consolidated balance sheet. At June 30, 2015, the Company was in compliance with all other terms of the Loan Facility. As of December 31, 2014, the Company was in compliance with all terms of the Loan Facility.
 
The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan Facility). PNC may use some elements of subjective business judgment in determining whether a material adverse change has occurred in the Company's condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of the Loan Facility.
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2015, the scheduled future minimum principal payments for the term loans are as follows, however as discussed above, the balance of the term loans have been classified as current:

For the twelve months ending
 
Amount
 
June 30, 2016
 
$
2,253,000
 
June 30, 2017
   
5,522,000
 
June 30, 2018
   
1,117,000
 
June 30, 2019
   
1,117,000
 
June 30, 2020
   
708,000
 
Thereafter
   
     243,000
 
PNC Term Loans payable
   
10,960,000
 
Less: Current portion
   
 (10,960,000
)
Long-term portion
 
$
-
 
 
Interest expense related to these credit facilities amounted to approximately $375,000 and $225,000 for the three months ended June 30, 2015 and 2014, respectively, and $660,000 and $411,000 for the six months ended June 30, 2015 and 2014, respectively.

Capital Leases Payable – Equipment

The Company is committed under several capital leases for manufacturing and computer equipment. Each lease has a bargain purchase option exercisable at the termination of the lease. Capital lease obligations totaled $3,484,000 and $1,645,000 as of June 30, 2015 and December 31, 2014, respectively, with various interest rates ranging from approximately 4% to 7%.

As of June 30, 2015, the aggregate future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:

For the twelve months ending
 
Amount
 
June 30, 2016
 
$
891,000
 
June 30, 2017
   
891,000
 
June 30, 2018
   
891,000
 
June 30, 2019
   
762,000
 
June 30, 2020
   
502,000
 
Thereafter
   
       1,000
 
Total future minimum lease payments
   
3,938,000
 
Less: imputed interest
   
(454,000
)
Less: current portion
   
  (716,000
)
Total Long Term Portion
 
$
2,768,000
 

Notes Payable - Sellers

In connection with the acquisition of Welding on August 24, 2007, the Company incurred a note payable (the “Note”) to the former stockholders of Welding. At December 31, 2014, the balance owed under the Note was $41,000. On January 5, 2015 the remaining balance of $41,000 was paid and the obligation was extinguished.

Interest expense related to the Note was $0 and $9,000 for the three months ended June 30, 2015 and 2014, respectively, and $0 and $21,000 for the six months ended June 30, 2015 and 2014, respectively.
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Junior Subordinated Notes

In 2008 and 2009, the Company sold in a series of private placements to accredited investors $5,990,000 of principal amount in Junior Subordinated Notes. The notes bear interest at the rate of 1% per month (or 12% per annum).

In connection with the offering of the Company's Junior Subordinated Notes, the Company issued to Taglich Brothers, Inc. ("Taglich Brothers"), as placement agent, a Junior Subordinated Note in the principal amount of $510,000. The terms of the note issued to Taglich Brothers are identical to the notes. In connection with the amounts raised in 2009, the Company issued to Taglich Brothers a Junior Subordinated Note on the same terms as the Junior Subordinated Notes referred to above for commission of $44,500.

In conjunction with the Private Placement of our common stock to raise money for the NTW Acquisition, the Company solicited the holders of our Junior Subordinated Notes to convert their notes to Common Stock at a price of $6.00 per share. On June 29, 2012, the Company issued 867,461 shares of its Common Stock in exchange for approximately $5,204,000 of its Junior Subordinated Notes. On July 26, 2012, the Company repaid $115,000 of its Junior Subordinated Notes along with the accrued interest thereon of approximately $1,000.

The due dates of the remaining Junior Subordinated Notes were extended from November 18, 2013 to mature on November 30, 2016 and are subordinated to the Company's obligations to PNC. The Junior Subordinated Notes were satisfied in June 2014.

Interest expense on the Junior Subordinated Notes amounted to $0 and $31,000 for the three months ended June 30, 2015 and 2014, respectively, and $0 and $61,000 for the three months ended June 30, 2015 and 2014, respectively.

Note 7. STOCKHOLDERS' EQUITY

Common Stock Issuances

During the six months ended June 30, 2015, the Company issued 25,819 shares of its common stock pursuant to the cashless exercise of Stock Options.

On March 1, 2015, in connection with the acquisition of Sterling, the Company issued 425,005 shares of its common stock to the former stockholders of Sterling.

Dividends

On July 17, 2015, the Board of Directors approved a quarterly dividend of $0.15 per common share or $1,134,000 to be paid on August 12, 2015 to all shareholders of record as of the close of business on August 3, 2015.

On April 24, 2015 the Company paid a dividend equal to $0.15 per common share or $1,134,000 to all shareholders of record as of April 13, 2015.

On January 15, 2015 the Company paid a dividend equal to $0.15 per common share or $1,066,000 to all shareholders of record as of January 2, 2015.

Stock Options

On March 30, 2015, the Board of Directors adopted the Company’s 2015 Equity Incentive Plan (“2015 Plan”). The 2015 Plan is virtually identical to, and is intended to replace, the Company’s 2013 Equity Incentive Plan. The proposal to accept the 2015 Plan was approved by affirmative vote of the Company’s stockholders on June 25, 2015.
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8. INCOME TAXES

The provision for income taxes at June 30, 2015 and 2014 is set forth below:

   
2015
   
2014
 
   
(unaudited)
   
(unaudited)
 
Current
           
   Federal
 
$
186,000
   
$
871,000
 
   State
   
     4,000
     
14,000
 
Total Current Expense
   
 190,000
     
885,000
 
Adjustment for prior year over (under) accruals
   Federal
   
-
     
10,000
 
   State
   
            -
     
(290,000)
 
     
 190,000
     
605,000
 
Deferred Tax Benefit
   
  17,000
     
(746,000)
 
Provision for (Benefit from) Income Taxes
 
$
207,000
   
$
(141,000)
 

The components of net deferred tax assets as of June 30, 2015 and December 31, 2014 are set forth below:

   
June 30,
   
December 31,
 
   
2015
   
2014
 
   
(unaudited)
       
Deferred tax assets:
           
Current:
           
Bad debts
 
410,000
   
 $
650,000
 
Inventory - 263A adjustment
   
939,000
     
762,000
 
Account payable, accrued expenses and reserves
   
         9,000
     
       9,000
 
Total current deferred tax asset before valuation allowance
   
1,358,000
     
1,421,000
 
Valuation allowance
   
                 -
     
               -
 
Total current deferred tax asset after valuation allowance
 
$
  1,358,000
   
$
1,421,000
 
                 
Non-Current:
               
Capital loss carry forwards
 
$
1,088,000
   
$
1,088,000
 
Section 1231 loss carry forward
   
4,000
     
4,000
 
Stock based compensation - options and restricted stock
   
549,000
     
527,000
 
Capitalized engineering costs
   
374,000
     
522,000
 
Deferred rent
   
478,000
     
483,000
 
Amortization - NTW Transaction
   
796,000
     
663,000
 
Lease impairment
   
10,000
     
22,000
 
Deferred gain on sale of real estate
   
171,000
     
179,000
 
Other
   
     100,000
     
                 -
 
Total deferred tax assets before valuation allowance
   
3,570,000
     
3,488,000
 
Valuation allowance
   
 (1,092,000
)
   
(1,092,000
)
Total deferred tax assets after valuation allowance
 
 $
  2,478,000
   
 $
 2,396,000
 
                 
Deferred tax liabilities:
               
Property and equipment
 
(1,007,000
)
 
 $
(1,082,000
)
Goodwill - NTW Transaction
   
(13,000
)
   
(11,000)
 
Goodwill - AMK Transaction
   
(13,000)
     
(4,000)
 
Amortization - Welding Transaction
   
    (407,000
)
   
    (441,000
)
Total Deferred Tax Liability
   
 (1,440,000
)
   
 (1,538,000
)
                 
Net non-current deferred tax asset
 
$
1,038,000
   
$
858,000
 
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the six months ended June 30, 2015 and 2014, the Company provided a valuation allowance on the deferred tax assets related to capital loss and section 1231 loss carryforwards. The valuation allowance at both June 30, 2015 and December 31, 2014 amounted to $1,092,000.  Management believes that the remainder of the net deferred tax assets are more likely than not to be realized.

The Company has a capital loss carry forward from the sale of Sigma Metals, Inc., a former subsidiary of the Company, of $2,719,000 which will expire in fiscal 2015.

Note 9. SEGMENT REPORTING

In accordance with FASB ASC 280, “Segment Reporting” ("ASC 280"), 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.

The Company follows ASC 280, which establishes standards for reporting information about operating segments in annual and interim financial statements, and requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.

The Company currently divides its operations into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures and Electronics which consists of WMI, WPI, Miller Stuart, Eur-Pac and ECC; and Turbine Engine Components which consists of AMK and Sterling.

The accounting policies of each segment are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based on revenue, gross profit contribution and assets employed.

Effective January 1, 2015, all operating costs are allocated to the Company’s operating segments. Prior to January 1, 2015 certain operating costs that were not directly attributable to a particular segment were included in corporate and presented as an independent segment. Results for the three and six months ended June 30, 2014 have been reclassified to conform to the current period presentation.

Financial information about the Company’s operating segments for the three and six months ended June 30, 2015 and 2014 are as follows:
 
 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     
Three Months Ended June 30,
 
     
2015
   
2014
 
     
(unaudited)
   
(unaudited)
 
COMPLEX
MACHINING
             
 
Net Sales
 
$
9,530,000
   
$
9,320,000
 
 
Gross Profit
   
2,229,000
     
2,104,000
 
 
Pre Tax Income (Loss)
   
363,000
     
22,000
 
 
Assets
   
65,137,000
     
33,840,000
 
                   
AEROSTRUCTURES
AND ELECTRONICS
                 
 
Net Sales
   
6,277,000
     
4,040,000
 
 
Gross Profit
   
1,396,000
     
1,249,000
 
 
Pre Tax Income (Loss)
   
(46,000)
     
(131,000)
 
 
Assets
   
17,375,000
     
20,627,000
 
                   
TURBINE ENGINE COMPONENTS
                 
 
Net Sales
   
3,250,000
     
-
 
 
Gross Profit
   
272,000
     
-
 
 
Pre Tax Income (Loss)
   
(735,000)
     
-
 
 
Assets
   
18,272,000
     
-
 
                   
CORPORATE
                 
 
Net Sales
   
-
     
-
 
 
Gross Profit
   
-
     
-
 
 
Pre Tax Income (Loss)
   
-
     
-
 
 
Assets
   
24,806,000
     
17,254,000
 
                   
CONSOLIDATED
                 
 
Net Sales
   
19,057,000
     
13,360,000
 
 
Gross Profit
   
3,897,000
     
3,353,000
 
 
Pre Tax Income (Loss)
   
(418,000)
     
(109,000)
 
 
(Provision for) Benefit from Income Taxes
   
(183,000)
     
725,000
 
 
Net Income (Loss)
   
(601,000)
     
616,000
 
 
Elimination of Assets
   
(47,011,000
)
   
(13,314,000
)
 
Assets
 
$
78,579,000
   
$
58,407,000
 
 
 
18

 
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     
Six Months Ended June 30,
 
     
2015
   
2014
 
     
(unaudited)
   
(unaudited)
 
COMPLEX
MACHINING
             
 
Net Sales
 
$
18,595,000
   
$
21,460,000
 
 
Gross Profit
   
4,318,000
     
5,312,000
 
 
Pre Tax Income (Loss)
   
184,000
     
1,301,000
 
 
Assets
   
65,137,000
     
33,840,000
 
                   
AEROSTRUCTURES
AND ELECTRONICS
                 
 
Net Sales
   
12,059,000
     
7,353,000
 
 
Gross Profit
   
3,559,000
     
2,086,000
 
 
Pre Tax Income (Loss)
   
724,000
     
(485,000)
 
 
Assets
   
17,375,000
     
20,627,000
 
                   
TURBINE ENGINE COMPONENTS
                 
 
Net Sales
   
5,214,000
     
-
 
 
Gross Profit
   
389,000
     
-
 
 
Pre Tax Income (Loss)
   
(1,198,000)
     
-
 
 
Assets
   
18,272,000
     
-
 
                   
CORPORATE
                 
 
Net Sales
   
-
     
-
 
 
Gross Profit
   
-
     
-
 
 
Pre Tax Income (Loss)
   
-
     
-
 
 
Assets
   
24,806,000
     
17,254,000
 
                   
CONSOLIDATED
                 
 
Net Sales
   
35,868,000
     
28,813,000
 
 
Gross Profit
   
8,266,000
     
7,398,000
 
 
Pre Tax Income (Loss)
   
(290,000)
     
816,000
 
 
(Provision for) Benefit from Income Taxes
   
(207,000)
     
141,000
 
 
Net Income (Loss)
   
(497,000)
     
957,000
 
 
Elimination of Assets
   
(47,011,000
)
   
(13,314,000
)
 
Assets
 
$
78,579,000
   
$
58,407,000
 
 
Note 10. SUBSEQUENT EVENTS
 
On August 10, 2015, the Company entered into an amendment to the PNC Loan Facility and paid an amendment fee of $40,000. The Amended Loan Facility provides for maximum borrowings of approximately $38,000,000, including a $28,000,000 revolving loan and Term Loans A, B, C and D.
 
On August 12, 2015, the Company announced that it had reached an agreement in principle to acquire Compac Development Corporation (Compac). The transaction is scheduled to close shortly.
 
Compac is located in Bay Shore, New York and specializes in the manufacture of RFI/EMI (Radio Frequency Interference-Electro-Magnetic Interference) shielded enclosures for electronic components.
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in our report on Form 10-K for the year ended December 31, 2014, which was filed on March 31, 2015, that could cause actual results to differ materially from those anticipated in these forward-looking statements.

Business Overview

We are an aerospace company operating primarily in the defense industry, though the proportion of our business represented by the commercial sector is increasing. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal fabrication of aerostructures, tube bending, welding and kitting services. Our Turbine Engine Components sector makes components and provides services for jet engines and ground turbines. Our products are currently deployed on a wide range of high profile military and commercial aircraft including Sikorsky's UH-60 Blackhawk and CH-47 Chinook helicopters, Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2D Hawkeye, Boeing's 777 and Airbus' 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the USAF F-15 and F-16, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.

Air Industries Machining Corporation (“AIM”) became a public company in 2005 when its net sales were approximately $30 million. AIM has manufactured components and subassemblies for the defense and commercial aerospace industry for over 45 years and has established long-term relationships with leading defense and aerospace manufacturers. Since becoming public, we have completed a series of acquisitions of defense aerospace and recently commercial aerospace businesses which have enabled us to broaden the range of products and services beyond those which were provided by AIM. For example, where AIM was primarily a machining shop, as a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding and tube bending; the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment and printed circuit boards; the machining of turbine engine components, and the assembly of packages or “kits” containing supplies for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical and electrical assemblies.

In June 2012, we acquired the business and operations now conducted by Nassau Tool Works, Inc. (“NTW”) in an asset acquisition (the “NTW Acquisition”). We acquired the business and operations of Decimal Industries, Inc. (“Decimal”) in an asset acquisition on July 1, 2013 (the “Decimal Transaction”). The assets and business of Decimal Industries became part of our subsidiary, Welding Metallurgy, Inc. (“WMI”). On November 6, 2013, WMI acquired 100% of the stock of Miller Stuart Inc., (“MSI”).

Since January 1, 2014 we have acquired the following businesses:

 
-
In April 2014 we acquired Woodbine Products, Inc. (“WPI”). WPI is a fabricator of precision sheet metal assemblies for aerospace applications. WPI has been consolidated into WMI;
 
-
In June 2014 we acquired Eur-Pac Corporation (“EPC”). EPC specializes in military packaging and supplies all branches of the United States Defense Department with ordnance parts and kits, hose assemblies, hydraulic, mechanical and electrical assemblies;
 
-
In September 2014 we acquired Electronic Connection Corporation (“ECC”). ECC specializes in wire harnesses and leads for the aerospace and other industries;
 
-
In October 2014 we acquired AMK Welding, Inc. (“AMK”). AMK has been a provider of welding services primarily for aircraft jet engine and ground turbine manufacturers since 1964;
 
-
In March 2015 we acquired The Sterling Engineering Corporation (“Sterling”). Sterling provides complex machining services and its business is concentrated with aircraft jet engine and ground turbine manufacturers.

The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete assemblies for our customers.
 
 
Our ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.

While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive. The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold.

A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and decreased usage of aircraft have reduced the demand for both new production and replacement spares. This has reduced our sales, particularly in our complex machining segment. In response to the reduction in military sales, we are focusing greater efforts on the civilian aircraft market though we still remain dependent upon the military for an overwhelming portion of our revenues.

Segment Data

We follow FASB ASC 280, “Segment Reporting” (“ASC 280”), which establishes standards for reporting information about operating segments in annual and interim financial statements, and requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.

We currently divide our operations into three operating segments: Complex Machining; Aerostructures and Electronics; and Turbine Engine Components. As our businesses continue to develop and evolve, and we acquire additional companies, we may deem it appropriate to reallocate our companies into different operating segments and, once we achieve sufficient integration among our businesses, report as a unified company.

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance based on revenue, gross profit contribution and assets employed.

Results of Operations

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 six months ended June 30, 2015 and 2014. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report.

For the three and six months ended June 30, 2015, we had three operating segments: Complex Machining comprised of AIM and NTW; Aerostructures and Electronics comprised of WMI (including Decimal and Woodbine Products), Eur-Pac (including ECC) and MSI; and Turbine Engine Components comprised of AMK and Sterling. For the three and six months ended June 30, 2014, we had four operating segments, AIM, WMI, NTW and Eur-Pac, and separately reported our corporate overhead (which was comprised of certain operating costs that were not directly attributable to a particular segment). Effective January 1, 2015, all operating costs are allocated to the Company’s three operating segments. Results for the three and six months ended June 30, 2014 have been reclassified to conform to the current period presentation.

The results of operations of the businesses we have acquired are included in our financial results from their respective dates of acquisition.
 
 
Selected Financial Information:

  
    Three Months Ended June 30, 2015 and 2014:
 
   
2015
   
2014
 
Net sales
 
$
19,057,000
   
$
13,360,000
 
Cost of sales
   
15,160,000
     
10,007,000
 
Gross profit
   
3,897,000
     
3,353,000
 
Operating expenses and interest costs
   
(4,369,000
   
(3,400,000
Other income (expense) net
   
54,000
     
(62,000)
 
Income taxes
   
(183,000)
     
725,000
 
Net Income (Loss)
 
$
(601,000)
   
$
616,000
 
 
    Six Months Ended June 30, 2015 and 2014:
 
   
2015
   
2014
 
Net sales
 
$
35,868,000
   
$
28,813,000
 
Cost of sales
   
27,602,000
     
21,415,000
 
Gross profit
   
8,266,000
     
7,398,000
 
Operating expenses and interest costs
   
(8,618,000
   
(6,519,000
Other income (expense) net
   
62,000
     
(63,000)
 
Income taxes
   
(207,000)
     
141,000
 
Net Income (Loss)
 
$
(497,000)
   
$
957,000
 

Balance Sheet Data:

   
   
June 30, 2015
(Unaudited)
   
December 31, 2014
 
Cash and cash equivalents
 
$
1,214,000
   
$
1,418,000
 
Working capital
   
3,907,000
     
16,176,000
 
Total assets
   
78,579,000
     
65,920,000
 
Total stockholders' equity
 
$
29,765,000
   
$
28,272,000
 
 
 
The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:


     
Three Months Ended June 30,
 
     
2015
   
2014
 
     
(unaudited)
   
(unaudited)
 
COMPLEX
MACHINING
                 
 
Net Sales
 
$
9,530,000
   
$
9,320,000
 
 
Gross Profit
   
2,229,000
     
2,104,000
 
 
Pre Tax Income (Loss)
   
363,000
     
22,000
 
 
Assets
   
65,137,000
     
33,840,000
 
                   
AEROSTRUCTURES
AND ELECTRONICS
                 
 
Net Sales
   
6,277,000
     
4,040,000
 
 
Gross Profit
   
1,396,000
     
1,249,000
 
 
Pre Tax Income (Loss)
   
(46,000)
     
(131,000)
 
 
Assets
   
17,375,000
     
20,627,000
 
                   
TURBINE ENGINE COMPONENTS
                 
 
Net Sales
   
3,250,000
     
-
 
 
Gross Profit
   
272,000
     
-
 
 
Pre Tax Income (Loss)
   
(735,000)
     
-
 
 
Assets
   
18,272,000
     
-
 
                   
CORPORATE
                 
 
Net Sales
   
-
     
-
 
 
Gross Profit
   
-
     
-
 
 
Pre Tax Income (Loss)
   
-
     
-
 
 
Assets
   
24,806,000
     
17,254,000
 
                   
CONSOLIDATED
                 
 
Net Sales
   
19,057,000
     
13,360,000
 
 
Gross Profit
   
3,897,000
     
3,353,000
 
 
Pre Tax Income (Loss)
   
(418,000)
     
(109,000)
 
 
(Provision for) Benefit from Income Taxes
   
(183,000)
     
725,000
 
 
Net Income (Loss)
   
(601,000)
     
616,000
 
 
Elimination of Assets
   
(47,011,000
)
   
(13,314,000
)
 
Assets
 
$
78,579,000
   
$
58,407,000
 
 
 
Net Sales:

Consolidated net sales for the three months ended June 30, 2015 were approximately $19,057,000, an increase of $5,697,000, or 42.6%, compared with $13,360,000 for the three months ended June 30, 2014. The increase in net sales resulted primarily from our Turbine Engine Components segment which generated $3,250,000 in sales as a result of the acquisitions of AMK and Sterling; an increase of $2,237,000 in sales in our Aerostructures & Electronics segment primarily as a result of the acquisitions of EPC and ECC; and an increase in our Complex Machining segment of $210,000.

As indicated in the table below, two customers represented 29.9% and three customers represented 58.3% of total sales for the three months ended June 30, 2015 and 2014, respectively.

Customer
 
Percentage of Sales
 
   
2015
   
2014
 
Sikorsky Aircraft
   
16.7
     
29.3
 
Goodrich Landing Gear Systems
   
13.2
     
18.4
 
GKN Aerospace
   
*
     
10.6
 
 
* Customer was less than 10% of sales for the three months ended June 30, 2015
 
Sikorsky Aircraft and Goodrich Landing Gear Systems are units of United Technologies Corporation.

Gross Profit:

Consolidated gross profit from operations for the three months ended June 30, 2015 was $3,897,000 an increase of approximately $544,000, or 16.2%, as compared to gross profit of $3,353,000 for the three months ended June 30, 2014. Consolidated gross profit as a percentage of sales was 20.5% and 25.1% for the three months ended June 30, 2015 and 2014, respectively. The increase in gross profit results from the operations of our Turbine Engine Components segment, and increases in our Aerostructures & Electronics and Complex Machining segments.

Operating Expenses:

Consolidated Operating Expenses for the three months ended June 30, 2015 totaled approximately $3,825,000 and increased by $729,000, or 23.5%, compared to $3,096,000 for the three months ended June 30, 2014. The increase reflects approximately $737,000 resulting from the acquisitions completed subsequent to June 30, 2014, partially offset by a slight decrease in operating expenses at our ongoing businesses.

Interest and financing costs for the three months ended June 30, 2015 were approximately $544,000 an increase of approximately $240,000, or 78.9% compared to $304,000 for the three months ended June 30, 2014. The increase results from additional amounts outstanding due to acquisitions and increases in inventory.

Income (loss) before taxes for the three months ended June 30, 2015 was $(418,000), a decrease of $309,000, or 283.5%, compared to a net loss before taxes of $(109,000) for the three months ended June 30, 2014. The increase in our net loss before taxes results primarily from the pre-tax loss of $(735,000) at our Turbine Engine Components segment primarily as a result of the performance of AMK which has yet to reach its anticipated potential, partially offset by improved performance in our Aerostructures & Electronics and Complex Machining segments.

The Company recognized a provision for taxes of approximately $183,000 for three months ended June 30, 2015 compared to a benefit from taxes of approximately $725,000 for three months ended June 30, 2014, a change of $908,000 primarily resulting from a reduction of section 179 and bonus depreciation, and prior year over accruals.

Net loss for the three months ended June 30, 2015 was $(601,000), a decrease of $1,217,000, or 197.6%, compared to net income of $616,000 for the three months ended June 30, 2014. The decrease in net income results primarily from the loss incurred at our Turbine Engine Components segment, and the tax effects discussed above.
 
 
The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:

     
Six Months Ended June 30,
 
     
2015
   
2014
 
     
(unaudited)
   
(unaudited)
 
COMPLEX
MACHINING
             
 
Net Sales
 
$
18,595,000
   
$
21,460,000
 
 
Gross Profit
   
4,318,000
     
5,312,000
 
 
Pre Tax Income (Loss)
   
184,000
     
1,301,000
 
 
Assets