AIR INDUSTRIES GROUP

Previous wording

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Current wording

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Previous wording

For the past several years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes to bolster our competitive position. Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships with existing customers and cultivating new ones. Fiscal 2023 marked a year of overall progress and positioning for growth. During the first quarter of 2024 and looking forward, our business strategy is geared towards achieving sustainable and profitable business growth. We are firmly focused on securing new contract awards, improving operations and successful execution. We are also working with our existing lender to obtain adjusted or new financing that better meets our operational requirements and strategic goals.

Current wording

For the past several years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes to bolster our competitive position. Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships with existing customers and cultivating new ones. Fiscal 2023 marked a year of overall progress and positioning for growth. During the first half of 2024 and looking forward, our business strategy is geared towards achieving sustainable and profitable business growth. We are firmly focused on securing new contract awards, improving operations and successful execution.

Previous wording

With total unfilled contract values amounting to $179.1 million (including our $99.3 million in backlog and all potential orders against LTA agreements previously awarded to us), as of March 31, 2024, we are confident in our ability to boost sales during the remainder of 2024, attain profitability and improve our financial position.

Current wording

With total unfilled contract values amounting to $174.8 million (including our $100.7 million in backlog and all potential orders against LTA agreements previously awarded to us), as of June 30, 2024, we are confident in our ability to boost sales during the remainder of 2024, attain profitability and improve our financial position.

Previous wording

***Net Sales:***Net sales for the three months ended March 31, 2024 were $14,061,000, an increase of $1,512,000, or 12.0%, compared with $12,549,000 that we achieved in the three months ended March 31, 2023. The period-over-period increase in net sales was primarily due to overall changes in the mix of products requested by customers, which are discussed further below.

Current wording

***Net Sales:***Net sales for the three months ended June 30, 2024 were $13,572,000, an increase of $367,000, or 2.8%, compared with $13,205,000 that we achieved in the three months ended June 30, 2023. The period-over-period increase in net sales was primarily due to overall changes in the mix of products requested by customers, which are discussed further below.

Previous wording

***Gross Profit:***Gross profit for the three months ended March 31, 2024, was $1,906,000 as compared to $1,880,000 for the three months ended March 31, 2023. Our gross profit percentage for the three months ended March 31, 2024 decreased to 13.6% from the 15.0% for the three months ended March 31, 2023. The decrease in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.

Current wording

***Gross Profit:***Gross profit for the three months ended June 30, 2024, was $2,644,000 as compared to $2,170,000 for the three months ended June 30, 2023. Our gross profit percentage for the three months ended June 30, 2024 increased to 19.5% from the 16.4% for the three months ended June 30, 2023. The increase in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.

Previous wording

Operating Expenses: Operating expenses was $2,165,000, for the three months ended March 31, 2024, an increase of $127,000, from $2,038,000 for the three months ended March 31, 2023. As a percentage of consolidated net sales, operating expenses decreased to 15.4%, compared to the 16.2% achieved during the three months ended March 31, 2023. The dollar increase was primarily driven by the increases in professional fees as well as costs associated with the continued improvement of our information technology system and hardening our cyber-security defenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.

Current wording

Operating Expenses: Operating expenses was $1,892,000, for the three months ended June 30, 2024, a decrease of $206,000, from $2,098,000 for the three months ended June 30, 2023. As a percentage of consolidated net sales, operating expenses decreased to 13.9%, compared to the 15.9% achieved during the three months ended June 30, 2023. The dollar decrease was primarily driven by reductions in stock compensation expense and our allowance for credit loss, offset by increases in costs associated with the continued improvement of our information technology system and hardening our cyber-security defenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.

Previous wording

***Interest Expense:***Interest expense (which includes amortization of deferred financing costs) was $462,000 during the three months ended March 31, 2024, a decrease of $14,000 or 2.9% from $476,000 during the three months ended March 31, 2023. The decrease is primarily attributable to lower borrowing levels partially offset by an increase in the average interest rate on outstanding debt pursuant to our Current Credit Facility which increased to 7.85% in 2024 as compared to 7.04% in 2023.

Current wording

***Interest Expense:***Interest expense (which includes amortization of deferred financing costs) was $474,000 during the three months ended June 30, 2024, a decrease of $6,000 or 1.3% from $480,000 during the three months ended June 30, 2023. The decrease is primarily attributable to lower borrowing levels during a portion of the period, partially offset by an increase in the average interest rate on outstanding debt pursuant to our Current Credit Facility which increased to 7.85% in 2024 as compared to 7.51% in 2023.

Previous wording

Net Loss: Net loss for the three months ended March 31, 2024 was $706,000, compared to a net loss of $618,000 for the three months ended March 31, 2023, for the reasons discussed above.

Current wording

Net Income: Net income for the three months ended June 30, 2024 was $298,000, compared to a net loss of $395,000 for the three months ended June 30, 2023, for the reasons discussed above.

Previous wording

Under the terms of the Current Credit Facility, we are required to meet a Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and leases expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation and amortization. As of March 31, 2024, we achieved a Fixed Charge Coverage Ratio of 0.86 as compared to the 1.10x required, for the six months cumulative period ending March 31, 2024.

Current wording

Under the terms of the Current Credit Facility, as amended, we are required to achieve a defined EBITDA (as defined in the Current Credit Facility) amount at the end of each Fiscal Quarter on a rolling basis, for the Fiscal Quarters ending June 30, 2024, September 30, 2024 and December 31, 2024. Beginning with the Fiscal Quarter ending March 31, 2025 we are required to meet a Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and leases expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation and amortization. As of June 30, 2024, we achieved an EBITDA of $1,775,000 as compared to the $740,000 that was required, for the six months cumulative period ending June 30, 2024.

Previous wording

Although we have started discussions with our lender to receive a waiver with respect to our failure to meet the Fixed Charge Coverage Ratio at March 31, 2024, it is reasonably possible such waiver will not be granted. Even if such waiver is granted, we may fail to achieve the Fixed Charge Coverage Ratio in the future or otherwise fail to meet covenants in the Current Credit Facility. Therefore, we have classified the term loan that expires on December 30, 2025 as current as of March 31, 2024, in accordance with the guidance in ASC 470-10-45, “Debt – Other Presentation Matters”, related to the classification of callable debt. We are required to maintain a collection account with our lender into which substantially all of our cash receipts are remitted. If we were to default under our Current Credit Facility, our lender could choose to increase the rate of interest we pay or refuse to make loans under the revolving portion of the Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest we pay, it would adversely impact our operating results. If the lender were to cease making new loans under our revolving facility, we would lack the funds to continue our operations. The rights granted to our lender under the Current Credit Facility combined with the possibility that we might fail to meet covenants in the future raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the issuance of these condensed consolidated financial statements.

Current wording

Although we have obtained a waiver of the requirement to meet the Fixed Charge Coverage Ratio at March 31, 2024, and have met the financial covenants as of June 30, 3024 we may fail to achieve the required covenants in the future. Therefore, we have classified the term loan that expires on December 30, 2025 as current as of June 30, 2024, in accordance with the guidance in ASC 470-10-45, “Debt – Other Presentation Matters”, related to the classification of callable debt. We are required to maintain a collection account with our lender into which substantially all of our cash receipts are remitted. If we were to default under our Current Credit Facility, our lender could choose to increase the rate of interest we pay or refuse to make loans under the revolving portion of the Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest we pay, it would adversely impact our operating results. If the lender were to cease making new loans under our revolving facility, we would lack the funds to continue our operations. The rights granted to our lender under the Current Credit Facility combined with the possibility that we might fail to meet covenants in the future raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the issuance of these condensed consolidated financial statements.

Previous wording

In addition to required Term Loan payments of approximately $709,000 for the remainder of fiscal 2024, we may have to make additional payments. For so long as the Term Loan under the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal year, we are obligated to pay an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii) the outstanding principal balance of the Term Loan. Such payment shall be applied to the outstanding principal balance of the Term loan, on or prior to the April 15 immediately following such fiscal year. For the fiscal year ended December 31, 2023, based on the calculation there was no Excess Cash Flow payment required.

Current wording

In addition to required Term Loan payments of approximately $407,000 for the remainder of fiscal 2024, we may have to make additional payments. For so long as the Term Loan under the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal year, we are obligated to pay an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii) the outstanding principal balance of the Term Loan. Such payment shall be applied to the outstanding principal balance of the Term loan, on or prior to the April 15 immediately following such fiscal year. For the fiscal year ended December 31, 2023, based on the calculation there was no Excess Cash Flow payment required.

Previous wording

Our material cash requirements are for debt service, capital expenditures and funding working capital. We have historically met these requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions. Based on our current revenue visibility and strength of our backlog, we believe that we have sufficient liquidity to meet our cash requirements. However, if we are unable to obtain a waiver from our lender and they were to cease lending we may not have sufficient liquidity to meet our cash requirements for the next twelve months from the date of issuance of our condensed consolidated financial statements included in this Quarterly Report.

Current wording

Our material cash requirements are for debt service, capital expenditures and working capital. We have historically met these requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions. Although navigating the current business landscape remains challenging and it is difficult to predict period-to-period financial performance, based on our current revenue visibility and the strength of our backlog, we believe we have sufficient liquidity to meet our financial obligations for the next twelve months from the date of issuance of our condensed consolidated financial statements included in this Quarterly Report. However, if we were to default under our Current Credit Facility and were unable to obtain a waiver from our lender and it was to cease lending we would not be able to meet our financial obligations. As of June 30, 2024, the amount outstanding under our Revolving Line of Credit was $11,147,000, leaving $8,853,000 of availability to support our growth, subject to having the requisite collateral and maintaining compliance with the terms of the Credit Facility.

Previous wording

The following table summarizes our net cash flows from operating, investing and financing activities for the periods indicated (in thousands):

Current wording

The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):

Previous wording

Cash (Used in) Provided by Operating Activities

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Cash Provided by Operating Activities

Previous wording

For the three months ended March 31, 2024, we used $232,000 in operations as compared to cash flow generation of $1,438,000 for the three months ended March 31, 2023. The reduction was due primarily to the net loss and the use of a portion of customer deposits which had been advanced in 2023 for the procurement of long lead time raw materials expected to be utilized during 2024.

Current wording

For the six months ended June 30, 2024, we generated $334,000 of cash flows from operations as compared to $1,406,000 for the six months ended June 30, 2023. The reduction was due primarily to the net loss and the use of a portion of customer deposits which had been advanced in 2023 for the procurement of long lead time raw materials expected to be utilized during 2024.

Previous wording

For the three months ended March 31, 2023, we generated $1,438,000 in operations as compared to cash generation of $1,285,000 for the three months ended March 31, 2022. The increase was mainly attributable to the decrease in accounts receivable off set by an increase in inventory.

Current wording

For the six months ended June 30, 2023, we generated cash of $1,406,000 from operations which was mainly attributable to the decrease in accounts receivable offset by an increase in inventory.

Previous wording

During our most recent quarter, we continued to make investments to enhance our competitiveness and market position. Cash used in investing activities of $111,000 and $973,000, during the three months ended March 31, 2024 and 2023, respectively, was for new property and equipment. Investments in 2024 and 2023 increased our production efficiency and speed, while enabling us to maintain closer tolerances. They also expanded the size of products we can manufacture.

Current wording

During the first half of 2024, we continued to make investments to enhance our competitiveness and market position. Cash used in investing activities of $1,224,000 and $1,383,000, during the six months ended June 30, 2024 and 2023, respectively, was for new property and equipment. Investments in 2024 and 2023 increased our production efficiency and speed, while enabling us to maintain closer tolerances. They also expanded the size of products we can manufacture.

Previous wording

During fiscal 2024, we expect to continue to make strategic investments in capital equipment to enhance our competitiveness. We expect to invest approximately $2,000,000 during the remainder of 2024 for new or upgraded equipment.

Current wording

During fiscal 2024, we expect to continue to make strategic investments in capital equipment to enhance our competitiveness. We expect to invest approximately an additional $750,000 during the remainder of 2024 for new or upgraded equipment.

Previous wording

For the three months ended March 31, 2024, cash provided by financing activities was $222,000. During this period, we increased borrowings under our Current Credit Facility by $265,000 (consisting of net increase in Revolving Loan borrowings of $501,000 and a net decrease of $236,000 against the Term Loan). We also made payments of $41,000 pursuant to financing lease obligations and $2,000 on a loan payable.

Current wording

For the six months ended June 30, 2024, cash provided by financing activities was $791,000. During this period, we increased borrowings under our Current Credit Facility by $887,000 (consisting of a net increase in Revolving Loan borrowings of $343,000 and a net increase in our Term Loan of $544,000). We also made payments of $92,000 pursuant to financing lease obligations and $4,000 on a loan payable.

Previous wording

For the three months ended March 31, 2023, cash provided by financing activities was $379,000. During this period, we increased borrowings under our Current Credit Facility by $400,000 (consisting of a net decrease in Revolving Loan borrowings of $132,000, and a net increase of $532,000 in the Term Loan. We also made payments of $20,000 pursuant to financing lease obligations and $1,000 on a loan payable.

Current wording

For the six months ended June 30, 2023, cash provided by financing activities was $533,000. During this period, we increased borrowings under our Current Credit Facility by $586,000 (consisting of a net increase in Revolving Loan borrowings of $486,000, and a net increase of $100,000 in the Term Loan). We also made payments of $49,000 pursuant to financing lease obligations and $4,000 on a loan payable.