AIR Industries Group — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Comparisons are with Q1 2018 unless stated otherwise. The company manufactures aerospace components, primarily for defense and aerospace customers. Following the December 2018 sale of WMI and the March 2019 closure of EPC and ECC, continuing operations focus on Complex Machining and Turbine Engine Components.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net sales | $13.878 million | $11.909 million |
| Gross profit / margin | $2.274 million / 16.4% | $1.975 million / 16.6% |
| Operating expenses | $2.062 million | $2.474 million |
| Operating loss | $63,000 | $499,000 |
| Interest and financing costs | $963,000 | $776,000 |
| Loss from continuing operations | $995,000 | $1.259 million |
| Discontinued operations | $72,000 income | $209,000 loss |
| Net loss | $923,000 | $1.468 million |
| Cash used in operating activities | $1.728 million | $1.782 million |
| Cash at period end | $442,000 | $1.415 million at March 31, 2018 |
- Sales increased 16.5%; Complex Machining sales rose 16.9% to $12.418 million and Turbine Engine Components sales rose 13.9% to $1.460 million.
- Gross profit increased, but gross margin edged down 0.2 percentage points. Lower operating expenses helped narrow the operating loss; higher financing costs partly offset that improvement.
- Working capital was $5.703 million at March 31, versus $9.041 million at December 31, 2018. Total assets were $51.296 million and stockholders’ equity was $10.804 million.
- Total notes payable and finance lease obligations were $24.641 million, including $15.264 million owed to PNC and $4.982 million of related-party notes, net of discount. PNC debt and finance lease obligations are substantially classified as current; PNC debt matures December 31, 2019.
- Cash from investing activities was $54,000 and financing activities provided $104,000. Cash decreased $1.570 million in the quarter. Operating cash use reflected working-capital outflows, notably a $1.669 million increase in receivables.
Material changes and unusual items
- Management sold future AMK proceeds for $800,000 to improve liquidity, assigning investors rights to up to approximately $1.137 million of remaining payments. The company recorded a $721,000 net liability at quarter-end and estimated an effective annual interest rate of about 18%; investors may have a put right if the full amount is not received by March 31, 2023.
- On January 1, 2019, adoption of ASC 842 added operating lease right-of-use assets and lease liabilities. At March 31, the balance sheet included a $3.969 million right-of-use asset and $5.396 million of operating lease liabilities. The company also recorded a $275,000 impairment related to its vacant Hauppauge office lease.
- The PNC facility was amended in January and February 2019. The company reported compliance with minimum EBITDA covenants at March 31. The amendments impose further EBITDA tests, weekly reductions of the out-of-formula borrowing beginning April 1, and staged extension fees if the facility is not repaid by specified dates.
- Two related-party convertible notes totaling $2 million were issued in January 2019, bearing 7% interest, convertible at $0.93 per share, and due December 31, 2020.
- Three customers generated 73.8% of Q1 sales; two customers represented 57.0% of gross receivables at March 31. Management also identifies reliance on key sole-source suppliers.
Outlook, risks and contingencies
- No quantified sales or earnings guidance is provided. Management says it is focused on profitability, positive cash flow, customer satisfaction and executing backlog, and reports positive customer responses. Results are not necessarily indicative of full-year performance.
- The filing states that continued operations depend on achieving profitability and positive operating cash flow and, until then, obtaining further equity or other financing. The company reports operating losses and negative operating cash flow, is highly leveraged, and pledges substantially all assets to PNC. It warns that loss of PNC lending or inability to raise capital could impair operations.
- The PNC revolving and term loans mature December 31, 2019. The filing specifies extension fees of $250,000 by June 30 and additional fees of $125,000, $125,000 and $500,000 tied to later dates or repayment conditions. These obligations and refinancing needs are material liquidity risks.
- Claims include a landlord/sublease dispute seeking damages in excess of $1 million, which the company disputes; other landlord, employment and injury matters; and a shareholder lawsuit challenging a prior charter amendment. The company also says vendors have brought claims related to liquidity constraints.
- The working-capital adjustment on the WMI sale is contested by CPI and may be resolved through arbitration. Management cautions that actual results may differ materially from forward-looking statements.
- Disclosure controls were deemed ineffective due to material weaknesses involving inventory accounting, employee-hour and work-in-process tracking, subsidiary closing and consolidation/reporting processes, stock compensation, accounting staffing, and supervision. Remediation was planned but not yet complete.
Most important facts for investors to verify
- Cash availability, borrowing-base capacity, covenant compliance, and the company’s ability to refinance or repay PNC by December 31, 2019, including the staged fees and out-of-formula repayment requirement.
- Whether operating cash burn and working-capital needs improve, and whether the company can achieve profitability and positive cash flow without additional financing.
- Progress and evidence of remediation of the disclosed material weaknesses, especially inventory valuation and financial-close controls.
- Resolution and potential financial impact of the WMI working-capital dispute and the material landlord/sublease and shareholder claims.
- Exposure to concentrated customers and sole-source suppliers, and the remaining cash-flow and put-right obligations associated with the AMK proceeds transaction.