UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 000-29245
AIR INDUSTRIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-4458244
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1479 North Clinton Avenue Bay Shore, New York 11706
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code-(631) 968-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |X| No |_|
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes | | No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. As of June 30, 2007, the aggregate market value of the common stock of
the registrant held by non-affiliates (excluding shares held by directors,
officers and others holding more than 5% of the outstanding shares of the class)
was $15,837,736, based upon a closing sale price of $0.27 as reported by
Bloomberg Finance.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of March 31, 2008, the
registrant had outstanding 69,262,227 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Explanatory Note
Air Industries Group, Inc. is filing this amendment to its Annual Report on Form
10-K for the fiscal year ended December 31, 2007 originally filed with the
Securities and Exchange Commission on April 14, 2008, as amended on April 17,
2008 (the "Form 10-K"), to amend Item 8. Financial Statements and Supplementary
Data to restate its statement of operations for that fiscal year to account for
the "beneficial conversion feature" upon the issuance of its Series B
Convertible Preferred Stock in April and May of 2007 in response to a letter
from the Staff of the Securities and Exchange Commission dated August 29, 2008,
and Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation to reflect the adjustment relating to that restatement.
Additionally, during the preparation of the Company's December 31, 2008
consolidated financial statements, the Company discovered that certain expenses
which should have been included in cost of goods sold were classified as a
reduction of accounts payable and accrued expenses and therefore both cost of
goods sold and accounts payable and accrued expenses has been understated by a
like amount. The aggregate effect is to reduce the net income of the Company for
the year ended December 31,2007 and to reduce stockholders' equity of the
Company at December 31, 2007. As a result of the restatement, Air Industries
Group, Inc. had a net loss attributable to common stockholders of $(1,782,017),
or $(0.03 per share), for the year ended December 31, 2007 instead of net income
attributable to common stockholders of $233,858 or $0.00 per share, as
previously reported in the Form 10-K. In addition, in connection with the filing
of this amendment and pursuant to the rules of the Securities and Exchange
Commission, we are including with this amendment certain currently dated
certifications. Accordingly, Item 15 of Part IV has also been amended to reflect
the filing of these currently dated certifications.
Except as described above, no other changes have been made to the Form
10-K. All capitalized or other defined terms used in the Form 10-K have the same
meaning in this amendment. This amendment continues to speak as of the date of
the filing of the Form 10-K and we have not updated the disclosures contained
therein to reflect any events that occurred subsequent to that date. The filing
of this Form 10-K/A is not a representation that any statements contained in
items of Form 10-K other than Part II, Items 7 and 8 are true or complete as of
any date subsequent to the date of the filing of the Form 10-K.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion of our results of operations constitutes
management's review of the factors that affected our financial and operating
performance for the years ended December 31, 2007 and 2006. This discussion
should be read in conjunction with the financial statements and notes thereto
contained elsewhere in this report.
General
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e. being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual products
(SKU's) that are assembled by a skilled labor force.
Sigma Metals distributes aluminum, stainless, and titanium raw materials
for the aerospace industry to customers in the United States, Europe and Asia.
These materials are sold to Major Aerospace Manufacturers and their lower tier
supply chain companies, and are incorporated into products produced by Sikorsky,
Lockheed Martin, Boeing and Northrop Grumman and others.
Welding Metallurgy is a supplier of welded assemblies and performs tube
bending, sheet metal fabrication and precision assembly. Welding Metallurgy also
manufactures components for various subsectors of the commercial and military
aerospace industry. Its customers include Sikorsky, Lockheed Martin, Boeing and
Northrop Grumman.
Sales of parts and services to one customer accounted for 46% of AIRI's
revenue in 2007, and are subject to General Ordering Agreements which were
recently renegotiated and extended through 2012.
Results of Operations
We completed the acquisition of Sigma Metals on April 16, 2007, and the
acquisition of Welding Metallurgy on August 26, 2007; consequently, the results
of Sigma and Welding Metallurgy from April 17, 2007, and August 27, 2007,
respectively, are included in our financial statements for the year ended
December 31, 2007, and reflected in the discussion below.
Year ended December 31, 2007 compared with year ended December 31, 2006
Segment Data
We follow SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), 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. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. As a result of the acquisition of Sigma in
April 2007 and Welding Metallurgy in August 2007, we have three reportable
segments: Air Industries Machining, Sigma Metals and Welding Metallurgy. Air
Industries Machining is primarily engaged in processing, cutting, milling,
machining and hardening metals into assemblies that are widely used in the
aerospace industry. Sigma Metals is a supplier of sheet metal, plate, forgings
and bar stock to converters who supply parts to major domestic and international
aerospace customers. Welding Metallurgy is a fabricator of parts primarily used
in the defense industry. Welding specializes in complex welding applications and
in tubular structures.
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.
Operating costs that are not directly attributable to a segment are included in
the Air Industries Machining segment. These costs include corporate costs such
as legal, audit, tax and other professional fees related to being a public
company.
We are in the process of integrating Sigma Metals and Welding Metallurgy
into our fully integrated Enterprise Resource Program for operational and
financial control. This process is expected to be completed by the end of the
second quarter of 2008 and will enable our management to have more accurate and
current information when making decisions concerning sales, product pricing and
the reasonableness of related costs.
As a result of the acquisitions of Sigma Metals and Welding Metallurgy our
customer base has become more diversified and less dependent on one major
customer whose pre-acquisition percentage of revenue was in excess of 70% and is
now on a post-acquisition basis approximately 46%.
20
The following table sets forth, for the periods indicated, certain
components of our statements of operations
Year Ended December 31,
-----------------------
2007 2006
------------ ------------
Air Industries Machining Restated
Revenue $ 34,088,056 $ 33,044,996
Gross Profit 7,687,817 5,042,054
Pre Tax Income 2,739,500 1,563,036
Assets 31,304,053 24,576,329
Sigma Metals
Revenue 9,890,659 --
Gross Profit 2,781,253 --
Pre Tax Income 303,996 --
Assets 11,463,079 --
Welding Metallurgy
Revenue 2,089,930 --
Gross Profit 1,588,347 --
Pre Tax Income 1,026,715 --
Assets 8,425,658 --
Corporate
Revenue -- --
Gross Profit -- --
Pre Tax Income (3,503,866) (1,409,636)
Assets 22,962,665 8,333,815
Consolidated
Revenue 46,068,645 33,044,996
Gross Profit 12,057,417 5,042,054
Pre Tax Income 566,344 153,400
Provision for Taxes 365,319 489,969
Net Income 201,025 (336,569)
Elimination of Assets (23,865,005) (8,017,962)
Assets 50,290,040 24,892,182
In the paragraphs below, the numbers for 2007 reflect the consolidated
results of our operations for 2007.
Net sales were $46,068,645 for the year ended December 31, 2007, or Fiscal
2007, an increase of $13,023,649, or 39%, from net sales of $33,044,996 for the
year ended December 31, 2006, or Fiscal 2006. This increase was attributable to
the consolidation of $11,980,589 of net sales from Sigma and Welding Metallurgy
from April 16, 2007 and August 27, 2007, respectively, augmented by an increase
in net sales at AIM of $1,043,060. The increase in net sales at AIM reflects a
slight increase in price being paid by our largest customer and an increase in
overall unit volume.
Gross profit was $12,057,417 in Fiscal 2007 (26.2% of net sales), compared
to gross profit of $5,042,054 in Fiscal 2006 (15.3% of net sales). The increase
in gross profit is primarily attributable to the revenues of Sigma Metals
($9,890,659) and Welding Metallurgy ($2,089,930). The increase in gross profit
as a percentage of sales reflects the continuation of the shift in our
production to higher margin military products.
Selling and marketing expenses were $1,476,111 in Fiscal 2007, an increase
of $875,100 (145.6%) from selling and marketing expenses of $601,011 in Fiscal
2006. This increase was attributable to inclusion of selling expenses of Sigma
Metals ($963,705) and Welding Metallurgy ($15,284), partially offset by
reductions in field engineering and out bound freight expenses.
21
General and administrative expenses were $8,418,508 in Fiscal 2007, an
increase of $4,628,921 (122%) from general and administrative expenses of
$3,789,587 in Fiscal 2006. The increase was primarily due to inclusion of
general and administrative expenses of Sigma Metals ($1,405,910) and Welding
Metallurgy ($336,976). This increase also reflects (i) a reclassification of the
cost of certain management personnel to better reflect their functions, (ii)
professional fees attributable to our reporting requirements as a public company
($365,678) and (iii) preparations for compliance with Sarbanes-Oxley ($340,000).
Fiscal 2007 also reflects an increase in non-cash compensation charges resulting
from the grant of options to management under our Stock Incentive Plan
($406,210). In addition, we incurred additional bad debt expense in 2007 as
compared to 2006 ($200,000) based upon managements' assessment of the
collectability of certain outstanding receivables.
Interest and financing costs was $1,578,337 in Fiscal 2007, an increase of
$538,229 (52%) from interest and financing costs of $1,040,108 in Fiscal 2006.
This increase is attributable to borrowings relating to the acquisition of Sigma
Metals and Welding Metallurgy in Fiscal 2007, higher interest rates and
borrowings for operations at Sigma and Welding Metallurgy.
Other income and other expense was $56,113 in Fiscal 2007 a decrease of
$245,081 (130%) and primarily reflects the 2006 present value gain realized as a
result of the sale and lease-back transaction for our real estate.
Income Before Provision for Income Taxes was $566,344 in Fiscal 2007, an
increase of $412,944 (269%) from income before income taxes of $153,400 in
Fiscal 2006. The increase in income during Fiscal 2007 resulted primarily from
the impact on AIRI's business of the acquisitions of Sigma and Welding
Metallurgy offset in part by expenses incurred by us to comply with our
reporting obligations as a public entity.
Provision for Income Taxes decreased to $365,319 for Fiscal 2007, as
compared to $489,969 for Fiscal 2006, primarily reflecting the taxes payable as
a result of our net income for the reasons discussed above.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Liquidity and Capital Resources
Since the PNC Loan Facility requires that all cash at our operating
subsidiaries be swept on a daily basis to our loan accounts, at December 31,
2007 and December 31, 2006, we had no cash or cash equivalents. At December 31,
2007, we had working capital of $5,272,485 as compared to working capital of
$4,911,354 as of December 31, 2006. This increase reflects the proceeds of the
placement of our series B convertible preferred stock, offset by the cash used
to acquire Sigma and Welding Metallurgy ($4,060,796 and $ 3,500,000
respectively) and our negative cash flows from operations during the year ended
December 31, 2007. It should be noted that included in current liabilities is an
aggregate of $16,488,000 payable to our bank lenders. Under the terms of our
loan agreements these amounts are not payable until April 30, 2010 and August
24, 2010, respectively, but have been included in current liabilities due to the
right of the banks to demand immediate repayment as a result of the subjective
nature of the acceleration clause upon the occurrence of certain events, which
management believes are not likely to occur, combined with the existence of a
lockbox arrangement. We believe that our cash requirements for operations in the
next twelve months will be met by revenues from operations, cash reserves, and
amounts available under the PNC Loan Facility.
As of December 31, 2007, our outstanding debt consisted of $16,489,046
under our loan facility made up of $15,960,716 classified as short-term and
$528,330 classified as long-term. Notes payable to the former shareholders of
our subsidiaries AIM, Sigma and Welding of $3,938,832 are classified as
$1,435,796 short-term and $2,503,036 as long-term. Capital lease obligations of
$1,478,791 are classified as $290,285 short-term with the remaining balance of
$1,188,506 classified as long-term. Additionally at December 31, 2007 there was
a standby letter of credit outstanding in the amount of $127,500. In addition,
reflecting the sale leaseback of AIM's corporate campus, we now pay
approximately $45,000 per month as rent, plus $15,662 to fund real estate tax
escrow accounts and other reserves held by the landlord.
22
We used $5,948,396 in operations during the year ended December 31, 2007.
The use of cash in operations reflects an increase in inventory of $3,323,195,
an increase in our deposits with vendors of $724,607 , a decrease in prepaid
expenses of $47,643, and a decrease in our accounts payable and accrued expenses
of $2,431,218. The increase in our inventory and decrease in our accounts
payable noted above are associated with our pre-existing operations and do not
reflect the changes resulting from the acquisitions of Sigma and Welding
Metallurgy . The increase in the inventory in our pre-existing operations is
primarily related to the need to support the increase in contractual business
space for follow-on contracts in 2008 as well substantial activity in new
business products. The additional increase in inventory reflected on our balance
sheet results primarily from the acquisition of our metals and welding
operations. The increase in deposits with vendors and decrease in accounts
payable are due to advanced payment requirements imposed by certain suppliers of
our pre-existing operations. As a result of efforts to reduce amounts due these
suppliers, we anticipate that they may not require prepayments in the immediate
future.
In addition to the foregoing uses of cash, during 2007 AIM had capitalized
development costs in the amount of $1,533,215 in connection with engineering and
tooling outlays related to its successful efforts to win certain long-term
contracts. Included in these projects are contracts for Goodrich Landing Gear
related to the A380, Boeing, Latacoere and Sikorsky.
In connection with the acquisition of Air Industries Machining Corp., we
paid the sellers $2,040,103 in cash and incurred notes payable obligations to
the sellers in the aggregate principal amount of $1,627,262, of which $665,262,
plus accrued interest of $54,511 were in the form of convertible promissory
notes which were converted by the holders into 1,799,432 shares of common stock
at a conversion price of $0.40 per share on January 26, 2007. The remaining
principal amount, $625,300, is payable in equal quarterly installments of
$48,100 of principal, plus interest through March 2011.
In connection with the acquisition of Sigma Metals, we paid the sellers
$4,060,796 in cash and incurred notes payable obligations to the former
shareholders of Sigma Metals in the aggregate principal amount of $1,497,411.
The remaining principal balance as of December 31, 2007 is $1,216,488, and is
payable in equal monthly installments of $43,446 of principal plus interest,
through 2010, except that in April 2008 $247,090 was prepaid on the notes due
the former shareholders.
In connection with the acquisition of Welding Metallurgy, we paid the
sellers $3,500,000 in cash and incurred a notes payable obligation to the former
shareholders of Welding Metallurgy in the aggregate principal amount of
$2,000,000, which bears no interest until August 24, 2008, and bears interest
thereafter at 7% per annum. To reflect the fact that this note does not bear
interest for the first year, we have discounted the value of the note in our
balance sheet to $1,860,000, and will expense the imputed interest on a monthly
basis and accrete up the value of the note to its face value of $2,000,000. The
balance of this note at December 31, 2007 was $1,906,667. The indebtedness
evidenced by this note is subordinate to our indebtedness to PNC and SCCF and is
payable in one installment in the principal amount of $500,000 due on August 24,
2008 and twelve consecutive quarterly installments of principal in the amount of
$125,000, plus accrued interest, commencing on November 30, 2008 and continuing
through August 31, 2011. Under the stock purchase agreement, we are obligated to
pay the sellers an additional $190,377 as an adjustment to the purchase price.
We have agreed to pay this adjustment to the purchase price in four equal
monthly installments of $49,400 (which amount includes interest of 7% per annum
from November 1, 2007) commencing on March 31, 2008 and on the last day of each
calendar month thereafter through June 30, 2008.
The terms of the PNC Loan Facility are described in the notes to our
consolidated financial statements included in this report. Under the PNC Loan
Facility, as of December 31, 2007, we had revolving loan balances of
$11,332,940, a term loan balance of $244,906, and an equipment loan balance of
$411,200 as compared to balances of $5,027,043; $362,034 and $411,200 as of
December 31, 2006. In addition, as of December 31, 2007 we had capital lease
obligations to other parties totaling $1,478,791.
23
To finance the acquisition of Sigma Metals and to provide us with
additional working capital and funds for future acquisitions, we completed a
private placement of our series B convertible preferred stock in which we raised
gross proceeds of $8,023,000. A first closing, in which we received gross
proceeds of $4,955,000 occurred simultaneously with the acquisition of Sigma
Metals and was entirely devoted to the acquisition. A second closing occurred on
May 3, 2007, in which we received gross proceeds of $3,068,000. The holders of
the series B preferred stock are entitled to a cumulative annual dividend of 7%
per annum, which we have the right to pay in additional shares of series B
preferred stock, except under certain circumstances. In October 2007 and January
2008, we issued an aggregate of 26,798 and 16,456 shares of series B preferred
stock in payment of accrued dividends. The shares of series B preferred stock
issued in the offering and in payment of accrued dividends are convertible into
approximately 30,439,944 shares of our common stock. On April 1, 2008, our Board
declared a dividend on our series B convertible preferred stock, payable in
19,825 additional shares of series B convertible preferred stock.
In connection with the acquisition of Sigma Metals, we also amended and
modified the terms of the Loan Facility with PNC to allow for Sigma to become a
borrower under the Loan Facility. The cost of this amendment was $42,500 and is
being amortized over the remaining term of the Credit Facility. As part of the
amendment, Sigma Metals' pledged all of its assets and to PNC to secure the
payment of its obligations under the Loan Facility. In addition the termination
date of the PNC Loan Facility was extended to April 30, 2010 and the maximum
revolving advance amount was increased by $2,000,000, to $11,000,000.
In connection with the acquisition of Welding Metallurgy, the terms of the
PNC Loan Facility were amended and modified to include Welding Metallurgy as a
borrower and Air Industries Group and Welding Metallurgy as guarantors of
amounts due under the PNC Loan Facility. In connection with that amendment,
Welding Metallurgy pledged all of its assets and properties to PNC to secure its
obligations under the PNC Loan Facility. The maximum revolving advance amount
was increased by an additional $3,000,000 to $14,000,000.
Additionally, in connection with the Welding Metallurgy acquisition, Steel
City Capital Funding LLC, or SCCF provided a Term Loan of $4,500,000. The Term
Loan is payable on August 24, 2010. Borrowings under the SCCF Loan Agreement
bear interest, payable monthly, generally at a rate of 6% over the base
commercial lending rate of PNC Bank as publicly announced to be in effect from
time to time. Under the terms of our loan agreements these amounts are not
payable until August 24, 2010, but have been included in current liabilities due
to the right of the banks to demand immediate repayment as a result of the
subjective nature of the acceleration clause upon the occurrence of certain
events, which management believes are not likely to occur, combined with the
existence of a lockbox arrangement. In addition, to secure the obligations due
SCCF, we pledged to SCCF the capital stock of Air Industries Machining Corp,
Sigma Metals, and Welding Metallurgy, and each of those entities granted to SCCF
a security interest on all of their assets.
During the year ended December 31, 2007, borrowings under the PNC Loan
Facility increased by $6,305,477. These funds were used to reduce a trade
payable ($2,431,218), for production engineering ($1,533,215), to purchase raw
materials inventory ($1,186,256) and to pay taxes ($509,165).
As of December 31, 2007, two customers accounted for approximately 22% and
11% of our accounts receivable. In addition, these customers accounted for
approximately 46% and 11% of net sales, respectively, for the year ended
December 31, 2007. In the event either of such customers is unable or unwilling
to pay amounts due or in the event our relationships with such customers are
severed or negatively affected, our results of operations will be materially
adversely affected and we may not have the resources to meet our capital
obligations.
Agreement for the Acquisition of the Blair Companies
On November 15, 2007, we entered into a Stock Purchase Agreement (the
"Blair Purchase Agreement") with the shareholders of Blair Industries, Inc., a
New York corporation, Blair Accumulators, Inc., a New York corporation, H.S.M.
Machine Works, Inc., a New York corporation, and H.S.M. Machine Works, Inc., a
North Carolina corporation (collectively, the "Blair Companies") to acquire all
of outstanding capital stock of the Blair Companies.
Founded in 1951, the Blair Companies produce structural landing gear
components; complex airframe machined parts, as well as hydraulic components. In
1979 the Blair Companies expanded their operations to include hydraulic
actuators, mechanical assemblies, a wide variety of kits, and complete landing
gear assemblies. Currently, they also design and manufacture fully dressed
landing gear and other structural and hydraulic components primarily for
commercial and military aircraft. The Blair Companies operate out of one
facility in Medford, Long Island, New York, and another facility in Leland,
North Carolina. For over 10 years, Blair has been a certified supplier for
Goodrich Landing Gear, the world's largest provider of landing gear to the
aerospace industry's prime contractors, and maintains similar standing with
France-based Messier-Dowty, the world's second largest provider of landing gear.
24
We believe the acquisition of the Blair Companies will facilitate and
accelerate our transition from basic contract manufacturing to becoming a
provider of comprehensive integration services, particularly for fully dressed
landing gear and provide us with expanded capabilities and a high-end customer
base for landing gear and other critical flight safety components and
assemblies.
The purchase price for the Blair Companies is $16,358,000, subject to
adjustment based upon the Net Asset Value (as defined in the Blair Purchase
Agreement) of the Blair Companies as of the date of closing. The purchase price
is payable in a combination of cash, promissory notes and shares of our
preferred stock having a liquidation value of $1,000,000. However, we are
engaged in discussions with the shareholders of the Blair Companies to eliminate
the preferred stock as part of the purchase price and with respect to certain
other terms. The promissory notes will have a term of five years commencing on
the date of closing, accrue interest at rates of four percent (4%) per annum, as
to promissory notes in the initial principal amount of $1,358,000, and eight
percent (8%) per annum, as to principal notes in the initial principal amount of
$5,000,000, and contain other customary terms and conditions.
The closing is subject to certain conditions including, but limited to,
our ability to secure not less than $12 million in debt or equity financing. We
have agreed to pay the shareholders of the Blair Companies a break-up fee of
$150,000 under certain circumstances.
Concurrent with the closing, we will enter into employment agreements with
one of the shareholders and a key employee of the Blair Companies. The
employment agreements provide for annual base salaries aggregating initially to
$400,000, together with certain bonuses based upon performance and customary
increases. The employment agreements will contain customary terms and provisions
relating to severance, benefits and vacation. One of the employment agreements
will have an initial term of five (5) years and the other employment agreement
will have an initial term of three (3) years.
We cannot assure you that (i) we will be successful in negotiating an
amendment to the Blair Purchase Agreement on terms favorable to us, if at all,
(ii) we will be able to obtain the financing to complete the acquisition on
terms favorable to us, if at all, or (iii) even if we are able to amend the
Blair Purchase Agreement and obtain a commitment for financing, we will be able
to complete the acquisition. See Item 1A ("Risk Factors") under the risks
captioned "Our indebtedness may affect operations," "We may issue shares of our
capital stock to complete an acquisition, which would reduce the equity interest
of our stockholders" and "We may issue our debt securities to complete an
acquisition, and if we are unable to generate sufficient cash flow from
operations to satisfy the debt service associated with that indebtedness, our
inability to do so may force us to sell assets and restrict our ability to
obtain additional financing or place onerous restrictions on our operations."
Restatement of Quarterly Operating Results (unaudited)
We have made certain adjustments, described below, to our balance sheet as of
December 31, 2007 and our results of operations previously reported in our Form
10-K for the year ended December 31, 2007 and Form 10-QSBs for the first three
fiscal quarters of 2007. These adjustments were the result of:
o our determination to capitalize certain amounts related to development
expenditures made in the first three quarters of 2007 previously expensed
and the completion of the allocation of the purchase price we paid for
Sigma Metals and Welding Metallurgy among certain intangible assets of
those companies that initially had been allocated to goodwill. These
adjustments were previously included on our Form 10K filed on April 14,
2008, for the year-ended December 31, 2007. These adjustments have been
audited by McGladrey & Pullen, LLp and are indicated in the tables below
as adjustment (1) and (2).
o our determination to make certain adjustments to our statement of
operations to account for the "beneficial conversion feature" upon the
issuance of our Series B Preferred Stock issued in the second quarter of
2007, following our receipt of a letter from the Staff of the Securities
and Exchange Commission dated August 29, 2008, requesting information with
respect to the accounting treatment of the Series B Preferred Stock. This
adjustment was previously included on our Form 10Q filed on November 19,
2008 under the caption, restated statement of operations for the nine
months ended September 30, 2007. This adjustment reduces the Net Income
Available to Common Shareholders by $1,589,000. This adjustment has been
audited by McGladrey & Pullen, LLP and is indicated in the tables below as
adjustment (3).
o our discovery that certain expenses in the amount of $673,229 which should
have been included in cost of goods sold were classified as a reduction of
accounts payable and accrued expenses, resulting in the understatement of
cost of goods sold and accounts payable and accrued expenses by a like
amount. Additionally the results of this adjustment created an income tax
benefit in the amount of $246,354. The aggregate effect of which is to
reduce our net income for the year ended December 31, 2007 and to reduce
our stockholders' equity at December 31, 2007 by $426,875. This adjustment
has been audited by Rotenberg Meril Solomon Bertiger & Guttilla PC and are
indicated in the tables below as adjustment (4).
25
Balance Sheet Restated Items
2007 2007
as filed adjustments Note restated
-------- ----------- ---- --------
Accounts Payable and Accrued expenses $ 6,549,122 $ 673,229 (4) $ 7,222,351
Income Taxes Payable 390,615 (246,354) (4) 144,261
Accumulated Deficit $ (458,373) $ (426,875) (4) $ (885,248)
2007 2007
As Filed Adjustments Note Adjusted
------------ ------------ ---- ------------
Net Income $ 46,068,645 $ -- $ 46,068,645
Cost of Sales 33,337,999 673,229 (4) 34,011,228
--------------------------------------------------
Gross Profit 12,730,646 673,229 12,057,417
Cost and expenses 9,894,619 -- 9,894,619
--------------------------------------------------
Operating Income 2,836,027 673,229 2,162,798
Interest and amortization costs 1,578,377 -- 1,578,377
Other (Income) Expenses 18,077 -- 18,077
--------------------------------------------------
Income before income taxes 1,239,573 (673,229) 566,344
Income tax provision 611,673 (246,354) (4) 365,319
--------------------------------------------------
Net (Loss) Income 627,900 (426,875) 201,025
Less: Dividend attributable to 394,042 -- 394,042
preferred stockholders
Less: Beneficial conversion
Feature -- 1,589,000 (3) 1,589,000
--------------------------------------------------
Net (loss) income attributable
to common stockholders $ 233,858 $ (1,548,158) $ (1,782,016)
==================================================
Loss per common share: -- -- --
Net loss per common share
(Basic) $ 0.00 -- $ (0.03)
==================================================
Net loss per common share
(Diluted) $ 0.00 -- $ (0.03)
==================================================
Weighted average shares
outstanding (Basic) 65,402,711 -- 65,402,711
Weighted average shares
outstanding (Diluted) 67,861,015 -- 65,402,711
Q1 2007 Q1 2007 Q2 2007 Q2 2007
as filed Adjustments Notes Adjusted as filed Adjustments Notes Adjusted
------------ ------------ ----- ------------ ------------ ------------ ----- ------------
Net Income $ 7,488,130 $ -- $ 7,488,130 $ 10,989,536 $ -- $ 10,989,536
Cost of Sales 6,239,484 (418,014) (1) -- 8,616,698 (434,234) (1)(2) --
-- (88,169) (4) 5,733,301 -- 562,026 (4) 8,182,464
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 1,248,646 506,183 1,754,829 2,372,838 (127,792) 2,245,046
Cost and expenses 1,126,792 -- 1,126,792 2,330,498 55,881 (1)(2) 2,386,379
------------ ------------ ------------ ------------ ------------ ------------
Operating Income 121,854 506,183 628,037 42,340 (183,673) (141,333)
Interest and amortization costs 130,954 -- 130,954 280,869 -- 280,869
Other (Income) Expenses (2,377) -- (2,377) (1,224) -- (1,224)
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes (6,723) 506,183 499,460 (237,305) (183,673) (420,978)
Income tax provision 64,764 194,430 (1) -- 78,138 (85,445) (1)(2) --
-- 41,046 (4) 300,240 -- -(4) (7,307)
------------ ------------ ------------ ------------ ------------ ------------
Net (Loss) Income (71,487) 270,707 199,220 (315,443) (98,228) (413,671)
Less: Dividend attributable to
preferred stockholders -- -- -- 110,964 -- 110,964
Less: Beneficial conversion
Feature -- -- -- -- 1,589,000 (3) 1,589,000
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) income attributable
to common stockholders (71,487) 270,707 199,220 (426,407) (1,687,228) (2,113,635)
============ ============ ============ ============ ============ ============
Loss per common share:
Net loss per common share
(Basic) $ (0.00) $ 0.00 $ (0.01) $ (0.03)
============ ============ ============ ============
Net loss per common share
(Diluted) $ (0.00) $ 0.00 $ (0.01) $ (0.03)
============ ============ ============ ============
Weighted average shares
outstanding (Basic) 58,833,681 58,833,681 65,667,564 65,667,564
Weighted average shares
outstanding (Diluted) 58,833,681 60,202,835 65,667,564 65,667,564
26
Q3 2007 Q3 2007 Q4 2007 Q4 2007
as filed Adjustments Notes Adjusted as filed Adjustments Notes Adjusted
------------ ------------ ----- ------------ ------------ ------------ ----- ------------
Net Income $ 12,845,821 $ -- $ 12,845,821 $ 14,745,158 $ -- $ 14,745,158
Cost of Sales 9,254,338 (456,336) (1) -- 10,536,063 161,150 (4) --
-- 38,222 (4) 8,836,224 -- -- 10,697,213
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 3,591,483 418,114 4,009,597 4,209,065 (161,150) 4,047,945
Cost and expenses 2,617,134 112,921 (1)(2) 2,730,055 3,651,393 -- 3,651,393
------------ ------------ ------------ ------------ ------------ ------------
Operating Income 974,349 305,193 1,279,542 557,702 (161,150) 396,552
Interest and amortization costs 478,920 -- 478,920 687,634 -- 687,634
Other (Income) Expenses 26,074 -- 26,074 (4,396) -- (4,396)
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes 469,355 305,193 774,548 (125,536) -- (286,686)
Income tax provision 46,761 159,757 (1)(2) 188,737 (108,217) (8,134) (4) (116,351)
-- (17,781) (4) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net (Loss) Income 422,594 163,217 585,811 (17,319) (153,016) (170,334)
Less: Dividend attributable to
preferred stockholders 136,578 -- 136,578 146,500 -- 146,500
Less: Beneficial conversion
Feature -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) income attributable
to common stockholders $ 286,016 $ 163,217 449,233 (163,819) (153,016) (316,834)
============ ============ ============ ============ ============ ============
Loss per common share:
Net loss per common share
(Basic) $ 0.00 $ 0.01 $ (0.00) $ (0.03)
============ ============ ============ ============
Net loss per common share
(Diluted) $ 0.00 $ 0.01 $ (0.00) $ (0.03)
============ ============ ============ ============
Weighted average shares
outstanding (Basic) 67,838,959 67,838,959 69,122,227 69,122,227
Weighted average shares
outstanding (Diluted) 70,734,615 70,734,615 70,738,078 70,738,078
(1) The adjustments to Cost of Sales relates to our determination to capitalize
certain engineering costs initially expensed.
(2) The adjustments to costs and expenses relate to the amortization of amounts
attributable to intangibles that have been specifically identified among the
assets of Sigma and Welding Metallurgy that initially had been included in
goodwill.
As of June 30, 2007 and September 30, 2007, $3,720,000 and $2,434,225 was
reclassified from goodwill to intangibles, respectively, related to the
completion of the allocation of purchase prices. There was no impact on cash
flow for any of the periods.
(3) The beneficial conversion feature adjustment arises as the conversion price
of the convertible preferred stock is less than the fair value of the common
shares into which it is convertible.
(4) The adjustment to Cost of Sales relates to certain expenses which should
have been included in cost of goods sold were classified as a reduction of
accounts payable and accrued expenses.
27
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our financial results.
Inventory Valuation
We value inventory at the lower of cost on a first-in-first-out basis or market.
AIM purchases inventory only when it has signed non-cancellable contracts
with its customers for orders of its finished goods. Welding Metallurgy
generally produces pursuant to customer orders and maintains relatively low
inventory levels. AIM occasionally produces finished goods in excess of purchase
order quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase orders.
Sigma routinely acquires inventory without corresponding purchase orders. We
periodically evaluate inventory items that are not secured by purchase orders
and establish reserves for obsolescence accordingly. We also reserve an
allowance for excess quantities, slow-moving goods, and obsolete items.
Capitalized Pre Production Costs
We have contractual agreements with certain customers to produce parts,
which the customers design. The production of these parts require pre-production
engineering and programming of our machines. We account for these pre-production
costs pursuant to Emerging Issues Task Force Issue No. 99-5, "Accounting for
Pre-Production Costs Related to Long-Term Supply Arrangements" (EITF 99-5). The
pre-production costs associated with a particular contract are capitalized and
beginning with the first shipment of product pursuant to such contract,
amortized over a period determined as follows: (i) if deliverables are scheduled
for a period of three years or less, on a straight line basis over the
anticipated length of the contract and (ii) if deliverables are scheduled for
more than three years, on a straight line basis over three years. If we were to
be reimbursed for a portion of the pre-production expenses associated with a
particular contract only the unreimbursed portion would be capitalized under
EITF 99-5. We also may progress bill on certain engineering being expended.
These billings are recorded as progress billings (a reduction of the associated
inventory) until the appropriate revenue recognition criteria have been met. The
Terms and Conditions contained in our customer purchase orders provide for
liquidated damages in the event that a stop-work order is issued prior to the
final delivery of the product.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition." We generally recognize revenue when products are shipped
and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists,
and the sales price is fixed or determinable. Payments received in advance from
customers for products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized. Air Industries utilizes a return
merchandise authorization procedure for determining whether to accept returned
products. Customer requests to return products are reviewed by the contracts
department and if the request is approved credit is issued upon receipt of the
product. Revenues are recorded net of returns and allowances.
28
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal and state taxes currently payable and deferred
taxes, due to temporary differences between financial statement and tax bases of
assets and liabilities. In addition, future tax benefits are recognized to the
extent that realization of such benefits is more likely than not. Valuation
allowances are established when management determines that it is more likely
than not that some portion or all of the deferred asset will not be realized.
The effect of a change in tax rates is recognized as income or expense in the
period of change.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS
No.123 and supersedes Accounting Principles Board Opinion No. 25. SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values at the date of grant. We recorded an expense of $437,202 and
$167,126 for the years ended December 31, 2007 and 2006, respectively, in
accordance with the measurement requirements under SFAS No. 123(R)
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. We apply SFAS No. 142,
Goodwill and Other Intangible Assets and accordingly do not amortize goodwill
but test it for impairment. The Company performs impairment testing for goodwill
annually, or more frequently when indicators of impairment exist, using a
two-step approach. Step one compares the fair value of the net assets of the
relevant reporting unit (calculated using a discounted cash flow method) to its
carrying value, a second step is performed to compute the amount of the
impairment. In this process, a fair value for goodwill is estimated, based in
part on the fair value of the operations, and is compared to its carrying value.
The shortfall of the fair value below carrying value represents the amount of
goodwill impairment.
The fair values of the reporting units were determined using a combination
of valuation techniques consistent with the income approach. For purposes of the
income approach, discounted cash flows were calculated by taking the net present
value of estimated cash flows using a combination of historical results,
estimated future cash flows and an appropriate price to earnings multiple. We
use our internal forecasts to estimate future cash flows and actual results may
differ from forecasted results. However, these differences have not been
material and we believe that this methodology provides a reasonable means to
determine fair values. Cash flows were discounted using a discount rate based on
expected equity return rates, which ranged from 12.61% to 14.73% for 2007. Our
evaluations for the year ended December 31, 2007 indicated there was no
impairment of our Goodwill.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our primary exposure to market risk consists of changes in interest rates
on borrowings under the loan facility. An increase in interest rates would
adversely affect our operating results and the cash flow available after debt
service to fund operations. We manage exposure to interest rate fluctuations by
optimizing the use of fixed and variable rate debt. Except with respect to the
interest rates under the loan facility, we do not have debts or hold instruments
that are sensitive to changes in interest rates, foreign currency exchange rates
or commodity prices.
29
Item 8. Financial Statements and Supplementary Data.
The financial information required by this item is set forth beginning on
page F-1 and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this Report:
1. Financial Statements
Our consolidated financial statements required by this Item are submitted
in a separate section beginning on page F-1 of this Report
2. Financial Statement Schedules:
None
3. Exhibits
Exhibit No. Description
----------- -----------
2.1 Debtor's Amended Plan of Reorganization (incorporated by
reference to Exhibit 2.1 of Registrant's Form 8-K, filed January
14, 2005.
2.2 Merger Agreement, dated as of November 14, 2005, among Gales
Industries Incorporated, two of its stockholders, Gales
Industries Merger Sub, Inc., and Ashlin Development Corporation
(incorporated herein by reference to Exhibit 10.1 of
Registrant's Form 8-K report filed November 21, 2005).
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of Registrant's Form 8-K report, filed
February 15, 2006).
3.2 Certificate of Amendment to Certificate of Incorporation
changing our corporate name (incorporated by reference to
Exhibit 3.1 of Registrant's Form 8-K report, filed July 2,
2007).
3.3 Certificate of Amendment to Certificate of Incorporation
increasing the number of shares of our authorized capital stock
(incorporated by reference to Exhibit 3.1 of the Registrant's
Form 8-K report, filed April 7, 2008.
3.4 By-Laws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Form 8-K report, filed February 15,
2006).
4.2 Form of Convertible Promissory Note, dated November 30, 2005, in
the amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to each of Peter Rettaliata and Dario
Peragallo (incorporated by reference to Exhibit 4.2 of the
Registrant's Form 8-K report, filed December 6, 2005).
4.3 Form of Warrant issued by the Registrant to GunnAllen Financial,
Inc. after completion of the Offering (incorporated by reference
to Exhibit 4.3 of the Registrant's Form 8-K report, filed
December 6, 2005).
4.4 Form of Warrant issued by Original Gales to Atlas Private
Equity, LLC (and assumed by the Registrant) (Incorporated by
reference to Exhibit 4.4 of the Registrants Form 10-KSB, filed
April 17, 2006).
4.5 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $45,000 Bridge
Financing in or about August 2005 (incorporated by reference to
Exhibit 4.5 of the Registrant's Form 8-K report, filed December
6, 2005).
4.6 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $105,000 Bridge
Financing in or about September, 2005 (incorporated by reference
to Exhibit 4.6 of the Registrant's Form 8-K report, filed
December 6, 2005).
4.7 Form of Warrant issued and to be issued to Porter, LeVay & Rose,
Inc. (incorporated herein by reference to the exhibit of the
same number to Registrant's Amendment No. 1 on Form SB-2/A,
filed June 16, 2006).
30
4.8 Certificate of Designation (incorporated by reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed with
the SEC on April 18, 2007).
10.1 Asset Purchase Agreement between the Registrant and TeeZee, Inc.
dated October 15, 2004 (incorporated by reference of the
Registrant's Report on Form 8-K, filed on January 14, 2005).
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and
among Gales Industries Incorporated, Air Industries Machining,
Corp., Luis Peragallo, Jorge Peragallo, Peter Rettaliata and
Dario Peragallo (incorporated by reference to Exhibit 10.2 of
the Registrant's Form 8-K report, filed December 6, 2005.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005,
in the amount of $962,000, from Gales Industries Incorporated
(and assumed by the Registrant) to Luis Peragallo (incorporated
by reference to Exhibit 10.3 of the Registrant's Form 8-K
report, filed December 6, 2005).
10.4 Security Agreement, dated as of November 30, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Luis Peragallo (incorporated by reference to
Exhibit 10.4 of the Registrant's Form 8-K report, filed December
6, 2005).
10.5 Contract of Sale, dated as of November 7, 2005, by and between
DPPR Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1480 North Clinton Avenue, Bay
Shore, NY (incorporated by reference to Exhibit 10.5 of the
Registrant's Form 8-K report, filed December 6, 2005).
10.6 Contract of Sale, dated as of November 7, 2005, by and between
KPK Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1460 North Fifth Avenue and
1479 North Clinton Avenue, Bay Shore, NY (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 8-K Report,
filed December 6, 2005).
10.7 Employment Agreement, dated as of September 26, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Michael A. Gales (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 8-K report, filed December
6, 2005).
10.8 Employment Agreement, dated as of September 26, 2005, by and
between Louis A. Giusto and Gales Industries Incorporated (and
assumed by the Registrant) (incorporated by reference to Exhibit
10.8 of the Registrant's Form 8-K report, filed December 6,
2005).
10.9 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Peter D.
Rettaliata (incorporated by reference to Exhibit 10.9 of the
Registrant's Form 8-K report, filed December 6, 2005).
10.10 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Dario Peragallo
(incorporated by reference to Exhibit 10.10 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.11 Form of Placement Agency Agreement, dated as of September 26,
2005, between GunnAllen Financial Inc. and Gales Industries
Incorporated (including Amendments No.1 and No.2 thereto, dated
October 25, 2005 and November 10, 2005, respectively).
(Incorporated by reference to Exhibit 10.11 of Registrant's
registration statement on Form SB-2, No. 333-131709, filed on
February 9, 2006).
10.12 Registrant's 1998 Stock Option Plan (incorporated by reference
to Exhibit 10.18 of the Registrant's annual report on Form
10-KSB, filed April 12, 2002).
10.13 2005 Stock Incentive Plan (incorporated by reference to Exhibit
10.14 of the Registrant's Form 8-K report, filed December 6,
2005).
10.14 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Michael A. Gales (incorporated by reference to Exhibit 10.15 of
the Registrant's Form 8-K report, filed December 6, 2005).
31
10.15 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Louis A. Giusto (incorporated by reference to Exhibit 10.16 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.16 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Peter Rettaliata (incorporated by reference to Exhibit 10.17 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.17 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Dario Peragallo (incorporated by reference to Exhibit 10.18 of
the Registrant's Form 8-K report, filed December 6, 2005).
10.18 Revolving Credit, Term Loan, Equipment Line and Security
Agreement, dated as of November 30, 2005, by and between Air
Industries Machining, Corp., PNC Bank, National Association, as
Lender, and PNC Bank, National Association, as Agent
(incorporated by reference to Exhibit 10.19 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.19 Mortgage and Security Agreement, dated as of November 30, 2005,
by and between Air Industries Machining, Corp. and PNC Bank
(incorporated by reference to Exhibit 10.20 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.20 Long Term Agreement, dated as of August 18, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation
(incorporated by reference to Exhibit 10.21 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.21 Long Term Agreement, dated as of September 7, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation
(incorporated by reference to Exhibit 10.22 of the Registrant's
Current Report on Form 8-K filed on December 6, 2005.
10.22 Stock Purchase Agreement, dated January 2, 2007, between Gales
Industries Incorporated, Sigma Metals, Inc. ("Sigma Metals"),
and George Elkins, Carole Tate and Joseph Coonan, the
shareholders of Sigma Metals (incorporated by reference to
Exhibit 10.01 of the Registrant's Form 8-K report, filed January
2, 2007).
10.23 Form of Subscription Agreement (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed with the SEC on April 18, 2007).
10.24 Form of Promissory Note (incorporated by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed with
the SEC on April 18, 2007).
10.25 Agreement dated March 30, 2007 between Gales Industries
Incorporated and James A. Brown (incorporated by reference to
Exhibit 10.11 of Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 2006).
10.26 Restricted Stock Agreement dated March 30, 2007 between Gales
Industries Incorporated and James A. Brown (incorporated by
reference to Exhibit 10.12 of Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2006).
10.27 Stock Purchase Agreement, dated March 9, 2007, between Gales
Industries Incorporated and John Gantt and Lugenia Gantt, the
shareholders of Welding Metallurgy, Inc. (incorporated by
reference to Exhibit 10.1 of the Registrant's Form 8-K report,
filed March 14, 2007).
10.28 Amendment No. 1 dated August 2, 2007 to the Stock Purchase
Agreement, dated March 9, 2007, between Gales Industries
Incorporated and John Gantt and Lugenia Gantt, the shareholders
of Welding Metallurgy, Inc. (incorporated by reference to
Exhibit 10.1 of Registrant's Form 8-K/A report, filed August 3,
2007).
10.29 Separation Agreement and General Release dated March 16, 2007
between the Registrant and Michael A. Gales (incorporated by
reference from the Registrant's Form 8-K filed on March 20,
2007).
10.30 7% Promissory Note of Registrant in the principal amount of
$2,000,000 in favor of John and Lugenia Gantt(incorporated by
reference from the Registrant's Form 8-K filed on August 26,
2007).
10.31 Escrow Agreement dated as of August 24, 2007 by and among the
Registrant, John and Lugenia Gantt and Eaton & Van Winkle LLP,
as escrow agent (incorporated by reference from the Registrant's
Form 8-K filed on August 26, 2007).
10.32 Registration Rights Agreement dated as of August 24, 2007 by and
among the Registrant and John and Lugenia Gantt (incorporated by
reference from the Registrant's Form 8-K filed on August 26,
2007).
32
10.33 Fourth Amendment to the Revolving Credit, Term Loan and Security
Agreement dated as of November 30, 2005 with the financial
institutions named therein (the "Lenders") and PNC Bank N.A., as
agent for the Lenders, as amended, dated as of August 24, 2007
(incorporated by reference from the Registrant's Form 8-K filed
on August 26, 2007).
10.34 Loan and Security Agreement dated as of August 24, 2007 among
Air Industries Machining, Corp., Sigma Metals, Inc., Welding
Metallurgy, Inc. and Steel City Capital Funding LLC incorporated
by reference from the Registrant's Form 8-K filed on August 26,
2007).
10.35 Pledge Agreement dated as of August 24, 2007 by and among Air
Industries Machining, Corp. and Sigma Metals, Inc., as pledgors,
and Steel City Capital Funding LLC., as pledge incorporated by
reference from the Registrant's Form 8-K filed on August 26,
2007).
10.36 Pledge Agreement dated as of August 24, 2007 by and among Air
Industries Machining, Corp. and Sigma Metals, Inc., as pledgors,
and John and Lugenia Gantt, as pledges (incorporated by
reference from the Registrant's Form 8-K filed on August 26,
2007).
10.37 Pledge Agreement dated as of August 24, 2007 by and between Air
Industries Group, Inc., as pledgor, and Steel City Capital
Funding LLC, as pledge (incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.38 Guarantor Surety ship Agreement dated as of August 24, 2007
between the Registrant and Steel City Capital Funding LLC
(incorporated by reference from the Registrant's Form 8-K filed
on August 26, 2007).
10.39 Stock Purchase Agreement, dated as of November 15, 2007, by and
among Air Industries Group, Inc. and the shareholders of Blair
Industries, Inc., Blair Accumulators, Inc., H.S.M. Machine
Works, Inc., and H.S.M. Machine Works, Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed with the SEC on November 15, 2007).
10.40 Letter of Clarification between the Company and Michael A. Gales
dated May 11, 2007 (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 2007).
10.41 Sublease agreement dated as of January 1, 2008 between Huttig
Building Products, Inc. and the Registrant*.
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-144561) filed with the SEC on July 13, 2007 and declared
effective on July 27, 2007).
21.1 Subsidiaries*
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
* Filed as part of the Registrant's Annual Report on Form 10-K as filed on
April 14, 2008
** Filed as part of the Registrant's Annual Report on Form 10-K/A as filed on
April 17, 2008
33
AIR INDUSTRIES GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 and 2006
F-1
AIR INDUSTRIES GROUP, INC.
Table of Contents
Consolidated Financial Information Page No.
Reports of Independent Registered Public Accounting Firms......... F-3 - F-4
Balance Sheet..................................................... F-5
Statement of Operations........................................... F-6
Statement of Stockholders' Equity................................. F-7
Statement of Cash Flows........................................... F-8
Notes to Consolidated Financial Statements........................ F-9 - F-30
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Air Industries Group, Inc. (formerly Gales Industries Incorporated)
We have audited, before the effects of the adjustments for the correction of the
error listed as (4) of Note 19, the consolidated balance sheet of Air
Industries Group, Inc. (formerly Gales Industries Incorporated) and subsidiaries
as of December 31, 2007, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (the 2007 financial
statements before the effects of the adjustments listed as (4) in Note 19 are
not presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, except for the error listed as (4) in Note 19, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Air Industries Group, Inc.
(formerly Gales Industries Incorporated) and subsidiaries as of December 31,
2007, and the results of their operations and their cash flows for year then
ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management's assertion about the effectiveness of
Air Industries Group, Inc. (formerly Gales Industries Incorporated) and
subsidiaries' internal control over financial reporting as of December 31, 2007
included in the accompanying Management's Annual Report on Internal Control over
Financial Reporting and, accordingly, we do not express an opinion thereon.
As described and listed as (3) of Note 19 to the financial statements, the 2007
financial statements have been restated for an error in recording a beneficial
conversion on the issuance of Preferred Stock.
We were not engaged to audit, review or apply any procedures to the adjustment
for the correction of the error listed as (4) of Note 19 and accordingly, we
do not express an opinion or any other form of assurance about whether such
adjustments are appropriate and properly applied. Those adjustments were audited
by Rotenberg Meril Solomon Bertiger & Guttilla P.C.
/s/ McGladrey & Pullen, LLP
New York, New York
April 14, 2008, except for item listed as (3) of Note 19 for which the date is
November 19, 2008
F-3
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Air Industries Group, Inc.
We have audited the adjustments described in Note 19 Item (4) that were applied
to restate the December 31, 2007 consolidated financial statements to correct
certain expenses which should have been included in cost of goods sold that were
classified as reductions of accounts payable and accrued expenses. In our
opinion, such adjustments are appropriate and have been properly applied. We
were not engaged to audit, review, or apply any procedures to the 2007
consolidated financial statements of Air Industries Group, Inc. and Subsidiaries
other than with respect to the adjustments and, accordingly, we do not express
an opinion or any other form of assurance on the December 31, 2007 consolidated
financial statements taken as a whole.
/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
Saddle Brook, New Jersey
October 5, 2009
F-4
AIR INDUSTRIES GROUP INC
Consolidated Balance Sheet At December 31,
ASSETS 2007 2006
------------ ------------
Current Assets (Restated)
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $302,016 and $176,458 $ 7,674,647 $ 3,508,957
Inventory 21,820,514 15,257,641
Prepaid Expenses and Other Current Assets 230,209 232,749
Deposits - Customers 905,063 180,456
------------ ------------
Total Current 30,630,433 19,179,803
Assets
Property and Equipment, net 4,786,143 3,565,316
Capitalized Engineering Costs - net of
Accumulated Amortization of $11,294 1,521,921 --
Deferred Financing Costs 575,502 369,048
Intangible Assets, net of accumulated amortization of $ 277,251 5,876,974 --
Goodwill 6,372,372 1,265,963
Deposits - Landlord 103,226 448,530
Other Assets 423,469 63,522
------------ ------------
TOTAL ASSETS $ 50,290,040 $ 24,892,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes Payable - Revolver $ 11,332,940 $ 5,027,463
Accounts Payable and Accrued Expenses 7,222,351 7,648,426
Notes Payable - Current Portion 4,627,776 127,776
Notes Payable - Sellers - Current Portion 1,435,796 192,400
Capital Lease Obligations - Current Portion 290,285 407,228
Due to Sellers -- 53,694
Dividends Payable 266,503 120,003
Deferred Gain on Sale - Current Portion 38,036 38,033
Income Taxes Payable 144,261 653,426
------------ ------------
Total current liabilities 25,357,948 14,268,449
Long term liabilities
Notes Payable - Net of Current Portion 528,330 645,458
Notes Payable - Sellers - Net of Current Portion 2,503,036 1,290,562
Capital Lease Obligations - Net of Current Portion 1,188,506 552,589
Deferred Tax Liability 1,878,677 512,937
Deferred Gain on Sale - Net of Current Portion 675,082 713,118
Deferred Rent 229,604 39,371
------------ ------------
Total liabilities 32,361,183 18,022,484
Commitments and contingencies
Stockholders' Equity
Preferred Stock Par Value $.001-Authorized 8,003,716 shares
Designated as Series "A" Convertible Preferred -$.001 par Value,
1,000 Shares Authorized 0 Shares issued and outstanding as of
December 31, 2007 and December 31, 2006, respectively. Designated as
Series "B" Convertible Preferred -$.001 Par Value, 2,000,000 shares
authorized, 829, 098 and 0 shares issued and
outstanding as as December 31, 2007 and December 31, 2006,
respectively.
Liquidation Value, $ 18,060,000 829 --
Common Stock - $.001 Par, 120,055,746 Shares Authorized,
69,122,189 and 57,269,301 Shares Issued and Outstanding as of
December 31, 2007 and 2006, respectively 69,122 57,269
Additional Paid-In Capital 18,744,154 7,898,702
Accumulated Deficit (885,248) (1,086,273)
------------ ------------
Total Stockholders' Equity 17,928,857 6,869,698
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,290,040 $ 24,892,182
============ ============
See Notes to Consolidated Financial Statements.
F-5
AIR INDUSTRIES GROUP INC
Consolidated Statement of Operations for the Years Ended December 31,
2007 2006
----------- -----------
(Restated)
Net sales $46,068,645 $33,044,996
Cost of Sales 34,011,228 28,002,942
----------- -----------
Gross profit 12,057,417 5,042,054
Operating costs and expenses:
Selling and marketing 1,476,111 601,011
General and administrative 8,418,508 3,789,587
----------- -----------
Income from operations 2,162,798 651,456
Interest and financing costs 1,578,377 1,040,108
Gain on Sale of Life Insurance Policy -- (53,047)
Gain on Sale of Real Estate (38,036) (300,037)
Other Income (25,014) (435,627)
Other Expenses 81,127 246,659
----------- -----------
Income before provision for
income taxes 566,344 153,400
Provision for income taxes 365,319 489,969
----------- -----------
Net Income (Loss) 201,025 (336,569)
Dividend attributable to preferred stockholders 394,042 420,003
Beneficial Conversion Feature 1,589,000 --
----------- -----------
Net Loss attributable to common stockholders $(1,782,017) $ (756,572)
=========== ===========
Income (Loss) per share (basic) $ (0.03) $ (0.02)
=========== ===========
Income (Loss) per share (diluted) $ (0.03) $ (0.02)
=========== ===========
Weighted average shares outstanding (basic) 65,402,711 32,208,029
=========== ===========
Weighted average shares outstanding (diluted) 65,402,711 32,208,029
=========== ===========
See Notes to Consolidated Financial Statements.
F-6
AIR INDUSTRIES GROUP INC
Consolidated Statement of Stockholders' Equity For the Years
Ended December 31, 2006 and 2007
Series A Series B
Preferred Stock Preferred Stock Common Stock
----------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2006 900 $ 1 -- -- 14,723,421 $ 14,723
Non-Cash Stock Option
Compensation -- -- -- -- -- --
Preferred Stock Dividend -- -- -- -- -- --
Non-Cash Warrant
Compensation -- -- -- -- -- --
Conversion of Preferred
Shares to Common Shares in
connection with filing the
registration statement (900) (1) -- -- 40,909,500 40,910
Conversion of Preferred
Dividend to Common Shares in
connection with filing the
registration statement -- -- -- -- 1,636,380 1,636
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2006 57,269,301 57,269
Conversion of warrants -- -- -- -- 311,265 312
Conversion of Seller's Notes -- -- -- -- 1,799,432 1,799
Issuance of Restricted Shares -- -- -- -- 200,000 200
Preferred Series B Stock Issuance -- -- 802,300 802 -- --
Transaction costs paid for
Series B Issuance -- -- -- -- -- --
Issuance of Stock for
Acquisition of Sigma -- -- -- -- 7,416,082 7,416
Exercise of Stock Options -- -- -- -- 90,580 91
Issuance of Stock for
Acquisition of Welding Met -- -- -- -- 2,035,529 2,035
Non-cash stock option expense -- -- -- -- -- --
Non-cash Warrants Expense -- -- -- -- -- --
Preferred Dividend Paid
In Stock -- -- 26,798 27 -- --
Dividend on Series B preferred
stock -- -- -- -- -- --
Net Income -- -- -- -- -- --
--------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2007
(Restated) -- $ -- 829,098 $ 829 69,122,189 $ 69,122
================================= ============ ============ ============ ============ ============ ============
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
------------ ------------ ------------
Balance, January 1, 2006 $ 7,844,614 $ (749,704) $ 7,109,634
Non-Cash Stock Option
Compensation 167,126 -- 167,126
Preferred Stock Dividend (480,003) -- (480,003)
Non-Cash Warrant
Compensation 49,510 -- 49,510
Conversion of Preferred
Shares to Common Shares in
connection with filing the
registration statement (40,909) -- --
Conversion of Preferred
Dividend to Common Shares in
connection with filing the
registration statement 358,364 -- 360,000
Net Loss -- (336,569) (336,569)
------------ ------------ ------------
Balance, December 31, 2006 7,898,702 (1,086,273) 6,869,698
Conversion of warrants (312) -- --
Conversion of Seller's Notes 717,974 -- 719,773
Issuance of Restricted Shares 51,800 -- 52,000
Preferred Series B Stock Issuance 8,022,198 -- 8,023,000
Transaction costs paid for
Series B Issuance (698,840) -- (698,840)
Issuance of Stock for
Acquisition of Sigma 1,949,585 -- 1,957,001
Exercise of Stock Options (91) -- --
Issuance of Stock for
Acquisition of Welding Met 564,464 -- 566,500
Non-cash stock option expense 354,210 -- 354,210
Non-cash Warrants Expense 30,991 -- 30,991
Preferred Dividend Paid
In Stock (27) -- --
Dividend on Series B preferred
stock (146,500) -- (146,500)
Net Income -- 201,025 201,025
--------------------------------- ------------ ------------ ------------
Balance, December 31,2007
(Restated) $ 18,744,154 $ (885,248) $ 17,928,858
================================= ============ ============ ============
See Notes to Consolidated Financial Statements.
F-7
AIR INDUSTRIES GROUP INC
Consolidated Statement of Cash Flows For the Years Ended December 31,
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES (Restated)
Net Income (loss) $ 201,025 $ (336,569)
Adjustments to Reconcile Net Income (Loss) to Net
Cash used in Operating Activities, net of effect of acquisitions:
Depreciation and amortization of property and equipment 850,428 597,009
Amortization of Intangible Assets 277,251 --
Amortization of Capitalized Engineering Costs 11,294 --
Bad Debt Expense 356,240 177,444
Non-Cash Compensation Expense 406,210 167,126
Warrants issued for Services 30,991 49,510
Non-Cash Interest Expense 63,271 --
Amortization of Deferred Financing costs 161,046 117,159
Gain on Sale of Officers Life Insurance -- (53,047)
Gain on Sale of Real Estate (38,033) (300,037)
Deferred Taxes 389,060 (163,457)
Changes in Assets and Liabilities
(Increase) Decrease in Operating Assets:
Accounts Receivable (1,569,686) (1,062,789)
Inventory (3,323,195) (2,653,831)
Prepaid Expenses and Other Current Assets 47,643 (22,625)
Deposits (724,607) (114,861)
Cash Surrender Value - Officers Life Insurance -- 33,263
Other Assets (337,184) (22,216)
Increase (Decrease) in Operating Liabilities
Accounts payable and accrued expenses (2,431,218) 2,353,797
Income Taxes payable (509,165) 653,426
Deferred Rent 190,233 39,371
Advance Payments - Customers -- (188,199)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (5,948,396) (729,526)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for deposit on Leasehold improvements (24,040) (448,530)
Cash paid for acquisitions, including transaction costs of
$486,200, net of cash acquired of $94,448 (7,952,548) --
Cash paid for Capitalized Engineering costs (1,533,215) --
Cash Received for sale of real estate -- 5,417,704
Purchase of property and equipment (205,296) (812,372)
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (9,715,099) 4,156,802
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Private Placement 8,023,000 --
Repayment of notes payable to Sellers (527,017) (181,838)
Payments for Issuance costs on Private Placement (698,840) --
Principal payments on capital lease obligations (154,026) (219,755)
Proceeds from notes payable 4,500,000 --
Net Proceeds from Revolver 6,305,477 --
Principal Payments on Notes Payable (1,417,599) --
Cash Paid for Deferred Financing Costs (367,500) --
Proceed from Sale of Officer's life insurance -- 86,000
Repayment of Mortgage Notes Payable -- (4,170,099)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,663,495 (4,485,692)
------------ ------------
Net decrease in cash and cash equivalents -- (1,058,416)
Cash and cash equivalents at beginning of year -- 1,058,416
------------ ------------
Cash and cash equivalents at end of year -- --
============ ============
Supplemental cash flow information
Cash paid during the year for interest $ 1,002,920 $ 828,807
============ ============
Supplemental cash flow information
Cash paid during the year for Income taxes $ 678,729 $ 12,758
============ ============
Supplemental schedule of non cash investing and financing activities
Property and Equipment acquired under capital leases $ 673,000
============
Non-cash Dividends on Preferred Stock $ 146,500 $ 480,003
============ ============
Conversion of Preferred Stock to Common Stock $ 40,909
============
Conversion of Preferred Dividends to Common stock $ 360,000
============
Conversion of Preferred Dividends to Preferred Stock $ 247,542
============
Notes Payable-Seller and accrued interest converted to
common Stock $ 719,773
============
Conversion of Warrants to common stock $ 312
============
Purchase of all capital stock of Sigma Metals, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 5,590,165
Goodwill 1,549,931
Intangibles 3,720,000
Cash paid (includes transaction costs of $280,500) (4,341,296)
Notes payable issued to Sellers (1,497,411)
Common Stock issued (1,957,001)
------------
Liabilities Assumed $ 3,064,388
============
Purchase of all capital stock of Welding Metallurgy, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 1,587,686
Goodwill 3,556,478
Intangibles 2,434,225
Cash paid (includes transaction costs of $205,700) (3,705,700)
Accrued Purchase Price (190,377)
Notes payable issued to Sellers (net of accredited value of $140,000) (1,860,000)
Common Stock issued (566,500)
------------
Liabilities Assumed $ 1,255,812
============
See Notes to Consolidated Financial Statements.
F-8
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp. (the "Company" or "Ashlin"), a Florida
corporation, entered into a Merger Agreement on November 14, 2005 with Gales
Industries Incorporated, a privately-held Delaware corporation ("Original
Gales"). As a result of the transaction, the former stockholders of Original
Gales became the controlling stockholders of Ashlin. Additionally, since Ashlin
had no substantial assets prior to the merger, the transaction was treated for
accounting purposes as a reverse acquisition of a public shell. Accordingly, for
financial statement presentation purposes, Original Gales is the surviving
entity.
Prior to the closing of the merger, Original Gales acquired all of the
outstanding capital stock of Air Industries Machining Corporation ("AIM").
Because of the change in ownership, management and control that occurred in
connection with the acquisition of AIM by Original Gales, in accordance with
Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations,
the transaction was accounted for as a purchase. Accordingly, the purchase price
was allocated to assets acquired and liabilities assumed based on SFAS No. 141.
Original Gales was formed in October 2004 and, since prior to the
acquisition it did not have any business operations or activity other than the
transactions contemplated with the merger and succeeded substantially all of the
business operations of AIM, AIM is the "Predecessor" to Original Gales.
On February 15, 2006, Ashlin changed its name to Gales Industries
Incorporated and its state of domicile from Florida to Delaware. On June 26,
2007, the name of the Company was changed from Gales Industries Incorporated to
Air Industries Group, Inc.
The financial statements presented are those of Original Gales, now known
as Air Industries Group, Inc. ("AIRI") and its wholly owned subsidiaries; AIM,
Sigma Metals ("Sigma") and Welding Metallurgy ("WeldingMet"). Sigma and Welding
are included from the dates of acquisition to the current year end.
F-9
Note 2. ACQUISITIONS
On April 16, 2007, the Company purchased all of the outstanding capital
stock of Sigma for approximately $7.5 million. We paid $4,060,796 of the
purchase price in cash and issued to the former shareholders of Sigma our 7 %
promissory notes due April 1, 2010 in the aggregate principal amount of
$1,497,411 and 7,416,082 shares of our common stock having a value of
$1,957,000. The remaining principal balance of the promissory notes, $1,216,488
as of December 31, 2007, is repayable in equal monthly installments of $43,446
principal, plus accrued interest at the rate of 7% per annum, through April, 1,
2010. In connection with the acquisition of Sigma Metals we entered into
Employment Agreements, discussed below, with three members of the management of
Sigma.
The acquisition has been accounted for in accordance with the provisions
of SFAS No. 141, "Business Combinations." The total purchase price was allocated
to the net tangible assets based on the estimated fair values. The allocation of
the purchase price was based upon valuation data as of April 17, 2007. The final
valuation has been completed. For tax reporting purposes the Company will
amortize goodwill. The allocation of the purchase price is as follows:
F-10
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase of all capital stock of Sigma Metals, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 5,590,164
Goodwill 1,549,931
Intangibles 3,720,000
Cash paid (includes transaction costs of $280,500) (4,341,296)
Notes payable issued to Sellers (1,497,411)
Common Stock issued (1,957,000)
-----------
Liabilities Assumed $ 3,064,388
===========
On August 24, 2007, we purchased, through a wholly-owned indirect
subsidiary, WMS Merger Corp, all of the issued and outstanding capital stock of
Welding Metallurgy, Inc pursuant to that certain Stock Purchase Agreement, dated
as of March 9, 2007, with the shareholders of Welding, as amended by Amendment
No.1 thereto dated as of August 2, 2007 (the "Welding Stock Purchase
Agreement").
In consideration for the shares of Welding, the Company paid the former
shareholders of Welding $3,500,000 in cash, and issued to them our promissory
note in the principal amount of $2,000,000 due August 31, 2011 and 2,035,529
shares of our common stock, having a value of $566,500. The promissory note
bears no interest until August 24, 2008, and thereafter bears interest at the
rate of 7% per annum. To reflect the fact that this note does not bear interest
for the first year, the Company has discounted the value of the note in its
balance sheet to $1,860,000, and will expense the imputed interest on a monthly
basis and accrete up the value of the note to its face value of $2,000,000.
Under the stock purchase agreement, we are obligated to pay the sellers an
additional $190,377 as an adjustment to the purchase price. We have agreed to
pay this adjustment to the purchase price in four equal monthly installments of
$49,400 (which includes interest of 7% per annum from November 1, 2007)
commencing on March 31, 2008 and on the last day of each calendar month
thereafter through June 30, 2008. The cash portion of the purchase price was
provided by the proceeds of a term loan of $4,500,000 under a Loan and Security
Agreement dated as of August 24, 2007 by and among our wholly-owned
subsidiaries, Air Industries Machining, Corp., or AIM, Sigma and Welding, and
Steel City Capital Funding LLC (the SCCF Loan Agreement"). To secure payment of
the indebtedness under the promissory note, AIM and Sigma Metals pledged to the
former shareholders of Welding Metallurgy, and granted them a security interest
in, all of the outstanding shares of Welding, subject to the prior rights of
Steel City Capital Funding LLC.
Since the purchase price paid by the Company was in excess of the fair
market value of the assets acquired, the excess has been recorded as goodwill.
The acquisition has been accounted for in accordance with the provisions
of SFAS No. 141, "Business Combinations." The total purchase price was allocated
to the net tangible assets based on the estimated fair values. The allocation of
the purchase price was based upon valuation data as of August 27, 2007. The
final valuation has been completed. For tax reporting purposes, the Company will
amortize goodwill. The allocation of the purchase price is as follows:
Purchase of all capital stock of Welding Metallurgy, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 1,587,686
Goodwill 3,556,478
Intangibles 2,434,225
Cash paid (includes transaction costs of $205,700) (3,705,700)
Accrued Purchase Price (190,377)
Notes payable issued to Sellers (net of discount of $140,000) (1,860,000)
Common Stock issued (566,500)
-----------
Liabilities Assumed $ 1,255,812
===========
F-11
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the intangibles acquired for Sigma and Welding are comprised
of the following:
Estimated
2007 Useful Lives
---- ------------
(Restated)
Trade Names $ 2,480,000 20 Years
Customer Relationships 2,900,000 11 to 14 Years
Technical know-how 660,000 10 Years
Professional Certification Certificates 114,225 0.25 to 2 years
-----------
Total 6,154,225
-----------
Less: Accumulated Amortization (277,251)
-----------
Intangibles, Net $ 5,876,974
===========
The expense for the amortization of the intangibles for the year ended December
31, 2007 amounted to $277,251.
The table set forth below indicates the amortization of intangibles over the
next five years:
Year Amount
---- ------
2008 $489,496
2009 $450,894
2010 $436,299
2011 $436,299
2012 $436,299
In the case of both Sigma and Welding, the fair value of the net assets acquired
was less than the amounts paid for the stock of the acquired entity. This excess
has been recognized as goodwill.
The following unaudited pro forma information assumes the acquisitions of Sigma
and Welding occurred as of the beginning of each year. The pro forma results are
not necessarily indicative of what actually would have occurred had the
acquisitions been in effect for the period presented.
(Restated)
(pro forma) (pro forma)
2007 2006
---- ----
(unaudited) (unaudited)
Net sales $54,412,000 $55,481,000
--------------------------
Gross Profit $15,737,000 $13,433,000
--------------------------
Net income $ 2,554,000 $ 1,971,000
--------------------------
Net income attributable to common
stockholders $ 570,958 $ 1,550,997
==========================
Earnings per share, basic $ 0.01 $ 0.05
==========================
Earnings per share, diluted $ 0.01 $ 0.04
==========================
Weighted average shares
outstanding (Basic) 68,889,275 41,659,640
==========================
Weighted average shares
outstanding (Diluted) 71,347,588 46,382,620
==========================
F-12
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company is primarily engaged in manufacturing aircraft structural
parts, assemblies and the distribution of metals principally for prime defense
contractors in the aerospace industry in the United States. The Company's
customer base consists mainly of publicly traded companies in the aerospace
industry.
Principles of Consolidation
The accompanying consolidated financial statements include accounts of the
Company and Merger Sub and Merger Sub's wholly owned subsidiaries, AIM, Sigma
Metals and Welding Metallurgy. Significant inter-company accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid instruments with an
original maturity of three months or less. All cash is applied on a daily basis
to amounts outstanding under the revolving portion of the Loan Facility.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances net of allowances for uncollectable accounts. The Company provides for
allowances for uncollectible receivables based on management's estimate of
uncollectible amounts considering age, collection history, and any other factors
considered appropriate. The Company writes off accounts receivable against the
Allowance for Doubtful Accounts when a balance is determined to be
uncollectible.
Inventory Valuation
The Company values inventory at the lower of cost on a first-in-first-out
basis or market.
AIM purchases inventory only when it has signed non-cancellable contracts
with its customers for orders of its finished goods. Welding Metallurgy
generally produces pursuant to customer orders and maintains relatively low
inventory levels. AIM occasionally produces finished goods in excess of purchase
order quantities in anticipation of future purchase order demands but
historically this excess has been used in fulfilling future purchase orders.
Sigma routinely acquires inventory without corresponding purchase orders. The
Company periodically evaluates inventory items that are not secured by purchase
orders and establishes reserves for obsolescence accordingly. The Company also
reserves for excess quantities, slow-moving goods, and obsolete items.
Capitalized Engineering Cost
The Company has contractual agreements with certain customers to produce
parts, which the customers design. The production of these parts require
pre-production engineering and programming of our machines. The Company accounts
for these pre-production costs pursuant to Emerging Issues Task Force Issue No.
99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply
Arrangements" (EITF 99-5). The pre-production costs associated with a particular
contract are capitalized and beginning with the first shipment of product
pursuant to such contract, amortized over a period determined as follows: (i) if
deliverables are scheduled for a period of three years or less, on a straight
line basis over the anticipated length of the contract and (ii) if deliverables
are scheduled for more than three years, on a straight line basis over three
years. If the Company were to be reimbursed for a portion of the pre-production
expenses associated with a particular contract only the unreimbursed portion
would be capitalized under EITF 99-5. The Company also may progress bill on
certain engineering being expended. These billings are recorded as progress
billings (a reduction of the associated inventory) until the appropriate revenue
recognition criteria have been met. The Terms and Conditions contained in
customer purchase orders provide for liquidated damages in the event that a
stop-work order is issued prior to the final delivery of the product.
F-13
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are carried at cost net of accumulated depreciation
and amortization. Repair and maintenance charges are expensed as incurred.
Property, equipment, and improvements are depreciated using the straight-line
method over the estimated useful lives of the assets. Expenditures for repairs
and improvements in excess of $1,000 that add to the productive capacity or
extend the useful life of an asset are capitalized. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any
related gain or loss is reflected in earnings.
Impairment of Long Lived Assets
The Company reviews long-lived assets for impairment if events or whenever
circumstances indicate that the carrying value of such assets may not be fully
recoverable. Impairment is evaluated based on the sum of undiscounted estimated
future cash flows expected to result from use of an asset compared to its
carrying value. The carrying amount of a long-lived asset is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset. If impairment is recognized, the
carrying value of the impaired asset is reduced to its fair value, based on
discounted estimated future cash flows.
Deferred Financing Cost
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition." The Company recognizes revenue when
products are shipped and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists, and the sales price is fixed or determinable. Payments
received in advance from customers for products delivered are recorded as
customer advance payments until earned, at which time revenue is recognized. The
Terms and Conditions contained in our customer Purchase orders provide for
liquidated damages in the event that a stop work order is issued prior to the
final delivery. The Company utilizes an RMA process for determining whether to
accept returned products. Customer requests to return products are reviewed by
the contracts department and if the request is approved credit is issued upon
receipt of the product. Net sales represent gross sales less returns and
allowances. Shipping costs are included in cost of sales.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. The more significant management estimates are
the useful lives of property and equipment, provisions for inventory
obsolescence, accrued expenses and various contingencies. Actual results could
differ from those estimates. Changes in facts and circumstances may result in
revised estimates, which are recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of December 31,
2007 approximately 22% and 11% are attributable to two customers, respectively.
Of the account receivable balance at December 31, 2006, approximately 34% and
17% are attributable to these customers, respectively.
Two customers accounted for approximately 46% and 11% of net sales for the
years ended December 31, 2007. One of these customers accounted for
approximately 61% of net sales for the year ended December 31, 2006.
F-14
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, accounts receivable, accounts payable and accrued
liabilities, approximates carrying value due to the immediate or short-term
maturity associated with these instruments and that the notes payable
approximate fair value in that they carry market-based interest rates.
Income Taxes
Income taxes are calculated using an asset and liability approach as
prescribed by SFAS No. 109, "Accounting for Income Taxes". The provision for
income taxes includes federal and state taxes currently payable and deferred
taxes, due to temporary differences between financial statement and tax bases of
assets and liabilities. In addition, future tax benefits are recognized to the
extent that realization of such benefits is more likely than not. Valuation
allowances are established when management determines that it is more likely
than not that some portion or the entire deferred asset will not be realized.
The effect of a change in tax rates is recognized as income or expense in the
period of change.
In June 2006, the FASB issued Financial Accounting Standards Board
("FASB") Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
Taxes--An Interpretation of FASB Statement No. 109," regarding accounting for,
and disclosure of, uncertain tax positions. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, "Accounting for
Income Taxes," and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. The Company will recognize
interest and penalties, if any, related to taxes not properly paid in prior
periods in tax expense. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company adopted FIN 48 effective as of
January 1, 2007.
Earnings per share
Basic earnings per share is computed by dividing the net income applicable
to common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Potentially dilutive shares, using the treasury
stock method, are included in the diluted per-share calculations for all periods
when the effect of their inclusion is dilutive.
The Company did not include 3,025,578 warrants and 4,060,000 options to
purchase the Company's common stock for the year ended December 31, 2007 and
5,271,257 warrants and 4,850,000 options to purchase the Company's common stock
for the year ended December 31, 2006 in the calculation of diluted earnings per
share because the effects of their inclusion would have been anti-dilutive. The
shares of Series B Preferred Stock that are convertible into 30,039,783 shares
of common stock at December 31, 2007 are not included in the calculation of
diluted earnings per shares because the effect of the inclusion would have been
anti-dilutive.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS
No. 123 and supersedes Accounting Principles Board Opinion No. 25. SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the statement of operations based on
their fair values at the date of grant. The Company recorded in the accompanying
statement of operations an expense of $437,202 and $167,126 for the years ended
December 31, 2007 and 2006, respectively, in accordance with the measurement
requirements under SFAS No. 123(R). The Company adopted SFAS No. 123(R),
effective as of January 1, 2005.
Goodwill and Intangibles
Goodwill represents the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. The Company applies SFAS
No. 142, "Goodwill and Other Intangible Assets" and accordingly does not
amortize goodwill but tests it for impairment. The Company performs impairment
testing for goodwill annually, or more frequently when indicators of impairment
exist, using a two-step approach. Step one compares the fair value of the net
assets of the relevant reporting unit (calculated using a discounted cash flow
method) to its carrying value, a second step is performed to compute the amount
of the impairment. In this process, a fair value for goodwill is estimated,
based in part on the fair value of the operations, and is compared to its
carrying value. The shortfall of the fair value below carrying value represents
the amount of goodwill impairment.
F-15
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the reporting units were determined using a combination
of valuation techniques consistent with the income approach. For purposes of the
income approach, discounted cash flows were calculated by taking the net present
value of estimated cash flows using a combination of historical results,
estimated future cash flows and an appropriate price to earnings multiple. We
use our internal forecasts to estimate future cash flows and actual results may
differ from forecasted results. However, these differences have not been
material and we believe that this methodology provides a reasonable means to
determine fair values. Cash flows were discounted using a discount rate based on
expected equity return rates, which ranged from 12.61% to 14.73% for 2007. Our
evaluations for the year ended December 31, 2007 indicated there was no
impairment of our Goodwill.
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS 157 "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Management is currently
evaluating the effect of this pronouncement on its financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; (b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS
141(R) requires contingent consideration to be recognized at its fair value on
the acquisition date and, for certain arrangements, changes in fair value to be
recognized in earnings until settled. SFAS 141(R) also requires
acquisition-related transaction and restructuring costs to be expensed rather
than treated as part of the cost of the acquisition. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at
fair value, and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The new guidance is
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the potential impact of the adoption of SFAS No. 159 on its
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests
in Consolidated Financial Statements an Amendment of ARB No. 51" ("SFAS 160"),
which establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. SFAS 160
also provides guidance when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent's owners and the interests of
the non controlling owners of a subsidiary. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company is currently evaluating the impact this statement
will have on its financial position and results of operations.
F-16
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 INVENTORY
The components of inventory consisted of the following:
2007 2006
---- ----
(Restated)
Raw Materials $ 9,050,196 $ 2,234,175
Work In Progress 7,755,367 7,546,178
Finished Goods 5,014,951 5,477,288
--------------------------
Total Inventory $21,820,514 $15,257,641
==========================
Note 5 PROPERTY AND EQUIPMENT
The components of property and equipment, at cost, consisted of the following:
Estimated
2007 2006 Useful Life
---- ---- -----------
(Restated)
Machinery and Equipment $ 3,105,545 $ 2,117,441 5 - 8 years
Capital Lease Machinery and Equipment 1,669,718 1,164,671 5 - 8 years
Tools and Instruments 827,351 555,164 3 - 7 years
Automotive Equipment 30,227 30,227 5 years
Furniture and fixtures 146,455 274,837 5 - 8 years
Leasehold Improvements 312,727 3,583 Term of Lease
Computer Software 131,168 4 years
-----------------------------
Total property and equipment 6,223,191 4,145,923
Less: Accumulated Depreciation and Amortization (1,437,048) (580,607)
-----------------------------
Property and equipment, net $ 4,786,143 $ 3,565,316
=============================
Depreciation and amortization expense for the years ended December 31,
2007 and 2006, amounted to $850,428 and $597,009 respectively.
Note 6 SALE-LEASEBACK TRANSACTION
On October 24, 2006, the Company consummated an agreement, whereby the
Company sold the buildings and real property located at its corporate
headquarters in Bay Shore, New York (the "Property") for a purchase price of
$6,200,000. As a result, the Company had a gain on the sale of approximately
$1,051,188 of which we recognized $300,037 during the year ended December 31,
2006. The remaining $751,151 will be recognized ratably over the remaining term
of the twenty year lease, and is included in the caption Deferred Gain on Sale
of Real Estate in the accompanying Balance Sheet.
Simultaneous with the closing of the sale of the Property, the Company
entered into a 20-year triple-net lease (the "Lease") with the Purchaser for the
property. Base annual rent is approximately $540,000 for the first five years,
$621,000 for the sixth year, and thereafter increases 3% per year. The Lease
grants AIM an option to renew the Lease for an additional period of five years.
The Company deposited with the Purchaser $127,500 as security for the
performance of its obligations under the Lease, which it subsequently replaced
with a $127,500 letter of credit. In addition, the Company deposited with the
landlord $393,000 (Deposits) as security for the completion of certain repairs
and upgrades to the Property. As of December 31, 2007, the Company has completed
certain of the improvements and has reclassified the amounts to the appropriate
fixed asset accounts. The Company still has deposits of $103,226 deposited with
the landlord. This amount is included in the caption Deposits - Landlord on the
accompanying Balance Sheet. Pursuant to the terms of the Lease, the Company is
required to pay all of the costs associated with the operation of the
facilities, including, without limitation, insurance, taxes and maintenance.
These costs will be offset against the funds that are deposited with the
landlord. The lease also contains customary representations, warranties,
obligations, conditions and indemnification provisions and grants the Purchaser
customary remedies upon a breach of the lease by the Company, including the
right to terminate the Lease and hold the Company liable for any deficiency in
future rent. (See Note 12).
F-17
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. NOTES PAYABLE - BANKS AND CREDIT FACILITY
On November 30, 2005 the Company executed a credit facility with PNC Bank
N.A. (the "Loan Facility"), secured by substantially all of its assets.
The Loan Facility provided for maximum borrowings of $14,000,000
consisting of (i) a $9,000,000 revolving loan, (ii) a $3,500,000 term loan, and
(iii) a $1,500,000 equipment financing loan. In connection with the Loan
Facility the Company paid a finder's fee of $196,500, consisting of $125,000 in
cash and 325,000 shares of Common Stock, which is included in deferred financing
costs. The shares issued to the finder were valued at $0.22 per share and were
contributed by one of the Company's senior executives and accounted for as a
capital contribution.
On January 10, 2007, the Company and PNC further amended the terms of the
Loan Facility to revise the formula to determine the amounts of revolving
advances permitted to be borrowed under the Loan Facility. The cost of this
amendment was $42,500 and is being amortized over the remaining term of the
Credit Facility. The amount that the Company is permitted to borrow as a
revolving advance under the Loan Facility is based on a percentage of the
Company's eligible receivables, which now includes government receivables that
have not been assigned by the Company.
To refinance the debt of Sigma Metals, on April 19, 2007, the Company
entered into a Third Amendment to the Loan Facility. The amendment modified the
terms of the loan facility to add Sigma Metals as a borrower, but required Sigma
Metals to pledge all of its assets and properties to PNC Bank to secure its
obligations under the Loan Facility. In addition, the termination date of the
Loan Facility was extended to April 30, 2010 and the maximum revolving advance
amount was increased from $9,000,000 to $11,000,000.
In connection with the acquisition of Welding Metallurgy, the Company
entered into the Fourth Amendment to the Loan Facility, dated as of August 24,
2007, which adds Welding Metallurgy as a borrower under the Facility and the
Company as a guarantor of the obligations there under. Additionally, amendment
four increased the maximum revolving advance amount from $11,000,000 to
$14,000,000.
The revolving loans bear interest, at the option of the Company, that is
based on (i) the higher of (A) PNC's base commercial lending rate as published
from time to time ("PNC Rate") plus 0.25% or (B) the Federal Funds rate plus
0.5%, or (ii) the Eurodollar Rate for the Interest Period selected by the
Company plus 2.5%. The revolving loans had an interest rate of 7.75% per annum
on December 31, 2007 and an outstanding balance of $11,332,940. The revolving
loans and equipment loans are payable in full on November 30, 2009.
The term loan is for a period of 4 years and bears interest, at the option
of the Company, at the (i) PNC Rate plus 0.50% per annum or (ii) the Eurodollar
Rate for the interest period selected by the Company plus 2.75 %. In October
2006 the Term Note was reduced by $2,800,000 and the remaining balance of
$383,330 became an Amended and Restated Term Note providing for principal
payments of $10,648 per month and the Maturity Date was amended to become the
first business day of October 2009. At December 31, 2007 the balance of the term
loan was $244,906.
In connection with the Welding Metallurgy acquisition, Steel City Capital
Funding LLC ("SCCF") provided a Term Loan of $4,500,000,which is payable on
August 24, 2010. Borrowings under the SCCF Loan Agreement bear interest, payable
monthly, generally at a rate of 6% over the base commercial lending rate of PNC
Bank as publicly announced to be in effect from time to time. Under the terms of
the Loan Facility and the SCCF Loan Agreement, the amounts are not due to be
repaid until August 2010, but have been included in current liabilities due to
the right of the banks to demand immediate repayment pursuant to a subjective
acceleration clause, which management believes are not likely to occur, combined
with the existence of a lockbox arrangement. To secure payment of the
indebtedness under the SCCF Loan Agreement, AIR pledged all of the outstanding
shares of AIM and Sigma, which, in turn, pledged all of the outstanding shares
of Welding Metallurgy.
F-18
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the foregoing, the Loan Facility was further amended to
allow the Company to borrow or to obtain the issuance, renewal, extension and
increase of standby letters of credit, up to an aggregate availability of
$500,000, for its account until November 30, 2009. At December 31, 2007 the
Company had an outstanding letter of credit in the amount of $127,500.
The equipment loans bear interest, at the option of the Company, that is
based on (i) the PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate for
the interest period selected plus 2.75% per annum. The equipment loan had an
interest rate of 7.75% per annum at December 31, 2007. Such equipment financing
is limited to an aggregate of $750,000 in any fiscal year and amortized in equal
installments of sixty months following the close of each "borrowing period", the
first of which ended December 31, 2007. Each subsequent "borrowing period" ends
on each December 31 thereafter. All equipment loans are due and payable on
November 30, 2009. As of December 31, 2007, the equipment financing loan had a
balance of $411,200.
To the extent that the Company may dispose of collateral used to secure
the Loan Facility, other than inventory, the Company must promptly repay the
draws on the credit facility in amount equal to the net proceeds of such sale.
The terms of the Loan Facility require that, among other things, the
Company maintain certain financial ratios and levels of working capital. As of
December 31, 2007 the Company has met these terms. The Loan Facility also is
secured by all assets of the Company and 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, as such, the revolving
loan has been classified as a current liability.
Interest expense related to these credit facilities amounted to $821,492
and $686,917 for the years ended December 31, 2007 and 2006, respectively.
As of December 31, 2007, future minimum principal payments are as follows:
Year Amount
---- ------
2008 $ 4,627,776
2009 528,330
-----------
5,156,106
Less: current portion (4,627,776)
-----------
Total Long Term Portion $ 528,330
===========
The Company incurred an aggregate of $859,564 in finders' fees and legal
costs in connection with the Loan Facility which is being amortized over the 48
month term of the Loan Facility. During the years ended December 31, 2007 and
2006, the Company amortized $161,046 and $117,159, respectively, of these costs.
On December 28, 2007, the Company and PNC entered into an amendment to the
Loan Facility modifying certain financial covenants.
F-19
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. CASH SURRENDER VALUE - OFFICER'S LIFE INSURANCE
During the year ended December 31, 2006, the Company sold its key-man life
insurance policies. Proceeds from the sale of the insurance policy were $86,000
which was offset by the cash surrender value of $33,263. The resulting gain of
$53,047 was recognized as Other Non-Operating Income in the accompanying
Statement of Operations for the year ended December 31, 2006.
Note 9. CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
and computer equipment. All leases have bargain purchase options exercisable at
the termination of each lease. Capital lease obligations totaled $1,478,791 and
$959,817 as of December 31, 2007 and 2006, respectively.
As of December 31, 2007, the aggregate future minimum lease payments,
including imputed interest, with remaining terms of greater than one year are as
follows:
Year Amount
---- ------
2008 $ 409,861
2009 413,798
2010 409,861
2011 409,861
2012 145,310
------------
Total future minimum lease payments 1,788,691
Less: imputed interest (309,900)
Less: current portion (290,285)
------------
Total Long Term Portion $ 1,188,506
============
Note 10. NOTES PAYABLE - SELLERS
On November 30, 2005, in connection with the acquisition of AIM, the
Company issued notes payable for an aggregate of $1,627,262 to three former AIM
shareholders, two of whom have become part of the Company's senior management
and are also stockholders of the Company. On January 26, 2007, the two senior
management members converted $665,262 principal amount of their notes, plus
accrued interest of $54,511, into an aggregate of 1,799,432 shares of common
stock at a conversion price of $0.40 per share.
The remaining principal amount of the note of $625,300 matures on
September 30, 2010, is subordinated to all of the Company's senior debt and is
payable in twenty consecutive calendar quarters of equal installments of
principal plus accrued interest commencing on December 31, 2005. The interest
rate on this note is equal to Prime Rate plus 0.5% per annum (8.75% at December
31, 2007). Interest on outstanding balances at September 30, 2010, in the event
of nonpayment, shall accrue at a floating rate equal to the Prime Rate plus 7%
per annum as of December 31, 2007.
In connection with the acquisition of Sigma, the Company incurred notes
payable obligations to the former shareholders of Sigma in the aggregate
principal amount of $1,497,411. The remaining principal balance, at December 31,
2007, of $1,216,488, is payable in equal monthly installments of $43,446 of
principal plus interest at 7% per annum through 2010, except that in April 2008
$247,090 was prepaid on the notes due the former shareholders.
These notes are subordinated to all of the Company's senior debt.
In connection with the acquisition of Welding, the Company incurred a note
payable to the former shareholders of Welding in the aggregate principal amount
of $2,000,000, which bears no interest until August 24, 2008, and bears interest
thereafter at 7% per annum.
F-20
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To reflect the fact that this note does not bear interest for the first
year, at December 31, 2007 the Company has discounted the value of the note in
its balance sheet to $1,906,667. The Company will expense the imputed interest
on a monthly basis and accrete up the value of the note to its face value of
$2,000,000. This note was originally recorded at the discounted value of
$1,860,000 and resulted in a non cash interest charge. The indebtedness
evidenced by this note is subordinate to the Company's indebtedness to PNC and
SCCF and is payable in one installment in the principal amount of $500,000 due
on August 24, 2008 and twelve consecutive quarterly installments of principal in
the amount of $125,000, plus accrued interest commencing on November 30, 2008
and continuing through August 31, 2011. This note is subordinated to all of the
Company's senior debt and accrues interest at 7% per annum. Additionally the
Company will pay an additional $190,377 to the former owners as a working
capital adjustment under the stock purchase agreement. This will be paid in four
monthly installments of $47,494 plus accrued interest at 7% per annum,
commencing on March 31, 2008.
As of December 31, 2007, the aggregate future minimum note payments, with
remaining terms of greater than one year are as follows:
Year Amount
---- ------
2008 $ 1,529,130
2009 1,213,752
2010 866,184
2011 423,100
------------
Sellers Notes Payable 4,032,166
Less: Unaccreted Interest (93,334)
Less: Current portion (1,435,796)
------------
Long-term portion $ 2,503,036
============
Interest expense on these notes amounted to $107,111 and $132,193 for the
years ended December 31, 2007 and 2006 respectively.
Note 11. EMPLOYEE BENEFITS PLANS
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code (the "Plan"). Pursuant to the Plan qualified employees may
contribute a percentage of their pretax eligible compensation to the Plan. The
Company does not match any contributions that employees may make to the Plan.
The Employees of the Company are members of the United Service Workers
Union TUJAT Local 355 (the "Union"), which provided medical benefit plans at
defined rates which are contributed in their entirety by the Company. The
company paid $1,712,115 and $2,275,295 in union benefits during the years ended
December 31, 2007 and 2006 respectively.
Note 12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under various operating lease
agreements, which contain renewal options and escalation provisions. Rent
expense was $842,795 and $111,775 for the years ended December 31, 2007 and
2006, respectively. The Company is responsible for paying all operating costs
under the term of the lease. As of December 31, 2007, the aggregate future
minimum lease payments are as follows:
Year Annual Rent
---- -----------
2008 $1,054,572
2009 1,069,968
2010 1,086,176
2011 1,126,206
2012 1,219,606
Thereafter 12,940,984
-----------
Total $18,497,512
===========
F-21
AIR INDUSTRIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The lease provides for scheduled increases in base rent. Rent expense is
charged to operations using the straight-line method over the term of the lease
which results in rent expense being charged to operations at inception of the
lease in excess of required lease payments. This excess is shown as deferred
rent in the accompanying balance sheet.
Litigation
We were a defendant in an action by our former investor relations firm
filed on September 18, 2007 in the Supreme Court of the State of New York, New
York County captioned Porter, Levay & Rose, Inc. against Air Industries Group,
Inc. et al. (Index No. 003104/07). This case has been settled for $65,000.
Customer Audits
The Company's government contracts and those of many of its customers are
subject to the procurement rules and regulations of the United States
government, including the Federal Acquisition Regulations ("FAR"). Many of the
contract terms are dictated by these rules and regulations. During and after the
fulfillment of a government contract, the Company may be audited in respect of
the direct and allocated indirect costs attributed thereto. These audits may
result in adjustments to its contract costs. Additionally, the Company may be
subject to U.S. government inquiries and investigations because of its
participation in government procurement. Any inquiry or investigation can result
in fines or limitations on the Company's ability to continue to bid for
government contracts and fulfill existing contracts.
The Company believes that it is in compliance with all federal, state and
local laws and regulations governing its operations and has obtained all
material licenses and permits required for the operation of its business.
Governmental Regulation
The Company is subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on the Company. Governmental
authorities have the power to enforce compliance with these regulations and to
obtain injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA") imposes strict, joint and several liability on the present
and former owners and operators of facilities that release hazardous substances
into the environment. The Resource Conservation and Recovery Act of 1976
("RCRA") regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. In New York, the handling, storage and disposal of
hazardous substances are governed by the Environmental Conservation Law, which
contains the New York counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place
of employment that is free from recognized and preventable hazards that are
likely to cause serious physical harm to employees, obligates employers to
provide notice to employees regarding the presence of hazardous chemicals and to
train employees in the use of such substances.
Employment Contracts
In September 2005, the Company entered into employment agreements (the
"Agreements") with four senior executives that became effective November 30,
2005. The Agreements are for a period of approximately eight years. The
Agreements provide for annual base compensation aggregating $940,000. The Board,
at its sole discretion, determines whether a bonus is issued, provided that in
the case of two executives, the amount of the bonus shall be predicated on their
performance and the achievement by the Company of its operating targets set
forth in its annual budget, and in the case of these two executives, provided
further, in no event shall the amount of their bonuses be less than 50% of their
salary at that time. For the years ended December 31, 2007 and 2006 no bonuses
were paid. Each senior executive's agreement also call for grants of stock
options to purchase the Company's common stock aggregating 4,850,000 shares of
which 3,410,000 have been granted as of December 31, 2007.
The Company and one of its four senior executives mentioned above entered
into a Separation Agreement and General Release (the "Separation Agreement")
effective March 16, 2007, whereby the executive resigned from his positions with
the Company. Pursuant to the Separation Agreement, the Employment Agreement
between the executive and the Company terminated effective March 16, 2007. In
lieu of the compensation payable to the executive pursuant to his Employment
Agreement, from March 16, 2007, to November 30, 2010, the executive will be paid
$100,000 per annum; from December 1, 2010 to May 31, 2011, he will be paid
$50,000. In addition, if the Company achieves certain agreed-upon levels of
performance he may receive up to an additional $50,000. Upon the execution of
his employment agreement mentioned above the Company granted this executive
options to purchase 1,250,000 shares of Common Stock, subject to an agreed upon
vesting schedule and exercisable over a ten-year period commencing on the date
of grant. Pursuant to the Separation Agreement, all unvested options held by
this executive vested as of March 16, 2007, and the right to exercise all of his
options terminated as of March 16, 2008.
On April 17, 2007, the Company entered into employment agreements (the
"Agreements") with three senior executives at Sigma Metals. The Agreements are
for a period of approximately five years.
F-22
AIR INDUSTRIES GROUP, INC.
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
The Agreements provide for annual base compensation aggregating $600,000.
Additionally, each of these Agreements provide for performance based bonus
compensation of up to 15% of the Executive's base salary and options to purchase
up to 100,000 shares per year, should Sigma achieve specified levels of growth
in its year over year earnings, as defined in the agreements. Sigma did not
achieve the requisite level of growth in earnings in 2007 and, accordingly, no
accrual was made for performance bonuses under these Agreements.
Note 13. INCOME TAXES:
The provision for income taxes at December 31, 2007 and 2006 consists of the
following:
2007 2006
(Restated)
-----------------------
Current
Federal $ 233,248 $ 504,585
State 7,391 148,841
-----------------------
Total Current Provision 240,639 653,426
Deferred
Federal (150,623) (127,595)
State 104,238 (35,862)
-----------------------
Total Deferred Taxes (46,385) (163,457)
Valuation Allowance 171,065 --
-----------------------
Net deferred taxes after valuation allowance 124,680 (163,457)
-----------------------
Net Provision for Income Taxes $ 365,319 $ 489,969
=======================
The components of deferred tax assets as of December 31, 2007 and 2006, are as
follows:
2007 2006
---- ----
(Restated)
Bad debts $ 120,014 $ 76,080
Inventory - 263A Adjustment 340,617 338,092
Non-cash compensation - warrants 43,108 40,121
Non-cash compensation - options 240,685 124,354
Deferred Rent 79,591 16,977
Deferred gain on sale of real estate 247,202 323,859
Federal tax benefit of State Tax -- (64,790)
--------------------------
Total deferred tax asset 1,071,217 854,693
Valuation allowance (1,071,217) (854,693)
--------------------------
Net deferred tax asset $ -- $ --
==========================
The components of the deferred tax liability as of December 31, 2007 and 2006
are as follows:
2007 2006
---- ----
(Restated)
Property and equipment $ 772,895 $ 512,937
Amortization - Sigma Transaction 91,658 --
Amortization - Welding Transaction 1,014,124 --
-----------------------
Total deferred tax liability $1,878,677 $ 512,937
=======================
The difference between income taxes computed at the statutory federal rate and
the provision for income taxes for the years ended December 31, 2007 and 2006
relates to the following:
2007 2006
---- ----
(Restated)
Tax benefit at federal statutory rate 34.00% 34.00%
State income taxes, net of federal
income tax benefit 1.12% 6.02%
Permanent differences 1.37% 6.66%
Other -0.38% --
True-up from prior year -1.81% -84.37%
Change in valuation allowance 30.21% 357.10%
---------------------
Total effective tax rate 64.50% 319.41%
=====================
F-23
AIR INDUSTRIES GROUP, INC.
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
Realization of deferred tax assets is dependent on future earnings. Due to
the uncertainty of realization of the net deferred tax assets, the Company has
provided a valuation allowance. In assessing the realizability of it, management
considers whether it is more likely than not that some or all of the deferred
tax asset will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making the assessment.
Note 14 STOCK-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option plan
and reserved 10,000,000 shares of its Common Stock for issuance under the plan.
The stock option plan permits the Company to grant non-qualified and incentive
stock options to employees, directors, and consultants. Awards granted under the
Company's plans vest over one and five years.
Weighted Weighted
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Shares Price Term Value
------ ----- ---- -----
Outstanding at January 1, 2006 2,370,000 $0.38 -- --
--------------------------------------------------
Outstanding at December 31, 2006 2,370,000 0.38 9 $ 20,540
Options granted 3,923,900 0.35 -- --
Options exercised (250,000) -- -- --
Options cancelled (66,667) -- -- --
Reserved for grant based on future market price 1,440,000 N/A -- --
--------------------------------------------------
Outstanding at December 31, 2007 7,417,233 $0.35 6 $ 8,100
==================================================
Options vested and exercisable
At December 31,2007 2,786,665 $0.44 6 $ 8,100
==================================================
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R) (revised
2004), Share-Based Payment ("SFAS 123(R)"). The weighted average fair values of
options granted for December 31, 2007 and 2006 are $0.35 and $0.38. During the
year ended December 31, 2007, 250,000 stock options were exercised.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model using weighted average assumptions
for grants in the years ended December 31, 2007 and 2006 as follows:
2007 2006
---- ----
Risk Free Interest Rates 3.55%- 4.77% 4.77%
Expected Dividend Yields 0% 0%
Expected Terms to Exercise 1 - 8 Years 9 Years
Expected Volatility 78.07% -177.30% 180%
Certain of the Company's stock options contain features which include
variability in grant prices. A portion of the currently issued stock options
will be priced based on average trading prices of the Company's Common Stock at
the end of a given future period. Due to this variable feature, these stock
options are not deemed to be granted for purposes of applying SFAS 123(R) and
accordingly, their fair value will be calculated and expensed in future periods.
F-24
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2007 and 2006, 2,786,665 and 1,580,000 options are vested
and exercisable, respectively. The weighted average exercise price of
exercisable options at December 31, 2007 and 2006 was $0.44 and $0.32 per share,
respectively. A summary of the status of the Company's stock options as of
December 31, 2007, and changes during the year then ended is presented below.
The Company recorded expenses of $437,202 and $167,126 in its consolidated
statement of operations, which reflects the value of granted stock options over
the vesting period in accordance with SFAS No. 123R, for the years ended
December 31, 2007 and 2006, respectively.
The following table summarizes information about stock options at December 31,
2007:
Options Outstanding Options Exercisable
Weighted Weighted Average
Number Average Remaining Exercise Number Weighted Average
Exercise Price Outstanding Contractual Life Price Exercisable Exercise Price
$0.22 - $0.29 3,897,233 6.87 $0.26 706,665 $0.23
$0.43 - $0.48 1,580,000 7.74 0.46 1,580,000 0.46
$0.67 500,000 0.21 0.67 500,000 0.67
Based on
Future Market
Price 1,440,000 -- N/A -- --
---------------------------------------------------------------------------------------------
7,417,233 4.94 $0.35 2,786,665 $0.44
=============================================================================================
A summary of the status of the Company's non-vested options as of December 31,
2007 and changes during the year ended December 31, 2007 is presented below:
Weighted Weighted Average
Average Remaining
Number of Exercise Price Contractual Term
Options Per Option (in years)
------- ---------- ----------
Non-vested Options at
January 1, 2007 3,270,000 $0.45 9
Options granted and priced 4,463,900 $0.32 --
Options vested (2,786,665) $0.44 --
Options forfeited ,expired or
exercised (316,667) $0.22 --
---------- ----- ----------
Non-vested Options at
December 31, 2007 4,630,568 $0.26 8
========== ===== ==========
F-25
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2007, there was $480,826 of unrecognized compensation
cost related to non vested stock option awards, which is to be recognized over
the remaining weighted average vesting period of five years.
On February 13, 2007, the Company granted each of the four non-management
members of the Board an option to purchase 100,000 shares of common stock. The
options vested as to 33,333 shares upon grant, as to a total of 66,666 on March
1, 2008 and will vest as to all 100,000 shares on March 1, 2009 and are
exercisable at a price of $0.27 per share until March 1, 2014. Options to
purchase 66,667 shares granted to Stephen M. Nagler lapsed upon his failure to
stand for re-election in June 2007. On August 29, 2007, the Company granted
David Buonanno, a non-management director, an option to purchase 100,000 shares
of common stock, which was immediately exercisable as to 33,333 shares. The
option will become exercisable as to a total of 66,666 shares on June 26, 2008,
and as to all 100,000 shares on June 26, 2009. The exercise price of the option
is $0.28 per share. The option expires on August 1, 2014.
Warrants to acquire 125,000 shares with a grant date of March 16, 2007
were issued to a consulting firm. These warrants are exercisable at a per share
price of $0.28, which was the average closing price of the Company's common
stock for the 20 days preceding the date of grant, and have a cashless exercise
feature and vested on the grant date. The warrants were valued using the
Black-Scholes model and the Company recorded an expense of $25,789 in its
consolidated statement of operations for the year ended December 31, 2007.
The Company issued to a placement agent in the Private offering of the
Company's Series B Convertible Preferred Stock described in Note 14, warrants to
purchase 2,900,578 shares of Common Stock at a per share exercise price of
$0.305 in addition to other consideration. These warrants have a term of
five-years and a cashless exercise feature. These warrants were valued at
$32,000 using the Black-Scholes model and the value of such warrants was
deducted from the additional paid in capital resulting from the offering.
The following table summarizes the Company's outstanding warrants as of December
31, 2007 and changes during the year then ended:
Average Remaining
Weighted Number Weighted Average Contractual Life
of Shares Exercise Price (Years)
Outstanding at
January 1, 2006 5,229,589 $0.21 4.1
Granted 41,668 0.97 4.8
--------- ----- -----
Outstanding at December 31, 2006 5,271,257 $0.22 4.9
Granted 3,025,578 0.30 4.3
Cancelled (41,668) 0.97 3.7
Exercised (409,091) -- --
-----------------------------------------------
Outstanding at December 31, 2007 7,846,076 0.25 3.4
===============================================
The following tables summarizes the Company's outstanding restricted shares as
of December 31, 2007:
Weighted Number Exercise
of Shares Grant Date Price
------------------------------------
Outstanding at -- --
January 1, 2007
Granted 200,000 $ 0.26
Vested (200,000) 0.26
------------------------------------
Outstanding at December 31, 2007 -- --
====================================
F-26
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. EQUITY TRANSACTIONS AND ASSET ACQUISITIONS
Sigma Metals, Inc
On April 16, 2007, the Company purchased all of the outstanding capital
stock of Sigma Metals for approximately $7.5 million. The Company paid
$4,060,796 of the purchase price in cash and issued to the former shareholders
of Sigma Metals 7% promissory notes due April 1, 2010 in the aggregate principal
amount of $1,497,411 and 7,416,082 shares of the Company's common stock having a
value of $1,957,000. The remaining principal balance of the promissory notes,
$1,216,488 as of December 31, 2007, is repayable in equal monthly installments
of $43,446 principal, plus accrued interest at the rate of 7% per annum, through
April, 1, 2010, except that in April 2008 $247,090 was prepaid to the former
shareholders.
To finance the acquisition of Sigma and provide us with additional working
capital, the Company completed a private placement of our Series B Convertible
Preferred Stock, par value $0.001 per share ("Series B Preferred Stock") in
which the Company raised gross proceeds of $8,023,000. A first closing, in which
we received gross proceeds of $4,955,000 occurred simultaneously with the
acquisition of Sigma and was entirely devoted to the acquisition. A second
closing occurred on May 3, 2007, in which the Company received gross proceeds of
$3,068,000. The Company recorded a beneficial conversion feature of $1,589,000,
as the conversion price of the convertible preferred stock is less than the fair
value of the common shares into which it is convertible. The holders of the
Series B Preferred Stock are entitled to a cumulative annual dividend of 7% per
annum which the Company has the right to pay in additional shares of Series B
Preferred Stock, except under certain circumstances. In October 2007 and January
2008, an aggregate of 26,798 shares and 16,456 shares of Series B Preferred
Stock were issued in payment of accrued dividends on the Series Preferred Stock
of $247,542 and $146,500 respectively. The shares of Series B Preferred Stock
issued in the offering and in payment of accrued dividends are convertible into
approximately 30,439,944 shares of the Company's common stock. The series B
convertible preferred stock is convertible into shares of the Company's common
stock at a conversion price per share of $0.276, subject to adjustment for
certain anti-dilution events.
Welding Metallurgy, Inc.
On August 24, 2007, the Company purchased, through a wholly-owned indirect
subsidiary, all of the outstanding capital stock of Welding Metallurgy, Inc.
pursuant to that certain Stock Purchase Agreement, dated as of March 9, 2007, as
amended, with the shareholders of Welding Metallurgy (the "Welding Metallurgy
Stock Purchase Agreement"). In consideration for the shares of Welding
Metallurgy, the Company paid the former shareholders of Welding Metallurgy
$3,500,000 in cash, and issued to them a promissory note in the principal amount
of $2,000,000 due August 31, 2011 and 2,035,529 shares of common stock, having a
value of $566,500. The promissory note bears no interest until August 24, 2008,
and thereafter bears interest at the rate of 7% per annum. To reflect the fact
that this note does not bear interest for the first year, the Company has
discounted the value of the note in its balance sheet to $1,860,000, and will
expense the imputed interest on a monthly basis and accrete up the value of the
note to its face value of $2,000,000. The cash portion of the purchase price was
provided by the proceeds of a term loan of $4,500,000 under a Loan and Security
Agreement dated as of August 24, 2007 by and among the Company's wholly-owned
subsidiaries, Air Industries Machining, Corp., Sigma Metals and Welding
Metallurgy, and Steel City Capital Funding LLC (the "SCCF Loan Agreement"). To
secure payment of the indebtedness under the promissory note, AIM and Sigma
Metals pledged to the former shareholders of Welding Metallurgy, and granted
them a security interest in, all of the outstanding shares of Welding
Metallurgy, subject to the prior rights of Steel City Capital Funding LLC.
The Company has agreed to register for resale under the Securities Act the
shares of its common stock issued to the former shareholders of Welding
Metallurgy, at their request, in connection with certain registration statements
the Company may file in the future. One half of the shares of the common stock
issued to the former shareholders of Welding Metallurgy have been deposited in
escrow to secure their indemnity obligations under the Stock Purchase Agreement
until February 24, 2009.
F-27
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 RELATED PARTY TRANSACTIONS
Stephen M. Nagler, a director of the Company until June 26, 2007, is a partner
in Eaton & Van Winkle LLP, the Company's legal counsel. The Company paid Eaton &
Van Winkle LLP $443,991 in 2007 and $500,000 in 2006 for legal fees and
disbursements.
Note 17 SUBSEQUENT EVENTS
The operations of Sigma Metals and Welding Metallurgy have been relocated
to a new 81,035 square foot facility located in Hauppauge, New York. This space
is occupied under a sublease which provides for an annual base rent of
approximately $514,572 for the first year of the sublease, with increases of
approximately 3% per year for the remainder of the following eight years.
Sigma Metals operations had previously been conducted at a facility in
Deer Park, Long Island under a lease which expired on January 31, 2008. Welding
Metallurgy's operations had previously been conducted at a facility located in
West Babylon, New York under a lease which expired at the end of February 2008.
In February 2008, the Company and PNC entered into an amendment to the
Loan Facility increasing the inventory sublimit used in the borrowing base
calculation to $10,250,000.
On April 1, 2008, the Company declared a dividend on its series B
convertible preferred stock, payable in 19,825 shares of series B convertible
preferred stock.
At a Special Meeting of Stockholders on April 3, 2008, the stockholders
approved an amendment to the certificate of incorporation increasing to
250,000,000 the number of shares of common stock we are authorized to issue and
authorized the Board of Directors to effect, at its discretion at any time not
later than December 31, 2008, if at all, a reverse stock split of common stock
at a ratio within the range from one-for-ten to one-for-thirty, with the ratio
and timing to be selected and implemented by our Board. The reverse stock split
is part of a plan intended to enable the Company to obtain a listing for common
stock on a national securities exchange. If the reverse stock split is effected,
the number of authorized shares of common stock would be reduced to 125,000,000
shares.
On April 11, 2008, the Company granted each of its four non-management
directors an option to purchase 100,000 shares of common stock at an exercise
price per share of $0.225 exercisable immediately for five years. In addition,
the terms of the options previously granted to Messrs. Rettaliata, Giusto and
Peragallo were modified to provide that the options scheduled to vest from 2008
through 2012, 1,440,000 options in the aggregate, will be exercisable at a per
share price of $0.225.
F-28
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 SEGMENT REPORTING
Financial information about the Company's operating segments for the year
ended December 31, 2007 and 2006 as required under Statement of Financial
Accounting Standard 131 is as follows:
Year Ended December 31,
-----------------------
2007 2006
------------ ------------
Air Industries Machining (Restated)
Revenue $ 34,088,056 $ 33,044,996
Gross Profit 7,687,817 5,042,054
Pre Tax Income 2,739,500 1,563,036
Assets 31,304,053 24,576,329
Sigma Metals
Revenue 9,890,659 --
Gross Profit 2,781,253 --
Pre Tax Income 303,996 --
Assets 11,463,079 --
Welding Metallurgy
Revenue 2,089,930 --
Gross Profit 1,588,347 --
Pre Tax Income 1,026,715 --
Assets 8,425,658 --
Corporate
Revenue -- --
Gross Profit -- --
Pre Tax Income (3,503,866) (1,409,636)
Assets 22,962,665 8,333,815
Consolidated
Revenue 46,068,645 33,044,996
Gross Profit 12,057,417 5,042,054
Pre Tax Income 566,344 153,400
Provision for Taxes 365,319 489,969
Net Income 201,025 (336,569)
Elimination of Assets (23,865,005) (8,017,962)
Assets 50,290,040 24,892,182
F-29
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 RESTATEMENT AND ADJUSTED UNAUDITED QUARTERLY DATA
We have made certain adjustments, described below, to our balance sheet as of
December 31, 2007 and our results of operations previously reported in our Form
10-K for the year ended December 31, 2007 and Form 10-QSBs for the first three
fiscal quarters of 2007. These adjustments were the result of:
o our determination to capitalize certain amounts related to development
expenditures made in the first three quarters of 2007 previously expensed
and the completion of the allocation of the purchase price we paid for
Sigma Metals and Welding Metallurgy among certain intangible assets of
those companies that initially had been allocated to goodwill. These
adjustments were previously included on our Form 10K filed on April 14,
2008, for the year-ended December 31, 2007. These adjustments have been
audited by McGladrey & Pullen, LLp and are indicated in the tables below
as adjustment (1) and (2).
o our determination to make certain adjustments to our statement of
operations to account for the "beneficial conversion feature" upon the
issuance of our Series B Preferred Stock issued in the second quarter of
2007, following our receipt of a letter from the Staff of the Securities
and Exchange Commission dated August 29, 2008, requesting information with
respect to the accounting treatment of the Series B Preferred Stock. This
adjustment was previously included on our Form 10Q filed on November 19,
2008 under the caption, restated statement of operations for the nine
months ended September 30, 2007. This adjustment reduces the Net Income
Available to Common Shareholders by $1,589,000. This adjustment has been
audited by McGladrey & Pullen, LLP and is indicated in the tables below as
adjustment (3).
o our discovery that certain expenses in the amount of $673,229 which should
have been included in cost of goods sold were classified as a reduction of
accounts payable and accrued expenses, resulting in the understatement of
cost of goods sold and accounts payable and accrued expenses by a like
amount. Additionally the results of this adjustment created an income tax
benefit in the amount of $246,354. The aggregate effect of which is to
reduce our net income for the year ended December 31, 2007 and to reduce
our stockholders' equity at December 31, 2007 by $426,875. This adjustment
has been audited by Rotenberg Meril Solomon Bertiger & Guttilla PC and are
indicated in the tables below as adjustment (4).
Balance Sheet Restated Items
2007 2007
as filed adjustments Note restated
-------- ----------- ---- --------
Accounts Payable and Accrued expenses $ 6,549,122 $ 673,229 (4) $ 7,222,351
Income Taxes Payable 390,615 (246,354) (4) 144,261
Accumulated Deficit $ (458,373) $ (426,875) (4) $ (885,248)
2007 2007
As Filed Adjustments Note Adjusted
------------ ------------ ---- ------------
Net Income $ 46,068,645 $ -- $ 46,068,645
Cost of Sales 33,337,999 673,229 (4) 34,011,228
--------------------------------------------------
Gross Profit 12,730,646 673,229 12,057,417
Cost and expenses 9,894,619 -- 9,894,619
--------------------------------------------------
Operating Income 2,836,027 673,229 2,162,798
Interest and amortization costs 1,578,377 -- 1,578,377
Other (Income) Expenses 18,077 -- 18,077
--------------------------------------------------
Income before income taxes 1,239,573 (673,229) 566,344
Income tax provision 611,673 (246,354) (4) 365,319
--------------------------------------------------
Net (Loss) Income 627,900 (426,875) 201,025
Less: Dividend attributable to 394,042 -- 394,042
preferred stockholders
Less: Beneficial conversion
Feature -- 1,589,000 (3) 1,589,000
--------------------------------------------------
Net (loss) income attributable
to common stockholders $ 233,858 $ (1,548,158) $ (1,782,016)
==================================================
Loss per common share: -- -- --
Net loss per common share
(Basic) $ 0.00 -- $ (0.03)
==================================================
Net loss per common share
(Diluted) $ 0.00 -- $ (0.03)
==================================================
Weighted average shares
outstanding (Basic) 65,402,711 -- 65,402,711
Weighted average shares
outstanding (Diluted) 67,861,015 -- 65,402,711
F-30
Q1 2007 Q1 2007 Q2 2007 Q2 2007
as filed Adjustments Notes Adjusted as filed Adjustments Notes Adjusted
------------ ------------ ----- ------------ ------------ ------------ ----- ------------
Net Income $ 7,488,130 $ -- $ 7,488,130 $ 10,989,536 $ -- $ 10,989,536
Cost of Sales 6,239,484 (418,014) (1) -- 8,616,698 (434,234) (1)(2) --
-- (88,169) (4) 5,733,301 -- 562,026 (4) 8,182,464
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 1,248,646 506,183 1,754,829 2,372,838 (127,792) 2,245,046
Cost and expenses 1,126,792 -- 1,126,792 2,330,498 55,881 (1)(2) 2,386,379
------------ ------------ ------------ ------------ ------------ ------------
Operating Income 121,854 506,183 628,037 42,340 (183,673) (141,333)
Interest and amortization costs 130,954 -- 130,954 280,869 -- 280,869
Other (Income) Expenses (2,377) -- (2,377) (1,224) -- (1,224)
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes (6,723) 506,183 499,460 (237,305) (183,673) (420,978)
Income tax provision 64,764 194,430 (1) -- 78,138 (85,445) (1)(2) --
-- 41,046 (4) 300,240 -- -(4) (7,307)
------------ ------------ ------------ ------------ ------------ ------------
Net (Loss) Income (71,487) 270,707 199,220 (315,443) (98,228) (413,671)
Less: Dividend attributable to
preferred stockholders -- -- -- 110,964 -- 110,964
Less: Beneficial conversion
Feature -- -- -- -- 1,589,000 (3) 1,589,000
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) income attributable
to common stockholders (71,487) 270,707 199,220 (426,407) (1,687,228) (2,113,635)
============ ============ ============ ============ ============ ============
Loss per common share:
Net loss per common share
(Basic) $ (0.00) $ 0.00 $ (0.01) $ (0.03)
============ ============ ============ ============
Net loss per common share
(Diluted) $ (0.00) $ 0.00 $ (0.01) $ (0.03)
============ ============ ============ ============
Weighted average shares
outstanding (Basic) 58,833,681 58,833,681 65,667,564 65,667,564
Weighted average shares
outstanding (Diluted) 58,833,681 60,202,835 65,667,564 65,667,564
Q3 2007 Q3 2007 Q4 2007 Q4 2007
as filed Adjustments Notes Adjusted as filed Adjustments Notes Adjusted
------------ ------------ ----- ------------ ------------ ------------ ----- ------------
Net Income $ 12,845,821 $ -- $ 12,845,821 $ 14,745,158 $ -- $ 14,745,158
Cost of Sales 9,254,338 (456,336) (1) -- 10,536,063 161,150 (4) --
-- 38,222 (4) 8,836,224 -- -- 10,697,213
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 3,591,483 418,114 4,009,597 4,209,065 (161,150) 4,047,945
Cost and expenses 2,617,134 112,921 (1)(2) 2,730,055 3,651,393 -- 3,651,393
------------ ------------ ------------ ------------ ------------ ------------
Operating Income 974,349 305,193 1,279,542 557,702 (161,150) 396,552
Interest and amortization costs 478,920 -- 478,920 687,634 -- 687,634
Other (Income) Expenses 26,074 -- 26,074 (4,396) -- (4,396)
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes 469,355 305,193 774,548 (125,536) (161,150) (286,686)
Income tax provision 46,761 159,757 (1)(2) 188,737 (108,217) (8,134) (4) (116,351)
-- (17,781) (4) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net (Loss) Income 422,594 163,217 585,811 (17,319) (153,016) (170,334)
Less: Dividend attributable to
preferred stockholders 136,578 -- 136,578 146,500 -- 146,500
Less: Beneficial conversion
Feature -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) income attributable
to common stockholders $ 286,016 $ 163,217 449,233 (163,819) (153,016) (316,834)
============ ============ ============ ============ ============ ============
Loss per common share:
Net loss per common share
(Basic) $ 0.00 $ 0.01 $ (0.00) $ (0.03)
============ ============ ============ ============
Net loss per common share
(Diluted) $ 0.00 $ 0.01 $ (0.00) $ (0.03)
============ ============ ============ ============
Weighted average shares
outstanding (Basic) 67,838,959 67,838,959 69,122,227 69,122,227
Weighted average shares
outstanding (Diluted) 70,734,615 70,734,615 70,738,078 70,738,078
(1) The adjustments to Cost of Sales relates to our determination to capitalize
certain engineering costs initially expensed.
(2) The adjustments to costs and expenses relate to the amortization of amounts
attributable to intangibles that have been specifically identified among the
assets of Sigma and Welding Metallurgy that initially had been included in
goodwill.
As of June 30, 2007 and September 30, 2007, $3,720,000 and $2,434,225 was
reclassified from goodwill to intangibles, respectively, related to the
completion of the allocation of purchase prices. There was no impact on cash
flow for any of the periods.
(3) The beneficial conversion feature adjustment arises as the conversion price
of the convertible preferred stock is less than the fair value of the common
shares into which it is convertible.
(4) The adjustment to Cost of Sales relates to certain expenses which should
have been included in cost of goods sold were classified as a reduction of
accounts payable and accrued expenses.
F-31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AIR INDUSTRIES GROUP, INC.
Dated: October 9, 2009
By: /s/ Peter D. Rettaliata
--------------------------------------------
Peter D. Rettaliata
President and CEO
(principal executive officer)
By: /s/ Scott Glassman
--------------------------------------------
Scott Glassman
Chief Accounting Officer
(principal financial and accounting officer)