Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - AIR INDUSTRIES GROUPFinancial_Report.xls
EX-32.1 - AIR INDUSTRIES GROUPe610876_ex32-1.htm
EX-31.2 - AIR INDUSTRIES GROUPe610876_ex31-2.htm
EX-31.1 - AIR INDUSTRIES GROUPe610876_ex31-1.htm
EX-32.2 - AIR INDUSTRIES GROUPe610876_ex32-2.htm

FORM 10-Q
 
 (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED March 31, 2013
 
OR
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _______ TO ________.

Commission file number 000-29245

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

                  Delaware                                           20-4458244
 (State or other jurisdiction of                            (IRS Employer
incorporation or organization)                          Identification No.)

1479 N. Clinton Avenue Bay Shore, New York 11706
 (Address of principal executive offices)

(631) 968-5000
 (Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of "accelerated filer." "large accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.

      Large accelerated filer o           Accelerated filer o
 
      Non-accelerated filer (do not check if smaller reporting company) o       Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No x
 
As of May 3, 2013, the registrant had outstanding 5,711,093 shares of common stock.
 
 
 

 
 
   
 
Page No.
PART I.     FINANCIAL INFORMATION
 
   
Item 1.  Financial Statements
1
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
17
   
Item 4. Controls and Procedures
24
   
PART II.    OTHER INFORMATION
 
   
Item 1A. Risk Factors
25
   
Item  2. Unregistered Sales of Equity Securities and Use of Proceeds
25
   
Item 6.  Exhibits
25
   
SIGNATURES
26

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act.  Forward-looking statements are predictive in nature and can be identified by the fact that they do not relate strictly to historical or current facts and generally include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions. Certain of the matters discussed herein concerning, among other items, our operations, cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and the effect of economic conditions, include forward-looking statements.
 
Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations, and general economic conditions, these statements and other projections contained herein expressing opinions about future outcomes and non-historical information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved.  Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given these uncertainties, you should not place any reliance on these forward-looking statements which speak only as of the date hereof. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012 and elsewhere in this report and the risks discussed in our other filings with the SEC.
 
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under the securities laws of the United States.  
 
 
 

 
PART I
   
FINANCIAL INFORMATION
   
Item 1. Financial statements
Page No.
   
Condensed Consolidated Financial Statements:
2
   
Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012
2
   
Condensed Consolidated Statements of Operations for the three months ended March 31, 2013
 
 and 2012 (unaudited)
3
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013
 
 and 2012 (unaudited)
4
   
 Notes to Condensed Consolidated Financial Statements
5
 
 
1

 
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Balance Sheets
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
ASSETS
 
(Unaudited)
       
Current Assets
           
  Cash and Cash Equivalents
  $ 966,000     $ 490,000  
Accounts Receivable, Net of Allowance for Doubtful Accounts
    of $725,000 and $705,000
    9,509,000       11,631,000  
  Inventory
    27,464,000       26,739,000  
  Prepaid Expenses and Other Current Assets
    420,000       546,000  
  Deposits  - Customers
    3,000       133,000  
Total Current Assets
    38,362,000       39,539,000  
                 
Property and Equipment, net
    5,526,000       5,883,000  
Capitalized Engineering Costs - net of Accumulated Amortization
    of $3,550,000 and $3,449,000
    807,000       802,000  
Deferred Financing Costs, net, deposit and other assets
    676,000       590,000  
Intangible Assets, net
    5,598,000       5,889,000  
Goodwill
    453,000       453,000  
TOTAL ASSETS
  $ 51,422,000     $ 53,156,000  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
Current Liabilities
               
  Notes Payable and Capitalized Lease Obligations - Current Portion
  $ 17,675,000     $ 19,211,000  
  Accounts Payable and Accrued Expenses
    7,291,000       7,077,000  
  Lease Impairment - Current
    82,000       85,000  
  Deferred Gain on Sale - Current Portion
    38,000       38,000  
  Dividends Payable
    358,000       -  
  Income Taxes Payable
    1,941,000       1,448,000  
                 
Total Current Liabilities
    27,385,000       27,859,000  
                 
Long Term Liabilities
               
  Notes Payable and Capitalized  Lease Obligation - Net of Current Portion
    3,469,000       4,640,000  
  Lease Impairment - Net of Current Portion
    108,000       127,000  
  Deferred Gain on Sale - Net of Current Portion
    475,000       485,000  
  Deferred Rent
    1,076,000       1,057,000  
                 
TOTAL LIABILITIES
    32,513,000       34,168,000  
                 
Contingencies
               
Stockholders' Equity
               
Preferred Stock - Par Value $.001-Authorized 8,003,716 shares,
 
  0 shares issued and outstanding as of March 31, 2013 and December 31, 2012,
  respectively;    
    -       -  
Common Stock - Par Value $.001-Authorized 20,000,000 shares,
5,711,093 and 5,711,093 Shares Issued and Outstanding as of
March 31, 2013 and December 31, 2012, respectively
    6,000       6,000  
Additional Paid-In Capital
    37,555,000       37,913,000  
Accumulated Deficit
    (18,652,000 )     (18,931,000 )
TOTAL STOCKHOLDERS' EQUITY
    18,909,000       18,988,000  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 51,422,000     $ 53,156,000  
 
See notes to consolidated financial statements
 
 
2

 
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Statements of Income for the Three months ended March 31,
(Unaudited)
 
   
2013
   
2012
 
             
Net Sales
  $ 14,325,000     $ 16,038,000  
                 
Cost of Sales
    10,678,000       12,767,000  
                 
Gross Profit
    3,647,000       3,271,000  
                 
Operating Expenses
    2,469,000       1,674,000  
                 
Income from Operations
    1,178,000       1,597,000  
                 
Interest and financing costs
    (385,000 )     (497,000 )
Other (expense) income, net
    (25,000 )     6,000  
Income before provision for income taxes
    768,000       1,106,000  
                 
Provision for income taxes
    489,000       286,000  
                 
Net income
  $ 279,000     $ 820,000  
                 
Income per share - basic
  $ 0.05     $ 0.23  
Income per share - diluted
  $ 0.05     $ 0.23  
                 
Weighted average shares outstanding - basic
    5,711,093       3,579,114  
Weighted average shares outstanding - diluted
    5,809,572       3,579,114  
 
See notes to consolidated financial statements
 
 
3

 
AIR INDUSTRIES GROUP, INC.
Condensed Consolidated Statements of Cash Flows For the Three months Ended March 31,
(Unaudited)
 
   
2013
   
2012
 
 CASH FLOWS FROM OPERATING ACTIVITIES
           
 Net Income
  $ 279,000     $ 820,000  
   Adjustments to Reconcile Net Income to Net
               
   Cash provided by Operating Activities
               
Depreciation of property and equipment
    403,000       356,000  
Amortization of intangible assets
    291,000       42,000  
Amortization of capitalized engineering costs
    101,000       110,000  
Bad debt expense
    27,000       86,000  
Non-cash compensation expense
    -       22,000  
Amortization of deferred financing costs
    15,000       13,000  
Gain on sale of real estate
    (10,000 )     (10,000 )
Adjustments to Lease Impairment
    -       53,000  
                 
Changes in Assets and Liabilities
               
 (Increase) Decrease in Operating Assets:
               
Accounts Receivable
    2,095,000       (1,844,000 )
Inventory
    (725,000 )     856,000  
Prepaid Expenses and Other Current Assets
    126,000       (12,000 )
Deposits
    130,000       (41,000 )
Other Assets
    (100,000 )     19,000  
 Increase (Decrease) in Operating Liabilities
               
Accounts payable and accrued expenses
    213,000       9,000  
Deferred Rent
    19,000       24,000  
Income Taxes payable
    493,000       223,000  
 NET CASH PROVIDED BY OPERATING ACTIVITIES
    3,357,000       726,000  
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
               
Capitalized engineering costs
    (107,000 )     (77,000 )
Purchase of property and equipment
    (45,000 )     (54,000 )
Deposit for new property and equipment
    -       (101,000 )
 NET CASH USED IN INVESTING ACTIVITIES
    (152,000 )     (232,000 )
                 
 CASH FLOWS FROM FINANCING  ACTIVITIES
               
Notes payable - Sellers
    (157,000 )     (146,000 )
Capital lease obligations
    (185,000 )     (139,000 )
Notes payable - Revolver
    (1,914,000 )     403,000  
Payments of notes payable - Term Loan PNC
    (450,000 )     (250,000 )
Payments related to Lease Impairment
    (23,000 )     (28,000 )
 NET CASH USED IN FINANCING ACTIVITIES
    (2,729,000 )     (160,000 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    476,000       334,000  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    490,000       577,000  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 966,000     $ 911,000  
                 
Schedule of noncash activities
               
Dividends payable
  $ 358,000     $ -  
                 
Supplemental cash flow information
               
Cash paid during the period for interest
  $ 381,000     $ 437,000  
                 
Supplemental cash flow information
               
Cash paid during the period for income taxes
  $ -     $ 64,000  
 
See notes to consolidated financial statements
 
 
4

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. FORMATION AND BASIS OF PRESENTATION
 
Organization

Air Industries Group, Inc. (the "Company" or “AIRI”), a Delaware corporation, was incorporated on January 13, 2006.

The accompanying consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corporation (“AIM”), Welding Metallurgy, Inc. ("Welding") and Nassau Tool Works, Inc. (“NTW”).

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principal Business Activity

The Company through its AIM subsidiary is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace industry in the United States. Welding is a specialty welding and products provider whose significant customers include the world's largest aircraft manufacturers, subcontractors, and original equipment manufacturers. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter aircraft.  The Company's customers consist mainly of publicly traded companies in the aerospace industry.

Inventory Valuation

Inventory at March 31, 2013 and 2012 was computed based on a “gross profit” method.

The Company valued inventory at December 31, 2012 at the lower of cost on a first-in-first-out basis or market.

Credit and Concentration Risks

There were three customers that represented 59.3% and 67.9% of total sales for the three months ended March 31, 2013 and 2012, respectively. This is set forth in the table below.

Customer
 
Percentage of Sales
 
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
             
1
    25.8       37.8  
2
    18.3       30.1  
3
    15.2       *  
                 
* Customer was less than 10% of sales for three months ended March 31, 2012
 
 
There were three customers that represented 51% and 54.6% of gross accounts receivable at March 31, 2013 and December 31, 2012, respectively. This is set forth in the table below.

Customer
 
Percentage of Receivables
 
   
March
   
December
 
   
2013
   
2012
 
   
(Unaudited)
       
1
    19.1       18.6  
2
    17.0       25.3  
3
    14.9       10.7  
 
The Company has occasionally maintained balances in its bank accounts that were in excess of the FDIC limit.  The Company has not experienced any losses on these accounts.
 
 
5

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AIM has several sole-source suppliers of various parts that are used in one or more of its products. If any of these sole source suppliers were to go out of business or be unable to provide it parts for any reason, AIM would be required to develop new suppliers or to re-engineer its products, or both, which could delay shipment of products and have a material adverse effect on its operating results

Earnings per share

Basic earnings per share is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share calculations for all periods when the effect of their inclusion is dilutive.

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

   
March 31,
2013
   
March 31,
2012
 
   
(Unaudited)
   
(Unaudited)
 
Weighted average shares outstanding used to compute basic earning per share
    5,711,093       3,579,114  
Effect of dilutive stock options and warrants
    98,479       -  
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share
    5,809,572       3,579,114  

The following securities have been excluded from the calculation as their effect would be anti-dilutive:

   
March 31,
   
March 31,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
Stock Options
    12,548       306,336  
Warrants
    250       250  
      12,798       306,586  

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC 718, "Compensation – Stock Compensation." Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock-based compensation amounted to $0 and $22,000 for the three months ending March 31, 2013 and 2012, respectively and was included in operating expenses on the accompanying Condensed Consolidated Statement of Income.
 
Goodwill

Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $453,000 relates to the acquisition of Welding  ($291,000) and NTW Acquisition ($162,000). Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances change that will more likely than not reduce the fair value of the reporting unit below its carrying amount.  

The Company has determined that there has been no impairment of goodwill at March 31, 2013 and December 31, 2012.
 
 
6

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Pronouncements

Effective January 1, 2013, the Company adopted ASU 2013-01, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-01).   ASU 2013-01 requires the disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This guidance is effective prospectively for the Company for annual and interim periods beginning January 1, 2013. The adoption of ASU 2013-01 did not have a material effect on the Company’s financial position, results of operations or cash flows.

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

Reclassifications

Certain account balances in 2012 have been reclassified to conform to the current period presentation.

Subsequent Events

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

Note 3. ACCOUNTS RECEIVABLE
 
The components of accounts receivable are detailed as follows:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
Accounts Receivable Gross
  $ 10,234,000     $ 12,336,000  
Allowance for Doubtful Accounts
    (725,000 )     (705,000 )
Accounts Receivable Net
  $ 9,509,000     $ 11,631,000  
 
Note 4. PROPERTY AND EQUIPMENT

The components of property and equipment consisted of the following:
 
   
March 31,
   
December 31,
   
   
2013
   
2012
   
   
(Unaudited)
         
Machinery and Equipment
  $ 5,818,000     $ 5,801,000  
5 - 8 years
Capital Lease Machinery and Equipment
    4,503,000       4,503,000  
5 - 8 years
Tools and Instruments
    3,984,000       3,968,000  
1.5 - 7 years
Automotive Equipment
    55,000       55,000  
5 years
Furniture and Fixtures
    232,000       232,000  
5 - 8 years
Leasehold Improvements
    612,000       612,000  
Term of Lease
Computers and Software
    331,000       318,000  
4-6 years
Total Property and Equipment
    15,535,000       15,489,000    
Less: Accumulated Depreciation
    (10,009,000 )     (9,606,000 )  
Property and Equipment, net
  $ 5,526,000     $ 5,883,000    
 
 
7

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Depreciation expense for the three months ended March 31, 2013 and 2012 was approximately $403,000 and $356,000, respectively.

Note 5. INTANGIBLE ASSETS

The components of the intangibles assets consisted of the following:

   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
Customer Relationships
  $ 5,815,000     $ 5,815,000  
Trade Names
    770,000       770,000  
Technical Know-how
    660,000       660,000  
Non-Compete
    50,000       50,000  
Professional Certifications
    15,000       15,000  
Total Intangible Assets
    7,310,000       7,310,000  
Less: Accumulated Amortization
    (1,712,000 )     (1,421,000 )
Intangible Assets, net
  $ 5,598,000     $ 5,889,000  

The expense for the amortization of the intangibles for the three months ended March 31, 2013 and 2012 was approximately $291,000 and $42,000, respectively.
 
 
8

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Notes payable and capital lease obligations consist of the following:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
Revolving credit notes payable to PNC Bank N.A. ("PNC") and
           
     secured by substantially all assets
  $ 13,752,000     $ 15,667,000  
Term loan, PNC
    3,298,000       3,748,000  
Capital lease obligations
    1,875,000       2,060,000  
Notes payable to sellers of acquired business
    1,219,000       1,376,000  
Junior subordinated notes
    1,000,000       1,000,000  
Subtotal
    21,144,000       23,851,000  
Less:  Current portion of notes and capital obligations
    (17,675,000 )     (19,211,000 )
Notes payable and capital lease obligations, net of current portion
  $ 3,469,000     $ 4,640,000  
 
 PNC Bank N.A. ("PNC")

The Company has a credit facility with PNC (the "Loan Facility"), secured by substantially all of its assets.  Simultaneously with the NTW Acquisition, the Company entered into an amendment to the Loan Facility and paid an amendment fee of $50,000.  The Loan Facility now provides for maximum borrowings of $23,400,000 consisting of the following:

(i)  
a $18,000,000 revolving loan (includes inventory sub-limit of $12,250,000) and
(ii)  
a $5,400,000 term loan.

The revolving loan bears interest at (a) the sum of PNC's base commercial lending rate as published from time to time ("PNC Rate") plus 2.00% or (b) the greater of the sum of the Eurodollar rate plus 3.5.  The revolving loan had an interest rate of 5.50% per annum at both March 31, 2013 and December 31, 2012, and an outstanding balance of $13,752,000 and $15,667,000, respectively. The maturity date of the revolving loan is November 30, 2016.

Each day, the Company's cash collections are swept directly by the bank to reduce the revolving loans and it then borrows according to a borrowing base. As such, the Company generally has no cash on hand. Because the revolving loans contain a subjective acceleration clause which could permit PNC to require repayment prior to maturity, the loans are classified with the current portion of notes and capital lease obligations.

The maturity date of the term loan is June 2015 and bears interest, at the option of the Company equal to (a) the greater of (i) the sum of the PNC Rate plus 6.5% and (ii) 11.5%, with respect to Domestic Rate Loans or (b) the greater of (i) the sum of the Eurodollar Rate plus 8.5% and (ii) 10.5%, with respect to Eurodollar Rate Loans.  Repayment under the term loan shall consist of 36 consecutive monthly principal installments, the first 35 of which will be in the amount of $150,000 commencing on the first business day of July 2012, with the 36th and final payment of any unpaid balance of principal and interest payable on the first business day of June 2015.  Additionally, there is a mandatory prepayment equal to 50% of Excess Cash Flow (as defined) for each fiscal quarter commencing with the fiscal quarter ended September 30, 2012, payable upon the delivery of the financial statements to PNC for such fiscal period, but no later than 45 days after the end of the fiscal period.   As of March 31, 2013, the amount due for the Excess Cash Flow was calculated as $698,000. At March 31, 2013 and December 31, 2012, the balance due under the term loan was $3,298,000 and $3,748,000, respectively.

To the extent that the Company disposes of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws on the credit facility in the amount equal to the net proceeds of such sale.
 
 
9

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The terms of the Loan Facility require that, among other things, the Company maintain certain financial ratios and levels of working capital. As of both March 31, 2013 and December 31, 2012, the Company was in compliance with all terms of its credit facility with PNC.

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 of March 31, 2013 the future minimum principal payments for the term loan are as follows

For the twelve months ending
 
Amount
 
             March 31, 2014
  $ 2,498,000  
             March 31, 2015
    800,000  
PNC Term Loan Payable
    3,298,000  
Less: Current portion
    (2,498,000 )
Long-term portion
  $ 800,000  

Interest expense related to these credit facilities amounted to approximately $268,000 and $205,000 for the three months ended March 31, 2013 and 2012, respectively.

On July16, 2012, the Company entered into the 18th amendment to its Credit Facility with PNC.  This amendment allowed for the repayment of $115,000 of our Junior Subordinated Notes (see discussion below).

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 $1,875,000 and $2,060,000 as of March 31, 2013 and December 31, 2012, respectively, with various interest rates ranging from 7.0% to 9.5%.

As of March 31, 2013, the aggregate future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:

For the twelve months ending
 
Amount
 
March 31, 2014
  $ 900,000  
March 31, 2015
    488,000  
March 31, 2016
    396,000  
March 31, 2017
    241,000  
March 31, 2018
    95,000  
 Total future minimum lease payments
    2,120,000  
 Less: imputed interest
    (245,000 )
 Less: current portion
    (769,000 )
Total Long Term Portion
  $ 1,106,000  
 
 
10

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    Notes Payable - Sellers

As of March 31, 2013 and December 31, 2012, the balance owed to the sellers of Welding is:

   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
Former Welding Stockholders
  $ 1,219,000     $ 1,376,000  
Less:  Current Portion
    (656,000 )     (644,000 )
Total long-term portion
  $ 563,000     $ 732,000  

In connection with the acquisition of Welding on August 24, 2007, the Company incurred a note payable (“Note”) to the former stockholders of Welding.  Our obligation under the Note is subordinate to our indebtedness to PNC.

     The Note and payment terms were adjusted and/or amended several times.  On October 1, 2010, the Company entered into a letter agreement with the former stockholders of Welding making the new balance of the Note $2,397,967.  Payments on the Note began on October 1, 2010.  It was further agreed that payments would be made according to the following schedule: equal monthly installments of $40,000 on the first business day of each month until December 31, 2011, followed by equal monthly installments of $60,000 on the first business day of each month commencing on January 1, 2012 and continuing until the entire principal amount of the obligation is paid in full, which is estimated to be in January 2015.  Interest shall accrue at the rate of 7% per annum, and each payment will first apply to interest and then to principal.  At March 31, 2013 and December 31, 2012, the balance owed under the Note was $1,219,000 and $1,376,000, respectively.

As of March 31, 2013, the future minimum payments for the note payable to the former stockholders of Welding are as follows:
 
For the twelve months ending
 
Amount
 
             March 31, 2014
  $ 656,000  
             March 31, 2015
    563,000  
Former WMI Stockholders  Notes Payable
    1,219,000  
Less: Current portion
    (656,000 )
Long-term portion
  $ 563,000  
 
  Interest expense related to notes payable to the former stockholder was $23,000 and $34,000 for the three months ended March 31, 2013 and December 31, 2012, respectively.

       Junior Subordinated Notes

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

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

In conjunction with the Private Placement of our common stock to raise money for the NTW Acquisition, we solicited the holders of our Junior Subordinated Notes to convert their notes to Common Stock at a price of $6.00 per share. On June 29, 2012, we issued 867,461 shares of our common stock in exchange for approximately $5,204,000 of our Junior Subordinated Notes. On July 26, 2012, we repaid $115,000 of our Junior Subordinated Notes along with the accrued interest thereon of approximately $1,000.
 
 
11

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The due dates of the remaining notes were extended from November 18, 2013 to mature on November 30, 2016 and are subordinated to the Company's obligations to PNC.

The balance owed at both March 31, 2013 and December 31, 2012 amounted to $1,000,000.

Interest expense amounted to $30,000 and $191,000 for the three months ended March 31, 2013 and 2012, respectively.

Note 7. STOCKHOLDERS' EQUITY

Common Stock Issuances

There were no shares issued during the three months ended March 31, 2013 and 2012.

Dividends

On March 11, 2013, the Board of Directors approved and the Company announced a quarterly dividend of $0.0625 per common share to be paid on April 1, 2013 to all shareholders of record as of the close of business on March 15, 2013.  The approximate amount of the dividend was $358,000.

Derivative Liability

In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, “Derivatives and Hedging.”
 
      The Company issued warrants to Taglich.  Such warrants contain “cashless exercise” provisions.  As a result, the value of the warrants has to be recognized as a liability.  In addition, the Company would be required to revalue the derivative liability at the end of each reporting period with the change in value reported on the statement of operations.  The Company did not account for the derivative liability in its financial statements as it was determined to not be material.
 
Note 8.  CONTINGENCIES

Litigation

Sigma Metals, Inc. (“Sigma”):  Several former vendors to Sigma, a former subsidiary of the Company, had commenced legal action against Sigma seeking to recover amounts owed to them. All of these have been settled except for one that is still deciding whether to commence litigation seeking the recovery of approximately $71,000.  Settlement discussions have commenced with this vendor but there is not yet a definitive resolution.
 
 
12

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10. INCOME TAXES

The provision for income taxes as at March 31, are set forth below:

   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
Current
           
Federal
  $ 376,000     $ -  
Federal AMT
    -       227,000  
State
    113,000       59,000  
Total Expense
    489,000       286,000  
                 
Deferred
               
Federal
    -       -  
State
    -       -  
Total Deferred Taxes
    -       -  
Net Expense for Income Taxes
  $ 489,000     $ 286,000  
 
 
13

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of net deferred tax assets as of March 31, 2013 and December 31 2012 are set forth below:

   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
Deferred tax assets:
           
Capital loss carry forwards
  $ 1,088,000     $ 1,088,000  
Bad debts
    290,000       282,000  
Stock based compensation - options and restricted stock
    506,000       506,000  
Capitalized engineering costs
    461,000       447,000  
Account payable, accrued expenses and reserves
    9,000       9,000  
Deferred rent
    430,000       423,000  
Amortization - NTW Transaction
    210,000       138,000  
Inventory - 263A adjustment
    734,000       569,000  
Lease Impairment
    76,000       85,000  
Deferred gain on sale of real estate
    205,000       209,000  
Section 1231 loss carryover
    86,000       86,000  
Total deferred tax assets before valuation allowance
    4,095,000       3,842,000  
Valuation allowance
    (2,608,000 )     (2,269,000 )
Total deferred tax assets after valuation allowance
    1,487,000       1,573,000  
                 
Deferred tax liabilities:
               
Property and equipment
    (928,000 )     (997,000 )
Amortization - Welding Transaction
    (559,000 )     (576,000 )
Total Deferred Tax Liability
    (1,487,000 )     (1,573,000 )
                 
Net deferred tax asset
  $ -     $ -  

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 perhaps all of the deferred tax assets 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.  The valuation allowance at March 31, 2013 and December 31, 2012 amounted to $2,608,000 and $2,269,000, respectively.

The Company has a capital loss carry forward from the sale of Sigma of $2,719,000 which will expire in fiscal 2015.
 
 
14

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note  11. SEGMENT REPORTING
 
In accordance with FASB ASC 280, “Segment Reporting”, the Company discloses financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company is operating in three segments. AIM manufactures components and subassemblies for the defense and aerospace industry.  NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter aircraft. The financial information of NTW is only included as of the date of acquisition (June 20, 2012). Welding provides specialty welding services and metal fabrications to the defense and commercial aerospace industry. While each of these segments service the same industries and a similar customer base, we evaluate the performance of each segment separately in deciding how to allocate resources and in accessing profitability. Financial information about the Company's operating segments for the three months ended March 31, 2013 and 2012 are as follows:
 
 
15

 
AIR INDUSTRIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31,
     
2013
   
2012
 
     
(Unaudited)
   
(Unaudited)
 
AIM
             
 
Net Sales
  $ 7,478,000     $ 12,143,000  
 
Gross Profit
    1,460,000       2,246,000  
 
Pre Tax Income
    493,000       913,000  
 
Assets
    23,871,000       27,721,000  
                   
WMI
                 
 
Net Sales
    3,139,000       3,895,000  
 
Gross Profit
    849,000       1,025,000  
 
Pre Tax (Loss) Income
    (11,000 )     492,000  
 
Assets
    9,796,000       8,338,000  
                   
NTW
                 
 
Net Sales
    3,708,000       -  
 
Gross Profit
    1,338,000       -  
 
Pre Tax Income
    493,000       -  
 
Assets
    13,563,000       -  
                   
Corporate
                 
 
Net Sales
    -       -  
 
Gross Profit
    -       -  
 
Pre Tax Loss
    (207,000 )     (299,000 )
 
Assets
    12,256,000       6,832,000  
                   
Consolidated
                 
 
Net Sales
    14,325,000       16,038,000  
 
Gross Profit
    3,647,000       3,271,000  
 
Pre Tax Income
    768,000       1,106,000  
 
Provision for Taxes
    489,000       286,000  
 
Net Income
    279,000       820,000  
 
Elimination of Assets
    (8,064,000 )     (4,929,000 )
 
Assets
    51,422,000       37,962,000  
 
 
16

 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in our 2012 Form 10-K for and elsewhere in this report and the risks discussed in our other filings with the SEC that could cause actual results to differ materially from those anticipated in these forward-looking statements.
 
Business Overview
 
We are an aerospace and defense company.  We design and manufacture structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants and other components. We also provide sheet metal fabrication of aerostructures, tube bending and welding services.   Our products are currently deployed on a wide range of high profile military and commercial aircraft including Sikorsky's UH-60 Blackhawk helicopter, Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2D Hawkeye, Boeing's 777, Airbus' 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft.
 
We became a publicly traded company in December 2005 in connection with our acquisition of AIM. In June 2007, we changed our name to Air Industries Group, Inc.  In addition to growing organically at AIM since becoming publicly-traded, we acquired Sigma Metals in April 2007 and Welding Metallurgy in August 2007, and acquired the business and operations now conducted by NTW in an asset acquisition in June 2012 (the “NTW Acquisition”).  In October 2008, we discontinued the operations of Sigma and subsequently liquidated or otherwise disposed of its assets. Consequently, we currently have three operating subsidiaries - AIM, WMI and NTW.  AIM has manufactured components and subassemblies for the defense and commercial aerospace industry for over 40 years.  WMI has provided specialty welding services and metal fabrications to the defense and commercial aerospace industry since 1979.  The predecessor of NTW was founded in 1959 and its principal business is the fabrication and assembly of  landing gear components and complete landing gear for fighter aircraft for the US and foreign governments.
 
The aerospace and defense market is highly competitive and we face intense competition in all areas of our business.  Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process.  As the aerospace and defense industries continue to consolidate and major contractors seek to streamline their supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class service but also by increasing our ability to deliver more complex and complete assemblies.
 
Our ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely satisfactory basis at costs that enable us to generate a profit based upon the agreed upon contract price.  Winning a contract generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time.  Thus, when submitting bids we are required to estimate our future costs of productions and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.
 
While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors.  The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products.  The cost of materials used in the aerospace industry is highly volatile.  In addition, the market for the skilled labor we require to operate our plants is highly competitive.
 
 
17

 
 Segment Data

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

AIM is primarily engaged in processing, cutting, milling, machining and hardening metals into flight critical and other assemblies widely used in the aerospace industry and sold primarily to prime defense contractors. WMI specializes in complex welding applications in tubular structures and fabrication of complex sheet metal structures.  NTW is primarily engaged in the production of complete landing gear and landing gear sub-assemblies for military fighter aircraft, sold primarily directly to the US Government.

Along with our operating subsidiaries, we report the results of our corporate division as an independent segment.  Given the similarity of their operations, the combination of AIM and NTW will enable us to increase the variety and complexity we of products we produce for customers.  Nevertheless, we have determined to operate AIM and NTW as independent business units and, in the discussion below, they are considered independent business segments and we once again have three reportable operating segments. 
 
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 particular segment are included in Corporate. These costs include corporate costs such as legal, audit, tax and other professional fees including those related to being a public company.

Results of Operations

Three months ended March 31, 2013 and 2012:

      2013       2012  
     
(Unaudited)
     
(Unaudited)
 
Net sales
  $ 14,325,000     $ 16,038,000  
Cost of sales
    10,678,000       12,767,000  
Gross profit
    3,647,000       3,271,000  
Operating and interest costs
    2,854,000       2,171,000  
Other income (expense) net
    (25,000 )     6,000  
Income taxes
    489,000       286,000  
Net Income
  $ 279,000     $ 820,000  
                 
Balance Sheet Data
               
   
March 31, 2013
   
December 31, 2012
 
   
(Unaudited)
         
Cash and cash equivalents
  $ 966,000     $ 490,000  
Working capital
    11,332,000       11,680,000  
Total assets
    51,422,000       53,156,000  
Total stockholders' equity
    18,909,000       18,988,000  
 
 
18

 
The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated.
 
Three Months Ended March 31,
     
2013
   
2012
 
     
(Unaudited)
   
(Unaudited)
 
AIM
             
 
Net Sales
  $ 7,478,000     $ 12,143,000  
 
Gross Profit
    1,460,000       2,246,000  
 
Pre Tax Income
    493,000       913,000  
 
Assets
    23,871,000       27,721,000  
                   
WMI
                 
 
Net Sales
    3,139,000       3,895,000  
 
Gross Profit
    849,000       1,025,000  
 
Pre Tax (Loss) Income
    (11,000 )     492,000  
 
Assets
    9,796,000       8,338,000  
                   
NTW
                 
 
Net Sales
    3,708,000       -  
 
Gross Profit
    1,338,000       -  
 
Pre Tax Income
    493,000       -  
 
Assets
    13,563,000       -  
                   
Corporate
                 
 
Net Sales
    -       -  
 
Gross Profit
    -       -  
 
Pre Tax Loss
    (207,000 )     (299,000 )
 
Assets
    12,256,000       6,832,000  
                   
Consolidated
                 
 
Net Sales
    14,325,000       16,038,000  
 
Gross Profit
    3,647,000       3,271,000  
 
Pre Tax Income
    768,000       1,106,000  
 
Provision for Taxes
    489,000       286,000  
 
Net Income
    279,000       820,000  
 
Elimination of Assets
    (8,064,000 )     (4,929,000 )
 
Assets
    51,422,000       37,962,000  
 
The following discussion of our results of operations constitutes management's review of the factors that affected our financial and operating performance for the three months ended March 31, 2013 ("1st Qtr 2013") and March 31, 2012 ("1st Qtr 2012"). This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report.

For the 1st Qtr 2013, we had three segments operating segments, AIM, Welding Metallurgy and NTW, and separately report our corporate overhead.   For the 1st Qtr 2012, we had two operating segments, AIM and Welding Metallurgy, and separately report our corporate overhead.   We completed the NTW Acquisition on June 20, 2012. The results of NTW for 1st Qtr 2013 are included and reflected in the discussion below.
 
 
19

 
Net Sales:

Consolidated net sales from operations for 1st Qtr 2013 were approximately $14,325,000, a decrease of $(1,713,000) or (10.7 %) compared with $16,038,000 for 1st Qtr 2012. Net sales at AIM for 1st Qtr 2013 were $7,478,000, a decrease of approximately ($4,665,000) or (38.4%) compared with $12,143,000 for 1st Qtr 2012. The decrease in net sales at AIM is primarily attributable to a reduction in sales to Sikorsky and Goodrich Landing Gear Systems. Management believes the decline in sales results from the reduction in the budget for the department of defense commonly referred to as a sequestration. In addition AIM experienced delays in manufacturing product for the Navy’s E2-D aircraft. Net sales at Welding for 1st Qtr 2013 were $3,139,000 a decrease of approximately $(756,000) or (19.4%) compared with $3,895,000 for 1st Qtr 2012. Sales at NTW for 1st Qtr 2013 were $3,708,000. We acquired NTW on June 20, 2012

As indicated in the table below, three customers represented 59.3% and two customers represented 67.9% of total sales for the first quarter of 2013 and 2012, respectively.
Customer
 
Percentage of Sales
 
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
             
Sikorsky Aircraft
    25.8       37.8  
Goodrich Landing Gear Systems
    18.3       30.1  
United States Department of Defense
    15.2       *  
                 
* Customer was less than 10% of sales for the quarter ended March 31, 2012
         

As indicated in the table below, three customers represented 51.0% and 54.6% of gross accounts receivable at March 31, 2013 and December 31, 2012, respectively.
 
Customer
 
Percentage of Receivables
 
   
March
   
December
 
   
2013
   
2012
 
   
(Unaudited)
       
GKN Aerospace
    19.1       18.6  
Northrup Grumman Corporation
    17.0       25.3  
Goodrich Landing Gear Systems
    14.9       10.7  
 
Gross Profit:

 
Consolidated: Gross profit from operations for 1st Qtr  2013 increased by approximately $376,000 or 11.5%, to approximately $3,647,000 as compared to gross profit of $3,271,000 for the comparable period in 2012.
 
AIM: Gross profit for 1st Qtr  2013 at AIM decreased by approximately $(786,000) or (35%) to $1,460,000 as compared to $2,246,000 for the comparable period in 2012. The decrease in gross profit at AIM is attributable and comparable to lower sales, modestly offset by an increase in gross margin from approximately 18.5% to 19.5%.
 
WMI: Gross profit at Welding for 1st Qtr 2013 decreased by approximately $(176,000) or (17.2%) to $849,000 compared to $1,025,000 for the comparable period in 2012. The decrease in gross profit at WMI was primarily attributable to the decrease in sales.
 
NTW: Gross profit for 1st Qtr 2013 was $1,338,000.
 
 
20

 
Selling, General & Administrative (“SG&A”):

 
Consolidated SG&A costs for 1st Qtr 2013 totaled $2,469,000 and increased by $795,000 or 47.5% compared to $1,674,000 for 1st Qtr 2012. SG&A incurred by NTW, exclusive of SG&A allocated to it as a result of the determination to allocate corporate SG&A historically attributed to Air Industries Group, Inc (“AIRI”) to its subsidiaries as described herein, accounted for all of the increase. Beginning January 1, 2013, the Company began to allocate all of the corporate SG&A costs of AIRI to its subsidiaries based on projected sales for 2013. For 2013, these costs are allocated 50% to AIM and 25% to each of WMI and NTW. In the discussion below, for 2012, SG&A costs have been reclassified 75% to AIM and 25% to WMI based on actual sales.  The amount reclassified in 1st Qtr 2012 is approximately $284,000 to AIM and $95,000 to WMI.

The principal components of the SG&A costs were:

 
o
AIM: SG&A costs for 1st Qtr 2013 totaled approximately $795,000 a decrease of $(374,000) or (32.0 %) compared to $1,169,000 for 1st Qtr 2012. The decline in SG&A costs at AIM results principally from a shifting of certain personnel from AIM to WMI. This reallocation accounted for 75.9% of the total decline in SG&A at AIM.  The balance of the decline is attributable to cost reductions at AIM.
 
 
o
WMI: SG&A costs for 1st Qtr 2013 totaled approximately $829,000 an increase of $324,000 or approximately 64.1% compared to $505,000 for 1st Qtr 2012. The increase in SG&A costs at Welding resulted primarily from the reallocation of corporate costs from AIRI ($215,000 or 66.4% of the increase) and a shifting of personnel from AIM to WMI ($109,000 or 33.6% of the increase). In June 2012 certain management personnel costs were reclassified from factory overhead to SG&A. The reclassification resulted from a determination that the nature of the services performed by certain individuals had evolved from production activities to more managerial activities.
 
 
o
NTW: SG&A costs totaled approximately $845,000 for 1st Qtr 2013.
 
Interest and financing costs were approximately $385,000 for 1st Qtr 2013, a decrease of approximately $(111,000) or (22.3%) as compared to $497,000 for the comparable period in 2012.  Interest expense decreased as a result of the conversion into common stock in June 2012 of the Company’s Junior Subordinated Notes which bore interest at 12%. This reduction was offset in part by increased borrowings from PNC Bank. The interest rate charged on the PNC debt is significantly lower than the rate on the Junior Subordinated Notes.

The provision for income taxes was approximately $489,000 for 1st Qtr 2013 compared to a provision of $286,000 for the comparable period in 2012. During the first quarter of 2012, the Company utilized nearly all of its available NOL’s and accordingly, is now subject to income tax at full statutory rates.

Net income for 1st Qtr 2013 was $279,000, a decrease of $(541,000) or (66.0%) compared to net income of $820,000 for the comparable period in 2012. The decrease in net income reflects the reduction in pretax income at AIM and WMI due to the reasons set forth above, partially offset by the contribution from NTW, and the increase in the Company’s effective tax rate as a result of the exhaustion of its NOL in the first quarter of 2012.
 
 
21

 
Liquidity and Capital Resources

The Company is highly leveraged and relies upon its ability to continue to borrow from its bank lenders.  Substantially all of the assets of the Company are used as collateral under our existing loan agreements with our senior lender.  The Company is required to maintain a lockbox account with our senior lender, into which substantially all of the Company’s cash receipts are paid.  If our senior lender were to cease lending, the Company would lack funds to continue its operations.

In June 2012, in connection with the NTW Acquisition, we increased our equity by approximately $11,700,000 which allowed us to complete the NTW Acquisition with only a slight increase in our debt.  To increase our equity we concluded a private placement of our common stock at a price of $6.00 per share from which we derived net proceeds of $6,528,000, and the holders of $5,204,000 principal amount of our Junior Subordinated Notes converted the notes into 867,461 shares of our common stock.  To obtain the balance of the cash necessary to complete the NTW Acquisition in excess of the amount provided by the private placement, we increased our term loan with our senior lender by $3,900,000 from $1,500,000 to $5,400,000 and drew down on our revolving loan. Given that the rate of interest on our Junior Subordinated Notes exceeded that on our term loan and revolving loan, though the principal amount of our debt increased, the cost of carrying our debt decreased.  Significantly, we now have the benefit of the newly acquired operations of NTW to service this debt.  Thus, though we remain significantly leveraged, we believe our capacity to service our debt is much greater today than it was before the NTW Acquisition.  As of March 31, 2013, our debt for borrowed monies consisted of the revolving note due our senior lender in the amount of $13,752,000, the term loan due our senior lender in the amount of $3,298,000, a note due the sellers of WMI in the aggregate amount of $1,219,000, Junior Subordinated Notes of $1,000,000 and capitalized lease obligations of $1,875,000.

As of March 31, 2013, we had approximately $966,000 in cash of which approximately $358,000 was used to pay dividends on our Common Stock on April 1, 2013.

Anticipated uses of Cash

As a requirement of our Credit Facility substantially all of our cash receipts from operations are deposited into our lockbox account at our senior lender.  These cash receipts are used to reduce our indebtedness under our Revolving Credit Facility.  Additionally, under the terms of our Term Loan Agreement with our senior lender, we are required to make 36 consecutive monthly principal installments, the first 35 of which will be in the amount of $150,000 which commenced on the first business day of July 2012, with the 36th and final payment of any unpaid balance of principal and interest payable on the first business day of June 2015.  Additionally, there is a mandatory prepayment equal to 50% of Excess Cash Flow (as defined) for each fiscal quarter commencing with the fiscal quarter ended September 30, 2012, payable upon the delivery of the financial statements to our senior lender for such fiscal period, but no later than 45 days after the end of the fiscal period. On November 16, 2012 we paid our senior lender approximately $752,000 based on the Excess Cash Flow calculation. As of March 31, 2013, the Excess Cash Flow calculation indicates a payment due our senior lender of approximately $698,000.

As of March 31, 2013, there is approximately $518,000 due to NTW Dissolution, the party from which we acquired the business now operated by NTW.  This amount relates to a working capital adjustment based on the net working capital of NTW Dissolution as of June 20, 2012, the date of the acquisition as compared to the net working capital at December 31, 2011.  The $518,000 will be offset by $107,000 that is due us for the payment of certain liabilities that were not assumed in the transaction.

We intend subject to the discretion of our Board o Directors and senior lender to continue to make quarterly dividend payments which began with the fourth quarter of 2012. A dividend payment of $0.0625 per share or approximately $360,000 was made on November 12, 2012 to shareholders of record as of October 31, 2012.  A second dividend payment was declared to all shareholders of record on March 15, 2013, and paid on April 1, 2013 in the amount of $0.0625 per share or approximately $358,000.
 
 
22

 
Cash Flow

The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):
 
   
Three months ended
   
Three months ended
 
   
March 31, 2013
   
March 31, 2012
 
   
(unaudited)
   
(unaudited)
 
Cash Provided by (used in):
           
Operating activities
  $ 3,357     $ 726  
Investing activities
    (152 )     (232 )
Financing activities
    (2,729 )     (160 )
Net increase in cash and cash equivalents
  $ 476     $ 334  
 
Cash provided by operating activities

Cash provided by our operating activities primarily consists of our net income adjusted for certain non-cash items and changes to working capital.

For the three months ended March 31, 2013 net cash provided by operating activities of $3.4 million was comprised of net income of $279,000 plus $2.3 million of cash provided by changes in working capital and adjustments for non-cash items of $827,000.  Adjustments for non-cash items consisted primarily of depreciation of property and equipment of $403,000, amortization of capitalized engineering costs, intangibles and other items of $392,000, and bad debt expense of $27,000 representing all amounts more than 120 days past due. The increase in working capital primarily consisted of a net increase in Operating Assets of $1.5 million and a net increase in Operating Liabilities of $725,000.  The increase in Operating Assets was comprised of a decrease in accounts receivable of $2.1 million due to the timing of shipments to and cash receipts from customers, and a decrease in prepaid expenses and other current assets of $126,000 offset by an increase in inventory of $725,000.  The increase in Operating Liabilities was comprised of an increase in accounts payable and accrued expenses of $213,000 due to the timing of the receipt and payment of invoices, an increase in income taxes payable of $493,000 and a change in deferred rent of $19,000.

Cash used in investing activities

Cash used in investing activities consists of capital expenditures for property and equipment, capitalized engineering costs and the cash portion of the cost of any business we might acquire. A description of capitalized engineering costs can be found in footnote 3 Summary of Significant Accounting Policies in our Consolidated Financial Statements for the year ended December 31, 2012.

For the three months ended March 31, 2013 cash used in investing activities was $152,000.  This was comprised of $107,000 for capitalized engineering costs, and $45,000 for the purchase of property and equipment.

Cash provided by (used in) financing activities

Cash provided by (used in) financing activities consists of the net proceeds from the sale of our equity securities, and the borrowings and repayments under our credit facilities with our senior lender and repayment of our capital lease obligations and other notes payable.

For the three months ended March 31, 2013 cash used in financing activities was $2.7 million.  This was comprised of payments of $495,000 on our term loan, $185,000 of payments on our capital lease obligations, $157,000 for the payment of notes to the former shareholders of Welding Metallurgy, $1.9 million for the payment of our revolving credit facility, and $23,000 related to Lease Impairment.
 
 
23

 
Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2013.

Critical Accounting Policies

A description of our critical accounting policies can be found in our Form 10-K for the year ended December 31, 2012, which was filed on March 29, 2013.
 
Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive Officer and our Chief Accounting Officer.  Based on that evaluation, our Chief Executive Officer and our Chief Accounting Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter which is the subject of this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
24

 
PART II

OTHER INFORMATION

Item 1A. Risk Factors.

Reference is made to the risks and uncertainties disclosed in our 2012 Form 10-K, which are incorporated by reference into this report.  Prospective investors are encouraged to consider the risks described in our 2012 Form 10-K, our Management’s Discussion and Analysis of Financial Condition and Result of Operation contained in this Report and other information publicly disclosed or contained in documents we file with the Securities and Exchange Commission before purchasing our common stock.

Item  2. Unregistered Sales of Equity Securities and Use of Proceeds.

On April 19, 2013, we granted options to purchase 3,000 shares of common stock to each of our six non-employee directors pursuant to our 2010 Equity Incentive Plan. The options expire on April 18, 2018 and have an exercise price of $6.00 per share. The fair value as of the date of grant using the Black-Scholes-Merton option pricing model of the 3,000 options granted to each director was $4,214. The grant of these options was exempt from the registration requirements of the Securities Act under the exemptions provided by Section 4(2) of the Securites Act and Rule 506 of Regulation D promulgated thereunder.

Item 6 - Exhibits

31.1
 
Certification of Principal Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
     
31.2
 
Certification of the Principal Financial Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
32.1
  
Certification of the Principal Executive Officer   pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
 
Certification of the Principal Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema
101.CAL*
 
XBRL Taxonomy Extension Calculation
101.DEF*
 
XBRL Taxonomy Extension Definition
101.LAB*
 
XBRL Taxonomy Extension Label
101.PRE*
 
XBRL Taxonomy Extension Presentation
___                                                                      
* In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
 
 
25

 
SIGNATURES

      In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 10, 2013
 
  AIR INDUSTRIES GROUP INC.  
       
 
By:
/s/ Peter D. Rettaliata  
    Peter D. Rettaliata  
    President and Chief Executive Officer  
       
 
26