UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, ~~2021~~2022

☐ Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to_______

Commission File No. 001-35927

AIR INDUSTRIES GROUP

(Exact name of registrant as specified in its charter)

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

1460 Fifth Avenue, Bay Shore, New York 11706

(Address of principal executive offices)

(631) 968-5000

(Registrant’s telephone number, including area code)

Securities Registered pursuant to Section 12(b) of the Act

Title of Each Class		Trading Symbol(s)		Name of each Exchange on which Registered
Common Stock		AIRI		NYSE-American

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 past 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☐	Non-Accelerated Filer ☐☒
Accelerated Filer ☐	Smaller Reporting Company ☒
	Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~32,128,006~~3,247,937 shares of the registrant’s common stock outstanding as of November ~~5, 2021.~~8, 2022.

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 4.	Controls and Procedures	2827

PART II.	OTHER INFORMATION	2928

Item 1A.	Risk Factors	2928

Item 6.	Exhibits	3029

SIGNATURES		3130

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, as amended, 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 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.

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, ~~2020,~~2021, as amended, 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

		Page No.
Item 1. Financial statements

Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets as of September 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021		2

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)		3

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)		4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 ~~and 2020~~ (unaudited)		5

Notes to Condensed Consolidated Financial Statements		7

AIR INDUSTRIES GROUP

Condensed Consolidated Balance Sheets

	September 30,			December 31,			September 30,			December 31,
	2021			2020			2022			2021
	(Unaudited)						(unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	692,000		$	2,505,000
Accounts Receivable, Net of Allowance for Doubtful Accounts of $620,000 and $964,000		10,546,000			8,798,000
Cash							$	192,000		$	627,000
Accounts Receivable, Net of Allowance for Doubtful Accounts of $493,000 and $594,000								8,658,000			10,473,000
Inventory		29,359,000			32,120,000			33,408,000			29,532,000
Prepaid Expenses and Other Current Assets		328,000			173,000			250,000			226,000
Prepaid Taxes		19,000			15,000			25,000			22,000
Total Current Assets		40,944,000			43,611,000			42,533,000			40,880,000

Property and Equipment, Net		8,459,000			9,581,000			8,478,000			8,404,000
Operating Lease Right-Of-Use-Asset		3,146,000			3,510,000			2,615,000			3,018,000
Deferred Financing Costs, Net, Deposits and Other Assets		809,000			912,000			989,000			960,000
Goodwill		163,000			163,000			163,000			163,000

TOTAL ASSETS	$	53,521,000		$	57,777,000		$	54,778,000		$	53,425,000

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Notes Payable and Finance Lease Obligations - Current Portion	$	14,285,000		$	16,475,000
Debt - Current Portion							$	14,820,000		$	14,112,000
Accounts Payable and Accrued Expenses		7,023,000			8,682,000			6,979,000			6,723,000
Operating Lease Liabilities - Current Portion		664,000			701,000			754,000			686,000
Deferred Gain on Sale - Current Portion		38,000			38,000			38,000			38,000
Deferred Revenue		1,488,000			917,000
Liability Related to the Sale of Future Proceeds from
Disposition of Subsidiary - Current Portion		130,000			200,000
Deferred payroll tax liability - CARES Act - Current Portion		314,000			314,000
Customer Deposits								1,291,000			1,470,000
Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary								-			59,000
Deferred payroll tax liability - CARES Act								314,000			314,000
Total Current Liabilities		23,942,000			27,327,000			24,196,000			23,402,000

Long Term Liabilities
Notes Payable and Finance Lease Obligations - Net of Current Portion		3,632,000			4,786,000
Notes Payable - Related Party - Net of Current Portion		6,412,000			6,012,000
Debt - Net of Current Portion								4,001,000			2,838,000
Subordinated Notes Payable - Related Parties								6,162,000			6,412,000
Operating Lease Liabilities - Net of Current Portion		3,423,000			3,927,000			2,669,000			3,241,000
Deferred Gain on Sale - Net of Current Portion		152,000			181,000			114,000			143,000
Liability Related to the Sale of Future Proceeds from
Disposition of Subsidiary - Net of Current Portion		-			122,000
Deferred payroll tax liability - CARES Act - Net of Current Portion		313,000			313,000
TOTAL LIABILITIES		37,874,000			42,668,000			37,142,000			36,036,000

Commitments and Contingencies
Commitments and Contingencies (Notes 4 and 8)

Stockholders' Equity
Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both September 30, 2021 and December 31, 2020.		-			-
Common Stock - Par Value $.001 - Authorized 60,000,000 Shares, 32,077,530 and 31,906,971 Shares Issued and Outstanding as of September 30, 2021 and December 31, 2020, respectively		32,000			32,000
Stockholders’ Equity
Preferred Stock, par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both September 30, 2022 and December 31, 2021.								-			-
Common Stock - Par Value $.001 - Authorized 6,000,000 Shares, 3,232,467 and 3,212,801 Shares Issued and Outstanding as of September 30, 2022 and December 31, 2021, respectively								3,000			3,000
Additional Paid-In Capital		81,755,000			81,238,000			82,344,000			81,920,000
Accumulated Deficit		(66,140,000	)		(66,161,000	)		(64,711,000	)		(64,534,000	)
TOTAL STOCKHOLDERS' EQUITY		15,647,000			15,109,000
TOTAL STOCKHOLDERS’ EQUITY								17,636,000			17,389,000

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	53,521,000		$	57,777,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY							$	54,778,000		$	53,425,000

Share and per share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022.

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Three Months Ended						Nine Months Ended
	2021			2020			2021			2020			September 30,						September 30,
													2022			2021			2022			2021
Net Sales	$	14,354,000		$	13,662,000		$	43,519,000		$	35,603,000		$	13,278,000		$	14,354,000		$	39,348,000		$	43,519,000

Cost of Sales		12,340,000			12,006,000			37,105,000			31,152,000			11,036,000			12,340,000			32,606,000			37,105,000

Gross Profit		2,014,000			1,656,000			6,414,000			4,451,000			2,242,000			2,014,000			6,742,000			6,414,000

Operating Expenses		1,837,000			1,896,000			5,770,000			6,064,000			2,073,000			1,837,000			6,116,000			5,770,000

Income (loss) from Operations		177,000			(240,000	)		644,000			(1,613,000	)
Income from Operations														169,000			177,000			626,000			644,000

Interest and Financing Costs		(205,000	)		(234,000	)		(585,000	)		(789,000	)		(205,000	)		(205,000	)		(566,000	)		(585,000	)

Interest Expense - Related Parties		(126,000	)		(125,000	)		(376,000	)		(378,000	)		(118,000	)		(126,000	)		(369,000	)		(376,000	)

Other Income, Net		88,000			122,000			338,000			363,000			12,000			88,000			132,000			338,000

(Loss) Income before Benefit From Income Taxes		(66,000	)		(477,000	)		21,000			(2,417,000	)
(Loss) Income before Provision for Income Taxes														(142,000	)		(66,000	)		(177,000	)		21,000

Provision for (Benefit) from Income Taxes		-			-			-			(1,414,000	)
Provision for Income Taxes														-			-			-			-

Net (Loss) Income	$	(66,000	)	$	(477,000	)	$	21,000		$	(1,003,000	)	$	(142,000	)	$	(66,000	)	$	(177,000	)	$	21,000

Net (Loss) Income per share - Basic	$	(0.00	)	$	(0.02	)	$	0.00		$	(0.03	)

Net (Loss) Income per share - Diluted	$	(0.00	)	$	(0.02	)	$	0.00		$	(0.03	)
(Loss) Income per share - Basic													$	(0.04	)	$	(0.02	)	$	(0.05	)	$	0.01
(Loss) Income per share - Diluted													$	(0.04	)	$	(0.02	)	$	(0.05	)	$	0.01

Weighted Average Shares Outstanding - basic		32,074,053			30,620,990			32,022,873			30,524,874			3,232,467			3,207,405			3,224,912			3,202,287
Weighted Average Shares Outstanding - diluted		32,074,053			30,620,990			38,743,765			30,524,874			3,232,467			3,207,405			3,224,912			3,874,377

Share and per share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022.

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021

(Unaudited)

					Additional						Total							Additional					Total
	Common Stock				Paid-in			Accumulated			Stockholders'			Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Capital			Deficit			Equity			Shares		Amount		Capital		Deficit			Equity
Balance, January 1, 2021		31,906,971	$	32,000	$	81,238,000		$	(66,161,000	)	$	15,109,000
Balance, January 1, 2022															3,212,801	$	3,000	$	81,920,000	$	(64,534,000	)	$	17,389,000

Common Stock issued for directors fees		41,960		-		52,000			-			52,000			5,522		-		54,000		-			54,000
Stock Compensation Expense		-		-		157,000			-			157,000			-		-		66,000		-			66,000
Net Loss															-		-		-		(28,000	)		(28,000	)
Balance, March 31, 2022															3,218,323	$	3,000	$	82,040,000	$	(64,562,000	)	$	17,481,000

Common Stock issued for directors fees															6,429		-		54,000		-			54,000
Stock Compensation Expense															-		-		141,000		-			141,000
Net Loss															-		-		-		(7,000	)		(7,000	)
Balance, June 30, 2022															3,224,752	$	3,000	$	82,235,000	$	(64,569,000	)	$	17,669,000

Common Stock issued for directors fees															7,715		-		54,000		-			54,000
Stock Compensation Expense															-		-		55,000		-			55,000
Net Loss															-		-		-		(142,000	)		(142,000	)
Balance, September 30, 2022															3,232,467	$	3,000	$	82,344,000	$	(64,711,000	)	$	17,636,000

Balance January 1, 2021															3,190,698	$	3,000	$	81,267,000	$	(66,161,000	)	$	15,109,000
Common Stock issued for directors fees															4,196		-		52,000		-			52,000
Stock Options exercised		51,224		-		-			-			-			5,122		-		-		-			-
Stock Compensation Expense															-		-		157,000		-			157,000
Net Loss		-		-		-			(152,000	)		(152,000	)		-		-		-		(152,000	)		(152,000	)
Balance, March 31, 2021		32,000,155	$	32,000	$	81,447,000		$	(66,313,000	)	$	15,166,000			3,200,016	$	3,000	$	81,476,000	$	(66,313,000	)	$	15,166,000

Common Stock issued for directors fees		37,392	$	-	$	52,000		$	-		$	52,000			3,739		-		52,000		-			52,000
Stock Compensation		-		-		57,000			-			57,000
Stock Compensation Expense															-		-		57,000		-			57,000
Net Income		-		-		-			239,000			239,000			-		-		-		239,000			239,000
Balance, June 30, 2021		32,037,547	$	32,000	$	81,556,000		$	(66,074,000	)	$	15,514,000			3,203,755	$	3,000	$	81,585,000	$	(66,074,000	)	$	15,514,000

Common Stock issued for directors fees		39,983	$	-	$	52,000		$	-		$	52,000			3,998		-		52,000		-			52,000
Stock Compensation		-		-		147,000			-			147,000
Stock Compensation Expense															-		-		147,000		-			147,000
Net Loss		-		-		-			(66,000	)		(66,000	)		-		-		-		(66,000	)		(66,000	)
Balance, September 30, 2021		32,077,530	$	32,000	$	81,755,000		$	(66,140,000	)	$	15,647,000			3,207,753	$	3,000	$	81,784,000	$	(66,140,000	)	$	15,647,000

Balance, January 1, 2020		29,478,338	$	29,000	$	77,434,000		$	(67,257,000	)	$	10,206,000
Common Stock issued for directors fees		43,771		-		55,000			-			55,000
Costs related to issuance of stock		-		-		(145,000	)		-			(145,000	)
Issuance of Common Stock		419,597		1,000		983,000			-			984,000
Common Stock Issued for Convertible Notes		590,243		-		885,000			-			885,000
Stock Compensation Expense		-		-		140,000			-			140,000
Net Income		-		-		-			1,058,000			1,058,000
Balance, March 31, 2020		30,531,949	$	30,000	$	79,352,000		$	(66,199,000	)	$	13,183,000

Common Stock issued for directors fees		47,126	$	-	$	46,000		$	-		$	46,000
Stock Compensation Expense		-		-		74,000			-			74,000
Net Loss		-		-		-			(1,584,000	)		(1,584,000	)
Balance, June 30, 2020		30,579,075	$	30,000	$	79,472,000		$	(67,783,000	)	$	11,719,000

Common Stock issued for directors fees		41,915	$	-	$	58,000		$	-		$	58,000
Stock Compensation Expense		-		-		52,000			-			52,000
Net Loss		-		-		-			(477,000	)		(477,000	)
Balance, September 30, 2020		30,620,990	$	30,000	$	79,582,000		$	(68,260,000	)	$	11,352,000

Share data have been adjusted for all periods presented to reflect the one-for-10 reverse stock split effective October 18, 2022.

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,
(Unaudited)

2021 2020

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 21,000 $ (1,003,000 )
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation of property and equipment 2,105,000 1,920,000
Non-cash employee compensation expense 361,000 266,000
Non-cash directors compensation 156,000 159,000
Non-cash other income recognized (274,000 ) (302,000 )
Non-cash interest expense 82,000 90,000
Non-cash deferred payroll tax expense - CARES Act - 429,000
Amortization of Right-of-Use Asset 364,000 366,000
Deferred gain on sale of real estate (29,000 ) (29,000 )
Loss on sale of equipment - 16,000
Amortization of debt discount on convertible notes payable - 196,000
Bad debt expense (recovery) (54,000 ) 367,000
Amortization of deferred financing costs 118,000 73,000
Changes in Assets and Liabilities
(Increase) Decrease in Operating Assets:
Accounts receivable (1,692,000 ) (2,257,000 )
Inventory 2,761,000 (4,194,000 )
Prepaid expenses and other current assets (159,000 ) 53,000
Prepaid taxes - (6,000 )
Deposits and other assets (15,000 ) (213,000 )
Increase (Decrease) in Operating Liabilities:
Accounts payable and accrued expenses (1,261,000 ) 1,594,000
Operating lease liabilities (541,000 ) (506,000 )
Income taxes payable - (27,000 )
Deferred revenue 571,000 (176,000 )
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,514,000 (3,184,000 )

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (983,000 ) (1,471,000 )
NET CASH USED IN INVESTING ACTIVITIES (983,000 ) (1,471,000 )

CASH FLOWS FROM FINANCING ACTIVITIES
Note payable - revolver - net - Sterling National Bank (2,187,000 ) 3,340,000
Payments of note payable - term note - Sterling National Bank (1,147,000 ) (414,000 )
SBA Loan Proceeds - Sterling National Bank - 2,414,000
Payments of finance lease obligations (3,000 ) (11,000 )
Proceeds from issuance of common stock - 984,000
Share issuance costs - (145,000 )
Payments of notes payable issuances- related party - (1,032,000 )
Payments of notes payable - third party - (100,000 )
Payments of loan payable - financed asset (7,000 ) (215,000 )
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,344,000 ) 4,821,000

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,813,000 ) 166,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,505,000 1,294,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 692,000 $ 1,460,000

	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income	$	(177,000	)	$	21,000
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
Depreciation of property and equipment		1,906,000			2,105,000
Non-cash employee compensation expense		262,000			361,000
Non-cash directors compensation		162,000			156,000
Non-cash other income recognized		(59,000	)		(274,000	)
Non-cash interest expense		-			82,000
Amortization of operating Right-of-Use assets		403,000			364,000
Deferred gain on sale of real estate		(29,000	)		(29,000	)
Bad debt recovery		(102,000	)		(54,000	)
Amortization of deferred financing costs		48,000			118,000
Changes in Operating Assets and Liabilities
Decrease (Increase) in Operating Assets:
Accounts receivable		1,917,000			(1,692,000	)
Inventory		(3,876,000	)		2,761,000
Prepaid expenses and other current assets		(24,000	)		(159,000	)
Prepaid taxes		(3,000	)		-
Deposits and other assets		(74,000	)		(15,000	)
Increase (Decrease) in Operating Liabilities:
Accounts payable and accrued expenses		256,000			(1,261,000	)
Operating lease liabilities		(504,000	)		(541,000	)
Customer deposits		(179,000	)		571,000
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(73,000	)		2,514,000

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,980,000	)		(983,000	)
NET CASH USED IN INVESTING ACTIVITIES		(1,980,000	)		(983,000	)

CASH FLOWS FROM FINANCING ACTIVITIES
Note payable - revolver - net - Webster Bank		1,641,000			(2,187,000	)
Proceeds from term loan - Webster Bank		1,945,000			-
Payments of term loan - Webster Bank		(1,430,000	)		(1,147,000	)
Payments of deferred Financing Costs		(20,000	)		-
Payment of subordinated note payable - related party		(250,000	)		-
Payments of finance lease obligations		(263,000	)		(3,000	)
Payments of loan payable - financed asset		(5,000	)		(7,000	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		1,618,000			(3,344,000	)

NET DECREASE IN CASH		(435,000	)		(1,813,000	)
CASH AT BEGINNING OF PERIOD		627,000			2,505,000
CASH AT END OF PERIOD	$	192,000		$	692,000

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, (Continued)
(Unaudited)

2021 2020

Supplemental cash flow information
Cash paid during the period for interest $ 918,000 $ 680,000
Cash received for income taxes $ - $ 1,416,000

Supplemental disclosure of non-cash
investing and financing activities
Right of Use Asset additions under ASC 842 $ - $ 642,000
Operating Lease Liabilities under ASC 842 $ - $ 642,000
Common Stock issued for conversion of notes payable and accrued interest $ - $ 885,000

	2022		2021
Supplemental cash flow information
Cash paid during the period for interest	$	895,000	$	918,000

Supplemental disclosure of non-cash investing and financing activities
Capitalization of related party note interest to principal	$	-	$	400,000

See Notes to Condensed Consolidated Financial Statements

AIR INDUSTRIES GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. FORMATION AND BASIS OF PRESENTATION

Organization

Air Industries Group is a Nevada corporation (“AIRI”). As of September 30, 2022, and for the three and nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, the accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the condensed unaudited consolidated financial statements, and the reported amount of net sales and expenses during the reported period. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which would be recorded in the period in which they become known. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated December 31, ~~2020~~2021 was derived.

Effective with the Company’s first quarter ended March 31, 2022, the Company is presenting its operations as one reportable operating segment.

Historically the Company operated its businesses and reported its results as two separate segments with AIM and NTW comprising the Complex Machining segment (“CMS”) and Sterling as the Turbine & Engine Component segment (“TEC”). The CMS segment specialized in flight critical components including flight controls and landing gear. The TEC segment focused on manufacturing components for jet engines. Along with its operating subsidiaries, the Company reported the results of its corporate division as an independent segment.

In recent years the Company integrated and consolidated the business of AIM and NTW into one facility on Long Island and the operations of its CMS and TEC segments have become increasingly integrated. The Company also made significant capital expenditures and all of its operations now share the same manufacturing facilities and use most, if not all, of the same sales and marketing functions. The Company made these changes to take advantage of the long-term growth opportunities it sees in the aerospace and defense market. In early fiscal 2022, the Company further changed its management approach and is now making decisions about resources to be allocated and assesses performance based on one integrated business rather than two reporting segments. As such, effective with the first quarter ended March 31, 2022, the Company is presenting its operations as one reportable operating segment.

Reverse Stock Split

~~Reclassifications~~

~~Reclassification occurred~~On October 4, 2022, the Company announced a reverse stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. All share and per share amounts of its common stock presented have been retroactively adjusted to ~~certain 2020 amounts to conform~~reflect the 1-for-10 reverse stock split. As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the ~~2021 classification. These reclassifications had no impact on the statement of operations.~~next whole share. See Note 7 for more information.

~~Liquidity~~

At each reporting period, management evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if management concludes that substantial doubt exists about the Company’s ability to continue as a going concern and such doubt is not alleviated by the Company’s plans or when the Company’s plans alleviate substantial doubt about its ability to continue as a going concern. The evaluation entails analyzing prospective operating budgets and forecasts for expectations regarding cash needs and comparing those needs to the current cash and cash equivalent balance and expectations regarding cash to be generated over the following year.

Although the global outbreak of COVID-19 negatively impacted the Company’s revenues, earnings and operating cash flows in 2020, management believes the Company’s operations substantially returned to normal in fiscal 2021. With nine months of fiscal 2021 now completed and the Company beginning to see the benefits from its recent investments in machinery and equipment, management believes the Company will continue to improve its liquidity. As such, based on the Company generating operating income of $177,000 and $644,000 for the three and nine months ended September 30, 2021, respectively, its current best estimates of fourth quarter fiscal 2021 and the first quarter of fiscal 2022 sales, confirmed and expected orders, the strength of existing backlog, overall market demand, expected timing of future cash receipts and expenditures and the Company’s ability to access additional liquidity, if needed, the Company believes it will have adequate cash to support operations through at least November 30, 2022.

~~Subsequent Events~~

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

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Inventory Valuation

For annual periods, the Company values inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical inventories at interim quarterly reporting periods. For interim periods, substantially all of the inventory value has been estimated using a gross profit percentage based on the annual gross profit ~~percentages~~percentage of the immediately preceding year as applied to the net sales of the current period. During the three and nine months ended September 30, 2021, the Company increased its estimate of its gross profit percentage from the percentage for the prior year based on the better absorption of Manufacturing Overhead which results from increased sales. Adjustments to reconcile the annual physical inventory to the Company’s ~~records~~books are recorded in the fourth quarter.

Inventories consist of the following at:

	September 30,			December 31,
	2022			2021
Raw Materials	$	4,163,000		$	3,410,000
Work In Progress		22,329,000			20,926,000
Finished Goods		9,677,000			8,350,000
Reserve		(2,761,000	)		(3,154,000	)
Total Inventory	$	33,408,000		$	29,532,000

Credit and Concentration Risks

There were 2two customers that represented ~~67.7%~~63.9% and ~~3 customers that represented 70.6%~~67.7% of total net sales for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. This is set forth in the table below.

Customer Percentage of Sales
September 30,
2021 September 30,
2020
(Unaudited) (Unaudited)
1 41.6 % 23.2 %
2 26.1 % 25.8 %
3 * 21.6 %

~~Customer was less than 10% of sales for the three months ended September 30, 2021.~~

Customer	Percentage of Sales
	September 30, 2022			September 30, 2021
1		40.7	%		41.6	%
2		23.2	%		26.1	%

There were 3three customers that represented ~~75.5%~~68.9% and ~~74.2%~~75.5% of total sales for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. This is set forth in the table below.

Customer	Percentage of Sales						Percentage of Sales
	September 30, 2021			September 30, 2020
	(Unaudited)			(Unaudited)			September 30, 2022			September 30, 2021
1		36.8	%		28.2	%		32.5	%		36.8	%
2		26.2	%		32.1	%		19.5	%		26.2	%
3		12.5	%		13.9	%		16.9	%		12.5	%

There were 2two customers that represented ~~68.9%~~70.2% and 3three customers that represented ~~80.3%~~74.7% of gross accounts receivable at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. This is set forth in the table below.

Customer							Percentage of Receivables
	Percentage of Receivables						September 30,			December 31,
Customer	September 30, 2021			December 31, 2020
	(Unaudited)						2022			2021
1		53.5	%		57.1	%		58.1	%		50.3	%
2		15.4	%		*			12.1	%		12.7	%
3		**			12.0	%		*			11.7	%
4		**			11.2	%

~~Customer was less than 10% of accounts receivable at December 31, 2020.~~

**●

Customer was less than 10% of accounts receivable at September 30, ~~2021.~~2022.

~~Cash~~Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three and ~~Cash Equivalents~~nine month periods ending September 30, 2022 and 2021:

	Three Months Ended				Nine Months Ended
Product	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Military	$	11,266,000	$	12,380,000	$	33,399,000	$	38,750,000
Commercial		2,012,000		1,973,000		5,949,000		4,769,000

Total	$	13,278,000	$	14,353,000	$	39,348,000	$	43,519,000

Concentration of Credit Risk

During the ~~year,~~period, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC insurance limit. The Company has not experienced any losses on these accounts.

Major Suppliers

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

~~To date, global supply chain constraints that have been impacting the aerospace and defense industry have not materially impacted our ability to source parts or operate our business.~~Customer Deposits

The Company receives advance payments on certain contracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves the product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s invoice.

At September 30, 2022 and December 31, 2021, customer deposits were $1,291,000 and $1,470,000 respectively. The Company recognized revenue of $73,000 and $126,000 during the three and nine months ended September 30, 2022, respectively, that was included in the customer deposits balance as of December 31, 2021. The Company recognized revenue of $132,000 and $507,000 during the three and nine months ended September 30, 2021, respectively, that was included in the customer deposits balance as of December 31, 2020.

Backlog

Backlog represents executed non-cancellable contracts that represent firm orders that are deliverable over the next 18- month period. As of September 30, 2022, backlog relating to remaining performance obligations in contracts was approximately $65,000,000. We expect to recognize revenue amounts in future periods related to these remaining performance obligations as follows: approximately $13,000,000 to $15,000,000 of our backlog during the remainder of 2022, approximately $25,000,000 to $30,000,000 from January 1, 2023 - June 30, 2023, and approximately $11,000,000 to $15,000,000 from July 1, 2023 through December 31, 2023. This expectation assumes that raw material suppliers, and that outsourced processing is completed and delivered on-time and that its customers will accept delivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales pursuant to contracts that are not currently in backlog.

Leases

The Company accounts for leases under ASC 842, “Leases.” All leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. See Note 4.

Earnings (Loss) per share

Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

For purposes of calculating diluted earnings per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method.

The following is the calculation of net (loss) income applicable to common stockholders utilized to calculate the EPS:

	Three Months Ended						Nine Months Ended					Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021		September 30, 2020			September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
	(Unaudited)			(Unaudited)			(Unaudited)		(Unaudited)
Net (Loss) Income per statement of operations	$	(66,000	)	$	(477,000	)	$	21,000	$	(1,003,000	)
(Loss) Income - Basic												$	(142,000	)	$	(66,000	)	$	(177,000	)	$	21,000
Add: Convertible Note Interest for Potential Note Conversion		-			-			232,000		-			-			-			-			232,000

(Loss) Income used to calculate diluted earnings per share	$	(66,000	)	$	(477,000	)	$	253,000	$	(1,003,000	)	$	(142,000	)	$	(66,000	)	$	(177,000	)	$	253,000

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

	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		Three Months Ended				Nine Months Ended
									September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Weighted average shares outstanding used to compute basic earnings per share		32,074,053		30,620,990		32,022,873		30,524,874		3,232,467		3,207,405		3,224,912		3,202,287
Effect of dilutive stock options and warrants		-		-		2,663,000		-		-		-		-		266,300
Effect of dilutive convertible notes payable		-		-		4,057,892		-		-		-		-		405,789
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share		32,074,053		30,620,990		38,743,765		30,524,874		3,232,467		3,207,405		3,224,912		3,874,376

The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares:

	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		Three Months Ended				Nine Months Ended
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Stock Options		1,178,000		163,000		186,000		163,000		305,350		118,000		305,350		16,000
Warrants		1,828,000		1,423,000		1,068,000		1,423,000		76,000		183,000		76,000		142,000
		3,006,000		1,586,000		1,254,000		1,586,000		381,350		301,000		381,350		158,000

The following securities have been excluded from the calculation even though the exercise price was less than the average market price of the common shares during the periods set forth below because the effect of including these potential shares was anti-dilutive due to the net loss incurred during these periods:

	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		Three Months Ended				Nine Months Ended
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Stock Options		1,330,000		1,696,000		-		1,696,000		-		133,000		-		-
Warrants		-		760,000		-		760,000
Convertible notes payable		5,092,000		5,092,000		-		5,092,000		405,810		509,000		405,810		-
		6,422,000		7,548,000		-		7,548,000		405,810		642,000		405,810		-

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 expense for employees amounted to $55,000 and $147,000 for the three months ended September 30, 2022 and 2021, respectively, and $262,000 and $361,000 for the nine months ended September 30, 2022 and 2021, respectively. Stock compensation expense for directors amounted to $54,000 and $52,000 for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively and ~~$361,000~~$162,000 and ~~$266,000~~$156,000 for the nine months ended September 30, ~~2021~~2022 and ~~2020, respectively. Stock compensation expense for directors amounted to $52,000 and $58,000 for the three months ended September 30,~~ 2021, ~~and 2020, respectively and $156,000 and $159,000 for the nine months ended September 30, 2021 and 2020,~~ respectively. Stock compensation expense for employees and directors was included in operating expenses on the accompanying Condensed Consolidated Statements of Operations.

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 $163,000 at both September 30, ~~2021~~2022 and December 31, ~~2020~~2021 relates to the acquisition of NTW.

Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.

~~The Company will test Goodwill for impairment at December 31, 2021, and has determined that there has been no impairment of goodwill as of December 31, 2020.~~Recently Issued Accounting Pronouncements

~~Recently Issued Accounting Pronouncements~~Effective January 1, 2022, the Company adopted ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated with applying accounting principles generally accepted in the United States of America for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users. The adoption of ASU 2020-06 did not have a material effect on the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU ~~2016- 13”~~2016-13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. ~~Early adoption is permitted. The Company will evaluate the impact of ASU 2016-13 on the Company’s consolidated financial statements in a future period closer to the date of adoption.~~

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users. ASU 2020-06 is effective for fiscal years, and interim periods in those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods with those fiscal years. The Company is ~~evaluating~~currently assessing the ~~effect of adopting this new accounting guidance~~impact ASU 2016-13 will have on its consolidated financial statements.

On January 1, 2021, the Company adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.

On January 1, 2021, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform” (Topic 848): Scope: which clarified the scope of ASU 2020-04. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The adoption of these ASU’s did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which will clarify and reduce diversity in practice. Specifically, the new standard includes a recognition model comprising four categories of transactions and corresponding accounting treatment for each category. The category that would apply to a modification or an exchange of an equity-classified warrant would depend on the substance of the modification transaction (e.g. a financing transaction to raise equity versus one to raise debt). This recognition model is premised on the idea that the accounting for the transaction should not differ from what it would have been had the issuer of the warrants paid cash instead of modifying the warrants. ASU 2021-04 will be effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. This ASU will be applied prospectively to modifications or exchanges occurring on or after the effective date of the ASU. The Company is currently evaluating the impact this new guidance will have on its condensed consolidated financial statements.

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

Note 3. PROPERTY AND EQUIPMENT

The components of property and equipment at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:

	September 30,			December 31,
	2021			2020				September 30,			December 31,
								2022			2021
Land	$	300,000		$	300,000			$	300,000		$	300,000
Buildings and Improvements		1,697,000			1,683,000		31.50 years		1,945,000			1,723,000
Machinery and Equipment		22,035,000			21,738,000		5 - 8 years		23,055,000			22,013,000
Finance Lease Machinery and Equipment		78,000			78,000		5 - 8 years		375,000			375,000
Tools and Instruments		12,593,000			12,116,000		1.50 - 7 years		13,495,000			12,866,000
Automotive Equipment		148,000			148,000		5 years		266,000			200,000
Furniture and Fixtures		290,000			290,000		5 - 8 years		290,000			290,000
Leasehold Improvements		882,000			855,000		Term of Lease		882,000			882,000
Computers and Software		583,000			436,000		4 - 6 years		604,000			583,000
Total Property and Equipment		38,606,000			37,644,000				41,212,000			39,232,000
Less: Accumulated Depreciation		(30,147,000	)		(28,063,000	)			(32,734,000	)		(30,828,000	)
Property and Equipment, net	$	8,459,000		$	9,581,000			$	8,478,000		$	8,404,000

Depreciation expense for the three months ended September 30, 2022 and 2021 was $598,000 and ~~2020 was~~ $688,000, ~~and $576,000,~~ respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $1,906,000 and ~~2020 was~~ $2,105,000, ~~and $1,920,000,~~ respectively.

Assets held under financed lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under finance leases is included in depreciation expense for ~~2021~~2022 and ~~2020.~~2021. Accumulated depreciation on these assets was approximately ~~$32,000~~$12,000 and ~~$28,000~~$32,000 as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Note 4. LEASES

The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. The Company leases certain machinery and equipment under finance leases and leases its offices and manufacturing facilities under operating leases. The leases have remaining lease terms of one to six years, some of which include options to extend or terminate the leases.

	September 30,			December 31,
	2021			2020			September 30,			December 31,
	(unaudited)						2022			2021
Weighted Average Remaining Lease Term - in years		4.87			5.53			3.91			4.53
Weighted Average discount rate - %		8.89	%		8.90	%		8.97	%		8.89	%

The aggregate undiscounted cash flows of operating lease payments for leases with remaining terms greater than one year are as follows:

Amount
December 31, 2021 (remainder of the year) $ 249,000
December 31, 2022 1,007,000
December 31, 2023 1,038,000
December 31, 2024 1,070,000
December 31, 2025 992,000
Thereafter 730,000
Total future minimum lease payments 5,086,000
Less: discount (999,000 )
Total operating lease maturities 4,087,000
Less: current portion of operating lease liabilities (664,000 )
Total long term portion of operating lease maturities $ 3,423,000

On April 29, 2021 the Company entered into an agreement to surrender possession of the premises of the former corporate office, located in Hauppauge, NY. The Company made a one-time payment of 40% of the remaining balance due to the landlord as of May 1, 2021, of approximately $37,000. The Company had previously recognized a lease impairment of $275,000 to its Operating Lease Right-of-Use-Asset for the year-ended December 31, 2019.

	Amount
December 31, 2022 (remainder of year)	$	257,000
December 31, 2023		1,038,000
December 31, 2024		1,070,000
December 31, 2025		992,000
December 31, 2026		729,000
Total future minimum lease payments		4,086,000
Less: discount		(663,000	)
Total operating lease maturities		3,423,000
Less: current portion of operating lease liabilities		(754,000	)
Total long term portion of operating lease maturities	$	2,669,000

Note 5. ~~NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS~~DEBT

Notes payable, related party notes payable and finance lease obligations ~~at September 30, 2021 and December 31, 2020 consisted~~consist of the following:

September 30, December 31,
2021 2020

Revolving credit note payable to Sterling National Bank ("SNB") $ 13,463,000 $ 15,649,000
Term loan, SNB 4,411,000 5,558,000
Finance lease obligations 2,000 6,000
Loans Payable - financed assets 41,000 48,000
Related party notes payable, net of debt discount 6,412,000 6,012,000
Subtotal 24,329,000 27,273,000
Less: Current portion of notes payable, related party notes payable and finance lease obligations (14,285,000 ) (16,475,000 )
Notes payable, related party notes payable and finance lease obligations,
net of current portion $ 10,044,000 $ 10,798,000

	September 30,			December 31,
	2022			2021
Revolving loan payable to Webster Bank (F/K/A Sterling National Bank) (“Webster”)	$	14,097,000		$	12,456,000
Term loan, Webster		4,691,000			4,192,000
Finance lease obligations		-			263,000
Loans Payable - financed assets		34,000			39,000
Related party subordinated notes payable		6,162,000			6,412,000
Subtotal		24,984,000			23,362,000
Less: Current portion		(14,820,000	)		(14,112,000	)
Long Term Portion	$	10,164,000		$	9,250,000

Webster Bank (F/K/A Sterling National ~~Bank~~Bank) (“~~SNB”~~Webster”)

OnThe Company has a loan facility (“Webster Facility”) with Webster Bank that expires on December 30, 2025. The Webster Facility, which was first entered into on December 31, 2019, ~~the Company entered into a loan facility (“SNB Facility”) with SNB expiring on December 30, 2022. The loan facility~~was amended several times, and now provides for a ~~$16,000,000~~$20,000,000 revolving loan (“~~SNB revolving line~~Revolving Line of ~~credit”~~Credit”), a $5,000,000 term loan (“Term Loan”) and a $2,000,000 Equipment Line of Credit, which as it is drawn upon will be added to the balance of the Term Loan.

As of September 30, 2022, there is currently $14,097,000 outstanding under the Revolving Loan and $4,691,000 under the Term Loan. The below table shows the timing of payments due under the Term Loan:

For the period ending	Amount
December 31, 2022 (remainder of the year)	$	178,000
December 31, 2023		714,000
December 31, 2024		714,000
December 31, 2025		3,156,000
Webster Term Loan payable		4,762,000
Less: debt issuance costs		(71,000	)
Total Webster Term Loan payable, net of debt issuance costs		4,691,000
Less: Current portion of Webster Term Loan payable		(714,000	)
Total long-term portion of Webster Term Loan payable	$	3,977,000

As of December 31, 2021, our debt to Webster in the amount of $16,648,000 consisted of the Webster Revolving Loan in the amount of $12,456,000 and the Webster term loan ~~(“SNB term loan”).~~in the amount of $4,192,000.

Interest expense related to the Webster Facility amounted to approximately $204,000 and $181,000 for the three months ended September 30, 2022 and 2021, respectively, and $506,000 and $542,000 for the nine months ended September 30, 2022 and 2021, respectively.

The below summarizes historical amendments to the Webster Facility and various terms:

In 2020, the Company entered into the First Amendment to the ~~Loan and Security Agreement (“First Amendment”). The terms of the amendment increase~~Webster Facility which increased the Term Loan to ~~$5,685,000. The repayment terms of~~$5,685,000 and required the ~~term loan were amended~~Company to ~~provide~~make monthly principal installments in the amount of $67,679 beginning on December 1, ~~2020, with a final payment of any unpaid balance of principal~~2020. Other minor modifications were made and ~~interest payable on December 30, 2022. Additionally,~~ the ~~date by which certain subordinated third-party notes need to be extended was changed from September 30, 2020 to November 30, 2020. The~~ Company paid an amendment fee of $20,000.

OnIn June ~~14,~~ 2021, the Company entered into the Second Amendment to the ~~Loan and Security Agreement (“Second Amendment”). The purpose of the Second Amendment was to clarify~~Webster Facility, which clarified the definition and calculation of Excess Cash Flow, and to confirm the ~~extension of the~~ due date ~~for the~~of required payment of the Excess Cash Flow payment. For so long as the ~~SNB~~Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay to ~~SNB~~Webster an amount equal to the lesser of (i) twenty-five percent (25%) of the ~~excess~~Excess Cash ~~flow~~Flow for such fiscal year and (ii) the outstanding principal balance of the term loan. Such payment shall be made to ~~SNB~~Webster and applied to the outstanding principal balance of the term loan, on or prior to the close of the fiscal year immediately following such fiscal year. The ~~amount of the~~Company made Excess Cash Flow ~~payment for~~payments of $558,750 in 2021 (for the fiscal year ended December 31, ~~2020 was calculated to be $558,750. Per the terms of the Second Amendment, the Excess Cash Flow is payable~~2020) and $854,000 in ~~three instalments of $186,250 on each of June 15, 2021, June 30, 2021, and September 15, 2021. As of September 30, 2021, the Company paid this in full. Additionally,~~April 2022 (for fiscal year ended December 31, 2021). In connection with these changes, the Company paid an amendment fee of $10,000.

On December 7, 2021, the Company entered into the Third Amendment to the Webster Facility (“Third Amendment”). The purpose of the amendment was to provide a maturity date for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022. Such amendment also increased the Revolving Line of Credit to its current limit of $20,000,000 (up from the original $16,000,000) and also provided for a similar increase in the inventory sublimit to $14,000,000 (up from the original $11,000,000). The Third Amendment, also allows the Company, subject to certain limitations, to begin amortizing $250,000 of its related party subordinated notes payable each quarter as long as certain conditions are met. In connection with these changes, the Company paid an amendment fee of $75,000.

On May 17, 2022, the Company entered into the Fourth Amendment to the Webster Facility (“Fourth Amendment”). The purpose of the amendment was to increase the Term Loan to $5,000,000, generating proceeds of $1,945,000, reduced the monthly principal installments to be made in respect to the term loan, and establish a capital expenditure line of credit in the amount of $2,000,000 which the Company can draw upon from time to time to finance purchases of machinery and equipment, thereby increasing the amount of capital expenditures that the Company may make each year. The principle payments are $59,524 per month commencing in June 2022 with a balloon payment due on December 30, 2025. In connection with these changes, the Company paid an amendment fee of $20,000.

Under the terms of the ~~SNB~~Webster Facility, ~~require that, among~~both the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal (or such other ~~things,~~presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum. The average interest rate charged was 4.70% and 3.50% for the three months ended September 30, 2022 and 2021, respectively and was 3.94% and 3.50% for the nine months ended September 30, 2022 and 2021, respectively.

All amendment fees paid in connection with the Webster Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance Sheets and are amortized over the term of the loan.

In connection with the Webster Facility, the Company is required to maintain a ~~specified~~defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal ~~Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, the Company is limited in~~Quarter. The Webster Facility limits the amount of Capital Expenditures ~~it can make. As of September 30, 2021, the Company was in compliance with all loan covenants. The SNB Facility also restricts the amount of~~and dividends the Company ~~may~~can pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the ~~SNB~~Webster Facility.

~~The aggregate payments for the term note at September 30, 2021 are as follows:~~

For the twelve months ending Amount
December 31, 2021 (remainder of the year) $ 203,000
December 31, 2022 4,247,000
SNB Term Loan payable 4,450,000
Less: debt issuance costs (39,000 )
Total SNB Term Loan payable, net of debt issuance costs 4,411,000
Less: Current portion of SNB Term Loan payable (812,000 )
Total long-term portion of SNB Term Loan payable $ 3,599,000

Under the terms of the SNB Facility, both the SNB revolving line of credit and the SNB term loan bear an interest rate equal to 30-day LIBOR (with a 1% floor) plus 2.5%. The average interest rate charged during the period ended September 30, 2021 was 3.5%.

As of September 30, ~~2021,~~2022, the ~~debt to SNB~~Company was in ~~the amount of $17,874,000 consisted of the SNB revolving line of credit note in the amount of $13,463,000 and the SNB term~~compliance with all financial loan in the amount of $4,411,000. As of December 31, 2020, the debt to SNB in the amount of $21,207,000 consisted of the SNB revolving line of credit note in the amount of $15,649,000 and the SNB term loan in the amount of $5,558,000.covenants.

Interest expense related to the SNB Facility amounted to approximately $181,000 and $147,000 for the three months ended September 30, 2021 and 2020, respectively, and $542,000 and $420,000 for the nine months ended September 30, 2021 and 2021, respectively.Finance Lease Obligations

~~Loans~~The Company entered into a Finance lease in December of 2021 for the purchase of new manufacturing equipment. The obligation for the Finance lease totaled $0 and $263,000 as of September 30, 2022 and December 31, 2021, respectively. The lease had an imputed interest rate of 4.2% per annum and was payable monthly with the final payment due on December 17, 2026. In connection with the Fourth Amendment to the Webster Facility, this Finance Lease was paid in full.

Loan Payable – Financed ~~Assets~~Asset

The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled ~~$41,000~~$33,000 and ~~$48,000~~$39,000 as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.

~~Annual maturities of this~~The future minimum loan payments are as follows:

For the twelve months ending	Amount
December 31, 2021 (remainder of the year)	$	2,000
December 31, 2022		9,000
For the period ending				Amount
December 31, 2022 (remainder of the year)				$	2,000
December 31, 2023		9,000			9,000
December 31, 2024		9,000			9,000
December 31, 2025		9,000			9,000
Thereafter		3,000
December 31, 2026					4,000
Loans Payable - financed assets		41,000			33,000
Less: Current portion		(9,000	)		(9,000	)
Long-term portion	$	32,000		$	24,000

Related Party Notes Payable

Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich.

Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received cash and equity compensation for their services.

From 2016 through 2020, the Company entered into various subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich. These notes resulted in proceeds to the Company totaling $6,550,000. In connection with these notes, Michael and Robert were issued a total of ~~355,082~~35,508 shares of common stock and Taglich Brothers Inc. was issued promissory notes totaling $554,000 for placement agency fees. At December 31, 2020, related party notes payable totaled $6,012,000 and accrued interest totaled $400,000.

On January 1, 2021, the related party subordinated notes due to Michael and Robert Taglich and Taglich Brothers, Inc., were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. Per the terms of the ~~SNB~~Webster Facility, these notes remain subordinate to the ~~SNB~~Webster Facility and are due on July 1, ~~2023.~~2026. Approximately $2,732,000 of the related party convertible subordinated notes can be converted at the option of the holder into Common Stock of the Company at ~~$0.93~~$15.00 per share, while the remaining $2,080,000 of the related party convertible subordinated notes can be converted at the option of the holder into ~~Common Stock~~common stock of the Company at ~~$1.50~~$9.30 per share. There are no principal payments due on these ~~notes until such time. The note holders and~~notes. Under the ~~principal balance~~terms of the ~~notes as amended on January 1, 2021 are shown below:~~Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations, to make principal payments of $250,000 per quarter of this subordinated debt.

Michael Taglich, Robert Taglich, Taglich Brothers,
Chairman Director Inc. Total
Convertible Subordinated Notes $ 2,666,000 $ 1,905,000 $ 241,000 $ 4,812,000
Subordinated Notes 1,250,000 350,000 - 1,600,000
Total $ 3,916,000 $ 2,255,000 $ 241,000 $ 6,412,000

For the three and nine months ended September 30, ~~2021, no~~2022, a principal ~~payments have been~~payment of $250,000 was made ~~on these notes~~against the Subordinated Notes due to Michael Taglich. This payment was made pursuant to the conditions set forth in the Third Amendment to the Webster Facility.

The note holders and the principal ~~balances remain unchanged from~~balance of the ~~table above.~~ notes of September 30, 2022 are shown below:

	Michael Taglich,		Robert Taglich,		Taglich Brothers,
	Chairman		Director		Inc.		Total
Convertible Subordinated Notes	$	2,666,000	$	1,905,000	$	241,000	$	4,812,000
Subordinated Notes		1,000,000		350,000		-		1,350,000
Total	$	3,666,000	$	2,255,000	$	241,000	$	6,162,000

Interest expense for the three months ended September 30, ~~2021~~2022 and ~~2020~~2021 on all related party notes payable was ~~$126,000~~$118,000 and ~~$125,000,~~$126,000, respectively, and ~~$376,000~~$369,000 and ~~$378,000~~$376,000 for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ respectively.

~~Convertible Notes Payable – Third Parties~~

As of both September 30, 2021 and December 31, 2020, the notes payable to third parties totaled $0 as the notes were converted into shares of common stock in 2020. Interest incurred on these notes amounted to approximately $38,000 and $118,000 for the three and nine months ended September 30, 2020, respectively. Amortization of debt discount on these notes amounted to approximately $0 and $7,000 for the three and nine months ended September 30, 2020, respectively. These costs are included in interest and financing costs in the Condensed Consolidated Statement of Operations.

NOTE 6. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY

In connection with the sale of the Company’s wholly-owned subsidiary, AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., (“Meyer”) in 2017, Meyer was obligated to pay the Company within 30 days after the end of each calendar quarter, commencing April 1, 2017, an amount equal to five (5%) percent of the net sales of AMK for that quarter until the aggregate payments made to the Company (the “Meyer Agreement”) equals $1,500,000 (the “Maximum Amount”).

In order to increase liquidity, on January 15, 2019, the Company entered into a “Purchase Agreement” with 15 accredited investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to which the Company assigned to the Purchasers all of its rights, title and interest to the remaining $1,137,000 of the $1,500,000 in payments due from Meyer for the sale of AMK (the “Remaining Amount”) for an immediate payment of $800,000, including $100,000 from each of Michael and Robert Taglich, and $75,000 for the benefit of the children of Michael Taglich. The timing of the payments is based upon the net sales of AMK. If the Purchasers have not received the entire Remaining Amount by March 31, 2023, they have the right to demand payment of their pro rata portion of the unpaid Remaining Amount from the Company (“Put Right”). To the extent the Purchasers exercise their Put Right, the remaining payments from Meyer will be retained by the Company.

The Company recognized ~~$79,000~~$0 and ~~$91,000~~$79,000 of non-cash income for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$274,000~~$94,000 and ~~$302,000~~$274,000 of non-cash income for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, reflected in “other income, net” on the condensed consolidated statements of operations and recorded ~~$24,000~~$0 and ~~$26,000~~$24,000 of related non-cash interest expense related to the Purchase Agreement for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$82,000~~$35,000 and ~~$90,000~~$82,000 for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ respectively.

The table below shows the activity within the liability account ~~for the nine months ended September 30, 2021 and the year ended December 31, 2020:~~for:

	September 30, 2021			December 31, 2020
	(Unaudited)
							September 30, 2022			December 31, 2021
Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance	$	322,000		$	602,000		$	59,000		$	322,000
Non-Cash other income recognized		(274,000	)		(402,000	)		(94,000	)		(360,000	)
Non-Cash interest expense recognized		82,000			122,000			35,000			97,000
Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance		130,000			322,000			-			59,000
Less: unamortized transaction costs		(3,000	)		(3,000	)		-			(3,000	)
Liability related to sale of future proceeds from disposition of subsidiary, net	$	127,000		$	319,000		$	-		$	56,000

Note 7. STOCKHOLDERS’ EQUITY

On October 4, 2022 the Company announced a reverse stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10. The reverse stock split was effective on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time. As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the next whole share. An additional 7,287 shares were issued to account for this. As such all references to shares and per share price has been adjusted to retrospectively account for this transaction.

Common Stock – Sale of Securities

The Company issued ~~39,983~~7,715 and ~~41,915~~3,998 shares of common stock in payment of director fees totaling ~~$52,000~~$54,000 and ~~$58,000~~$52,000 for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~119,335~~19,667 and ~~132,812~~11,934 shares totaling ~~$156,000~~$162,000 and ~~$159,000~~$156,000 for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Additionally, the Company issued ~~51,224~~5,122 shares of common stock upon the cashless exercise of stock options during the nine months ended September 30, 2021.

In January 2020, the Company issued and sold 419,597 shares of our common stock for gross proceeds of $984,000 pursuant to a Form S-3 filed on October 10, 2019 as updated on January 15, 2020. Costs of the sale amounted to $145,000.

During the ~~nine months ended September 30, 2020,~~fourth quarter of 2022, the Company issued ~~590,243 shares of common stock to convert third party subordinated debt totaling $885,000 to equity.~~

~~On or about October 1, 2021, the Company issued 50,476~~8,183 shares of common stock in payment of directors’ fees totaling $54,000.

Issuance of Stock Options

~~Issuance~~Issued in 2022

On January 31, 2022, the Company granted certain employees, stock options to purchase an aggregate of ~~Stock Options~~3,000 shares of the Company’s common stock at a price of $8.50 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.

On April 6, 2022, the Company granted to its directors, stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one year.

On April 11, 2022, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of 53,000 shares of the Company’s common stock at a price of $8.40 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.

Issued in 2021

On January 11, 2021, the Company granted to its directors, stock options to purchase an aggregate of ~~70,000~~7,000 shares of the Company’s common stock at a price of ~~$1.32~~$13.20 per share. The options expire on the seventh anniversary of the grant date and ~~vest~~vested over a term of one year.

On March 24, 2021, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of ~~327,500~~32,750 shares of the Company’s common stock at a price of ~~$1.39~~$13.90 per share. The options expire on the fifth anniversary of the grant date and vest over a term of three years.

On July 30, 2021, the Company granted to certain members of management and certain employees, stock options to purchase an aggregate of ~~415,000~~41,500 shares of the Company’s common stock at a price of ~~$1.22~~$12.20 per share. The options expire on the fifth anniversary of the grant date and vest over a term of one to three years.

Note 8. CONTINGENCIES

A number of actions have been commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result of an injury suffered on a portion of a leased property not occupied by the Company. As certain ~~portions~~ of these claims represent amounts included in accounts payable they are not specifically discussed herein.

On October 2, 2018, Contract Pharmacal Corp. (“~~Contact~~Contract Pharmacal”) commenced an action, ~~on October 2, 2018,~~ relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with respect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal ~~originally~~ sought damages for an amount in excess of $1,000,000 for the Company’s failure to make the entire premises available by the Sublease commencement date. On July 8, 2021, the Court denied Contract ~~Pharmacal’s Motion~~Phamacal’s motion for ~~Summary Judgement.~~summary judgement. In the Order, the ~~Court~~court granted Contract Pharmacal’s Motions to drop its claim for specific performance and to amend its Complaint to reduce its claim for damages to $700,000. Contract Pharmacal filed a Motion to reargue which the Court denied on November 30, 2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company will oppose. The Company ~~continues to dispute~~disputes the validity of the claims asserted by Contract Pharmacal and ~~believes it has meritorious defenses to those claims. As of September 30, 2021, it is not possible to estimate if a loss will be incurred, as such there has been no accrual.~~

From time to time the Company may be engaged in various lawsuits and legal proceedings in the ordinary course of business. Currently management is not aware of any legal proceedings the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on the Company’s business, financial condition or operating results. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest averse to our interest.intends contest them vigorously.

Note 9. INCOME TAXES

The Company recorded no income tax expense for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 because the estimated annual effective tax rate was zero. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.

As ~~a result of the passage of the CARES Act, the Company filed for a net operating loss carryback claim of $1,416,000 in March 2020. The refund was received in April 2020.~~

As of September 30, ~~2021~~2022, and December 31, ~~2020,~~2021, the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.

Note 10. ~~SEGMENT REPORTING~~

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

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

The Company currently divides its operations into two operating segments: Complex Machining, which consists of AIM and NTW; and Turbine Engine Components, which consists of Sterling. Along with its operating subsidiaries, the Company reports the results of its corporate division as an independent segment.

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. Intersegment transfers are recorded at the transferor’s cost, and there is no intercompany profit or loss on intersegment transfers. Management evaluates performance based on revenue, gross profit contribution and assets employed.SUBSEQUENT EVENTS

~~Financial information about~~Management has evaluated subsequent events through the ~~Company’s reporting segments for the three and nine months ended September 30, 2021 and 2020 are as follows:~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
(unaudited) (unaudited) (unaudited) (unaudited)
COMPLEX MACHINING
Net Sales $ 13,043,000 $ 12,423,000 $ 38,992,000 $ 31,795,000
Gross Profit 2,022,000 1,735,000 5,966,000 4,584,000
Income before benefit from income taxes 1,420,000 912,000 3,973,000 2,072,000
Assets 49,275,000 52,963,000 49,275,000 52,963,000

TURBINE ENGINE COMPONENTS
Net Sales 1,311,000 1,239,000 4,527,000 3,808,000
Gross (loss) Profit (8,000 ) (79,000 ) 448,000 (133,000 )
Loss before benefit from income taxes (119,000 ) (251,000 ) (20,000 ) (594,000 )
Assets 3,443,000 3,941,000 3,443,000 3,941,000

CORPORATE
Net Sales - - - -
Gross Profit - - - -
Loss before benefit from income taxes (1,367,000 ) (1,138,000 ) (3,932,000 ) (3,895,000 )
Assets 803,000 1,860,000 803,000 1,860,000

CONSOLIDATED
Net Sales 14,354,000 13,662,000 43,519,000 35,603,000
Gross Profit 2,014,000 1,656,000 6,414,000 4,451,000
(Loss) Income before benefit from income taxes (66,000 ) (477,000 ) 21,000 (2,417,000 )
Benefit from Income Taxes - - - (1,414,000 )
Net (Loss) Income (66,000 ) (477,000 ) 21,000 (1,003,000 )
Assets $ 53,521,000 $ 58,764,000 $ 53,521,000 $ 58,764,000

date of this filing.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, ~~2020~~2021 (the ~~“2020~~“2021 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report and in our 2021 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements.

Business Overview

~~The financial statements contained in this report as well as the discussion below principally reflect the status of our business~~Air Industries Group is a holding company with three legal subsidiaries, Air Industries Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”) and the ~~results of our operations as of September 30, 2021.~~

Sterling Engineering Company (“SEC”). SEC began manufacturing aircraft components in 1941 – over 80-years ago – for use in World War II. NTW was formed in the early 1960’s and AIM has been in business since 1971. We became a public company in ~~2005 and we are an~~2005.

We manufacture aerospace ~~company operating~~components primarily infor the defense industry. ~~Our Complex Machining segment manufactures~~AIM and NTW, manufacture structural parts and assemblies ~~that focus~~focusing on flight safety, including aircraft landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. ~~Our Turbine Engine Components segment~~SEC makes components and provides services for aircraft jet engines and ground-power turbines. ~~Our products~~

Products of AIM and NTW are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft. They also make a critical component for the Pratt & Whitney Geared TurboFan (“GTF”) aircraft ~~Boeing 777~~engine used on commercial airliners. ~~Our Turbine Engine segment~~SEC makes ~~components for~~products used in jet engines that are used on military and commercial aircraft including the USAF F-15 and F-16, the Airbus A-330 and the Boeing 777, and others, and in addition, to a number of ground-power turbine applications.

The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class products and service but also by increasing our ability to produce more complex and complete assemblies for our customers.

We are ~~currently~~ focused on maintaining profitability ~~achieving~~and positive cash flows from operating ~~activities and~~activities. We remain resolute on meeting customers’ needs. ~~In order to~~To take advantage of the long-term growth opportunities we see in our markets, we have made significant capital investments in new equipment in recent ~~years and have expanded our operations and manufacturing cells located in our Connecticut facility where our Turbine Engine segment is located.~~years. We believe these investments will increase the ~~volume~~velocity and efficiency of production, increase the size of product we can make and allow us to offer additional services to our customers. Some of our investments expand our capabilities allowing us to internally process product that was previously outsourced to third party processors. We are pleased with the positive responses ~~received~~ from our customers ~~to date.~~about these initiatives.

Our ability ~~to continue~~ to operate profitably and generate positive cash flows from operating activities is determined by our ability to win new or renewal contracts and ~~renewals of existing contracts, and then fulfill~~fulfilling these contracts on a timely ~~basis at costs that enable us to generate a profit based upon the agreed upon contract price.~~and cost effective basis. Winning a contract generally requires that we submit a bid containing a fixed ~~price~~prices for the product or products covered by the contract for an agreed upon period of ~~time.~~time, sometimes for five-years or longer, with negotiated increases to reflect a portion of the impact of inflation. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.

While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. The invasion of Ukraine by the Russian Federation and retaliatory measures imposed by the United States, United Kingdom, the European Union and other countries, and the responses of Russia to such measures, have negatively impacted the availability of certain minerals, such as titanium, for which Russia was a source of supply. We are working with our larger customers, some of which have access to sources of metals necessary to manufacture their products not readily available to us or other companies of our size. Nevertheless, there can be no assurance that disruptions in the markets for metals will not adversely impact our ability to timely meet the needs of our customers.

In addition, the market for the skilled labor we require to operate our plants is highly competitive. Changes in the available pool of labor caused by Covid-19 have not materially adversely impacted our ability to meet our production schedules. Nevertheless, as we seek to grow our business, there can be no assurance that the skilled labor we need to operate our machinery will be available to us or that the costs incurred to maintain our current labor force and those we seek to bring on will not increase.

The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold. Our operations have a large percentage of fixed factory overhead. As a result, our profit margins are also highly variable with sales volumes as under-absorption of factory overhead decreases profits.

Our revenues are principally determined by orders from our customers for the delivery of product – which we call releases – against LTA’s with those customers. These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact of inflation, though over the term of a LTA prices often increase and not all of the increase is covered by agreed upon price protection clauses in our agreements. Our direct costs of production include costs for material, labor, and factory overhead; all of these costs may vary based on the efficiency of our factory operations. Our gross profit is highly variable due to the mix of products sold, and by sales volume, which can lead to the over absorption or under absorption of factory overhead costs.

Beyond these direct costs of production, we incur general and administrative costs termed Operating Expenses and financing costs for borrowed money, income taxes and miscellaneous income and expense.

A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already in the fleet of the armed services or for the production of new aircraft. ~~Recent increases in Defense Department spending have increased orders for our products.~~ Reductions to the Defense Department budget orand decreased usage of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business and our ~~revenues. We are focusing greater efforts on the civilian aircraft market though we still remain dependent upon the military for an overwhelming portion of our revenues.~~revenue.

~~Segment Data~~

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

We currently divide our operations into two operating segments: Complex Machining and Turbine Engine Components. Along with our operating subsidiaries, we report the results of our corporate office as an independent segment.

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

RESULTS OF OPERATIONS

For purposes of the following discussion of our selected financial information and operating results, we have presented our financial information based on our continuing operations unless otherwise noted.

Selected Financial Information:

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,		September 30,
	2021			2020			2021		2020			Three Months Ended						Nine Months Ended
	(unaudited)			(unaudited)			(unaudited)		(unaudited)			September 30,			September 30,			September 30,			September 30,
												2022			2021			2022			2021
Net sales	$	14,354,000		$	13,662,000		$	43,519,000	$	35,603,000		$	13,278,000		$	14,354,000		$	39,348,000		$	43,519,000
Cost of sales		12,340,000			12,006,000			37,105,000		31,152,000			11,036,000			12,340,000			32,606,000			37,105,000
Gross profit		2,014,000			1,656,000			6,414,000		4,451,000			2,242,000			2,014,000			6,742,000			6,414,000
Operating expenses and interest and financing costs		2,168,000			2,255,000			6,731,000		7,231,000			2,396,000			2,168,000			7,051,000			6,731,000
Other income, net		88,000			122,000			338,000		363,000			12,000			88,000			132,000			338,000
Benefit from income taxes		-			-			-		(1,414,000	)
Net (Loss) income	$	(66,000	)	$	(477,000	)	$	21,000	$	(1,003,000	)
Net (loss) income												$	(142,000	)	$	(66,000	)	$	(177,000	)	$	21,000

Balance Sheet Data:

	September 30,		December 31,
	2022		2021
Cash	$	192,000	$	627,000
Working capital	$	18,337,000	$	17,478,000
Total assets	$	54,778,000	$	53,425,000
Total stockholders’ equity	$	17,636,000	$	17,389,000

September 30, December 31,
2021 2020
(unaudited)

Cash and cash equivalents $ 692,000 $ 2,505,000
Working capital $ 17,002,000 $ 16,284,000
Total assets $ 53,521,000 $ 57,777,000
Total stockholders’ equity $ 15,647,000 $ 15,109,000

~~The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
(unaudited) (unaudited) (unaudited) (unaudited)
COMPLEX MACHINING
Net Sales $ 13,043,000 $ 12,423,000 $ 38,992,000 $ 31,795,000
Gross Profit 2,022,000 1,735,000 5,966,000 4,584,000
Income before benefit from income taxes 1,420,000 912,000 3,973,000 2,072,000
Assets 49,275,000 52,963,000 49,275,000 52,963,000

TURBINE ENGINE COMPONENTS
Net Sales 1,311,000 1,239,000 4,527,000 3,808,000
Gross (Loss) Profit (8,000 ) (79,000 ) 448,000 (133,000 )
Loss before benefit from income taxes (119,000 ) (251,000 ) (20,000 ) (594,000 )
Assets 3,443,000 3,941,000 3,443,000 3,941,000

CORPORATE
Net Sales - - - -
Gross Profit - - - -
Loss before benefit from income taxes (1,367,000 ) (1,138,000 ) (3,932,000 ) (3,895,000 )
Assets 803,000 1,860,000 803,000 1,860,000

CONSOLIDATED
Net Sales 14,354,000 13,662,000 43,519,000 35,603,000
Gross Profit 2,014,000 1,656,000 6,414,000 4,451,000
(Loss) Income before benefit from income taxes (66,000 ) (477,000 ) 21,000 (2,417,000 )
Benefit from Income Taxes - - - (1,414,000 )
Net (Loss) Income (66,000 ) (477,000 ) 21,000 (1,003,000 )
Assets $ 53,521,000 $ 58,764,000 $ 53,521,000 $ 58,764,000

Results of Operations for the three months ended September 30, ~~2021~~2022

Net Sales:

Consolidated net sales for the three months ended September 30, ~~2021~~2022 were ~~$14,354,000, an increase~~$13,278,000, a decrease of ~~$692,000,~~$1,076,000, or ~~5.1%~~7.5%, compared with ~~$13,662,000~~$14,354,000 for the three months ended September 30, ~~2020.~~2021. The ~~increase~~decrease in ~~consolidated net~~ sales ~~is driven by our ability to increase production and return to pre-COVID-19 business environment.~~resulted principally from the sale of products with lower selling prices during the quarter.

Net sales of our Complex Machining segment were $13,043,000 in the three months ended September 30, 2021, an increase of $620,000, or 5.0%, from $12,423,000 in the three months ended September 30, 2020. Net sales in our Turbine Engine Components segment for the three months ended September 30, 2021 were $1,311,000, an increase of $72,000, or 5.8%, compared with $1,239,000 for the three months ended September 30, 2020.

As indicated in the table below, two customers represented ~~67.7%~~63.9% and ~~three customers represented 70.6%~~67.7% of total sales for the three months ended September 30, ~~2021~~2022 and September 30, ~~2020,~~2021, respectively.

Customer	Percentage of Sales						Percentage of Sales
	2021			2020
	(unaudited)			(unaudited)
							2022			2021
Goodrich Landing Gear Systems		41.6	%		23.20	%		40.7	%		41.6	%
Sikorsky Aircraft		26.1	%		25.80	%		23.2	%		26.1	%
United States Department of Defense		*			21.60	%

~~Customer was less than 10% of sales for the three months ended September 30, 2021.~~

Gross Profit:

Consolidated gross profit from operations for the three months ended September 30, ~~2021~~2022 was ~~$2,014,000,~~$2,242,000, an increase of ~~$358,000,~~$228,000, or ~~21.6%~~11.3%, as compared to gross profit of ~~$1,656,000~~$2,014,000 for the three months ended September 30, ~~2020.~~2021. Consolidated gross profit as a percentage of sales was ~~14.0%~~16.9% and ~~12.1%~~14.0% for the three months ended September 30, 2022 and 2021, ~~and 2020,~~ respectively.

~~During~~ For interim periods, substantially all of ~~our~~the inventory value has been estimated using a gross profit percentage based on the annual gross profit ~~percentages~~percentage of the immediately preceding ~~year as~~year. Inventory value and gross profit margin for 2021 was estimated using the gross profit margin percentage in 2020. Gross profit margins in 2020 were negatively impacted by Covid-19 and therefore impacted the estimated gross profit margins applied to the ~~net sales of the current period. However, during the three months ended September 30,~~ 2021 ~~we increased our estimate of~~interim periods. Actual gross profit margins returned to historical levels in 2021 and this higher gross profit margin have been used to calculate the gross profit ~~percentage~~margins for ~~our Complex Machining segment from~~ the ~~percentage~~interim periods for ~~2020 based on the better absorption of Manufacturing Overhead which results from increased sales.~~2022.

Operating Expense

Consolidated operating expenses for the three months ended September 30, ~~2021~~2022 totaled ~~$1,837,000~~$2,073,000 and ~~decreased~~increased by ~~$59,000~~$239,000 or ~~3.1%~~13.0% compared to ~~$1,896,000~~$1,837,000 for the three months ended September 30, ~~2020.~~2021. The ~~decrease~~increase was caused by increases in ~~operating~~employment costs, including employee health benefits increases which were not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel to customers as Covid restrictions eased. These increased costs were partially offset by reductions in expenses ~~is due~~related to ~~management’s successful efforts to reduce costs as well as timing.~~information technology and the recovery of bad debt.

Interest and Financing Costs

Interest and financing costs for the three months ended September 30, ~~2021~~2022 were ~~$331,000~~$323,000 a decrease of ~~$28,000~~$8,000 or ~~7.8%~~2.4% compared to ~~$359,000~~$331,000 for the three months ended September 30, ~~2020.~~2021. The primary reason for this was lower balances on our debt with Webster Bank. The average interest rate charged was 4.70% and 3.50% for the three months ended September 30 2022 and 2021, respectively.

Net Loss

Net loss for the three months ended September 30, ~~2021~~2022 was ~~$66,000,~~$142,000, compared to a net loss of ~~$477,000~~$66,000 for the three months ended September 30, ~~2020. The lower loss period-over-period primarily reflects our ability~~2021 due to ~~generate operating income in fiscal 2021 as compared to an operating loss in fiscal 2020.~~the reasons stated above.

Results of Operations for the nine months ended September 30, ~~2021~~2022

Net Sales:

Consolidated net sales for the nine months ended September 30, ~~2021~~2022 were ~~$43,519,000, an increase~~$39,348,000, a decrease of ~~$7,916,000,~~$4,171,000, or ~~22.2%~~9.6%, compared with ~~$35,603,000~~$43,519,000 for the nine months ended September 30, ~~2020.~~2021. The ~~increase~~decrease in ~~consolidated net~~ sales ~~is driven by our ability to increase production~~resulted principally from the sale of products with lower selling prices and ~~return to pre-Covid-19 business environment.~~from contracts that expired in 2021 and were not renewed in 2022.

Net sales of our Complex Machining segment were $38,992,000 in the nine months ended September 30, 2021, an increase of $7,197,000, or 22.6%, from $31,795,000 in the nine months ended September 30, 2020. Net sales in our Turbine Engine Components segment were $4,527,000 for the nine months ended September 30, 2021, an increase of $719,000, or 18.9% compared with $3,808,000 for the nine months ended September 30, 2020.

As indicated in the table below, three customers represented ~~75.5%~~68.9% and ~~74.2%~~75.5% of total sales for the nine months ended September 30, ~~2021~~2022 and September 30, ~~2020,~~2021, respectively.

Customer	Percentage of Sales						Percentage of Sales
	2021			2020
	(unaudited)			(unaudited)
							2022			2021
Goodrich Landing Gear Systems		36.8	%		28.2	%		32.5	%		36.8	%
Sikorsky Aircraft		26.2	%		32.1	%		19.5	%		26.2	%
United States Department of Defense		12.5	%		13.9	%		16.9	%		12.5	%

Gross Profit:

Consolidated gross profit from operations for the nine months ended September 30, ~~2021~~2022 was ~~$6,414,000,~~$6,742,000, an increase of ~~$1,963,000,~~$328,000, or ~~44.1%~~5.1%, as compared to gross profit of ~~$4,451,000~~$6,414,000 for the nine months ended September 30, ~~2020.~~2021. Consolidated gross profit as a percentage of sales was ~~14.7%~~17.1% and ~~12.5%~~14.7% for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ respectively.

~~During~~ For interim periods, substantially all of ~~our~~the inventory value has been estimated using a gross profit percentage based on the annual gross profit ~~percentages~~percentage of the immediately preceding ~~year as~~year. Inventory value and gross profit margin for 2021 was estimated using the gross profit margin percentage in 2020. Gross profit margins in 2020 were negatively impacted by Covid-19 and therefore impacted the estimated gross profit margins applied to the ~~net sales of the current period. However, during the nine months ended September 30,~~ 2021 ~~we increased our estimate of~~interim periods. Actual gross profit margins returned to historical levels in 2021 and this higher gross profit margin have been used to calculate the gross profit ~~percentage~~margins for ~~our Complex Machining segment based on~~ the ~~better absorption of Manufacturing Overhead which results from increased sales.~~interim periods for 2022.

Operating Expense

Consolidated operating expenses for the nine months ended September 30, ~~2021~~2022 totaled ~~$5,770,000~~$6,116,000 and ~~decreased~~increased by ~~$294,000~~$346,000 or ~~4.8%~~6.0% compared to ~~$6,064,000~~$5,770,000 for the nine months ended September 30, ~~2020.~~2021. The increase was caused by increases in employment costs, including employee health benefits increases which were not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel to customers as Covid restrictions eased. These increased costs were partially offset by reductions in information technology and bad debt expense.

Interest and Financing Costs

Interest and financing costs for the nine months ended September 30, ~~2021~~2022 were ~~$961,000~~$935,000 a decrease of ~~$206,000~~$26,000 or ~~17.7%~~2.7% compared to ~~$1,167,000~~$961,000 for the nine months ended September 30, ~~2020. This decrease is attributable to~~2021. The primary reason for this was lower balances on our debt with Webster Bank. The average interest rate charged was 3.94% and 3.50% for the ~~conversion of our third party Convertible Debt during fiscal 2020.~~ nine months ended September 30 2022 and 2021, respectively.

Net (Loss) Income ~~(Loss)~~

Net Loss for the nine months ended September 30, 2022 was $177,000, compared to net income of $21,000 for the nine months ended September 30, 2021, ~~was $21,000, compared to a net loss of $1,003,000 for the nine months ended September 30, 2020,~~ for the reasons discussed above. The Company was able to generate net income for its most recent nine-month period primarily due to the generating of operating income in fiscal 2021 as compared to an operating loss in fiscal 2020. The Company recorded a benefit from income taxes of $1,414,000 for the nine months ended September 30, 2020 pursuant to the filing of a net operating loss claim (see below).

LIQUIDITY AND CAPITAL RESOURCES

~~During fiscal 2020, we took advantage of a number of U.S. government programs to improve our liquidity to offset the negative impact to our business from COVID-19. These steps included:~~Our material cash requirements are for debt service, capital expenditures and funding working capital/operating costs.

As of September 30, 2022, we have debt service requirements related to:

~~Received Low Interest Loans from the SBA~~ ~~– In May 2020, our three operating subsidiaries entered into government subsidized loans with Sterling National Bank (“SNB”) in an aggregate principal amount~~Our Webster Facility of ~~$2.4 million (“SBA Loans”).~~

~~Applied for and Received Forgiveness~~$18,788,000 consisting of ~~the SBA Loans~~ ~~– In accordance with U.S. government regulations we applied to SNB for forgiveness~~a Revolving Loan of ~~each Loan in full and in December 2020 we received final approval from the SBA that the entire principal amount of our SBA Loans plus accrued interest had been forgiven.~~

~~Deferred Certain Tax Payments~~ – In accordance with Section 2302 of the CARES Act, we elected to defer the deposit and payment of the employer’s portion of Social Security taxes. These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of December 31, 2020, we deferred $627,000, which is included in Deferred payroll tax liability – CARES Act on the accompanying Condensed Consolidated Balance Sheet.

~~Received a Net Operating Loss Refund~~ ~~– Pursuant to the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter 2020.~~

Also, the U.S. Department of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on certain contracts.

~~In addition to taking advantage of U.S. government programs, during fiscal 2020 we took additional significant steps to improve our liquidity and operating performance, including:~~

~~Entered into a Lower Cost Financing Facility~~ – On December 31, 2019, we entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) which expires on December 30, 2022. The SNB Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”)$14,097,000 and a term loan ~~(“SNB~~in the amount of $4,691,000. During the remainder of fiscal 2022, we are required to pay $178,000 of principal under the term ~~loan”). The interest on the SNB Facility is more advantageous than that of our previous lending facility which we paid off with the proceeds from the SNB Facility.~~loan.

~~Increased Term~~Related party debt consisting of convertible subordinated note payables of $4,812,000 and subordinated note payables of $1,350,000. This debt is not due until July 1, 2026. We are permitted to make principal payments against this debt in the amount of $250,000 per quarter pursuant to the Third Amendment to the Loan ~~to Modernize Equipment~~ –and Security Agreement with Webster Bank, as long as certain conditions are met. On ~~November 6, 2020, we amended~~July 14, 2022, a principal payment in the ~~SNB Facility, increasing~~amount of $250,000 was made as the ~~Term Loan to $5,685,000. This allowed us to finance~~conditions for such payment were met for the ~~acquisition~~first quarter of ~~the new equipment at what we believe to be a reasonable interest rate.~~2022.

Various equipment leases and contractual obligations related to our normal business.

~~The repayment terms~~We have historically met our cash requirements with funds provided by a combination of ~~the term loan were amended~~cash generated from operating activities and cash generated from equity and debt financing transactions. Based on our current revenue visibility and strength of our backlog, we believe that we have sufficient liquidity to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022. We paid an amendment fee of $20,000. Additionally, the date by which certain subordinated third-party notes were to be extended by was changed from September 30, 2020 to November 30, 2020. We caused all of these notes to be converted into common stock prior to December 31, 2020.

The formula to determine the amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible receivables and inventory (as defined in the SNB Facility).

For so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year, beginning with the year ending December 31, 2020, we shall pay to SNB an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan. Such payment shall be made to SNB and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such Fiscal Year.

meet our short-term cash requirements. On ~~June 14, 2021,~~May 17, 2022, we entered into the ~~Second~~Fourth Amendment to the Loan and Security Agreement ~~(“Second Amendment”).~~with Webster Bank. The purpose of the ~~Second Amendment~~amendment was to ~~clarify~~increase the ~~definition and calculation of Excess Cash Flow, and~~Term Loan to ~~confirm~~$5,000,000, reduce the ~~extension of the due date for the payment of the Excess Cash Flow. The amount of the Excess Cash Flow payment for the year ended December 31, 2020 was calculated~~monthly principal installments to be ~~$558,750. Per~~made in respect to the ~~terms~~term loan and establish a capital expenditure line of the Second Amendment, the Excess Cash Flow is payable in three installments of $186,250 on each of June 15, 2021, June 30, 2021, and September 15, 2021. As of September 30, 2021, we paid the full amount of the Excess Cash Flow. Additionally, we paid an amendment fee of $10,000.

The terms of the SNB Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, we are limitedcredit in the amount of ~~Capital Expenditures~~$2,000,000 which we can ~~make. As~~draw upon from time to time to finance purchases of ~~September 30, 2021, we were in compliance with all loan covenants. The SNB Facility also restricts~~machinery and equipment, thereby increasing the amount of ~~dividends~~capital expenditures we may ~~pay~~make each year.

Because we believe our fourth quarter fiscal 2022 sales will be in line with the amount achieved in the comparable period of 2021, we believe our liquidity will continue to improve. As a result of recent increases in the federal funds borrowing rate, interest rates and related expense under our ~~stockholders. Substantially all~~Webster Facility are expected to increase from current levels. Such increases are not expected to materially impact our liquidity.

Our future liquidity may be adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such as COVID-19 and the war in the Ukraine, increases in inflation, disruptions in the labor market and other risks detailed in Part1, Item 1A of our ~~assets are pledged as collateral under the SNB Facility.~~2021 Annual Report on Form 10-K. Should our cash requirements change beyond our current expectations due to general economic conditions or a strategic decision, we may choose to raise additional funds through equity and debt financing transactions. We believe that we have sufficient access to credit and/or financing from public and private debt and equity markets.

Changes in our cash flow are discussed further below.

As of September 30, 2021, our debt to SNB in the amount of $17,874,000 consisted of the SNB revolving line of credit note in the amount of $13,463,000 and the SNB term loan in the amount of $4,411,000.

Conversion and Extension of Subordinated Notes – During 2020, third party holders of convertible subordinated notes of the remaining principal balance plus accrued interest, converted these notes into common stock. In addition, the maturity date of related party convertible subordinated notes and subordinated notes payable in the aggregate amount of $6,012,000 plus $400,000 of accrued interest was extended until July 1, 2023, and we were relieved of the obligation to make any principal payments on these notes prior to maturity.

~~Because we continue to believe our fiscal 2021 sales will be higher than the amount achieved in fiscal 2020, we believe our liquidity for the remainder of 2021 will continue to improve.~~

Cash Flow

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

	Nine Months Ended
	September 30,
	2022			2021
Cash provided by (used in)
Operating activities	$	(73,000	)	$	2,514,000
Investing activities		(1,980,000	)		(983,000	)
Financing activities		1,618,000			(3,344,000	)
Net decrease in cash	$	(435,000	)	$	(1,813,000	)

Nine Months Ended
September 30,
2021 2020
(unaudited) (unaudited)
Cash (used in) provided by
Operating activities $ 2,514,000 $ (3,184,000 )
Investing activities (983,000 ) (1,471,000 )
Financing activities (3,344,000 ) 4,821,000
Net (decrease) increase in cash and cash equivalents $ (1,813,000 ) $ 166,000

Cash Provided by (Used in) Operating Activities

Cash ~~provided by~~used in operating activities primarily consists of our net ~~income of $21,000~~loss adjusted for certain non-cash items and changes to working capital items.

For the nine months ended September 30, ~~2021~~2022, our net loss as adjusted for non-cash items provided cash of ~~$2,829,000 consisted~~$2,414,000. This was a result of our net loss of $177,000, offset by $2,591,000 of non-cash items consisting primarily of depreciation of property and equipment of ~~$2,105,000,~~$1,906,000, non-cash employee stock compensation expense of ~~$361,000,~~$262,000, amortization of right-of-use assets of ~~$364,000~~$403,000 and non-cash directors’ compensation expense of ~~$156,000 offset by $274,000 of non-cash income.~~$162,000. The remaining non-cash items totaled ~~$117,000.~~absorbed $142,000.

~~Operating~~Changes in operating assets and liabilities used cash in the net amount of ~~$336,000~~$2,487,000 consisting primarily of ~~the net~~ increases in ~~accounts receivable~~inventory, deposits and prepaid expenses and other current assets in the amounts of ~~$1,692,000~~$3,876,000, $74,000 and ~~$159,000,~~$24,000, respectively, and decreases in ~~accounts payable and~~ operating lease liabilities and customer deposits of ~~$1,261,000,~~$504,000 and ~~$541,000,~~$179,000, respectively, partially offset by a decrease in ~~inventory, a decrease~~accounts receivable in ~~other current assets~~the amount of $1,917,000, an increase in accounts payable and accrued expenses in the amount of $117,000 and an increase in ~~deferred revenue in the amounts~~other current liabilities of ~~$2,761,000, $15,000, and $571,000, respectively.~~$139,000.

Cash Used in Investing Activities

Cash used in investing activities consists of capital expenditures for property and equipment.

For the nine months ended September 30, ~~2021,~~2022, cash used in investing activities was ~~$983,000. This was for the purchase of property and equipment.~~$1,980,000.

Cash Provided by (Used in) Financing Activities

For the nine months ended September 30, ~~2021,~~2022, cash ~~used in~~provided by financing activities consisted of net ~~payments~~proceeds from the Webster re-financing of $1,945,000 and net advances on our ~~SNB~~Webster revolving loan ~~and~~in the amount of $1,641,000, partially offset by repayments of $1,430,000 on our Webster term note, ~~in the amounts of $2,187,000 and $1,147,000, respectively and payments of $3,000 and $7,000~~$263,000 on our ~~financing~~financed lease obligations, ~~and loan~~$250,000 on our subordinated notes payable – related party and $5,000 on our financed ~~asset.~~asset note payable.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements as of September 30, ~~2021.~~2022.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. ~~GAAP,~~GAAP”), and all applicable U.S. GAAP accounting standards effective as of September 30, ~~2021~~2022 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation of condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our condensed consolidated financial statements:

●

Liquidity;

●

Inventory valuation;

●

Revenue recognition;

●

Income taxes;

●

Stock-based compensation; and

●

Goodwill.

We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our estimates.

Recently Issued Accounting Pronouncements

See Note 2 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Item 4. Controls and Procedures

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~~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 as of the end of the period covered by this Report under the supervision of and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

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.

PART II

OTHER INFORMATION

Item 1A. Risk Factors.

Prospective investors are encouraged to consider the risks described in our ~~2020~~2021 Form 10-K, our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Report and other information publicly disclosed or contained in documents we file with the Securities and Exchange Commission before purchasing our securities. The following risk factor supplements the risk factors described in our 2020 Form 10-K and should be read in conjunction with the other risk factors presented in our Annual Report which are incorporated herein by reference.

~~COVID -19~~

The COVID-19 pandemic and the resulting macroeconomic disruptions have affected how we, our customers and our suppliers are operating our businesses and disrupted supply chains in various industries. The duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain. Our operations have substantially returned to normal, nevertheless, any future disruption from COVID-19 or any other event which depresses macroeconomic results or disrupts supply chains, may materially impact our business and our consolidated financial position, results of operations, and cash flows.

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

~~Except as previously disclosed on our Exchange Act reports, we did not issue or sell any unregistered equity securities during the period covered by this Report.~~

Item 6. Exhibits

Exhibit No.		Description

2.1		Agreement and Plan of Merger dated July 29, 2013 between Air Industries Group, Inc. and Air Industries Group (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed August 30, 2013).

2.2		Articles of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 28, 2013 (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed August 30, 2013).

2.3		Certificate of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 29, 2013 (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed August 30, 2013).

3.1		Articles of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 30, 2013).

3.2		Certificate of Amendment increasing authorized shares of common stock to 60,000,000 shares (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 filed on August 8, 2019).

3.3		Certificate of Change filed October 4, 2022 (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 8-K filed October 18, 2022).

3.4		Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on ~~Form 10-K~~form 10K for the year ended December 31, 2014 filed on March 31, ~~2015).~~2015.)


		Certifications

31.1		Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934.

31.2		Certification of principal financial officer pursuant to Rule 13a-14 or Rule 15d-14 of the Exchange Act of 1934.

32.1		Certification of principal executive officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

32.2		Certification of principal financial officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

		XBRL Presentation

101.INS		XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL ~~document~~document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November ~~12, 2021~~14, 2022

	AIR INDUSTRIES GROUP

	By:	/s/ Michael Recca
		Michael Recca Chief Financial Officer (principal financial and accounting officer)

3130

iso4217:USD xbrli:shares

	Amount
December 31, 2021 (remainder of the year)	$	249,000
December 31, 2022		1,007,000
December 31, 2023		1,038,000
December 31, 2024		1,070,000
December 31, 2025		992,000
Thereafter		730,000
Total future minimum lease payments		5,086,000
Less: discount		(999,000	)
Total operating lease maturities		4,087,000
Less: current portion of operating lease liabilities		(664,000	)
Total long term portion of operating lease maturities	$	3,423,000

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2021			2020			2021			2020
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
COMPLEX MACHINING
Net Sales	$	13,043,000		$	12,423,000		$	38,992,000		$	31,795,000
Gross Profit		2,022,000			1,735,000			5,966,000			4,584,000
Income before benefit from income taxes		1,420,000			912,000			3,973,000			2,072,000
Assets		49,275,000			52,963,000			49,275,000			52,963,000

TURBINE ENGINE COMPONENTS
Net Sales		1,311,000			1,239,000			4,527,000			3,808,000
Gross (loss) Profit		(8,000	)		(79,000	)		448,000			(133,000	)
Loss before benefit from income taxes		(119,000	)		(251,000	)		(20,000	)		(594,000	)
Assets		3,443,000			3,941,000			3,443,000			3,941,000

CORPORATE
Net Sales		-			-			-			-
Gross Profit		-			-			-			-
Loss before benefit from income taxes		(1,367,000	)		(1,138,000	)		(3,932,000	)		(3,895,000	)
Assets		803,000			1,860,000			803,000			1,860,000

CONSOLIDATED
Net Sales		14,354,000			13,662,000			43,519,000			35,603,000
Gross Profit		2,014,000			1,656,000			6,414,000			4,451,000
(Loss) Income before benefit from income taxes		(66,000	)		(477,000	)		21,000			(2,417,000	)
Benefit from Income Taxes		-			-			-			(1,414,000	)
Net (Loss) Income		(66,000	)		(477,000	)		21,000			(1,003,000	)
Assets	$	53,521,000		$	58,764,000		$	53,521,000		$	58,764,000