Formation and Basis of Presentation

12 Months Ended

Dec. 31, 2019

Formation and Basis of Presentation [Abstract]

FORMATION AND BASIS OF PRESENTATION

Note 1. FORMATION AND BASIS OF PRESENTATION

Organization

Air Industries Group is a Nevada corporation ("AIRI"). As of and for the year ended December 31, 2019, the accompanying consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. ("AIM"), Nassau Tool Works, Inc. ("NTW"), Eur-Pac Corporation ("Eur-Pac" or "EPC"), Electronic Connection Corporation ("ECC"), Air Realty Group, LLC ("Air Realty"), and The Sterling Engineering Corporation ("Sterling"), (together, the "Company"). The results of EPC and ECC are included in loss from discontinued operations, since operations ceased on March 31, 2019. See Note 2 for details of discontinued operations.

As of and for year ended December 31, 2018, the accompanying consolidated financial statements also include the Company's former subsidiaries all of which are included in loss from discontinued operations: Welding Metallurgy, Inc. ("WMI") including its wholly owned subsidiaries Miller Stuart, Inc. ("Miller Stuart"), Woodbine Products, Inc. ("Woodbine" or "WPI"), Decimal Industries, Inc. ("Decimal") and Compac Development Corporation ("Compac"), (collectively "WMI Group"). See Note 2 for details of discontinued operations.

Going Concern - Alleviation of Substantial Doubt

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company suffered net losses from continuing operations, net of taxes of $2,598,000 and $8,551,000 for the years ended December 31, 2019 and 2018, respectively, and had negative cash flows from operations (both continuing and discontinued combined) of $888,000 and $2,336,000 for the years ended December 31, 2019 and 2018, respectively. The Company has been dependent on raising equity or other financing to fund ongoing operations. These factors raised substantial doubt about the Company's ability to continue as a going concern.

In December 2019 the Company refinanced its PNC Bank revolving debt and term loan with Sterling National Bank on better terms and the combination of the significantly lower interest rates and extended amortization of the new credit facility is estimated to reduce the Company's cash interest and cash principal amortization significantly. The Company's revenues from sales and its gross profit from its continuing operations increased in 2019 by $10,043,000 and $3,697,000, respectively, from the previous year. The Company is projecting positive cash flows from operations in 2020 and management believes the Company will be able to meet its obligations as they come due for the year from the date of issuance of these financial statements.

Accordingly, the above factors have alleviated substantial doubt about the entity's ability to continue as a going concern.

Sale of Welding Metallurgy Inc.

On December 20, 2018, the Company sold all of the outstanding shares of WMI including its wholly owned subsidiaries Miller Stuart, Woodbine, Decimal and Compac to CPI Aerostructures, Inc., pursuant to a Stock Purchase Agreement (SPA) for a purchase price of $9,000,000, reduced by a working capital adjustment of ($1,093,000). The sale required an escrow deposit of $2,000,000 to cover the working capital adjustment and our obligation to indemnify CPI against damages arising out of the breach of our representations and warranties and obligations under the SPA. The amount of the final working capital adjustment has been contested by CPI and is currently the subject of litigation between the Company and CPI (See Note 14-Contingencies).

Closing EPC and ECC

The Company completed its shut-down of EPC and ECC and closed related operations on March 31, 2019. In connection with the shut-down, the Company recognized a loss on abandoned assets of $386,000 during the fourth quarter of 2018, which is included in loss from discontinued operations for the year ended December 31, 2018.

Additionally, the Company determined that goodwill for ECC in the amount of $109,000 had been impaired and is included in the loss from discontinued operations for the year ended December 31, 2018.

Adoption of ASC 842

On January 1, 2019, the Company adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases, or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet and the disclosure of key information about certain leasing arrangements. As permitted by ASC 842, the Company elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases, or ASC 840, which did not require the recognition of operating lease liabilities on the balance sheet, and is not comparative. Under ASC 842, 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. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in the Company's results of operations presented in the consolidated statement of operations for each period presented.

The Company adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on the Company's consolidated balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. The accounting of finance leases was substantially unchanged. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and the Company recorded an adjustment of $4,368,000 to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using the Company's incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the term. As permitted under ASC 842, the Company elected several practical expedients that permits it to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.

Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. Substantially all the Company's operating leases are comprised of office space leases and substantially all its finance leases are comprised of office furniture and technology equipment.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate for the same term as the underlying lease. For the Company's real estate and other operating leases, the Company uses its incremental borrowing rate. For the Company's finance leases, it uses the rate implicit in the lease or its incremental borrowing rate if the implicit lease rate cannot be determined.

Lease payments included in the measurement of the lease liability comprise the following: the fixed non-cancellable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Some of the Company's real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and separated into lease and non-lease components based on the initial amount stated in the lease or standalone selling prices. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in the Company's portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in re-measurement of the lease liability.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases on its right-of-use asset and lease liability was not material.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating lease. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

The impact of the adoption of ASC 842 on the balance sheet at December 31, 2018 was:

	As Reported December 31, 2018		Adoption of ASC 842 Increase (Decrease)			Balance January 1, 2019
Operating Lease Right-Of-Use-Asset	$	-	$	4,368,000		$	4,368,000
Total Assets	$	47,756,000	$	4,368,000		$	52,124,000
Operating Leases Liabilities - Current Portion	$	-	$	547,000		$	547,000
Total Current Liabilities	$	29,007,000	$	547,000		$	29,554,000
Operating Leases Liabilities - Net of Current Portion	$	-	$	4,986,000		$	4,986,000
Deferred Rent	$	1,165,000	$	(1,165,000	)	$	-
Total Liabilities	$	36,150,000	$	4,368,000		$	40,518,000
Total Liabilities and Stockholders' Equity	$	47,756,000	$	4,368,000		$	52,124,000

	December 31,
	2019
Weighted Average Remaining Lease Term - in years		6.32
Weighted Average discount rate - %		9.50	%

Subsequent Events

On March 11, 2020, the World Health Organization announced that infections caused by the coronavirus disease of 2019 ("COVID-19") had become pandemic, and on March 13, 2020, the U.S. President announced a national Emergency relating to the disease. National, state and local authorities have adopted various regulations and orders, including mandates on the number of people that may gather in one location and closing non-essential businesses. To date, the Company has been deemed an essential business and has not curtailed its operations.

The measures adopted by various governments and agencies, as well as the likelihood that many individuals and businesses will voluntarily shut down or self-quarantine, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts which may be adopted by governments is uncertain. The likely overall economic impact of the COVID-19 pandemic will be highly negative to the general economy. While the Company continues to operate in the normal course, they may be forced to close or reduce operations for reasons such as the health of its employees or because of disruptions in the continued operation of its supply chain and sources of supply. At this time, the Company cannot forecast with any certainty whether and to what degree the disruptions caused by the COVID-19 pandemic will increase, or the extent to which the disruption may materially impact its consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

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