EATON & VAN WINKLE LLP
Three Park Avenue, 16th floor
New York, NY 10016
February 3, 2009
Mr. David R. Humphrey
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 3561
100 F Street, N.E.
Washington, D.C. 20549
Re: Air Industries Group, Inc.
Form 10-K for the year ended December 31, 2007
Filed April 14, 2008
File No. 000-29245
Dear Mr. Humphrey:
On behalf of Air Industries Group, Inc., a Delaware corporation (the
"Company"), I am submitting this letter in response to the Staff's letter of
comment dated January 22, 2009 on the Company's Form 10-K for the fiscal year
ended December 31, 2007.
Our responses below have been numbered to correspond to the Staff's
comments.
Form 10-K for the year ended December 31, 2007
MD&A, page 20
1. Reference is made to your response to our prior comment 3. In order to
facilitate our evaluation of your response, please tell us more about the
project-specific engineering costs that have been capitalized in fiscal 2007.
You state in your Summary of Significant Accounting Policies (Footnote 3 to your
financial statements) that you produce parts for customers under contractual
agreements. The parts that you have produced have been designed by those
customers. You also state that "pre-production engineering and programming" of
your machines is required to "produce" these parts. Please describe, in greater
detail, the exact nature of the costs you have capitalized, including how each
significant cost category is associated with the creation of molds, dies, and
other "tools" that will be used to produce the products. Further, explain why
these tools do not involve "new" technology. In this regard, if the customer
provides you with a design, it appears that your efforts may constitute the
development of the customer's original design. Finally, your response states
that the more complex projects require "engineering and design" services. It
appears that your efforts may relate to the design and development of the part
or product that will be sold. Please provide further support for your conclusion
that the capitalization of these (specific) pre-production engineering and
machine programming costs is in accordance with GAAP. We may have further
comments upon review of your response.
Response: The Company has advised us that the nature of the cost that it
has capitalized is related to the setup of its production lines to manufacture
parts to the specifications provided by its customers. For example, the Company
received specifications from a customer to produce components of an Airbus A380
landing gear. The components had already been designed by the customer and all
specifications had been approved by the appropriate government agencies. Once
the Company accepted the purchase order to manufacture this component, it needed
to produce a prototype test part to be approved by the customer to ensure that
the component would be manufactured to the customer's specifications. The
Company capitalized all of the costs incurred in this process. Once the
Production Prototype had been approved, the Company manufactured the "First
Article." The labor, tooling and programming of the specific machines used to
produce the prototype and to be used to produce the component are all
capitalized. The "first article" is then sent to the customer for final
inspection and sign-off.
Amortization of the capitalized engineering hours begins once the first article
has been approved by the customer and the Company begins to produce the
component.
The Company advises us that it amortizes these costs over a three year period or
the length of the contract, whichever is less, but that if the contract is for
less than one year or $1 million in sales revenue, the costs are expensed.
The Company also advises us that the tooling developed in this process does not
constitute "new technology" - rather, it is used on the Company's existing
machines to assist in the manufacturing of the component. The tooling developed
is generally used during the manufacturing process to hold the raw material in
place so that it may be machined according to the specifications. If for any
reason the production must be moved to a different type of machine (i.e. the
machine breaks down, upgraded, etc.), the tooling might need to be modified.
In response to your inquiry regarding "it appears that your efforts may
constitute the development of the customer's original design," the Company has
advised us that in the course of this work it does not deviate from, or modify,
the customer's original design specifications -- it merely engineers, programs,
and tools its machinery to produce the component to the customer's exact
specifications. It also advises that many of the components it manufactures, may
have been previously manufactured by others, and therefore must be made to the
exact specifications indicated by the customer, as the component is going to be
used in an existing aircraft.
After researching the appropriate accounting treatment, EITF 99-5 "Accounting
for Pre-Production Costs Related to Long-Term Supply Arrangements," and
consulting with its independent certified public accountants, and upon review by
the Company's Audit Committee, the Company determined that capitalization of
these engineering costs was appropriate and in accordance with GAAP. The Company
also notes that these initial costs all relate to long-term contracts with its
customers. If the contract is terminated, there are clauses that allow the
Company to recoup certain of the setup costs from its customer.
General
2. We note your intension to file amended documents in response to our
previous comment 5.
Response: The Company has advised us that it intends to file amended
documents which include restated financial statements to reflect the adjustment
resulting from the beneficial conversion feature attending the issuance of its
series B convertible preferred stock in April and May of 2007 in response to
comment 5 in the staff's letter of comment dated August 29, 2008. The Company
believes, however, that these documents should be filed after any issues raised
by Comment 1 above have been resolved.
Please direct your comments or questions concerning the matters discussed
in this letter to me at (212) 561-3604, or in my absence, Mark Orenstein at
(212) 561-3638, or fax them to me at (212) 779-9928, 9930 or 9931.
Very truly yours,
/s/ Vincent J. McGill
cc: Scott Glassman
Kristin Schifflett
Margery Reich