{"url_path":"/sec/airi/10-k/2026/item-7","section_key":"item-7","section_title":"Item 7 MANAGEMENT’S DISCUSSION","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-03-27","source_url":"https://www.sec.gov/Archives/edgar/data/1009891/0001213900-26-035731-index.html","accession_number":"0001213900-26-035731","cik":"0001009891","ticker":"AIRI","issuer_name":"AIR INDUSTRIES GROUP","edgar_url":"https://www.sec.gov/Archives/edgar/data/1009891/0001213900-26-035731-index.html","primary_entity_key":"0001009891","primary_entity_name":"AIR INDUSTRIES GROUP"},"word_count":3832,"has_tables":true,"body_markdown":"**ITEM 7. MANAGEMENT’S DISCUSSION\nAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**\n\n \n\n*The following discussion of our financial condition\nand results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December\n31, 2025 and 2024 and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements\nthat involve risks and uncertainties. You should specifically consider the various risk factors identified in this report that could cause\nactual results to differ materially from those anticipated in these forward-looking statements.*\n\n \n\n**Business Overview**\n\n \n\nWe believe we are one of the leading manufacturers\nof precision components and assemblies for large aerospace and defense contractors. Our rich history dates to 1941, producing parts for\nWorld War II fighter aircraft. Since then, we have maintained an impeccable record with no known incidents of part failure leading to\na fatal mission. We became a public company in 2005.\n\n \n\nOur products include landing gear, flight controls,\nengine mounts and components for aircraft jet engines and ground turbines and other complex machines. The ultimate end-user for most of\nour products is the U.S. government, international governments, and commercial global airlines. Whether it is a small individual component\nfor assembly by others or complete assemblies we manufacture ourselves, our high quality and extremely reliable products are used in mission\ncritical operations that are essential for safety of military personnel and civilians.\n\n \n\nAlthough our net sales are concentrated amongst\na number of defense and aerospace prime contractors, we have cultivated long-standing relationships with a number of their subsidiaries\nand/or business units. Additionally, our net sales are generated across several high-profile platforms and programs including: the F-18\nHornet, the E-2 Hawkeye, the UH-60 Black Hawk Helicopters, Geared Turbo Engines (used on smaller aircraft such as the Airbus A220 and\nEmbraer E2), the CH-53 Helicopter, the F-35 Lighting II and the F-15 Eagle Tactical Fighter. In many cases, we are the sole or single\nsupplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment to us.\n\n \n\nWinning a new contract award is highly competitive.\nOur ability to win new contract awards generally requires us to deliver superior quality products, more quickly and with lower pricing\nthan our competitors. Accordingly, we must continually invest in process improvements and capital equipment. Recent investments in new\nequipment have improved the productive capacity of our employees, increased our efficiency and speed, and expanded the size of products\nwe can manufacture. We strategically operate two state-of-the-art manufacturing centers in the U.S. This allows for rigorous oversight\nof production and the adherence to stringent quality standards. Although there is currently a shortage of skilled workers, we maintain\na highly trained and close- knit team of over 160 professionals committed to driving excellence and precision in every aspect of our operations.\n\n \n\nOur period-to-period net sales and operating results\nare significantly impacted by timing. In addition, our gross profit is affected by a variety of factors, including the mix and complexity\nof products, production efficiencies, price competition and general business operating environments. In some cases, our gross profit is\nimpacted by our ability to deliver replacement parts on short notice. Our operations have a large percentage of fixed factory overhead.\nAs a result, our profit margins are highly variable with sales volumes.\n\n \n\nFor the past several years, despite facing significant\nfinancial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes\nto bolster our competitive position. Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships\nwith existing customers and cultivating new ones. Looking forward to fiscal 2026, we are focused on securing new contract awards, improving\noperations and successful completion of the Merger Agreement (as discussed elsewhere in this filing).\n\n \n\nAs of December 31, 2025, we have total unfilled\ncontract values amounting to $270.1 million (including our $136.8 million in backlog and all potential orders against LTA agreements previously\nawarded to us).\n\n \n\n27\n\n \n\n \n\n**RESULTS OF OPERATIONS**\n\n \n\n**Years ended December 31, 2025 and 2024:**\n\n \n\n**Selected Financial Information:**\n\n \n\n  \n2025  \n2025\n\nPercentage of\n\nNet Sales  \n2024  \n2024\n\nPercentage of\n\nNet Sales  \nChange 2025\n\nvs 2024  \nPercent\n\nChange 2025\n\nvs 2024 \n\n  \n   \n   \n   \n   \n   \n  \n\nNet sales \n$47,921,000  \n 100.0% \n$55,108,000  \n 100.0% \n$(7,187,000) \n -13.04%\n\nCost of sales \n 39,734,000  \n 82.9% \n 46,176,000  \n 83.8% \n (6,442,000) \n -13.95%\n\nGross profit \n 8,187,000  \n 17.1% \n 8,932,000  \n 16.2% \n (745,000) \n -8.34%\n\nOperating expenses \n 8,525,000  \n 17.8% \n 8,473,000  \n 15.4% \n 52,000  \n 0.61%\n\nInterest expense \n 1,841,000  \n 3.8% \n 1,893,000  \n 3.4% \n (52,000) \n -2.75%\n\nOther income, net \n 743,000  \n 1.6% \n 68,000  \n 0.1% \n 675,000  \n 992.65%\n\nBenefit from income taxes \n (131,000) \n -0.3% \n -  \n 0.0% \n (131,000) \n   \n\nNet loss \n$(1,305,000) \n -2.7% \n$(1,366,000) \n -2.5% \n$61,000  \n -4.47%\n\n \n\n**Balance Sheet Data:**\n\n \n\n  \nDecember 31,  \nDecember 31,  \n   \n**Percent** \n\n  \n2025  \n2024  \nChange  \nChange \n\n  \n   \n   \n   \n  \n\nCash \n$680,000  \n$753,000  \n$(73,000) \n -9.69%\n\nWorking capital \n$5,238,000  \n$11,776,000  \n$(6,532,000) \n -55.47%\n\nTotal assets \n$58,329,000  \n$51,011,000  \n$7,318,000  \n 14.35%\n\nTotal stockholders’ equity \n$19,201,000  \n$14,948,000  \n$4,253,000  \n 28.45%\n\n** **\n\n**Comparison of Fiscal 2025 to 2024**\n\n** **\n\n**Net Sales:**Net sales in 2025 were\n$47,921,000, a decrease of $7,187,000 or 13.0%, compared with $55,108,000 that we achieved in 2024. The year-over-year decrease in net\nsales was primarily due to timing and overall changes in the mix of products requested and delivered in response to customer orders.\n\n \n\nThe composition of customers that exceeded 10%\nof our net sales in either 2025 or 2024 are shown below:\n\n \n\n  \nPercentage of Net Sales \n\n**Customer** \n2025  \n2024 \n\nRTX (A) \n 36.2% \n 29.3%\n\nLockheed Martin \n 32.3% \n 25.1%\n\nNorthrop \n 6.7% \n 18.3%\n\n \n\n(A) RTX includes Collins Landing Systems\nand Collins Aerostructures\n\n \n\n28\n\n \n\n \n\nThe composition of our net sales by platform or program profiles for\nthe years ended December 31, 2025 and 2024 are shown below:\n\n \n\n  \nPercentage of Net Sales \n\n**Platform or Program** \n2025  \n2024 \n\nGTF \n 31.4% \n 22.0%\n\nUH-60 Black Hawk Helicopter \n 21.0% \n 23.1%\n\nCH-53 Helicopter \n 12.0% \n 3.4%\n\nE2-D Hawkeye \n 9.1% \n 24.0%\n\nF-35 Lightning II \n 4.6% \n 3.7%\n\nF-18 Hornet \n 1.5% \n 2.9%\n\nAll other platforms \n 20.4% \n 20.9%\n\nTotal \n 100.0% \n 100.0%\n\n** **\n\nPeriod-to-period changes in customer mix and related\nplatforms and programs are largely attributable to customer requirements, availability of parts, production capacity and timing.\n\n** **\n\n**Gross Profit:**Gross profit for the\nyear ended December 31, 2025, amounted to $8,187,000, a decrease from the $8,932,000 achieved in 2024. Our gross profit percentage in\nfiscal 2025 increased to 17.1% from the 16.2% we achieved in 2024. This improvement can be attributed to changes in sales across our major\nplatforms, shifts in product mix, and cost reductions implemented during the period.\n\n \n\n**Operating Expenses**: In fiscal 2025,\noperating expenses totaled $8,525,000, an increase of $52,000, from $8,473,000 recorded in 2024. As a percentage of consolidated net sales,\noperating expenses rose to 17.8%, compared to 15.4% in fiscal 2024. The dollar increase was due primarily to stock compensation expense\nand information technology expenses offset by lower personnel costs. We continue to look for ways to reduce our operating expenses.\n\n \n\n**Interest Expense:**Interest expense\n(which includes amortization of deferred financing costs) was $1,841,000 in fiscal 2025, a decrease of $52,000 or 2.8% from $1,893,000\nin 2024. The decrease is primarily attributable to lower levels of subordinated debt during a portion of the year and a decrease in the\naverage interest rate on debt outstanding pursuant to our Current Credit Facility which decreased to 6.72% in 2025 as compared to 7.66%\nin 2024.\n\n \n\n**Net Loss:** Net loss for the year\nended December 31, 2025 was $1,305,000, compared to a net loss of $1,366,000 for the year ended December 31, 2024, for the reasons discussed\nabove.\n\n \n\n**LIQUIDITY AND CAPITAL RESOURCES**\n\n \n\nAs of December 31, 2025, we have debt service\nrequirements related to:\n\n \n\n \n1)\nOutstanding indebtedness under our Current Credit Facility of $23,473,000 (consisting of a Revolving Loan of $17,618,000 and a Term Loan in the amount of $5,855,000). This debt matures on September 30, 2026, and requires us to make monthly payments of approximately $87,000 in 2026.\n\n \n\n \n2)\nRelated Party Notes of approximately $4,871,000. This debt matures on October 1, 2026.\n\n \n\n \n3)\nVarious equipment leases and contractual obligations related to our business, including advances under our Solar Facility for the installation of solar energy systems including the replacement of the existing roof at our Sterling Facility.\n\n \n\nThe Current Credit Facility\nand Related Party Subordinated are classified as current liabilities on the consolidated balance sheet as of December 31, 2025. As a result\nof the due dates of this debt, there is substantial doubt about our ability to continue as a going concern for the twelve months following\nthe date of filing of these consolidated financial statements. Webster Bank has advised us that it will not renew our Current Credit Facility.\nIn addition to discussions with our lenders, as discussed in our Current Report on Form 8-K filed February 17, 2026, we entered into a\nMerger Agreement with Tenax.\n\n \n\n29\n\n \n\n \n\nTo support current operations and strategic initiatives, beginning\nin December 2024 we raised capital through public market sales of our common stock and believe we can continue to access equity markets\nin future periods, though there is no assurance as to our ability to do so or as to the price and terms under which we could issue equity\nsecurities. During the year ended December 31, 2025, the Company sold 1,213,593 shares of common stock in the public market and generated\ngross proceeds of $4,869,000, of which approximately $3,930,000 is restricted for the benefit of the Current Credit Facility lender. Since\ninitiating the sales in December 2024, we have sold a total of 1,330,444 shares for gross proceeds of $5,375,000. In light of ongoing\nnegotiations with our lenders and in accordance with the Merger Agreement with Tenax, we have temporarily paused all equity raising activity\nwhile evaluating the most effective capital structure going forward.\n\n \n\nUnder the terms of the Current Credit Facility,\nas amended, we are required to meet a prescribed Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal\nquarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and lease expenses\nas divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation\nand amortization. We are also required to meet other business and financial covenants.\n\n \n\nAs of December 31, 2025, we were in compliance\nwith all financial and business covenants contained in the Current Credit Facility.\n\n \n\nThe Current Credit Facility expires on September\n30, 2026. In addition, we are required to maintain a collection account with our lender into which substantially all cash receipts are\nremitted. If we were to default under the Current Credit Facility, our lender could choose to increase the rate of interest or refuse\nto make loans under the revolving portion of the Current Credit Facility and keep the funds remitted to the collection account. If the\nlender were to raise the rate of interest, it would adversely impact our operating results. If the lender were to cease making new loans\nunder the revolving facility, we would lack the funds to continue operations. The Current Credit Facility expiration date and the rights\ngranted to the lender, combined with the reasonable possibility that we might fail to meet covenants in the future, raise substantial\ndoubt about our ability to continue as a going concern for the one year commencing as of the date of filing this report.\n\n \n\nThe following is a brief discussion of recent\namendments to the Current Credit Facility (all of which have been filed with the SEC):\n\n \n\n \n●\nOn May 31, 2024, we entered into a Seventh Amendment that waived the default caused by our failure to achieve the required Fixed Charge Coverage Ratio of the Sixth Amendment. This amendment further revised our Financial Covenants. For the six months ending June 30, 2025 our EBITDA shall not be less than $740,000; for the nine months ending September 30, 2025 our EBITDA shall not be less than $1,500,000; for the twelve months ending December 31, 2025 our EBITDA shall not be less than $2,800,000. For the rolling twelve-month period ending March 31, 2025, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x. Beginning with the rolling twelve-month period ending June 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage Ratio of 1.25x. All other covenants remain unchanged. Additionally, this amendment increased the Term Loan by approximately $1,000,000 to $5,700,000, with monthly principal installments in the amount of $68,000. In connection with these changes, the Company paid an amendment fee of $20,000.\n\n \n\n \n●\nOn January 30, 2025, we entered into an Eighth\nAmendment to provide for an additional Term Loan in the amount of $1,640,000 for the acquisition of additional equipment. The monthly\nprincipal installments on this additional Term Loan are $19,524 This amendment further revised our Financial Covenants. For the rolling\ntwelve-month period ending March 31, 2025 and June 30, 2035, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x. Beginning\nwith the rolling twelve-month period ending September 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage\nRatio of 1.25x. All other covenants remain unchanged. In connection with these changes, the Company paid an amendment fee of $20,000.\n\n \n\n30\n\n \n\n \n\n \n●\nOn September 10, 2025, we entered into a Ninth Amendment where it agreed that the $3,930,000 of the proceeds from its ATM Offering would be maintained in an interest bearing account. The funds in this account serve as additional security for its obligations under the Current Credit Facility.\n\n \n\n \n●\nOn December 15, 2025, we entered into a Tenth Amendment which waived the defaults caused by the failure to achieve the required fixed charge coverage ratio for the fiscal quarter ended June 30, 2025, and for exceeding the permitted amount of capital expenditures for the fiscal year ending December 31, 2025. Additionally, the maturity date of the revolving credit and term loans were extended to March 31, 2026, and amended the capital expenditure covenant. We paid an amendment fee of $40,000.\n\n \n\n \n●\nOn February 26, 2026, we entered into an Eleventh Amendment which extended the maturity date of the revolving credit and term loans to September 30, 2026. In connection with this Amendment, we paid an amendment fee of $25,000 and agreed to pay $150,000 when the loans are satisfied.\n\n \n\nIf we are unable to close the merger with Tenax\ncontemplated by the Merger Agreement or obtain a new lender to replace the Current Credit Facility we may not be able meet our financial\nobligations. As of December 31, 2025, we have borrowing capacity of approximately $2,382,000 under the Revolving Loan.\n\n \n\nIn addition to required Term Loan payments we\nmay have to make additional payments under the Current Credit Facility. For so long as the Term Loan under the Current Credit Facility\nremains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal year, we are obligated to pay an amount equal\nto the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii) the outstanding principal balance of the Term Loan. Such\npayment shall be applied to the outstanding principal balance of the Term loan, on or prior to the April 15 immediately following such\nfiscal year. For the fiscal year ended December 31, 2025, based on the calculation there is no Excess Cash Flow payment required.\n\n \n\nIn addition to the outstanding indebtedness under\nthe Current Credit Facility and Related Party Notes, we have various equipment leases and contractual obligations of an ongoing nature\nwhich we service in the ordinary course out of our cash flow from operations.\n\n \n\nOur material cash requirements are for debt service, capital expenditures\nand funding working capital. We have historically met these requirements with funds provided by a combination of cash generated from operating\nactivities and cash generated from equity and debt financing transactions. Based on our current revenue visibility, strength of our backlog,\nand availability under our Current Credit Facility, we believe that we have sufficient liquidity to meet our day-to-day cash requirements\nfor our operations. However, we must pay or refinance large portions of our indebtedness prior to September 30, 2026, and October 1, 2026.\nFurther, as a condition to refinancing our Current Credit Facility prior to September 30, 2026, our lender or a new lender may require\nthat the holders of our Related Party Notes extend or otherwise modify the subordination agreements they have given in favor of the lender.\n\n \n\nIf we do not close the contemplated Merger, it\nis unlikely we will be able to pay existing debt and will need to refinance our Current Credit Facility and Related Party Notes. We have\nengaged in discussions with Webster Bank and the holders of our Related Party Notes to explore potential extensions or refinancings of\nour obligations. Webster Bank has advised us that it will not extend our Current Credit Facility. Refinancing our indebtedness with other\nparties may require us to pay higher interest rates than we currently pay, agree to more restrictive business or financial covenants or\ninvolve the issuance of debt, equity and/or new securities convertible into or exercisable or exchangeable for our common stock. Any failure\nto refinance our existing debt or obtain additional working capital when required would have a material adverse effect on our business\nand financial condition.\n\n \n\n31\n\n \n\n \n\n**Cash Flow**\n\n \n\nThe following table summarizes our net cash flow\nfrom operating, investing and financing activities for the periods indicated (in thousands):\n\n \n\n  \nYear Ended \n\n  \nDecember 31, \n\n  \n2025  \n2024 \n\n  \n   \n  \n\nCash provided by (used in) \n   \n  \n\nOperating activities \n$(1,352) \n$324 \n\nInvesting activities \n (3,122) \n (2,285)\n\nFinancing activities \n 8,331  \n 2,368 \n\nNet increase in cash \n$3,857  \n$407 \n\n** **\n\n**Cash (Used in) Provided By Operating Activities**\n\n \n\nFor the year ended December 31, 2025, our operations absorbed $1,352,000\nof cash as compared to generating $324,000 of cash in fiscal 2024. The use of cash was due to an increase in inventory of $5,450,000,\nreflecting material and production costs incurred for product to be delivered in 2026. This was partially offset by non-cash expenses\nof depreciation and stock-based compensation in the amounts of $2,499,000 and $1,047,000, respectively, and by a reduction in accounts\nreceivable of $1,761,000.\n\n \n\nFor the year ended December 31, 2024, we generated cash flows from\noperations of $324,000 as compared to $4,862,000 for fiscal 2023. The decrease in cash flows was primarily due to the use of a portion,\n$2,442,000, of customer deposits which had been advanced prior to 2024 for the procurement of long lead time raw materials expected to\nbe utilized in 2024.\n\n \n\n**Cash Used In Investing Activities**\n\n \n\nDuring 2025 we continued to make significant investments to enhance\nour competitiveness and market position. Cash used in investing activities of $3,122,000 and $2,285,000, in 2025 and 2024, respectively,\nwas for new property and equipment.\n\n \n\nThe investments in 2025 and 2024 increased production efficiency and speed, while maintaining closer tolerances.\nThey also expanded the size of products we can manufacture. Any investment in 2026 will be at a much lower level.\n\n \n\n**Cash Provided by Financing Activities**\n\n \n\nFor the year ended December 31, 2025, cash provided\nby financing activities was $8,331,000. During fiscal 2025, we increased borrowings under our Current Credit Facility by $5,343,000 (consisting\nof a net increase in Revolving Loan borrowings of $4,713,000 and a net increase of $630,000 against the Term Loan). We also sold an aggregate\nof 1,213,593 shares of common stock to the public for net proceeds of $4,638,000. We used cash by paying $1,291,000 of the Related Party\nNotes. We also made payments of $223,000 pursuant to financing lease obligations and $8,000 on a loan payable.\n\n \n\nFor the year ended December 31, 2024, cash provided\nby financing activities was $2,368,000. During fiscal 2024, we increased borrowings under our Current Credit Facility by $2,238,000 (consisting\nof a net increase in Revolving Loan borrowings of $2,101,000 and a net increase of $137,000 against the Term Loan) and received advances\nof $8,000 against the Solar Facility. We also sold an aggregate of 116,851 shares of common stock to the public for net proceeds of $327,000.\nAdditionally, we made payments of $196,000 pursuant to financing lease obligations and $9,000 on a loan payable.\n\n \n\n32\n\n \n\n \n\n**OFF-BALANCE SHEET ARRANGEMENTS**\n\n** **\n\nWe did not have any off-balance sheet arrangements\nas of December 31, 2025 and 2024.\n\n \n\n**Critical Accounting Estimates**\n\n \n\nA critical accounting estimate is one that is\nboth important to the portrayal of a company’s financial condition and results of operations and requires management’s most\ndifficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently\nuncertain.\n\n \n\nUse of Estimates. The preparation of financial\nstatements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that\naffect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial\nstatements and the reported amounts of revenues and expenses during the reporting period. The financial statements in this Report include\nestimates based on currently available information and our judgment as to the outcome of future conditions and circumstances. Significant\nestimates in these financial statements include, inventory valuation and income tax provision. Changes in the status of certain facts\nor circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results\ncould differ from the estimates and assumptions. \n\n \n\nBelow is a description of our critical accounting estimates:\n\n \n\n \n●\nInventory Valuation, which includes the estimates and methodology used in accounting for the transition of production costs to inventory costs. In our consolidated financial statements, inventory is reflected at the lower of cost or net realizable value. We periodically evaluate inventory items not secured by backlog and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods (defined as goods which do not have an open order and have not had movement for two years), obsolescence and for other impairments of value.\n\n \n \n \n\n \n●\nIncome Taxes. We account for income taxes under the asset and liability method, based on the income tax laws in the United States. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company has recorded a valuation allowance in the current and prior years to reduce deferred tax assets to zero. If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities."}