{"url_path":"/sec/airi/10-q/2026/item-1","section_key":"item-1","section_title":"Item 1 Financial Statements**","topic":"sec","document":{"doc_type":"10-Q","doc_date":"2026-05-13","source_url":"https://www.sec.gov/Archives/edgar/data/1009891/0001213900-26-055772-index.html","accession_number":"0001213900-26-055772","cik":"0001009891","ticker":"AIRI","issuer_name":"AIR INDUSTRIES GROUP","edgar_url":"https://www.sec.gov/Archives/edgar/data/1009891/0001213900-26-055772-index.html","primary_entity_key":"0001009891","primary_entity_name":"AIR INDUSTRIES GROUP"},"word_count":7427,"has_tables":true,"body_markdown":"** **\n\n**Item 1. Financial Statements**\n\n** **\n\n**AIR INDUSTRIES GROUP**\n\n** **\n\n**Condensed Consolidated Balance Sheets**\n\n \n\n  \nMarch 31,  \nDecember 31, \n\n  \n2026  \n2025 \n\n  \n(unaudited)  \n  \n\nASSETS \n   \n  \n\nCurrent Assets \n   \n  \n\nCash \n$286,000  \n$680,000 \n\nRestricted cash \n 3,930,000  \n 3,930,000 \n\nAccounts Receivable, Net of Allowance for Credit Losses of $629,000 and $464,000 \n 7,485,000  \n 7,071,000 \n\nInventory \n 35,282,000  \n 34,261,000 \n\nPrepaid Expenses and Other Current Assets \n 1,140,000  \n 766,000 \n\nPrepaid Taxes \n 77,000  \n 76,000 \n\nTotal Current Assets \n 48,200,000  \n 46,784,000 \n\n  \n    \n   \n\nProperty and Equipment, Net \n 9,215,000  \n 9,501,000 \n\nFinance Lease Right-Of-Use-Assets \n 867,000  \n 916,000 \n\nOperating Lease Right-Of-Use-Assets \n 346,000  \n 514,000 \n\nDeferred Financing Costs, Net, Deposits and Other Assets \n 588,000  \n 614,000 \n\n  \n    \n   \n\nTOTAL ASSETS \n$59,216,000  \n$58,329,000 \n\n  \n    \n   \n\nLIABILITIES AND STOCKHOLDERS’ EQUITY \n    \n   \n\nCurrent Liabilities \n    \n   \n\nDebt \n$25,102,000  \n$23,721,000 \n\nAccounts Payable and Accrued Expenses \n 7,178,000  \n 7,903,000 \n\nSubordinated Notes - Related Party \n 4,871,000  \n 4,871,000 \n\nOperating Lease Liabilities \n 473,000  \n 702,000 \n\nDeferred Gain on Sale \n 19,000  \n 28,000 \n\nCustomer Deposits \n 968,000  \n 391,000 \n\nTotal Current Liabilities \n 38,611,000  \n 37,616,000 \n\n  \n    \n   \n\nLong Term Liabilities \n \n \n  \n \n \n \n\nDebt \n 1,460,000  \n 1,512,000 \n\nTOTAL LIABILITIES \n 40,071,000  \n 39,128,000 \n\n  \n    \n   \n\nCommitments and Contingencies (see Note 8) \n \n \n  \n \n \n \n\n  \n    \n   \n\nStockholders’ Equity \n    \n   \n\nPreferred Stock - par value $.001 - Authorized 3,000,000 shares, 0 shares outstanding, at both March 31, 2026 and December 31, 2025. \n \n-\n  \n \n-\n \n\nCommon Stock - Par Value $.001 - Authorized 6,000,000 shares, 4,781,054 and 4,776,454 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively \n 5,000  \n 5,000 \n\nAdditional Paid-In Capital \n 90,572,000  \n 89,608,000 \n\nAccumulated Deficit \n (71,432,000) \n (70,412,000)\n\nTOTAL STOCKHOLDERS’ EQUITY \n 19,145,000  \n 19,201,000 \n\n  \n    \n   \n\nTOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY \n$59,216,000  \n$58,329,000 \n\n \n\nSee accompanying notes to condensed consolidated\nfinancial statements\n\n \n\n2\n\n \n\n**AIR INDUSTRIES GROUP**\n\n** **\n\n**Condensed Consolidated Statements of Operations**\n\n**For the Three Months Ended March 31,**\n\n**(Unaudited)**\n\n  \n\n  \n2026  \n2025 \n\n  \n   \n  \n\nNet Sales \n$11,606,000  \n$12,135,000 \n\n  \n    \n   \n\nCost of Sales \n 9,004,000  \n 10,101,000 \n\n  \n    \n   \n\nGross Profit \n 2,602,000  \n 2,034,000 \n\n  \n    \n   \n\nOperating Expenses \n 3,167,000  \n 2,780,000 \n\n  \n    \n   \n\nLoss from Operations \n (565,000) \n (746,000)\n\n  \n    \n   \n\nInterest Expense \n (407,000) \n (345,000)\n\n  \n    \n   \n\nInterest Expense - Related Parties \n (86,000) \n (99,000)\n\n  \n    \n   \n\nOther Income, Net \n 38,000  \n 202,000 \n\n  \n    \n   \n\nLoss before Income Taxes \n (1,020,000) \n (988,000)\n\n  \n    \n   \n\nProvision for Income Taxes \n \n-\n  \n \n-\n \n\n  \n    \n   \n\nNet Loss \n$(1,020,000) \n$(988,000)\n\n  \n    \n   \n\nLoss per share - Basic and diluted \n$(0.21) \n$(0.27)\n\n  \n    \n   \n\nWeighted Average Shares Outstanding - Basic and diluted \n 4,781,003  \n 3,639,337 \n\n \n\nSee accompanying notes to condensed consolidated\nfinancial statements\n\n \n\n3\n\n** **\n\n**AIR INDUSTRIES GROUP**\n\n** **\n\n**Condensed Consolidated Statements of Changes\nin Stockholders’ Equity**\n\n**For the Three Months Ended March 31, 2026 and\n2025**\n\n**(Unaudited)**\n\n \n\n  \n   \n   \nAdditional  \n   \nTotal \n\n  \nCommon Stock  \nPaid-in  \nAccumulated  \nStockholders’ \n\n  \nShares  \nAmount  \nCapital  \nDeficit  \nEquity \n\nBalance January 1, 2026 \n 4,776,454  \n$5,000  \n$89,608,000  \n$(70,412,000) \n$19,201,000 \n\nCommon Stock issued to directors \n 4,600  \n \n-\n  \n 14,000  \n \n-\n  \n 14,000 \n\nStock-Based Compensation \n -  \n \n-\n  \n 950,000  \n \n-\n  \n 950,000 \n\nNet Loss \n -  \n \n-\n  \n \n-\n  \n (1,020,000) \n (1,020,000)\n\nBalance, March 31, 2026 \n 4,781,054  \n$5,000  \n$90,572,000  \n$(71,432,000) \n$19,145,000 \n\n  \n    \n    \n    \n    \n   \n\nBalance, January 1, 2025 \n 3,474,970  \n$3,000  \n$84,052,000  \n$(69,107,000) \n$14,948,000 \n\nCommon Stock issued to directors \n 9,185  \n \n-\n  \n 39,000  \n \n-\n  \n 39,000 \n\nStock-Based Compensation \n -  \n \n-\n  \n 435,000  \n \n-\n  \n 435,000 \n\nCommon Stock issued for cash \n 209,940  \n 1,000  \n 854,000  \n \n-\n  \n 855,000 \n\nNet Loss \n -  \n \n-\n  \n \n-\n  \n (988,000) \n (988,000)\n\nBalance, March 31, 2025 \n 3,694,095  \n$4,000  \n$85,380,000  \n$(70,095,000) \n$15,289,000 \n\n \n\nSee accompanying notes to condensed consolidated\nfinancial statements\n\n** **\n\n4\n\n** **\n\n**AIR INDUSTRIES GROUP**\n\n \n\n**Condensed Consolidated Statements of Cash Flows**\n\n**For the Three Months Ended March 31,**\n\n**(Unaudited)**\n\n \n\n  \n2026  \n2025 \n\n  \n   \n  \n\nCASH FLOWS FROM OPERATING ACTIVITIES \n   \n  \n\nNet Loss \n$(1,020,000) \n$(988,000)\n\nAdjustments to reconcile net loss to net cash (used in) provided by operating activities \n    \n   \n\nDepreciation of property and equipment \n 711,000  \n 580,000 \n\nStock-based compensation \n 964,000  \n 474,000 \n\nAmortization of Finance Lease Right-of-Use Assets \n 49,000  \n 49,000 \n\nAmortization of Operating Lease Right-of-Use Assets \n 168,000  \n 182,000 \n\nDeferred gain on sale \n (9,000) \n (10,000)\n\nAllowance for credit losses \n 165,000  \n 20,000 \n\nAmortization of deferred financing costs \n \n-\n  \n 17,000 \n\nChanges in Operating Assets and Liabilities \n    \n   \n\n(Increase) Decrease in Operating Assets: \n    \n   \n\nAccounts receivable \n (579,000) \n 2,097,000 \n\nInventory \n (1,021,000) \n (124,000)\n\nPrepaid expenses and other current assets \n (374,000) \n 5,000 \n\nContract costs receivable \n \n-\n  \n 296,000 \n\nPrepaid taxes \n (1,000) \n (2,000)\n\nDeposits and other assets \n 26,000  \n 252,000 \n\nIncrease (Decrease) in Operating Liabilities: \n    \n   \n\nAccounts payable and accrued expenses \n (725,000) \n (552,000)\n\nOperating lease liabilities \n (229,000) \n (239,000)\n\nCustomer deposits \n 577,000  \n (532,000)\n\nNET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES \n (1,298,000) \n 1,525,000 \n\n  \n    \n   \n\nCASH FLOWS FROM INVESTING ACTIVITIES \n    \n   \n\nPurchase of property and equipment \n (425,000) \n (1,217,000)\n\nNET CASH USED IN INVESTING ACTIVITIES \n (425,000) \n (1,217,000)\n\n  \n    \n   \n\nCASH FLOWS FROM FINANCING ACTIVITIES \n    \n   \n\nNote payable - revolver - net - Current Credit Facility \n 1,665,000  \n (1,701,000)\n\nProceeds from term loan - Current Credit Facility \n \n-\n  \n 1,640,000 \n\nProceeds from Common Stock issued for cash \n \n-\n  \n 855,000 \n\nPayments of Subordinated Notes - related party \n \n-\n  \n (1,291,000)\n\nPayments of term loan - Current Credit Facility \n (262,000) \n (223,000)\n\nPayments of Solar Credit Facility \n (14,000) \n \n-\n \n\nPayments of finance lease obligations \n (58,000) \n (54,000)\n\nPayments of loan payable - financed asset \n (2,000) \n (2,000)\n\nNET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES \n 1,329,000  \n (776,000)\n\n  \n    \n   \n\nNET DECREASE IN CASH \n (394,000) \n (468,000)\n\nCASH AT BEGINNING OF PERIOD \n 4,610,000  \n 753,000 \n\nCASH AT END OF PERIOD \n$4,216,000  \n$285,000 \n\n \n\nSee accompanying notes to condensed consolidated\nfinancial statements\n\n \n\n5\n\n** **\n\n**AIR INDUSTRIES GROUP**\n\n \n\n**Condensed Consolidated Statements of Cash Flows\n(Continued)**\n\n**For the Three Months Ended March 31,**\n\n**(Unaudited)**\n\n \n\n \n2026  \n2025 \n\n  \n   \n  \n\nSupplemental cash flow information \n   \n  \n\nCash paid during the period for interest \n$508,000  \n$432,000 \n\nCash paid during the period for taxes \n$2,000  \n$17,000 \n\n  \n    \n   \n\nSupplemental disclosure of non-cash investing and financing activities: \n    \n   \n\n  \n$\n-\n  \n$\n-\n \n\n \n\nSee accompanying notes to condensed consolidated\nfinancial statements\n\n** **\n\n6\n\n** **\n\n**AIR INDUSTRIES GROUP**\n\n \n\n**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**\n\n \n\n**Note 1. ORGANIZATION AND BASIS OF PRESENTATION**\n\n \n\n**Organization**\n\n \n\nAir Industries Group is a Nevada corporation (“AIRI”). \nThe accompanying condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries: Air Industries\nMachining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering Corporation (“Sterling”)\n(together, the “Company”).\n\n \n\n**Basis of Presentation**\n\n \n\nThe accompanying unaudited condensed consolidated\nfinancial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial\ninformation and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally\naccepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal\nrecurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March\n31, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026. These unaudited condensed\nconsolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included\nin the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange Commission\non March 27, 2026, from which the accompanying condensed consolidated balance sheet dated December 31, 2025 was derived.\n\n \n\n**Going Concern and Management’s Plan**\n\n \n\nAs of March 31, 2026, the Company was in default\nof its minimum Fixed Charge Coverage Ratio (“FCCR”), of 1.10x as of the last day of the Fiscal Quarter, having only attained\na ratio of 0.93x. All other financial and business covenants required under the terms of the Current Credit Facility were met. The Company’s\ndebt under our Current Credit Facility and Related Party Subordinated Notes approximates $29,747,000. The Current Credit Facility is scheduled\nto expire on September 30, 2026, and the Related Party Subordinated Notes mature on October 1, 2026. These obligations are classified\nas current liabilities on the consolidated balance sheets as of March 31, 2026. As a result of the default, the expiration dates of our\nCurrent Credit Facility and the rights that our Current Credit Facility lender could exercise, there is substantial doubt about the Company’s\nability to continue as a going concern for the twelve months following the date of filing of these condensed consolidated financial statements.\nThe terms of all outstanding indebtedness are discussed further in “Note 5. Debt”.\n\n \n\nThe Company is required to maintain a collection account with its lender into which substantially all cash receipts are remitted. Additionally,\nas the Company is in default of its Current Credit Facility, the lender could choose to exercise its rights, for example, increasing the\nrate of interest or refusing to make loans under the revolving portion of the Current Credit Facility and keep the funds remitted to the\ncollection account. If the lender were to raise the rate of interest or exercise other remedies available under the Current Credit Facility,\nit would adversely impact the Company’s operating results. If the lender were to cease making new loans under the revolving facility\nor limit availability under the revolving facility, the Company would lack the funds to continue operations or, possibly, expand its operations.\n\n \n\nThe Company is actively engaged in constructive\ndiscussions with various lenders as the Company has been advised by its lender that it will not renew its Current Credit Facility. While\nthese discussions have been professional and remain ongoing, there can be no assurance that agreements will be reached with existing lenders\nor alternative financing sources.\n\n \n\nTo support current operations and strategic initiatives,\nthe Company has raised capital through public market sales of its common stock since December 2024 and believes it can continue to access\nequity markets in future periods. During the year ended December 31, 2025, the Company generated gross proceeds of $4,869,000 through\nan At The Market (“ATM”) Offering, of which approximately $3,930,000 is restricted for the benefit of the Current Credit\nFacility lender. In light of the entry into the Merger Agreement with Tenax (each as defined in “Note 11. Merger Information”),\nthe Company has temporarily paused all equity raising activity. See “Note 11. Merger Information”.\n\n \n\n7\n\n \n\nAs of March 31, 2026, the Company had total unfilled\ncontract values amounting to $269.2 million (including its $134.7 million in funded backlog plus additional potential funded orders against\nLong-Term Agreements (“LTAs”). These unfilled contract values support a positive outlook for future growth; however extended lead\ntimes for raw material procurement and the complexity of manufacturing processes are expected to delay revenue acceleration until late\n2026.\n\n \n\nThe Company generally sources its raw material,\nprincipally metal casting or forgings, from domestic sources. As such, the Company is generally not exposed to increased prices on imports\nbut would be subject to increased prices if proposed tariffs or disruptions in supply chains resulting from tariffs or other geopolitical\nevents cause the general level of prices for its products to increase. One component used by the Company on a key commercial aviation\nprogram is sourced from China. The Company’s contract with its customer for the product requires the Company to absorb the first\nfive percent (5%) of any cost increases with further increases absorbed by the customer.\n\n \n\nA substantial portion of the Company’s products\nare used in United States military aviation and as such, changes in the US defense budget are more material to demand than to changes\nin general economic conditions. However, the Company does have significant exposure in commercial aviation; demand for these products\nmay be reduced if general economic conditions deteriorate reducing demand for commercial air travel.\n\n \n\nThe accompanying consolidated financial statements\ndo not include any adjustments relating to the recoverability and classification of recorded assets or the classification of liabilities\nthat might be necessary should the Company be unable to continue as a going concern.\n\n \n\n**Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**\n\n \n\n**Accounts Receivable**\n\n \n\nAccounts receivable are carried at the original\ninvoice amount less an estimate made for expected credit losses based on a review of all outstanding amounts on a quarterly basis. Management\ndetermines the allowance for expected credit losses primarily using historical experience as well as current conditions that affect the\ncollectability of the reported amount. Accounts receivable are written off when deemed uncollectible.  Bad debt expenses are\nrecorded in operating expenses on the consolidated statements of operations.\n\n \n\nThe activity for the allowance for credit losses\nduring the three months ended March 31, 2026 and 2025 is set forth in the table below:\n\n \n\n  \nBalance at  \n   \nDeductions  \nBalance at \n\n  \nBeginning of  \nCharged to  \nfrom the  \nEnd of \n\n  \nPeriod  \nExpenses  \nAllowance  \nPeriod \n\nThree Months ended March 31, 2026 Allowance for Credit Losses \n$464,000  \n$165,000  \n$\n            -\n  \n$629,000 \n\nThree Months ended March 31, 2025 Allowance for Credit Losses \n$396,000  \n$20,000  \n$\n-\n  \n$416,000 \n\n \n\n**Inventory Valuation**\n\n \n\nThe Company values inventory at the lower of cost\nor estimated net realizable value using the first-in first out method. The Company periodically evaluates inventory items not secured\nby backlog and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods, obsolescence and for\nother impairments of value. Adjustments to inventory net realizable value are recorded in cost of sales.\n\n \n\n8\n\n \n\nInventories consist of the following at:\n\n \n\n  \nMarch 31,  \nDecember 31, \n\n  \n2026  \n2025 \n\nRaw Materials \n$6,372,000  \n$7,306,000 \n\nWork In Progress \n 18,663,000  \n 17,072,000 \n\nSemi-Finished Goods \n 9,428,000  \n 9,206,000 \n\nFinal-Finished Goods \n 819,000  \n 677,000 \n\nTotal Inventory \n$35,282,000  \n$     34,261,000 \n\n** **\n\n**Credit and Concentration Risks**\n\n \n\nA large percentage of the Company’s revenues\nare derived directly from large aerospace and defense prime contractors for which the ultimate end-user is the U.S. Government, other\ngovernments, or commercial airlines. \n\n \n\nThe composition of customers that exceeded 10% of net sales for the\nthree months ended March 31, 2026 and 2025 are shown below:\n\n \n\nCustomer \nPercentage of Net Sales \n\n  \n2026  \n2025 \n\nLockheed Martin \n 34.4% \n 39.6%\n\nRTX (a) \n 28.4% \n 28.8%\n\n \n\n(a)RTX includes Collins Landing Systems and Collins Aerostructures\n\n \n\nThe composition of customers that exceed 10% of\naccounts receivable at March 31, 2026 and December 31, 2025 are shown below: \n\n \n\nCustomer \nPercentage of Net Receivables \n\n  \nMarch 31,  \nDecember 31, \n\n  \n2026  \n2025 \n\nRTX (a) \n 43.5% \n 39.8%\n\nLockheed Martin \n 16.4% \n 11.9%\n\n \n\n(a)RTX includes Collins Landing Systems and Collins Aerostructures\n\n \n\n**Disaggregation of Revenue**\n\n \n\nThe following table summarizes revenue from contracts with customers\nfor the three month periods ended March 31, 2026 and 2025:\n\n \n\nProduct \nMarch 31,\n\n2026  \nMarch 31,\n\n2025 \n\nMilitary \n$7,646,000  \n$8,340,000 \n\nCommercial \n 3,960,000  \n 3,795,000 \n\n  \n    \n   \n\nTotal \n$11,606,000  \n$12,135,000 \n\n \n\n**Cash and Restricted Cash**\n\n \n\nDuring the period ended March 31, 2026, the Company\nhad occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses\non these accounts.\n\n \n\n9\n\n \n\nAs of March 31, 2026, and December 31, 2025 the\nCompany reported restricted cash of $3,930,000 on its condensed consolidated balance sheets. Restricted cash represents proceeds from\nthe Company’s ATM offering that are pledged as security for its obligations under the Current Credit Facility.\n\n \n\nThe following table reconciles cash and restricted\ncash reported in the condensed consolidated balance sheets to the total amount shown in the condensed consolidated statements of cash\nflows:\n\n** **\n\n  \nMarch 31,  \nDecember 31, \n\n  \n2026  \n2025 \n\nCash \n$286,000  \n$680,000 \n\nRestricted Cash \n 3,930,000  \n 3,930,000 \n\n  \n    \n   \n\nTotal \n$4,216,000  \n$4,610,000 \n\n** **\n\n**Major Suppliers**\n\n \n\nThe Company utilizes sole-source suppliers to\nsupply raw materials or other parts used in production. These suppliers are its only source for such parts and, therefore, in the event\nany of them were to go out of business or be unable or unwilling to provide parts for any reason, the Company’s business would be\nseverely harmed.\n\n \n\n**Customer Deposits**\n\n** **\n\nThe Company receives advance payments on certain\ncontracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves\nthe product for shipment. At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s\ninvoice.\n\n** **\n\nAt March 31, 2026 and December 31, 2025, customer\ndeposits were $968,000 and $391,000, respectively. The Company recognized revenue of $100,000 during the three months ended March 31,\n2026 that was included in customer deposits balance as of December 31, 2025. The Company recognized revenue of $531,000 during the three\nmonths ended March 31, 2025, that was included in the customer deposits balance as of December 31, 2024.\n\n  \n\n**Backlog**\n\n \n\nBacklog represents the value of orders received\npursuant to our Long-Term Agreements (“LTA”) or spot orders pursuant to a purchase order. As of March 31, 2026, backlog relating\nto remaining performance obligations on contracts was approximately $134.7 million. The Company estimates that a substantial portion of\nthis backlog will be recognized as net sales during the next twenty-four months, with the rest thereafter. This expectation assumes that\nraw material supplies and outsourced processing is completed and delivered on time and that the Company’s customers will accept\ndelivery as scheduled. The Company anticipates that sales during the aforementioned periods will also include sales from expected new\norders that are not included in our backlog.\n\n** **\n\n**Earnings (Loss) per share**\n\n \n\nBasic earnings (loss) per share (“EPS”)\nis computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock\noutstanding for the period.\n\n \n\nFor purposes of calculating diluted earnings (loss)\nper common share, the numerator includes net income (loss) plus interest on convertible notes payable assumed converted as of the first\nday of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period and\nthe number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents\npotentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method.\n\n \n\n10\n\n \n\nThe following securities have been excluded from\nthe calculation because the effect of including these potential shares was anti-dilutive due to the net loss incurred during that period:\n\n \n\n  \nThree Months Ended \n\n  \nMarch 31,  \nMarch 31, \n\n  \n2026  \n2025 \n\nStock Options \n 395,453  \n 374,503 \n\nRestricted Stock Units \n 188,418  \n 285,628 \n\nConvertible notes payable \n 361,700  \n 361,700 \n\n  \n 945,571  \n 1,021,831 \n\n \n\n**Stock-Based Compensation**\n\n \n\nThe Company accounts for stock-based compensation\nin accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of\nthe ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the\nfair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing\nreported market value. Stock-based compensation expense for employees amounted to $535,000 and $435,000 for the three months ended March\n31, 2026 and 2025, respectively. Stock-based compensation expense for directors amounted to $429,000 and $39,000 for the three months\nended March 31, 2026 and 2025, respectively. Stock compensation expenses for employees and directors were included in operating expenses\nin the accompanying condensed consolidated statements of operations.\n\n \n\n**Recently Issued Accounting Pronouncements**\n\n \n\nIn November 2024, the FASB issued ASU 2024-03,\n“Disaggregation of Income Statement Expenses”, which requires public business entities to disclose additional information\nabout specific expenses categories in the notes to financial statements at interim and annual reporting periods. The amendments in ASU\n2024-03 are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December\n15, 2027. Early adoption is permitted. The Company is currently assessing the impact that adoption of this new accounting guidance will\nhave on its consolidated financial statements and footnote disclosures.\n\n \n\nThe Company does not believe that any other recently\nissued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated\nfinancial statements.\n\n \n\n**Note 3. PROPERTY AND EQUIPMENT**\n\n \n\nThe components of property and equipment at March\n31, 2026 and December 31, 2025 consisted of the following:\n\n \n\n   March 31,   December 31,     \n\n   2026   2025     \n\n             \n\nLand  $313,000   $313,000      \n\nBuildings and Improvements   2,739,000    2,739,000    31.5 years \n\nMachinery and Equipment   27,080,000    26,953,000    5 - 8 years \n\nTools and Instruments   16,577,000    16,278,000    1.5 - 7 years \n\nAutomotive Equipment   266,000    266,000    5 years \n\nFurniture and Fixtures   309,000    309,000    5 - 8 years \n\nLeasehold Improvements   1,139,000    1,139,000    Term of lease \n\nComputers and Software   705,000    705,000    4 - 6  years \n\nTotal Property and Equipment   49,128,000    48,702,000      \n\nLess: Accumulated Depreciation   (39,913,000)   (39,201,000)     \n\nProperty and Equipment, net  $9,215,000   $9,501,000      \n\n \n\nDepreciation expense for the three months ended\nMarch 31, 2026 and 2025 was approximately $711,000 and $580,000, respectively.\n\n \n\n11\n\n \n\n**Note 4. OPERATING LEASE LIABILITIES**\n\n** **\n\nThe Company has operating leases for leased office\nand manufacturing facilities. The leases have remaining lease terms of one to five years, some of which include options to extend or terminate\nthe leases.\n\n \n\n  \nThree Months Ended \n\n  \nMarch 31,  \nMarch 31, \n\n  \n2026  \n2025 \n\nOperating lease cost: \n$248,000  \n$278,000 \n\nTotal lease cost \n$248,000  \n$278,000 \n\n  \n    \n   \n\nOther Information \n    \n   \n\nCash paid for amounts included in the measurement lease liability: \n 243,000  \n 273,000 \n\nOperating cash flow from operating leases \n$243,000  \n$273,000 \n\n \n\n   March 31,   December 31, \n\n   2026   2025 \n\nWeighted Average Remaining Lease Term - in years   0.50                    0.75 \n\nWeighted Average discount rate - %   9.50%   9.50%\n\n \n\nThe aggregate undiscounted cash flows of operating lease payments as\nof March 31, 2026, with remaining terms greater than one year are as follows:\n\n \n\n  \nAmount \n\nDecember 31, 2026 (remainder of year) \n$486,000 \n\nTotal future minimum lease payments \n 486,000 \n\nLess: discount \n (13,000)\n\nTotal operating lease maturities \n 473,000 \n\nLess: current portion of operating lease liabilities \n (473,000)\n\nTotal long term portion of operating lease maturities \n$\n-\n \n\n \n\n**Note 5. DEBT**\n\n \n\nTotal debt outstanding as of March 31, 2026 is\n$26,562,000 and was $25,233,000 at December 31, 2025.\n\n \n\nIndebtedness to third parties consists of the following:\n\n \n\n  \nMarch 31,  \nDecember 31, \n\n  \n2026  \n2025 \n\nCurrent Credit Facility - Revolver \n$19,283,000  \n$     17,618,000 \n\nCurrent Credit Facility - Term Loan \n 5,593,000  \n 5,855,000 \n\nSolar Credit Facility \n 957,000  \n 971,000 \n\nFinance lease obligations \n 726,000  \n 784,000 \n\nLoans Payable - financed assets \n 3,000  \n 5,000 \n\nSubtotal \n 26,562,000  \n 25,233,000 \n\nLess: Current portion \n (25,102,000) \n (23,721,000)\n\nLong-Term Portion \n$1,460,000  \n$1,512,000 \n\n** **\n\n12\n\n** **\n\n**Current Credit Facility**\n\n \n\nThe Company has a credit facility (“Current\nCredit Facility”) with Webster Bank that expires on September 30, 2026. This facility, which was entered into on December 31, 2019,\nwas amended several times and now provides for a $20,000,000 revolving loan (“Revolving Line of Credit”), a $5,700,000 term\nloan and a $1,640,000 term loan (“Term Loans”). The loan is secured by a lien on substantially all of the assets of the Company.\n\n \n\nAs of March 31, 2026, there is $19,283,000 outstanding\nunder the Revolving Line of Credit and $5,593,000 under the Term Loans.\n\n \n\nAs discussed in Note 1, the Company was in\ndefault of its minimum Fixed Charge Coverage Ratio (“FCCR”) of 1.10x as of March 31, 2026, and the Current Credit\nFacility expires on September 30, 2026. Therefore, the entire Term Loan and all amounts due under the Revolving Line of Credit are\nclassified as short term as of March 31, 2026.\n\n \n\nThe below table shows the timing of payments due\nunder the Term Loan:\n\n \n\nFor the year ending \nAmount \n\nDecember 31, 2026 (remainder of year) \n$5,593,000 \n\nTerm Loan payable \n 5,593,000 \n\nLess: Current portion of Term Loan payable \n (5,593,000)\n\nTotal long-term portion of Term Loan payable \n$\n-\n \n\n \n\nInterest expense related to the Current Credit\nFacility amounted to approximately $379,000 and $315,000 for the three months ended March 31, 2026 and 2025, respectively. Interest expense\nincludes the amortization of deferred finance costs of $0 and $17,000 for the three months ending March 31, 2026 and 2025, respectively.\n\n \n\nThe below summarizes various terms of the Current\nCredit Facility:\n\n \n\n \n●\n\nThe Company is required to meet a Fixed\nCharge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter of 1.10x. As of March 31,2026, the Company\nwas in default with this ratio having attained a ratio of only 0.93. At December 31, 2025, the Company was in full compliance with\nits covenants.\n\n \n\nThe Current Credit Facility limits the amount of capital expenditures\nand dividends the Company can pay to its stockholders. As of March 31, 2026, the Company was in compliance with this Covenant.\n\n \n\nSubstantially all of the Company’s assets\nare pledged as collateral.\n\n \n\n  ● For so long as the Term Loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay 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 applied to the outstanding principal balance of the Term Loan, on or prior to the April 15 immediately following such fiscal year. For the fiscal year ended December 31, 2025, based on the calculation there was no Excess Cash Flow payment required.\n\n \n\n  ● Both the Revolving Line of Credit and the 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 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 6.10% and 6.85% for the three months ended March 31, 2026 and 2025, respectively.\n\n \n\nThe below summarizes certain amendments to the\nCurrent Credit Facility\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, 2025, 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. Additionally, the Company is allowed to pay off up to $4,800,000 of related party notes with funds raised in the Company’s\nAt The Market debt offering.  All other covenants remain unchanged. In connection with these changes, the Company paid an amendment\nfee of $20,000.\n\n \n\n13\n\n \n\n●On September 10, 2025, the Company entered into a Ninth Amendment\nwhere it agreed that $3,930,000 of the proceeds from its ATM Offering would be maintained in an interest bearing account. The funds in\nthis account serve as additional security for its obligations under the Current Credit Facility. Additionally, this amendment waived\nthe default as June 30, 2025.\n\n \n\n●On December 15, 2025, the Company entered into a Tenth Amendment\nwhich waived the defaults caused by the failure to achieve the required fixed charge coverage ratio for the fiscal quarter ended June\n30, 2025, and for exceeding the permitted amount of capital expenditures for the fiscal year ending December 31, 2025. Additionally,\nthe maturity date of the revolving credit and term loans were extended to March 31, 2026, and the capital expenditure covenant was amended.\nThe company paid an amendment fee of $40,000.\n\n \n\n●On February 26, 2026, the Company entered into an Eleventh\nAmendment to which extended the maturity date of the revolving credit and term loans to September 30, 2026. The company paid an amendment\nfee of $25,000 and agreed to pay an additional fee of $150,000 on the maturity date.\n\n \n\nAs the Company is in default under the Current\nCredit Facility, the lender could exercise additional rights and remedies, such as increasing the rate of interest on outstanding amounts\nor refuse to make loans under the revolving portion of the Current Credit Facility and keep the funds remitted to the collection account.\nIf the lender were to cease making new loans under the revolving facility or limit the amount of loans under the revolving facility,\nthe Company would lack the funds to continue or, possibly, expand operations. To date, the lender has chosen not to exercise any of its\nremedies, though we agreed to put $3,930,000 of ATM proceeds in an interest bearing account to serve as additional security for the Company’s\nobligations under the Current Credit Facility. The Company is actively engaged in constructive discussions with various lenders as the\nCompany has been advised by its lender that it will not renew its Current Credit Facility. While these discussions have been professional\nand remain ongoing, there can be no assurance that agreements will be reached with existing lenders or with alternative financing sources.\n\n \n\nAll amendment fees paid in connection with the\nCurrent Credit Facility that are for a future benefit of the Company are included in Deferred Financing Costs, Net, Deposits and Other\nAssets, in the accompanying consolidated balance sheets and are amortized over the term of the loan.\n\n \n\nAs of March 31, 2026, the Company has borrowing\ncapacity of approximately $717,000 under the Revolving Loan.\n\n** **\n\n**Solar Credit Facility**\n\n \n\nOn August 16, 2023, the Company entered into a\nfinancing agreement (“Solar Credit Facility”) with CT Green Bank, a quasi-public agency of the State of Connecticut, for the\ninstallation of solar energy systems including replacing the existing roof (“Project”) at its Sterling facility. Advances\nwere made by CT Green Bank upon its approval of costs incurred on the Project up to $934,000. As of October 1, 2024, cumulative advances\ntotaling $934,000 had been made including the payment of CT Green Bank’s closing costs of $25,000. Total interest accrued on the\nadvances at the rate of 5% was $36,000.\n\n \n\nOn October 1, 2024, the total cumulative advances\nof $934,000 along with the total accrued interest of $36,000 was converted by CT Green Bank, in accordance with the financing agreement,\nto a 20-year level payment term loan in the amount of $970,000 with interest accruing at the rate of 5.75%. Semi-annual payments in the\namount of $42,000 are due commencing on July 1, 2025. The first semi-annual payment was for interest only. The second payment due January\n1, 2026 and all subsequent semi-annual payments include both principal and interest. As of March 31, 2026, the amount classified as short\nterm is $29,000 and the amount classified as long term is $928,000.\n\n \n\n14\n\n \n\nInterest expense related to the Solar Credit Facility\namounted to approximately $14,000 and $14,000 for the three months ended March 31, 2026 and 2025, respectively.\n\n** **\n\n**Finance Lease Obligations**\n\n \n\nThe Company has entered into finance leases for\nthe purchase of additional manufacturing equipment. The obligations for the finance leases totaled $726,000 and $784,000 as of March 31,\n2026 and December 31, 2025, respectively. The leases have an average imputed interest rate of 7.43% per annum and are payable monthly\nwith the final payments due between September of 2026 and May of 2030.\n\n \n\n  \nThree Months Ended \n\n  \nMarch 31,  \nMarch 31, \n\n  \n2026  \n2025 \n\nFinance Lease cost: \n    \n   \n\nAmortization of ROU assets \n$49,000  \n$49,000 \n\nInterest on lease liabilities \n 14,000  \n 18,000 \n\nTotal lease Costs \n$63,000  \n$67,000 \n\n  \n    \n   \n\nOther Information: \n    \n   \n\nCash Paid for amounts included in the measurement lease liabilities: \n    \n   \n\nFinancing cash flow from finance lease obligations \n$58,000  \n$54,000 \n\n  \n    \n   \n\nSupplemental disclosure of non-cash activity \n    \n   \n\nAcquisition of finance lease asset \n$\n-\n  \n$\n-\n \n\n \n\n   March 31,   December 31, \n\n   2026   2025 \n\nWeighted  Average Remaining Lease Term - in years   3.6    4.8 \n\nWeighted Average Discount rate - %   7.43%   7.44%\n\n \n\nAs of March 31, 2026, the aggregate future minimum\nfinance lease payments, including imputed interest are as follows:\n\n \n\nFor the year ending \nAmount \n\nDecember 31, 2026 (remainder of year) \n$193,000 \n\nDecember 31, 2027 \n 190,000 \n\nDecember 31, 2028 \n 190,000 \n\nDecember 31, 2029 \n 190,000 \n\nDecember 31, 2030 \n 75,000 \n\nTotal future minimum finance lease payments \n 838,000 \n\nLess: imputed interest \n (112,000)\n\nLess: Current portion \n (194,000)\n\nLong-term portion \n$532,000 \n\n** **\n\n**Loan Payable – Financed Assets**\n\n** **\n\nThe Company financed the purchase of a delivery\nvehicle in July 2020. The loan obligation totaled $3,000 and $5,000 as of March 31, 2026 and December 31, 2025, respectively. The loan\nbears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.\n\n \n\n15\n\n \n\nAnnual maturities of this loan are as follows:\n\n \n\nFor the year ending \nAmount \n\nDecember 31, 2026 (remainder of year \n$3,000 \n\nLoans Payable - financed assets \n 3,000 \n\nLess: Current portion \n (3,000)\n\nLong-term portion \n$\n-\n \n\n \n\n**Related Party Indebtedness**\n\n \n\nTaglich Brothers, Inc. is a corporation co-founded\nby two directors of the Company, Michael and Robert Taglich.\n\n \n\nTaglich Brothers, Inc. has acted as placement\nagent for various debt and equity financing transactions and has received cash and equity compensation for their services.\n\n \n\nFrom 2016 through 2020, the Company entered into\nvarious subordinated notes payable and convertible subordinated notes payable (together referred to as “Related Party Notes”)\nwith Michael and Robert Taglich which generated proceeds to the Company totaling $6,550,000. In connection with the issuance of the Related\nParty Notes, Michael and Robert Taglich were issued a total of 35,508 shares of common stock and Taglich Brothers, Inc. was issued promissory\nnotes totaling $554,000 for placement agency fees.\n\n \n\nUnder the Eighth Amendment to the Current Credit\nFacility, the Company is allowed to make principal payments of up to $4,800,000 with funds raised in the Company’s At the Market\noffering. For the three month period ended March 31, 2025, the Company paid a total of $1,291,000 of principal payments. Of the $1,291,000\npaid, $1,050,000 was paid to Michael Taglich and $241,000 was paid to Taglich Brothers, Inc.\n\n \n\nThe Related Party Notes outstanding as of March\n31, 2026 and December 31, 2025 consist of:\n\n \n\n  \nMichael\nTaglich,  \nRobert\nTaglich,  \nTaglich\nBrothers,  \n  \n\n  \nDirector  \nDirector  \nInc.  \nTotal \n\nConvertible Subordinated Notes \n$2,416,000  \n$1,905,000  \n$\n        -\n  \n$4,321,000 \n\nSubordinated Notes \n \n-\n  \n 550,000  \n \n-\n  \n 550,000 \n\nTotal \n$2,416,000  \n$2,455,000  \n$\n-\n  \n$4,871,000 \n\n \n\nOf the $4,871,000, approximately $2,519,000 bears\nan annual rate of interest of 6%, $1,802,000 bears an annual rate of 7% and $550,000 bears an annual interest rate\nof 12%. Interest expense for the three months ended March 31, 2026 and 2025 on all related party notes payable was $86,000 and $99,000,\nrespectively.\n\n \n\nApproximately $2,519,000 of the convertible subordinated\nnotes can be converted at the option of the holder into Common Stock of the Company at $15.00 per share, while the remaining $1,802,000\nof the convertible subordinated notes can be converted at the option of the holder into common stock of the Company at $9.30 per share.\nThere are no principal payments due prior to October 1, 2026.\n\n \n\nThe Related Party Notes are subordinate to outstanding\ndebt pursuant to the Current Credit Facility and mature on October 1, 2026.\n\n \n\n**Note 6. STOCKHOLDERS’ EQUITY**\n\n \n\n**Common Stock – Issuances of Securities**\n\n \n\nThe Company issued 4,600 and 9,185 shares of common\nstock in payment of director fees totaling $14,000 and $39,000 for the three months ended March 31, 2026 and 2025, respectively.\n\n \n\nDuring April of 2026, the Company issued 4,484\nshares of common stock in payment of directors’ fees totaling $14,000.\n\n \n\n16\n\n \n\nDuring April of 2026, the Company issued 57,345\nshares of common stock upon the vesting of Restricted Stock Units (“RSUs”) to certain employees and withheld the balance of\nthe 94,210 RSUs in satisfaction of tax withholding obligations. This represents a portion of the RSUs granted in 2024.\n\n \n\nAdditionally, during April of 2026, the Company\nissued 7,775 shares of common stock upon the vesting of RSUs to a former executive pursuant a separation agreement and withheld the balance\nof the 12,159 RSUs in satisfaction of withholding tax obligations. This represents a portion of the RSUs granted in February of 2026.\n(See Note 7. Stock Options and Restricted Stock Units.)\n\n** **\n\n**Note 7. STOCK OPTIONS AND RESTRICTED STOCK UNITS**\n\n** **\n\n**Stock-Based Compensation**\n\n** **\n\n**Stock Options**\n\n \n\nIn June 2025, the shareholders of the Company\napproved the amendment to the 2022 Equity Incentive Plan (“2022 Plan”) to increase the number of shares authorized to be used\nunder the plan by 250,000 shares, from 650,000 shares to 900,000 shares.\n\n \n\nThe Company recorded stock-based compensation expense for certain\nemployees and members of the Company’s Board of Directors of $27,000 and $18,000 for the three months ended March 31, 2026 and 2025,\nrespectively, in its condensed consolidated statements of operations, and such amounts were included as a component of operating\nexpenses.\n\n \n\nA summary of the status of the Company’s stock options as of\nMarch 31, 2026 and December 31, 2025, and changes during the periods then ended are presented below:\n\n \n\n  \n   \nWtd. Avg. \n\n  \n   \nExercise \n\n  \nOptions  \nPrice \n\nBalance, January 1, 2025 \n 417,003  \n$7.00 \n\nGranted during the period \n 60,000  \n 3.00 \n\nExercised during the period \n \n-\n  \n \n-\n \n\nTerminated/Expired during the period \n (51,300) \n 10.57 \n\nBalance, December 31, 2025 \n 425,703  \n$6.01 \n\nGranted during the period \n \n-\n  \n \n-\n \n\nExercised during the period \n \n-\n  \n \n-\n \n\nTerminated/Expired during the period \n (30,250) \n 13.90 \n\nBalance, March 31, 2026 \n 395,453  \n$5.40 \n\n  \n    \n   \n\nExercisable at March 31, 2026 \n 380,453  \n$5.50 \n\n \n\nThe following table summarizes information about outstanding stock\noptions at March 31, 2026:\n\n \n\n    Number      Wtd. Avg. \n\nRange of Exercise Price   Outstanding   Wtd.Avg, Life  Exercise Price \n\n$3.00 - $23.80    395,453   2.4 Years  $5.50 \n\n \n\nThe following table summarizes information about outstanding stock\noptions at December 31, 2025:\n\n \n\n    Number      Wtd. Avg. \n\nRange of Exercise Price   Outstanding   Wtd.Avg, Life  Exercise Price \n\n$3.00 - $23.80    425,703   2.5 Years  $6.01 \n\n \n\n17\n\n \n\nAs of March 31, 2026, there was $8,000 of unrecognized compensation\ncost related to non-vested stock option awards, which is to be recognized over the remaining weighted average vesting period of 0.2 years.\n\n \n\nThe aggregate intrinsic value at March 31, 2026 was based on the Company’s\nclosing stock price of $3.23 was $14,000. The aggregate intrinsic value at December 31, 2025 was based on the Company’s closing\nstock price of $3.07 was approximately $4,000. The aggregate intrinsic value was calculated based on the positive difference between the\nclosing market price of the Company’s Common Stock and the exercise prices of the underlying options.\n\n** **\n\n**Restricted Stock Units (“RSUs”)**\n\n \n\nDuring the three months ended March 31, 2026 and 2025, the Company\ngranted 243,172 and 0 RSUs to certain employees and directors. These RSUs vested immediately.\n\n \n\nA summary of the status of the Company’s RSUs as of March 31,\n2026, is presented below.\n\n \n\n  \n   \nWtd. Avg. \n\n  \n   \nGrant Date Fair \n\n  \nNumber of\n\nUnits  \nValue per\n\nUnit \n\nUnvested units as of January 1, 2025 \n 282,628  \n$6.06 \n\nGranted during the period \n 3,000  \n - \n\nVested during the period \n (95,210) \n \n-\n \n\nForfeited during the period \n (2,000) \n \n-\n \n\nUnvested Units as of December 31, 2025 \n 188,418  \n$6.06 \n\nGranted during the period \n 243,172  \n 3.19 \n\nVested during the period but shares not issued \n (243,172) \n 3.19 \n\nForfeited during the period \n -  \n - \n\nUnvested Units as of March 31, 2026 \n 188,418  \n$6.06 \n\n  \n    \n   \n\nVested as of March 31, 2026 \n 338,382  \n$4.00 \n\n \n\nThe Company recorded stock-based compensation expense of $923,000\nand $417,000 for the three months ended March 31, 2026 and 2025, respectively, in its condensed consolidated statements of operations,\nand such amounts were included as a component of operating expenses.\n\n \n\nAs of March 31, 2026, there was $226,000 of unrecognized compensation\ncost related to non-vested RSUs, which is to be recognized over the remaining weighted average vesting period of 1.0 year. \n\n** **\n\n**Note 8. COMMITMENTS AND CONTINGENCIES**\n\n \n\nOn October 2, 2018, Contract Pharmacal Corp. (“Contract\nPharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with\nrespect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York.\nIn the action, Contract Pharmacal sought damages for an amount in excess of $1,000,000 for the Company’s alleged violation of the\nterms of the subject sublease, specifically the failure to make the entire premises available by what it claims was the Sublease commencement\ndate. The validity of the action is extremely suspect in that the subject sublease had no specific commencement date and Contract Pharmacal\nultimately received all the space. Discovery was conducted and the Plaintiff moved for summary judgement and to amend its complaint to\nadd a new cause of action all of which the company opposed. On July 8, 2021, the Court denied Contract Pharmacal’s motion for summary\njudgement and to add an additional cause of action. In the Order, the Court granted Contract Pharmacal’s Motions to drop its claim\nfor specific performance and to amend its Complaint to reduce its claim for damages to $700,000 both of which benefit the Company. Following\nthe Court’s decision, Contract Pharmacal filed a Motion to reargue its original motion which the Company opposed. The Court denied\nthat motion on November 30, 2021 and then on March 10, 2022, Contract Pharmacal filed an appeal of the Court’s decision with the\nAppellate Division of the State of New York. The Company opposed that action. The Company was again successful as the Appellate Division\nupheld the lower court’s denial of Contract Pharmacal’s motion for summary judgement and its motion to amend its Complaint.\nContract Pharmacal has now submitted a motion to the Appellate Division requesting leave to reargue the court’s denial of its original\nappeal. The Company will oppose that motion. The Appellate Division has yet to act in respect to Contract Pharmacal’s most recent\nmotion to reargue the Court’s denial of the original appeal. The Company continues to dispute the validity of the claims asserted\nby Contract Pharmacal and intends to contest them vigorously.\n\n \n\nFrom time to time the Company may be engaged\nin various lawsuits and legal proceedings in the ordinary course of business. The Company is currently not aware of any legal\nproceedings the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse\neffect on its business, financial condition or operating results. In consultation with legal counsel, there are no proceedings in\nwhich any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder of its common stock,\nis an adverse party or has a material interest adverse to our interest.\n\n \n\n18\n\n \n\n**Note 9. INCOME TAXES**\n\n \n\nThe Company recorded no income tax expense for\nthe three months ended March 31, 2026 and 2025 because the estimated annual effective tax rate was zero. In determining the estimated\nannual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and\ntaxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits\nand net operating loss carry forwards, and available tax planning alternatives.\n\n \n\nAs of March 31, 2026, and December 31, 2025, the\nCompany provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not\nthat its deferred tax assets will not be realized.\n\n** **\n\n**Note 10. SEGMENT INFORMATION**\n\n \n\nThe Company operates as one operating segment.\nThe Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer, who reviews financial information\npresented on a consolidated basis. The CODM used consolidated sales, gross margin and net income (loss) to assess financial performance\nand allocate resources. These financial metrics are used by the CODM to make key operating decisions, such as the need to allocate its\nbudget to operating expenses and invest in additional equipment. The segment assets are equal to the assets presented in the condensed\nconsolidated balance sheets.\n\n \n\nThe significant expenses that are regularly provided\nto the CODM are disclosed in the consolidated statements of operations as a part of the condensed consolidated net income (loss). See\nthe condensed consolidated financial statements for all financial information regarding the Company’s operating segment.\n\n \n\nAll revenues of the Company are earned in the\nUnited States of America.\n\n \n\nThe Company’s long-lived tangible assets,\nas well as the Company’s operating lease right-of use assets recognized on the Condensed Consolidated Balance Sheets were located\nin the United States.\n\n** **\n\n**Note 11. MERGER INFORMATION**\n\n \n\nOn February 16, 2026,\nthe Company and Transitory Air Sub LLC, its wholly owned subsidiary (“Merger Sub”),\nentered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tenax Aerospace Acquisition, LLC, a Delaware limited\nliability company (“Tenax”). Upon consummation of the merger contemplated by the Merger Agreement (the “Merger”),\nTenax will become a wholly owned subsidiary of the Company.\n\n \n\nPursuant to the Merger\nAgreement, the Company will issue shares of its common stock (the “Merger Consideration”) to the holders of the membership\ninterests of Tenax (the “Tenax Members”) at the closing of the Merger. A portion of the Merger Consideration allocated\nin respect of membership interests of Tenax underlying certain Tenax warrants that remain unexercised as of the closing, if any, will\nbe reserved by the Company for future issuance upon the exercise of such warrants. The number of shares of the Company’s common\nstock to be issued to the Tenax Members will be adjusted based on a calculation of AIR Net Indebtedness (as defined in the Merger Agreement).\nBased on the amount of AIR Net Indebtedness as of March 31, 2026, the calculation would result in the issuance of approximately 122.6\nmillion shares of the Company’s common stock. Consequently, based upon the calculation of the Merger Consideration as of March 31,\n2026, following the closing of the Merger, the Tenax Members will collectively own approximately 96% of the outstanding shares of the\nCompany’s common stock.\n\n \n\nThe closing of the Merger\nis subject to risks and uncertainties and certain specified conditions, including, among other things: (a) the expiration or termination\nof the applicable waiting period under the Hart-Scott-Rodino Act, (b) the listing of the Merger Consideration on the NYSE American,\nand (c) other customary conditions for a transaction such as the Merger, such as the absence of any legal restraint prohibiting\nthe consummation of the Merger and there not having occurred with respect to the Company or Tenax’s business a material adverse\nevent, subject to certain customary exceptions.\n\n \n\nTenax is a leading provider\nof special mission aviation solutions that combine aircraft sourcing, financing and modification with aviation services including pilots,\nmaintenance and other types of program support. Additionally, Tenax has a long-standing relationship with key government customers.\n\n \n\n19"}