{"url_path":"/sec/airi/10-q/2026/item-2","section_key":"item-2","section_title":"Item 2 MANAGEMENT’S DISCUSSION AND ANALYSIS","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":3988,"has_tables":true,"body_markdown":"** **\n\n**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS\nOF 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 the unaudited condensed consolidated financial statements and notes to those\nstatements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included\nin our Annual Report on Form 10-K, for the year ended December 31, 2025 (the “2025 Form 10-K”). This discussion contains forward-looking\nstatements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report and\nour 2025 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements. Further,\nalthough we believe we will not face a material increase in the price of raw materials due to tariffs that may be imposed, ongoing geopolitical\nconflicts could adversely impact our ability to manufacture our products, the markets for some of our products, and our ability to access\ndebt or equity financing.*\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-Fan (“GTF”) Engines (used on smaller aircraft such\nas the Airbus A220 and Embraer E2), the CH-53 Helicopter, the F-35 Lighting II and the F-15 Eagle Tactical Fighter. In many cases, we\nare the sole or single supplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment\nto 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\n20\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 for the rest of fiscal 2026, we are focused on securing new contract\nawards, improving operations and successful completion of the Merger Agreement (as discussed below).\n\n \n\nAs of March 31, 2026, we have total unfilled contract\nvalues amounting to $269.2 million (including our $134.7 million in backlog and all potential orders against LTA agreements previously\nawarded to us).\n\n \n\n**Recent Developments**\n\n \n\nOn February 16, 2026,\nwe and Transitory Air Sub LLC, our 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 AIR. Tenax is a leading provider of special mission aviation solutions that combine aircraft\nsourcing, financing and modification with aviation services including pilots, maintenance and other types of program support. Additionally,\nthey have long standing relationships with key government customers.\n\n \n\nPursuant to the Merger\nAgreement, we will issue shares of our 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 us for future issuance upon the exercise of such warrants. The number of shares of our common stock to be issued to the\nTenax Members will be adjusted based on a calculation of AIR Net Indebtedness (as defined in the Merger Agreement). Based on the amount\nof Air Net Indebtedness as of March 31, 2026, the calculation would result in the issuance of approximately 122.6 million shares of AIR\ncommon stock. Consequently, based upon the calculation of the Merger Consideration as of March 31, 2026, following the closing of the\nMerger, the Tenax Members will collectively own approximately 96% of the outstanding shares of our common stock.\n\n \n\nFor a more complete description\nof the Merger Agreement, transactions to be consummated, actions to be taken and agreements entered into or to be entered in connection\ntherewith, reference is made to the Current Report on Form 8-K filed February 17, 2026 and the full text of the Merger Agreement and the\ndocuments that are exhibits.\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 the consummation\nof the Merger and there not having occurred with respect to AIR or Tenax’s business a material adverse event, subject to certain\ncustomary exceptions.\n\n \n\nExcept where specifically\nnoted, the discussion of our business, operations, management team and financial results contained herein, gives no effect to changes\nthat would occur as a result of or subsequent to the consummation of the Merger.\n\n \n\n**RESULTS OF OPERATIONS**\n\n \n\n**Selected Financial Information:**\n\n** **\n\n  \nThree Months\n\nEnding\nMarch 31,\n\n2026  \n2026\n\nPercentage of\n\nNet Sales  \nThree Months\n\nEnding\nMarch 31,\n\n2025  \n2025 Percentage of\n\nNet Sales  \nChange\n\n2026 vs\n\n2025  \nPercent\n\nChange 2026\n\nvs 2025 \n\nNet sales \n$11,606,000  \n 100.0% \n$12,135,000  \n 100.0% \n$(529,000) \n -4.36%\n\nCost of sales \n 9,004,000  \n 77.6% \n 10,101,000  \n 83.2% \n (1,097,000) \n -10.86%\n\nGross profit \n 2,602,000  \n 22.4% \n 2,034,000  \n 16.8% \n 568,000  \n 27.93%\n\nOperating expenses \n 3,167,000  \n 27.3% \n 2,780,000  \n 22.9% \n 387,000  \n 13.92%\n\nInterest expense \n 494,000  \n 4.3% \n 444,000  \n 3.7% \n 50,000  \n 11.26%\n\nOther income, net \n 39,000  \n 0.3% \n 202,000  \n 1.7% \n (163,000) \n -80.69%\n\nProvision for income taxes \n -  \n 0.0% \n -  \n 0.0% \n -  \n - \n\nNet loss \n$(1,020,000) \n -8.8% \n$(988,000) \n -8.1% \n$(32,000) \n 3.24%\n\n** **\n\n21\n\n** **\n\n**Balance Sheet Data:**\n\n \n\n  \nMarch 31, 2026  \nDecember 31, 2025  \nChange  \nPercent\nChange \n\nCash \n$286,000  \n$680,000  \n$(394,000) \n -57.94%\n\nWorking capital \n$5,659,000  \n$5,238,000  \n$421,000  \n 8.04%\n\nTotal assets \n$59,216,000  \n$58,329,000  \n$887,000  \n 1.52%\n\nTotal stockholders’ equity \n$19,145,000  \n$19,201,000  \n$(56,000) \n -0.29%\n\n \n\n**Net Sales:**Net sales for the three\nmonths ended March 31, 2026 were $11,606,000, a decrease of $529,000, or 4.4%, compared with $12,135,000 that we achieved in the three\nmonths ended March 31, 2025. The period-over-period decrease in net sales was primarily due to overall changes in the mix of products\nrequested by customers, which are discussed further below.\n\n \n\nThe composition of customers that exceeded 10%\nof our net sales for the three 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 our net sales by platform or program profiles for\nthe three months ended March 31, 2026 and 2025 are shown below:\n\n \n\nPlatform or Program \nPercentage of Net Sales \n\n  \n2026  \n2025 \n\nUH-60 Black Hawk Helicopter \n 31.2% \n 28.2%\n\nGTF \n 23.4% \n 24.7%\n\nCH-53 Helicopter \n 7.5% \n 10.2%\n\nE-2D Hawkeye \n 6.9% \n 10.1%\n\nF-35 Lightning II \n 5.8% \n 2.9%\n\nF-18 Hornet \n 1.5% \n 3.1%\n\nAll other platforms \n 23.7% \n 20.8%\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\nthree months ended March 31, 2026, was $2,602,000 as compared to $2,034,000 for the three months ended March 31, 2025. Our gross profit\npercentage for the three months ended March 31, 2026 increased to 22.4% from the 16.8% for the three months ended March 31, 2025. The\nincrease in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating\nefficiencies. During the second half of 2025, we implemented several cost reductions that benefited our gross profit during the three\nmonths ended March 31, 2026 that were not in place during the three months ended March 31, 2025.\n\n** **\n\n**Operating Expenses**: Operating expenses\nwere $3,167,000, for the three months ended March 31, 2026, an increase of $387,000, from $2,780,000 for the three months ended March\n31, 2025. As a percentage of consolidated net sales, operating expenses increased to 27.3%, compared to the 22.9% achieved during the\nthree months ended March 31, 2025. The dollar increase was primarily driven by increases in stock-based compensation costs and professional\nfees as well as costs associated with the continued improvement of our information technology system and hardening our cyber-security\ndefenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.\n\n \n\n22\n\n \n\n**Interest Expense:**Interest expense\n(which includes amortization of deferred financing costs) was $494,000 during the three months ended March 31, 2026, an increase of $50,000\nor 11.2% from $444,000 during the three months ended March 31, 2025. The increase is primarily attributable to the higher loan balances\nunder our Current Credit Facility. The average interest rate on outstanding debt pursuant to our Current Credit Facility which decreased\nto 6.10% in 2026 as compared to 6.85% in 2025.\n\n** **\n\n**Net Loss:** Net loss for the three\nmonths ended March 31, 2026 was $1,020,000, compared to a net loss of $988,000 for the three months ended March 31, 2025, for the reasons\ndiscussed above.\n\n \n\n**LIQUIDITY AND CAPITAL RESOURCES** \n\n \n\nAs of March 31, 2026, we have debt service requirements\nrelated to:\n\n \n\n \n1)\nOutstanding indebtedness under our Current Credit Facility of $24,876,000\n(consisting of a Revolving Loan of $19,283,000 and a Term Loan in the amount of $5,593,000). This debt matures on September 30, 2026,\nand requires us to make monthly payments on the term loan of approximately $87,000 until the loan matures.\n\n \n\n \n2)\nRelated Party Notes of approximately $4,871,000, maturing on October 1, 2026.\n\n \n\n \n3)\nVarious equipment leases and contractual obligations related to our normal 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\nUnder the terms of the Current Credit Facility,\nas amended, we are required to meet a prescribed Fixed Charge Coverage Ratio (“FCCR”) (as defined) that is determined at the\nend of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest\nand lease expenses divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes,\ndepreciation and amortization. As of March 31, 2026, the Company is required to meet a FCCR of 1.10x. As of March 31, 2026, we were not in compliance with this ratio having only attained a ratio of 0.93x. We are in compliance with all other required business and\nfinancial covenants.\n\n \n\nThe Current Credit Facility\nand Related Party Subordinated are classified as current liabilities on the condensed consolidated balance sheet as of March 31, 2026.\nAs a result of the due dates of this debt, there is substantial doubt about our ability to continue as a going concern for the twelve\nmonths following the date of filing of these consolidated financial statements. In addition, we are in default under our Current Credit\nFacility due to our failure to meet the FCCR required for the period ended March 31, 2026. Webster Bank has advised us that it will not\nrenew our Current Credit Facility. In addition to discussions with our lenders, as discussed in our Current Report on Form 8-K filed February\n17, 2026, we entered into a Merger Agreement with Tenax.\n\n \n\nThe Current Credit Facility expires on September 30, 2026. In addition, we are required to maintain a collection account with our lender\ninto which substantially all cash receipts are remitted. As we are in to default under the Current Credit Facility, our lender could choose\nto increase the rate of interest or refuse to make loans under the revolving portion of the Current Credit Facility and keep the funds\nremitted to the collection account. If the lender were to raise the rate of interest, it would adversely impact our operating results.\nIf the lender were to cease making new loans under the revolving facility, we would lack the funds to continue operations. The Current\nCredit Facility expiration date and the rights granted to the lender, combined with the reasonable possibility that we might fail to meet\ncovenants in the future, raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the\ndate of filing this report. To date, the lender has chosen not to exercise any of its remedies, though we have agreed to place $3,930,000\nof ATM proceeds in an interest bearing account to serve as additional security for the Company’s obligations under the Current Credit\nFacility.\n\n \n\nTo support current operations and strategic initiatives,\nbeginning in December 2024 we raised capital through public market sales of our common stock and believe we can continue to access equity\nmarkets in 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\nequity securities. During the year ended December 31, 2025, the Company sold 1,213,593 shares of common stock in the public market and\ngenerated gross proceeds of $4,869,000, of which approximately $3,930,000 is restricted for the benefit of the Current Credit Facility\nlender. Since initiating the sales in December 2024, we have sold a total of 1,330,444 shares for gross proceeds of $5,375,000. In light\nof ongoing negotiations with our lenders and in accordance with the Merger Agreement with Tenax, we have temporarily paused all equity\nraising activity.\n\n \n\n23\n\n \n\nThe following is a brief discussion of the recent\namendments to the Current Credit Facility (all of which have been filed with the SEC):\n\n \n\n \n●\nOn January 30, 2025, we\nentered into an Eighth Amendment to provide for an additional Term Loan in the amount of $1,640,000 for the acquisition of equipment.\nThe monthly principal installments on this additional Term Loan are $19,524. This amendment further revised our Financial Covenants.\nFor the rolling twelve-month period ending March 31, 2025 and June 30, 2025, we are required to achieve a Fixed Charge Coverage Ratio\nof 1.05x. Beginning with the rolling twelve-month period ending September 30, 2025 and going forward the Company is required to achieve\na Fixed Charge Coverage Ratio of 1.25x. All other covenants remain unchanged. In connection with these changes, the Company paid\nan amendment fee of $20,000.\n\n \n\n \n●\nOn September 10, 2025,\nthe Company entered into a Ninth Amendment where we agreed that $3,930,000 of the proceeds from our ATM Offering would be maintained\nin an interest bearing account. The funds in this account serve as security for our obligations under the Current Credit Facility.\n\n \n\n●On\nDecember 15, 2025, the Company entered into a Tenth Amendment which waived the defaults caused\nby the failure to achieve the required fixed charge coverage ratio for the fiscal quarter\nended June 30, 2025, and for exceeding the permitted amount of capital expenditures for the\nfiscal year ending December 31, 2025. Additionally, the maturity date of the revolving credit\nand term loans were extended to March 31, 2026, and amended the capital expenditure covenant.\nThe company paid an amendment fee of $40,000.\n\n \n\n●On\nFebruary 26, 2026, the Company entered into an Eleventh Amendment to which extended the maturity\ndate 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 of the\nCurrent Credit Facility.\n\n \n\nIf\nwe are unable to close the merger with Tenax contemplated by the Merger Agreement or obtain a new lender to replace the Current Credit\nFacility we may not be able meet our financial obligations. As of March 31, 2026, we have borrowing capacity of approximately $787,000\nunder the Revolving Loan.\n\n \n\nIn\naddition to required Term Loan payments we may have to make additional payments under the Current Credit Facility. For so long\nas the Term Loan under the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any\nfiscal year, we are obligated to pay an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii)\nthe outstanding principal balance of the Term Loan. Such payment shall be applied to the outstanding principal balance of the Term loan,\non or prior to the April 15 immediately following such fiscal year. For the fiscal year ended December 31, 2025, based on the calculation\nthere 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\n24\n\n \n\nOur material cash requirements are for debt service,\nfunding working capital and capital expenditures. We have historically met these requirements with funds provided by a combination of\ncash generated from operating activities and cash generated from equity and debt financing transactions. Based on our current revenue\nvisibility, strength of our backlog, and availability under our Current Credit Facility, we believe that we have sufficient liquidity\nto meet our day-to-day cash requirements for our operations. However, we must pay or refinance large portions of our indebtedness prior\nto September 30, 2026. Further, as a condition to refinancing our Current Credit Facility prior to September 30, 2026, a\nnew lender may require that the holders of our Related Party Notes extend or otherwise modify the subordination agreements they have given\nin 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 may require us to pay higher interest rates than we currently pay, agree to more restrictive business\nor financial covenants or involve the issuance of debt, equity and/or new securities convertible into or exercisable or exchangeable for\nour common stock. Any failure to refinance our existing debt or obtain additional working capital when required would have a material\nadverse effect on our business and financial condition.\n\n \n\nFurther details regarding outstanding indebtedness are provided in\n“Note 5. Debt.”\n\n** **\n\n**Cash Flows**\n\n \n\nThe following table summarizes our net cash flows\nfrom operating, investing and financing activities for the periods indicated (in thousands): \n\n \n\n  \nThree Months Ended \n\n  \nMarch 31, \n\n  \n2026  \n2025 \n\nCash provided by (used in) \n   \n  \n\nOperating activities \n$(1,298) \n$1,525 \n\nInvesting activities \n (425) \n (1,217)\n\nFinancing activities \n 1,329  \n (776)\n\nNet decrease in cash \n$(394) \n$(468)\n\n** **\n\n**Cash (Used in) Provided by Operating Activities**\n\n \n\nFor the three months ended March 31, 2026, we\nused $1,298,000 in operations as compared to a cash flow provided of $1,525,000 for the three months ended March 31, 2025. The decrease\nwas due primarily to increases in inventory and accounts receivable and a decrease in accounts payable partially offset by an increase\nin customer deposits.\n\n \n\n25\n\n \n\nFor the three months ended March 31, 2025, we\ngenerated $1,525,000 from operations which was mainly attributable to a decrease in accounts receivable and the collection of contract\ncosts receivable.\n\n** **\n\n**Cash Used in Investing Activities**\n\n \n\nDuring our most recent quarter, we continued to\nmake investments to enhance our competitiveness and market position. Cash used in investing activities of $425,000 and $1,217,000, during\nthe three months ended March 31, 2026 and 2025, respectively, was for new property and equipment.\n\n \n\nThe investments made in 2026 and 2025 increased\nour production efficiency and speed, while maintaining closer tolerances. We intend to limit capital expenditures until such time as our\ndebt situation is resolved.\n\n \n\n**Cash Provided by (Used in) Financing Activities**\n\n \n\nFor the three months ended March 31, 2026, cash\nprovided by financing activities was $1,329,000. During this period, we increased borrowings under our Current Credit Facility by $1,403,000\n(consisting of a net increase in Revolving Loan borrowings of $1,665,000 and a net decrease of $262,000 against the Term Loan). Additionally,\nwe made payments of $59,000 pursuant to financing lease obligations, $13,000 on our Solar Credit Facility and $2,000 on a loan payable.\n\n** **\n\n**OFF-BALANCE SHEET ARRANGEMENTS**\n\n \n\nWe did not have any off-balance sheet arrangements\nas of March 31, 2026.\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 include estimates based\non currently available information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in\nthese financial statements include, inventory valuation, useful lives and impairment of long-lived assets, income tax provision, and allowance\nfor credit losses. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the\npreparation of the financial statements and actual results could differ from the estimates and assumptions. \n\n \n\n26\n\n \n\nThere have been no material changes to the Company’s\ncritical accounting estimates as compared to the estimates described in the 2025 Annual Report which we believe are the most critical\nto our business and understanding of our results of operations and affect the more significant judgments and estimates that we use in\npreparation of our condensed consolidated financial statements.** **"}