AIR INDUSTRIES GROUP

Previous wording

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Current wording

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Previous wording

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2023 (the “2023 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report and our 2023 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements.

Current wording

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2024 (the “2024 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report and our 2024 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements. Further, although we believe we will not face a material increase in the price of raw materials due to tariffs that may be imposed, ongoing geopolitical conflicts could adversely impact our ability to manufacture our products, the markets for some of our products, and our ability to access debt or equity financing.

Previous wording

Our products include landing gear, flight controls, engine mounts and components for aircraft jet engines and ground turbines and other complex machines. The ultimate end-user for most of our products is the U.S. government, foreign governments, and commercial global airlines. Whether it is a small individual component for assembly by others or complete assemblies we manufacture ourselves, our high quality and extremely reliable products are used in mission critical operations that are essential for safety of military personnel and civilians.

Current wording

Our products include landing gear, flight controls, engine mounts and components for aircraft jet engines and ground turbines and other complex machines. The ultimate end-user for most of our products is the U.S. government, international governments, and commercial global airlines. Whether it is a small individual component for assembly by others or complete assemblies we manufacture ourselves, our high quality and extremely reliable products are used in mission critical operations that are essential for safety of military personnel and civilians.

Previous wording

Although our net sales are concentrated amongst a number of defense and aerospace prime contractors, we have cultivated long-standing relationships with a number of their subsidiaries and/or business units. Additionally, our net sales are generated across several high-profile platforms and programs including: the F-18 Hornet, the E-2 Hawkeye, the UH-60 Black Hawk Helicopters, Geared Turbo Engines (used on smaller aircraft such as 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 are the sole or single supplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment to us.

Current wording

Although our net sales are concentrated amongst a number of defense and aerospace prime contractors, we have cultivated long-standing relationships with a number of their subsidiaries and/or business units. Additionally, our net sales are generated across several high-profile platforms and programs including: the F-18 Hornet, the E-2 Hawkeye, the UH-60 Black Hawk Helicopters, Geared Turbo-Fan (“GTF”) Engines (used on smaller aircraft such as 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 are the sole or single supplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment to us.

Previous wording

Winning a new contract award is highly competitive. Our ability to win new contract awards generally requires us to deliver superior quality products, more quickly and with lower pricing than our competitors. Accordingly, we must continually invest in process improvements and capital equipment. Recent investments in new equipment have improved the productive capacity of our employees, increased our efficiency and speed, and expanded the size of products we can manufacture. We strategically operate two state-of-the-art manufacturing centers in the U.S. This allows for rigorous oversight of production and the adherence to stringent quality standards. Although there is currently a shortage of skilled workers, we maintain a highly trained and close knit team of over 180 professionals committed to driving excellence and precision in every aspect of our operations.

Current wording

Winning a new contract award is highly competitive. Our ability to win new contract awards generally requires us to deliver superior quality products, more quickly and with lower pricing than our competitors. Accordingly, we must continually invest in process improvements and capital equipment. Recent investments in new equipment have improved the productive capacity of our employees, increased our efficiency and speed, and expanded the size of products we can manufacture. We strategically operate two state-of-the-art manufacturing centers in the U.S. This allows for rigorous oversight of production and the adherence to stringent quality standards. Although there is currently a shortage of skilled workers, we maintain a highly trained and close- knit team of over 184 professionals committed to driving excellence and precision in every aspect of our operations.

Previous wording

For the past several years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes to bolster our competitive position. Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships with existing customers and cultivating new ones. Fiscal 2023 marked a year of overall progress and positioning for growth. During the first nine months of 2024 and looking forward, our business strategy is geared towards achieving sustainable and profitable business growth. We are firmly focused on securing new contract awards, improving operations and successful execution.

Current wording

For the past several years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes to bolster our competitive position. Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships with existing customers and cultivating new ones. Fiscal 2024 marked a year of overall progress and positioning for growth. During the first quarter of 2025 and looking forward, our business strategy is geared towards achieving sustainable and profitable business growth. We are firmly focused on securing new contract awards, improving operations and successful execution.

Previous wording

With total unfilled contract values amounting to $175.7 million (including our $105.2 million in backlog and all potential orders against LTA agreements previously awarded to us), as of September 30, 2024, we are confident in our ability to boost sales during the remainder of 2024, attain profitability and improve our financial position.

Current wording

With total unfilled contract values amounting to $270.3 million (including our $120.6 million in backlog and all potential orders against LTA agreements previously awarded to us), as of March 31, 2025, we are confident in our ability to boost sales during the remainder of 2025, attain profitability and improve our financial position.

Previous wording

***Net Sales:***Net sales for the three months ended September 30, 2024 were $12,555,000, an increase of $262,000, or 2.1%, compared with $12,293,000 that we achieved in the three months ended September 30, 2023. The period-over-period increase in net sales was primarily due to overall changes in the mix of products requested by customers, which are discussed further below.

Current wording

***Net Sales:***Net sales for the three months ended March 31, 2025 were $12,135,000, a decrease of $1,926,000, or 13.7%, compared with $14,061,000 that we achieved in the three months ended March 31, 2024. The period-over-period decrease in net sales was primarily due to overall changes in the mix of products requested by customers, which are discussed further below.

Previous wording

The composition of customers that exceeded 10% of our net sales for 2024 and 2023 are shown below:

Current wording

The composition of customers that exceeded 10% of our net sales in either 2025 or 2024 are shown below:

Previous wording

***Gross Profit:***Gross profit for the three months ended September 30, 2024, was $1,941,000 as compared to $1,228,000 for the three months ended September 30, 2023. Our gross profit percentage for the three months ended September 30, 2024 increased to 15.5% from the 10.0% for the three months ended September 30, 2023. The increase in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.

Current wording

***Gross Profit:***Gross profit for the three months ended March 31, 2025, was $2,034,000 as compared to $1,906,000 for the three months ended March 31, 2024. Our gross profit percentage for the three months ended March 31, 2025 increased to 16.8% from the 13.6% for the three months ended March 31, 2024. The increase in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.

Previous wording

***Operating Expenses:***Operating expenses was $1,874,000, for the three months ended September 30, 2024, a decrease of $150,000, from $2,024,000 for the three months ended September 30, 2023. As a percentage of consolidated net sales, operating expenses decreased to 14.9%, compared to the 16.5% achieved during the three months ended September 30, 2023. The dollar decrease was primarily driven by reductions in stock compensation expense and our allowance for credit loss, offset by increases in costs associated with the continued improvement of our information technology system and hardening our cyber-security defenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.

Current wording

Operating Expenses: Operating expenses were $2,780,000, for the three months ended March 31, 2025, an increase of $615,000, from $2,165,000 for the three months ended March 31, 2024. As a percentage of consolidated net sales, operating expenses increased to 22.9%, compared to the 15.4% achieved during the three months ended March 31, 2024. The dollar increase was primarily driven by increases in stock-based compensation costs and professional fees as well as costs associated with the continued improvement of our information technology system and hardening our cyber-security defenses. We continue to look for ways to reduce our costs and improve our operating performance and financial results.

Previous wording

***Interest Expense:***Interest expense (which includes amortization of deferred financing costs) was $1,418,000 during the nine months ended September 30, 2024, a decrease of $54,000 or 3.7% from $1,472,000 during the nine months ended September 30, 2023. The decrease is primarily attributable to lower borrowing levels during a portion of the period, partially offset by an increase in the average interest rate on outstanding debt pursuant to our Current Credit Facility which increased to 7.83% in 2024 as compared to 7.44% in 2023.

Current wording

***Interest Expense:***Interest expense (which includes amortization of deferred financing costs) was $444,000 during the three months ended March 31, 2025, a decrease of $18,000 or 3.9% from $462,000 during the three months ended March 31, 2024. The decrease is primarily attributable to the repayment of a portion of our subordinated debt as well as a decrease in the in the average interest rate on outstanding debt pursuant to our Current Credit Facility which decreased to 6.85% in 2025 as compared to 7.85% in 2024.

Previous wording

***Net Loss:***Net loss for the three months ended September 30, 2024 was $404,000, compared to a net loss of $1,299,000 for the three months ended September 30, 2023, for the reasons discussed above.

Current wording

Net Loss: Net loss for the three months ended March 31, 2025 was $988,000, compared to a net loss of $706,000 for the three months ended March 31, 2024, for the reasons discussed above.

Previous wording

Under the terms of the Current Credit Facility, as amended, we are required to achieve EBITDA (as defined in the Current Credit Facility) at the end of each Fiscal Quarter on a rolling basis, for the Fiscal Quarters ending September 30, 2024 and December 31, 2024. Beginning with the Fiscal Quarter ending March 31, 2025 we are required to meet a Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and lease expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation and amortization. For the nine months cumulative period ending September 30, 2024, we achieved an EBITDA of $2,620,000 as compared to the $1,500,000.

Current wording

Under the terms of the Current Credit Facility, as amended, we are required to meet a prescribed Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and lease expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation and amortization. As of March 31, 2025, for twelve month rolling cumulative period we achieved a Fixed Charge Coverage Ratio of 1.19x as compared to the required 1.05x.

Previous wording

We obtained a waiver of the requirement to meet the Fixed Charge Coverage Ratio at March 31, 2024, and met the financial covenants as of both June 30, 2024 and September 30, 2024. Nevertheless, we may fail to achieve the required covenants in the future. Therefore, we have classified the term loan that expires on December 30, 2025 as current as of September 30, 2024, in accordance with the guidance in ASC 470-10-45, “Debt – Other Presentation Matters”, related to the classification of callable debt. We are required to maintain a collection account with our lender into which substantially all of our cash receipts are remitted. If we were to default under our Current Credit Facility, our lender could choose to increase the rate of interest we pay or refuse to make loans under the revolving portion of the Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest we pay, it would adversely impact our operating results. If the lender were to cease making new loans under our revolving facility, we would lack the funds to continue our operations. The rights granted to our lender under the Current Credit Facility combined with the possibility that we might fail to meet covenants in the future raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the issuance of these condensed consolidated financial statements.

Current wording

The Current Credit Facility expires on December 30, 2025. In addition, we are required to maintain a collection account with our lender into which substantially all cash receipts are remitted. If we were to default under the Current Credit Facility, our lender could choose to increase the rate of interest or refuse to make loans under the revolving portion of the Current Credit Facility and keep the funds remitted to the collection account. If the lender were to raise the rate of interest, it would adversely impact our operating results. If the lender were to cease making new loans under the revolving facility, we would lack the funds to continue operations. The Current Credit Facility expiration date and the rights granted to the lender, raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the date of filing this report.

Previous wording

The following is a brief discussion of recent amendments to the Current Credit Facility (all of which have been filed with the SEC):

Current wording

The following is a brief discussion of the recent amendment to the Current Credit Facility (all of which have been filed with the SEC):

Previous wording

In addition to required Term Loan payments of approximately $204,000 for the remainder of fiscal 2024, we may have to make additional payments. For so long as the Term Loan under the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal 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) 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, 2023, based on the calculation there was no Excess Cash Flow payment required.

Current wording

In addition to required Term Loan payments of approximately $1,011,000 in fiscal 2025, we may have to make additional payments. For so long as the Term Loan under the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal 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) 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, 2024, based on the calculation, a payment was not required.

Previous wording

Our material cash requirements are for debt service, capital expenditures and working capital. We have historically met these requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions. Although navigating the current business landscape remains challenging and it is difficult to predict period-to-period financial performance, based on our current revenue visibility and the strength of our backlog, we believe we have sufficient liquidity to meet our financial obligations for the next twelve months from the date of issuance of our condensed consolidated financial statements included in this Quarterly Report. However, if we were to default under our Current Credit Facility and were unable to obtain a waiver from our lender and it was to cease lending we would not be able to meet our financial obligations. As of September 30, 2024, the amount outstanding under our Revolving Line of Credit was $11,437,000, leaving $8,563,000 of availability to support our growth, subject to having the requisite collateral and maintaining compliance with the terms of the Credit Facility.

Current wording

Our material cash requirements are for debt service, capital expenditures and working capital. We have historically met these requirements with funds provided by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions. Although navigating the current business landscape remains challenging and it is difficult to predict period-to-period financial performance, based on our current revenue visibility and the strength of our backlog, we believe we have sufficient liquidity to meet our financial obligations for the next twelve months from the date of issuance of our condensed consolidated financial statements included in this Quarterly Report. However, if we were to default under our Current Credit Facility and were unable to obtain a waiver from our lender and it was to cease lending we would not be able to meet our financial obligations. As of March 31, 2025, the amount outstanding under our Revolving Line of Credit was $11,204,000, leaving $8,796,000 of availability to support our growth, subject to having the requisite collateral and maintaining compliance with the terms of the Credit Facility.

Previous wording

The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):

Current wording

The following table summarizes our net cash flows from operating, investing and financing activities for the periods indicated (in thousands):

Previous wording

Cash Provided by (Used in) Financing Activities

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Cash Provided by (Used in) Operating Activities

Previous wording

During the first nine months of 2024, we continued to make investments to enhance our competitiveness and market position. Cash used in investing activities of $1,493,000 and $1,867,000, during the nine months ended September 30, 2024 and 2023, respectively, was for new property and equipment. Investments in 2024 and 2023 increased our production efficiency and speed, while enabling us to maintain closer tolerances. They also expanded the size of products we can manufacture.

Current wording

During our most recent quarter, we continued to make investments to enhance our competitiveness and market position. Cash used in investing activities of $1,217,000 and $111,000, during the three months ended March 31, 2025 and 2024, respectively, was for new property and equipment. Investments in 2025 and 2024 increased our production efficiency and speed, while enabling us to maintain closer tolerances. They also expanded the size of products we can manufacture.

Previous wording

During fiscal 2024, we expect to continue to make strategic investments in capital equipment to enhance our competitiveness. We expect to invest approximately an additional $750,000 during the remainder of 2024 for new or upgraded equipment.

Current wording

We continue to make strategic investments in capital equipment to enhance our competitiveness. The investments in 2024 and 2023 increased production efficiency and speed, while maintaining closer tolerances. They also expanded the size of products we can manufacture. We expect to additionally invest approximately $750,000 during the remainder of 2025 for new or upgraded equipment.

Previous wording

For the nine months ended September 30, 2024, cash provided by financing activities was $825,000. During this period, we increased borrowings under our Current Credit Facility by $974,000 (consisting of a net increase in Revolving Loan borrowings of $633,000 and a net increase in our Term Loan of $341,000). We also made payments of $143,000 pursuant to financing lease obligations and $6,000 on a loan payable.

Current wording

For the three months ended March 31, 2025, cash used in financing activities was $776,000. During this period, we decreased borrowings under our Current Credit Facility by $284,000 (consisting of a net decrease in Revolving Loan borrowings of $1,701,000 and a net increase of $1,417,000 against the Term Loan). We also paid $1,291,000 of subordinated notes - related party and issued stock for cash in the amount of $855,000. Additionally, we made payments of $54,000 pursuant to financing lease obligations and $2,000 on a loan payable.