What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-12 compared with 2026-05-13 · 383 added, 288 removed, 52 unchanged (93% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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, 2025 (the “2025 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 2025 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements.

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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2025 (the “2025 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 2025 Form 10-K and the Registration Statement on Form S-4 filed with the SEC on July 22, 2026, that could cause

actual results to differ materially from those anticipated in these forward-looking statements.

Business Overview

We believe we are one of the leading manufacturers

of precision components and assemblies for large aerospace and defense contractors.

Our rich history dates to 1941, producing parts for

World War II fighter aircraft.

Since then, we have maintained an impeccable record with no known incidents of part failure leading to

a fatal mission.

we are one of the leading manufacturers of precision components and assemblies for large aerospace and defense contractors.

history dates to 1941, producing parts for World War II fighter aircraft.

Since then, we have maintained an impeccable record with no

known incidents of part failure leading to a fatal mission.

We became a public company in 2005.

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.

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.

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.

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.

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:

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

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 160 professionals committed to driving excellence and precision in every aspect of our operations.

Our period-to-period net sales and operating results

are significantly impacted by timing.

In addition, our gross profit is affected by a variety of factors, including the mix and complexity

of products, production efficiencies, price competition and general business operating environments.

In some cases, our gross profit is

impacted by our ability to deliver replacement parts on short notice.

Our operations have a large percentage of fixed factory overhead.

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 Lightning 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.

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

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 150 professionals committed to driving excellence

and precision in every aspect of our operations.

Our period-to-period

net sales and operating results are significantly impacted by timing.

In addition, our gross profit is affected by a variety of factors,

including the mix and complexity of products, production efficiencies, price competition and general business operating environments.

In some cases, our gross profit is impacted by our ability to deliver replacement parts on short notice.

Our operations have a large

percentage of fixed factory overhead.

As a result, our profit margins are highly variable with sales volumes.

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.

Looking forward for the rest of fiscal 2026, we are focused on securing new contract

awards, improving operations and successful completion of the Merger Agreement (as discussed below).

As of March 31, 2026, we have total unfilled contract

values amounting to $269.2 million (including our $134.7 million in backlog and all potential orders against LTA agreements previously

awarded to us).

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.

Looking forward for the rest

of fiscal 2026, we are focused on securing new contract awards, improving operations and successful completion of the Merger Agreement

(as discussed below).

30, 2026, we have total unfilled contract values amounting to $279.0 million (including our $139.7 million in backlog and all potential

orders against LTA agreements previously awarded to us).

Recent Developments

On February 16, 2026,

we and Transitory Air Sub LLC , our wholly owned subsidiary (“ Merger Sub ”),

entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tenax Aerospace Acquisition, LLC, a Delaware limited

liability company (“ Tenax ”).

Upon consummation of the merger contemplated by the Merger Agreement (the “Merger”),

Tenax will become a wholly owned subsidiary of AIR.

Tenax is a leading provider of special mission aviation solutions that combine aircraft

sourcing, financing and modification with aviation services including pilots, maintenance and other types of program support.

Additionally,

they have long standing relationships with key government customers.

Pursuant to the Merger

Agreement, we will issue shares of our common stock (the “ Merger Consideration ”) to the holders of the membership

interests of Tenax (the “ Tenax Members ”) at the closing of the merger.

A portion of the Merger Consideration allocated

in respect of membership interests of Tenax underlying certain Tenax warrants that remain unexercised as of the closing, if any, will

be 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

Tenax Members will be adjusted based on a calculation of AIR Net Indebtedness (as defined in the Merger Agreement).

Based on the amount

of Air Net Indebtedness as of March 31, 2026, the calculation would result in the issuance of approximately 122.6 million shares of AIR

common stock.

Consequently, based upon the calculation of the Merger Consideration as of March 31, 2026, following the closing of the

Merger, the Tenax Members will collectively own approximately 96% of the outstanding shares of our common stock.

For a more complete description

of the Merger Agreement, transactions to be consummated, actions to be taken and agreements entered into or to be entered in connection

therewith, 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

documents that are exhibits.

The closing of the merger

is subject to risks and uncertainties and certain specified conditions, including, among other things:

(a) the expiration or termination

of the applicable waiting period under the Hart-Scott-Rodino Act, (b) the listing of the Merger Consideration on the NYSE American,

and (c) other customary conditions for a transaction such as the Merger, such as the absence of any legal restraint prohibiting the consummation

of the Merger and there not having occurred with respect to AIR or Tenax’s business a material adverse event, subject to certain

customary exceptions.

Except where specifically

noted, the discussion of our business, operations, management team and financial results contained herein, gives no effect to changes

that would occur as a result of or subsequent to the consummation of the Merger.

On February 16, 2026, we and Transitory Air

Sub LLC , our wholly owned subsidiary (“Merger Sub”), entered into an

Agreement and Plan of Merger (the “Original Merger Agreement”) with Tenax Aerospace Acquisition, LLC, a Delaware limited

liability company (“Tenax”), pursuant to which we agreed to combine with Tenax and issue shares of our common stock to

the holders of the membership interests of Tenax (the “Tenax Members”) at the closing of the merger based on a

calculation of AIR Net Indebtedness (as defined in the Original Merger Agreement).

On June 2, 2026, our subsidiary, Air Industries

Machining Corp., received a payment of $1,971,070, (the “Advance”), from one of its customers for product to be

delivered after receipt of the Advance.

Subsequently, on June 8, 2026, we, Merger Sub and Tenax entered into an amendment

(“Amendment No.

1”) to the Original Merger Agreement which amended the definition of AIR Net Indebtedness (as defined in

the Original Merger Agreement) to mitigate the impact of the Advance on the calculation of AIR Net Indebtedness and thereby the

number of shares of common stock to be issued pursuant to the Original Merger Agreement.

On July 2, 2026, we,

Merger Sub and Tenax entered into an Amended and Restated Agreement and Plan of Merger (the “A&R Merger Agreement”), which

amended and restated the Original Merger Agreement, as amended by Amendment No.

1, in its entirety.

Pursuant to the A&R Merger Agreement,

Merger Sub will merge with and into Tenax, with Tenax continuing as the surviving company in such merger (the “ Merger ”)

and becoming our wholly owned subsidiary.

Pursuant to the A&R Merger Agreement, the number of shares of common stock we will issue has been fixed at 126,900,000 shares (25,380,000

shares after giving effect to a 1 for 5 Reverse Stock Split described herein) (the “Merger Consideration”) for the Tenax Members

in connection with the Merger.

A portion of the Merger Consideration allocated in respect of membership interests of Tenax underlying

certain Tenax warrants that remain unexercised as of the closing, if any, will be reserved by us for future issuance upon the exercise

of such warrants.

The A&R Merger Agreement further provides that the Debt Adjusted AIR Share Price (as defined in the A&R Merger

Agreement) shall be $3.05 ($15.25 after giving effect to a 1 for 5 Reverse Stock Split described herein).

Each of the Merger Consideration

and the Debt Adjusted AIR Share Price is subject to appropriate and equitable adjustment in the event of any subdivision, stock dividend

or stock split, combination, recapitalization, exchange or reclassification of our common stock prior to the closing, including the 1

for 5 Reverse Stock Split described herein.

The A&R Merger Agreement

requires us to amend our articles of incorporation (the “AIR Charter Amendment”) to increase the number of authorized shares

of our common stock from 20 million to 200 million.

Subsequent to the effectiveness of the AIR Charter Amendment, we shall cause a certificate

of change to be filed with the Secretary of State of the State of Nevada effecting a reverse stock split of the issued and outstanding

shares of our common stock at a ratio of one post-split share of our common stock for every five pre-split shares of our common stock

while simultaneously reducing the number of authorized shares of our common stock under our articles of incorporation (after giving effect

to the AIR Charter Amendment) by a corresponding factor, with any fractional share of our common stock otherwise resulting from the split

rounded up to the nearest whole share (the “1 for 5 Reverse Stock Split”).

Unless the parties agree otherwise, the number

of authorized shares of our common stock immediately after the closing will be 40,000,000.

The A&R Merger Agreement

eliminates the post-closing tender offer contemplated by the Original Merger Agreement, under which we would have been required, within

five business days following the closing, to commence a tender offer to purchase up to 1,000,000 shares of our common stock at a purchase

price equal to the Debt Adjusted AIR Share Price (as defined in the Original Merger Agreement) if the volume weighted average price of

our common stock during the 20 trading days preceding the closing was less than the Debt Adjusted AIR Share Price.

The A&R Merger Agreement further requires that, promptly following

the date of the A&R Merger Agreement, we file with the SEC a Registration Statement on Form S-4, which will register the shares of

our common stock to be issued to the Tenax Members pursuant to the A&R Merger Agreement, and will include a proxy statement/prospectus

relating to the Merger, and the matters to be voted on by our stockholders.

We and Tenax have agreed to use reasonable best efforts to

cause the Registration Statement to become effective under the Securities Act as promptly as practicable and to keep the Registration

Statement effective for so long as necessary to consummate the Merger.

On July 31, 2026, we, Merger Sub and Tenax entered

into an amendment (the “Amendment”) to the A&R Merger Agreement, which extended the Outside Date (as defined in the A&R

Merger Agreement) to close the transaction from September 30, 2026 to November 30, 2026.

of the Merger pursuant to the A&R Merger Agreement is subject to risks and uncertainties and certain specified conditions, including,

among other things:

(a) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Act, (b) the

listing of the Merger Consideration on the NYSE American, and (c) other customary conditions for a transaction such as the Merger,

such as the absence of any legal restraint prohibiting the consummation of the Merger and there not having occurred with respect to the

Company or Tenax’s business a material adverse event, subject to certain customary exceptions.

For a more complete description of the A & R Merger Agreement as

amended by the Amendment, transactions to be consummated, actions to be taken and agreements entered into or to be entered into in connection

therewith, reference is made to the Current Reports on Form 8-K filed July 9, 2026, and August 3, 2026 and the full text of the A &

R Merger Agreement, the Amendment and the documents that are exhibits thereto.

where specifically noted, the discussion of our business, operations, management team and financial results contained herein gives no

effect to changes that would occur as a result of or subsequent to the consummation of the Merger.

Tenax is a leading provider of special mission

aviation solutions that combine aircraft sourcing, financing and modification with aviation services including pilots, maintenance and

other types of program support.

Additionally, Tenax has a long-standing relationship with key government customers.

RESULTS OF OPERATIONS

Selected Financial Information:

Financial Information:

Three Months Ending

2026 Percentage of Net Sales

Three Months Ending

2025 Percentage of Net Sales

Percent Change

Cost of sales

Operating expenses

Interest expense

Other income, net

Provision for income taxes

Percentage of

Percent Change

$ (1,201,000 )

Cost of sales

4 unchanged sentences

$ (1,866,000 )

$ (1,410,000 )

Balance Sheet Data:

March 31, 2026

December 31, 2025

Percent Change

Working capital

Total stockholders’ equity

Net sales for the three

months 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

months ended March 31, 2025.

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.

The composition of customers that exceeded 10%

of our net sales for the three months ended March 31, 2026 and 2025 are shown below:

of Operations for the three months ended June 30, 2026

Net sales for the three months ended June 30, 2026 were $11,995,000, a decrease of $664,000, or 5.2%, compared with $12,659,000

that we achieved in the three months ended June 30, 2025.

The period-over-period decrease in net sales was primarily due to overall changes

in the mix of products delivered in response to customer orders.

The composition

of customers that exceeded 10% of our net sales for the three months ended June 30, 2026 and 2025 are shown below:

Percentage of Net Sales

2 unchanged sentences

The composition of our net sales by platform or program profiles for

the three months ended March 31, 2026 and 2025 are shown below:

Platform or Program

the three months ended June 30, 2026 and 2025 are shown below:

Percentage of Net Sales

Platform or Program

UH-60 Black Hawk Helicopter

Geared Turbo Fan Engine

All other platforms

CH-53 Helicopter

F-35 Lightning II

Period-to-period

changes in customer mix and related platforms and programs are largely attributable to customer requirements, availability of parts,

production capacity and timing.

Gross profit for the three months ended June 30, 2026, was $2,483,000 as compared to $2,028,000 for the three months

ended June 30, 2025.

Our gross profit percentage for the three months ended June 30, 2026 increased to 20.7% from 16.0% for the three

months ended June 30, 2025.

The increase in margin was attributed to changes in the sales across our major platforms, shifts in product

mix, and overall operating efficiencies.

During the second half of 2025, we implemented several cost reductions that benefited our gross

profit during the three months ended June 30, 2026 that were not in place during the three months ended June 30, 2025.

Operating expenses were $2,849,000, for the three months ended June

30, 2026, an increase of $829,000, from $2,020,000 for the three months ended June 30, 2025.

As a percentage of consolidated net sales,

operating expenses increased to 23.8%, compared to the 16.0% achieved during the three months ended June 30, 2025.

The dollar increase

was primarily driven by professional expenses associated with our pending merger, as well as costs associated with the continued improvement

of our information technology system and hardening our cyber-security defenses, offset by decreases in stock-based compensation costs.

The professional expenses related to the merger were approximately $1,195,000.

We continue to look for ways to reduce our costs and improve

our operating performance and financial results.

Interest expense was $500,000 during the three months ended June 30, 2026, an increase of $54,000 or 12.1% from $446,000

during the three months ended June 30, 2025.

The increase is primarily attributable to higher borrowing levels during a portion of the

period partially offset by a decrease in the average interest rate on outstanding debt pursuant to our Current Credit Facility which

decreased to 6.10% in 2026 as compared to 6.85% in 2025.

Net loss for the three months ended June 30, 2026 was $846,000, compared to a net loss of $422,000 for the three months

ended June 30, 2025, for the reasons discussed above.

Results of Operations for

the six months ended June 30, 2026

Net sales for the six months ended June 30, 2026 were $23,601,000, a decrease of $1,201,000, or 4.8%, compared with $24,802,000

that we achieved in the six months ended June 30, 2025.

The period-over-period decrease in net sales was primarily due to overall changes

in the mix of products delivered in response to customer orders.

The composition of customers that exceeded 10% of our net sales for

the six months ended June 30, 2026 and 2025 are shown below:

Percentage of Net Sales

Lockheed Martin

(a) RTX includes Collins Landing Systems and Collins Aerostructures

The composition of our net sales by platform or program profiles for

the six months ended June 30, 2026 and 2025 are shown below:

Percentage of Net Sales

Platform or Program

UH-60 Black Hawk Helicopter

Geared Turbo Fan Engine

All other platforms

Period-to-period changes in customer mix and related

platforms and programs are largely attributable to customer requirements, availability of parts, production capacity and timing.

CH-53 Helicopter

F-35 Lightning II

Gross Profit:

Gross profit for the

three 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

percentage for the three months ended March 31, 2026 increased to 22.4% from the 16.8% for the three months ended March 31, 2025.

increase in margin can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating

efficiencies.

During the second half of 2025, we implemented several cost reductions that benefited our gross profit during the three

months ended March 31, 2026 that were not in place during the three months ended March 31, 2025.

Operating Expenses :

Operating expenses

were $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

As a percentage of consolidated net sales, operating expenses increased to 27.3%, compared to the 22.9% achieved during the

three months ended March 31, 2025.

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

We continue to look for ways to reduce our costs and improve our operating performance and financial results.

Interest Expense:

Interest expense

(which includes amortization of deferred financing costs) was $494,000 during the three months ended March 31, 2026, an increase of $50,000

or 11.2% from $444,000 during the three months ended March 31, 2025.

The increase is primarily attributable to the higher loan balances

under our Current Credit Facility.

The average interest rate on outstanding debt pursuant to our Current Credit Facility which decreased

to 6.10% in 2026 as compared to 6.85% in 2025.

Net loss for the three

months 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

discussed above.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2026, we have debt service requirements

Outstanding indebtedness under our Current Credit Facility of $24,876,000

(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,

and requires us to make monthly payments on the term loan of approximately $87,000 until the loan matures.

Related Party Notes of approximately $4,871,000, maturing on October 1, 2026.

Various 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.

Under the terms of the Current Credit Facility,

as amended, we are required to meet a prescribed Fixed Charge Coverage Ratio (“FCCR”) (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 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, 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

financial covenants.

The Current Credit Facility

and Related Party Subordinated are classified as current liabilities on the condensed consolidated balance sheet as of March 31, 2026.

As 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

months following the date of filing of these consolidated financial statements.

In addition, we are in default under our Current Credit

Facility 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

renew our Current Credit Facility.

In addition to discussions with our lenders, as discussed in our Current Report on Form 8-K filed February

17, 2026, we entered into a Merger Agreement with Tenax.

The Current Credit Facility expires on September 30, 2026.

In addition, we are required to maintain a collection account with our lender

into which substantially all cash receipts are remitted.

As we are in 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.

Credit Facility expiration date and the rights granted to the lender, combined with the reasonable 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

date 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

of ATM proceeds in an interest bearing account to serve as additional security for the Company’s obligations under the Current Credit

To support current operations and strategic initiatives,

beginning in December 2024 we raised capital through public market sales of our common stock and believe we can continue to access equity

markets 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

equity securities.

During the year ended December 31, 2025, the Company sold 1,213,593 shares of common stock in the public market and

generated gross proceeds of $4,869,000, of which approximately $3,930,000 is restricted for the benefit of the Current Credit Facility

Since initiating the sales in December 2024, we have sold a total of 1,330,444 shares for gross proceeds of $5,375,000.

of ongoing negotiations with our lenders and in accordance with the Merger Agreement with Tenax, we have temporarily paused all equity

raising activity.

The following is a brief discussion of the recent

amendments to the Current Credit Facility (all of which have been filed with the SEC):

On January 30, 2025, we

entered into an Eighth Amendment to provide for an additional Term Loan in the amount of $1,640,000 for the acquisition of equipment.

The monthly principal installments on this additional Term Loan are $19,524.

profit for the six months ended June 30, 2026, was $5,085,000 as compared to $4,062,000 for the six months ended June 30, 2025.

profit percentage for the six months ended June 30, 2026 increased to 21.5% from 16.4% for the six months ended June 30, 2025.

in margin was attributed to changes in the sales across our major platforms, shifts in product mix and overall operating efficiencies.

Operating expenses were $6,016,000, for the six months ended June 30,

2026, an increase of $1,216,000, from $4,800,000 for the six months ended June 30, 2025.

As a percentage of consolidated net sales, operating

expenses increased to 25.5%, compared to 19.4% incurred during the six months ended June 30, 2025.

The dollar increase was primarily driven

by professional expenses associated with our pending merger and increases in stock compensation expense, and costs associated with the

continued improvement of our information technology system and hardening our cyber-security defenses.

The professional expenses related

to the merger were approximately $1,195,000.

We continue to look for ways to reduce our costs and improve our operating performance and

financial results.

Interest expense was $994,000 during the six months ended June 30, 2026, an increase of $104,000 or 11.7% from $890,000

during the six months ended June 30, 2025.

The increase is primarily attributable to higher borrowing levels during a portion of the

period partially offset by a reduction in the average interest rate on outstanding debt pursuant to our Current Credit Facility which

decreased to 6.10% in 2026 as compared to 6.85% in 2025.

Net Loss for the six months ended June 30, 2026 was $1,866,000, compared to a net loss of $1,410,000 for the six months

ended June 30, 2025, for the reasons discussed above.

LIQUIDITY AND CAPITAL

30, 2026, we have debt service requirements related to:

1) Outstanding indebtedness under

our Current Credit Facility of $24,014,000 (consisting of a Revolving Loan of $18,683,000 and a Term Loan of $5,331,000).

This debt matures

on September 30, 2026, and we are required to make monthly payments on the Term Loan of approximately $87,000 until the loan matures.

2) Related Party Notes of approximately

$4,871,000, maturing on October 1, 2026.

3) Various equipment leases and

contractual obligations related to our business, including advances under our Solar Facility for the installation of solar energy systems

including the replacement of the existing roof at our Sterling Facility.

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 on a rolling

twelve-month basis.

This ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and lease

expenses divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation

and amortization.

As of June 30, 2026, the Company is required to meet a Fixed Charge Coverage Ratio on a rolling twelve-month basis of

As of June 30, 2026, we were in compliance with this ratio having attained a ratio of 1.36x.

Additionally, we are in compliance

with all other required business and financial covenants in the Current Credit Facility.

The Current Credit Facility and Related Party Notes are due on September

30 and October 1, 2026, respectively and are classified as current liabilities on the condensed consolidated balance sheet as of June

As 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 months following the date of filing of these consolidated financial statements.

Moreover, Webster Bank has advised us that it does

not want to renew our Current Credit Facility.

In addition to discussions with our lenders, as discussed in our Current Report on Form

8-K filed on February 17, 2026, and Registration Statement on Form S-4 filed on July 22, 2026, we are seeking to merge with Tenax pursuant

to the terms of the A&R Merger Agreement, as amended by the Amendment.

It is likely that we will not complete the Merger with Tenax

prior to September 30, 2026.

However, we are currently engaged in discussions with Webster Bank as well as the holders of the Related

Party Notes as to the terms and conditions on which they will extend the maturity dates of their debt to the Outside Date of November

30, 2026, as defined in the Amendment to the A&R Merger Agreement.

Pursuant to the Current Credit Facility we are required to maintain

a collection account with our lender into which substantially all cash receipts are remitted.

Should our lender 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, 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,

combined with the reasonable 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 date 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 of ATM proceeds in an interest bearing account with the lender

to serve as additional security for our obligations under the Current Credit Facility and agreed to pay $150,000 for its agreement to

extend the maturity date to September 30, 2026.

It is likely that the lender under our Current Credit Facility and the holders of our

Related Party Notes will require additional fees for their respective agreement to extend the maturity date of the Current Credit Facility

and the Related Party Notes beyond September 30, 2026.

To support current operations and strategic initiatives, beginning

in December 2024 we raised capital through public market sales of our common stock and believe we can continue to access equity markets

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 equity

During the year ended December 31, 2025, we sold 1,213,593 shares of common stock in the public market and generated gross

proceeds of $4,869,000, of which approximately $3,930,000 is restricted for the benefit of the Current Credit Facility lender.

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 of ongoing negotiations

with our lenders and in accordance with the A & R Merger Agreement with Tenax, we have temporarily paused all equity raising activity.

The following is a brief discussion of the recent amendments to the

Current Credit Facility (all of which have been included as exhibits to reports filed with the SEC):

● On January 30, 2025, we entered

into an Eighth Amendment to provide for an additional Term Loan in the amount of $1,640,000 for the acquisition of equipment.

principal installments on this additional Term Loan are $19,524.

This amendment further revised our Financial Covenants.

For the rolling twelve-month period ending March 31, 2025 and June 30, 2025, we are required to achieve a Fixed Charge Coverage Ratio

Beginning with the rolling twelve-month period ending September 30, 2025 and going forward the Company is required to achieve

a Fixed Charge Coverage Ratio of 1.25x.

For the rolling

twelve-month period ending March 31, 2025 and June 30, 2025, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x.

with the rolling twelve-month period ending September 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage

Ratio of 1.25x.

All other covenants remain unchanged.

In connection with these changes, the Company paid

In connection with these changes, the Company paid an amendment fee of $20,000.

● On September 10, 2025, we entered into a Ninth Amendment where we agreed

that $3,930,000 of the proceeds from our ATM Offering would be maintained in an interest bearing account.

The funds in this account serve

as security for our obligations under the Current Credit Facility.

● On December 15, 2025, we entered into a Tenth Amendment which waived

the defaults caused by the failure to achieve the required fixed charge coverage ratio for the fiscal quarter ended June 30, 2025, and

for exceeding the permitted amount of capital expenditures for the fiscal year ending December 31, 2025.

Additionally, the maturity date

of the revolving credit and term loans were extended to March 31, 2026, and amended the capital expenditure covenant.

The company paid

an amendment fee of $40,000.

On September 10, 2025,

the Company entered into a Ninth Amendment where we agreed that $3,930,000 of the proceeds from our ATM Offering would be maintained

in an interest bearing account.

The funds in this account serve as security for our obligations under the Current Credit Facility.

December 15, 2025, the Company entered into a Tenth Amendment which waived the defaults caused

by the failure to achieve the required fixed charge coverage ratio for the fiscal quarter

ended June 30, 2025, and for exceeding the permitted amount of capital expenditures for the

fiscal year ending December 31, 2025.

Additionally, the maturity date of the revolving credit

and term loans were extended to March 31, 2026, and amended the capital expenditure covenant.

The company paid an amendment fee of $40,000.

February 26, 2026, the Company entered into an Eleventh Amendment to which extended the maturity

date of the revolving credit and term loans to September 30, 2026.

The company paid an amendment

fee of $25,000 and agreed to pay an additional fee of $150,000 on the maturity date of the

Current Credit Facility.

we are unable to close the merger with Tenax contemplated by the Merger Agreement or obtain a new lender to replace the Current Credit

Facility we may not be able meet our financial obligations.

As of March 31, 2026, we have borrowing capacity of approximately $787,000

● On February 26, 2026, we entered into an Eleventh Amendment to which

extended the maturity date of the revolving credit and term loans to September 30, 2026.

We paid an amendment fee of $25,000 and agreed

to pay an additional fee of $150,000 on the maturity date of the Current Credit Facility.

unable to close the merger with Tenax contemplated by the A & R Merger Agreement or obtain a new lender to replace the Current Credit

Facility we may not be able to meet our financial obligations.

As of June 30, 2026, we have borrowing capacity of approximately $1,317,000

under the Revolving Loan.

addition to required Term Loan payments we may have to make additional payments under the Current Credit Facility.

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, 2025, based on the calculation

there is no Excess Cash Flow payment required.

In addition to the outstanding indebtedness under

the Current Credit Facility and Related Party Notes, we have various equipment leases and contractual obligations of an ongoing nature

which we service in the ordinary course out of our cash flow from operations.

Our material cash requirements are for debt service,

funding working capital and capital expenditures.

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.

Based on our current revenue

visibility, strength of our backlog, and availability under our Current Credit Facility, we believe that we have sufficient liquidity

to meet our day-to-day cash requirements for our operations.

However, we must pay or refinance large portions of our indebtedness prior

to September 30, 2026.

Further, as a condition to refinancing our Current Credit Facility prior to September 30, 2026, a

new lender may require that the holders of our Related Party Notes extend or otherwise modify the subordination agreements they have given

in favor of the lender.

If we do not close the contemplated Merger, it

is unlikely we will be able to pay existing debt and will need to refinance our Current Credit Facility and Related Party Notes.

engaged in discussions with Webster Bank and the holders of our Related Party Notes to explore potential extensions or refinancings of

our 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

or financial covenants or involve the issuance of debt, equity and/or new securities convertible into or exercisable or exchangeable for

our common stock.

to required Term Loan payments we may have to make additional payments under the Current Credit Facility.

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, 2025, based on the calculation there is

no Excess Cash Flow payment required.

to the outstanding indebtedness under the Current Credit Facility and Related Party Notes, we have various equipment leases and contractual

obligations of an ongoing nature which we service in the ordinary course out of our cash flow from operations.

cash requirements are for debt service, funding working capital and capital expenditures.

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.

Based on our current revenue visibility, strength of our backlog, and availability under our Current Credit Facility, we believe that

we have sufficient liquidity to meet our day-to-day cash requirements for our operations.

However, we must pay or refinance large portions

of our indebtedness prior to September 30, 2026 and, even if the lender under our Current Credit Facility were to agree to additional

extensions, the extensions are likely to be short term and require the payment of significant fees.

Further, as a condition to any extension

which might be agreed to by our current lender or a refinancing of our Current Credit Facility, our current lender or a new lender may

require that the holders of our Related Party Notes extend or otherwise modify the subordination agreements they have given in favor

of our current lender and the holders of the Related Party Notes may seek consideration for agreeing to do so.

If we do not close the contemplated Merger, it is unlikely we will

be able to pay existing debt and will need to refinance our Current Credit Facility and Related Party Notes.

We have engaged in discussions

with Webster Bank and the holders of our Related Party Notes to explore potential extensions or refinancings of our obligations.

Bank has advised us that it will not extend our Current Credit Facility indefinitely and required us to make significant payments in consideration

of its agreement to extend the Current Credit Facility to September 30, 2026.

Refinancing our indebtedness may require us to pay higher

interest rates than we currently pay, agree to more restrictive business or financial covenants or involve the issuance of debt, equity

and/or new securities convertible into or exercisable or exchangeable for our common stock to our lenders or to third parties to reduce

the amount of our debt.

Any failure to refinance our existing debt or obtain additional working capital when required would have a material

adverse effect on our business and financial condition.

Further details regarding outstanding indebtedness are provided in

The following table summarizes our net cash flows

from operating, investing and financing activities for the periods indicated (in thousands):

Three Months Ended

Any issuances of our common stock, preferred stock, or securities such as warrants

or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and

economic interest of our existing stockholders.

Further details regarding outstanding

indebtedness are provided in “Note 5.

The following

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

Six months ended

Cash provided by (used in)

2 unchanged sentences

Financing activities

Net decrease in cash

Cash (Used in) Provided by Operating Activities

For the three months ended March 31, 2026, we

used $1,298,000 in operations as compared to a cash flow provided of $1,525,000 for the three months ended March 31, 2025.

was due primarily to increases in inventory and accounts receivable and a decrease in accounts payable partially offset by an increase

in customer deposits.

For the three months ended March 31, 2025, we

generated $1,525,000 from operations which was mainly attributable to a decrease in accounts receivable and the collection of contract

costs receivable.

Net increase in cash

Cash Provided by Operating

six months ended June 30, 2026, we generated $225,000 of cash flows from operations as compared to $1,870,000 for the six months ended

June 30, 2025.

The decrease was due primarily to the increase in our net loss, increases in inventory and decreases in accounts payable

partially offset by an increase in customer deposits.

six months ended June 30, 2025, we generated $1,870,000 from operations which was mainly attributable to a decrease in accounts receivable

and an increase in non-cash expenses partially offset by the net loss and an increase in inventory.

Cash Used in Investing

the first half of 2026, we continued to make investments to enhance our competitiveness and market position.

Cash used in investing activities

During our most recent quarter, we continued to

make investments to enhance our competitiveness and market position.

Cash used in investing activities of $425,000 and $1,217,000, during

the three months ended March 31, 2026 and 2025, respectively, was for new property and equipment.

The investments made in 2026 and 2025 increased

our production efficiency and speed, while maintaining closer tolerances.

We intend to limit capital expenditures until such time as our

debt situation is resolved.

Cash Provided by (Used in) Financing Activities

For the three months ended March 31, 2026, cash

provided by financing activities was $1,329,000.

During this period, we increased borrowings under our Current Credit Facility by $1,403,000

(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,

we made payments of $59,000 pursuant to financing lease obligations, $13,000 on our Solar Credit Facility and $2,000 on a loan payable.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements

as of March 31, 2026.

of $485,000 and $2,113,000, during the six months ended June 30, 2026 and 2025, respectively, was for new machinery and equipment.

The investments

made in 2026 and 2025 increased our production efficiency and speed, while maintaining closer tolerances.

We intend to limit capital

expenditures until such time as our debt situation is resolved.

Cash Provided by (Used

in) Financing Activities

six months ended June 30, 2026, cash provided by financing activities was $274,000.

During this period, we increased borrowings under

our Current Credit Facility by $541,000 (consisting of a net increase in Revolving Loan borrowings of $1,065,000 and a net decrease of

$524,000 against the Term Loan).

Additionally, we made payments of $118,000 pursuant to financing lease obligations, $14,000 on our Solar

Credit Facility, $4,000 on a loan payable and $131,000 for taxes related to the net share settlement of equity awards.

SHEET ARRANGEMENTS

not have any off-balance sheet arrangements as of June 30, 2026.

Critical Accounting Estimates

A critical accounting estimate is one that is

both important to the portrayal of a company’s financial condition and results of operations and requires management’s most

difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently

A critical accounting estimate is one that is both important to the portrayal of a company’s financial condition and results of

operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates

about the effect of matters that are inherently uncertain.

Use of Estimates.

11 unchanged sentences

preparation of the financial statements and actual results could differ from the estimates and assumptions.

There have been no material changes to the Company’s

critical accounting estimates as compared to the estimates described in the 2025 Annual Report which we believe are the most critical

to our business and understanding of our results of operations and affect the more significant judgments and estimates that we use in

preparation of our condensed consolidated financial statements.

been no material changes to the Company’s critical accounting estimates as compared to the estimates described in the 2025 Annual

Report which we believe are the most critical to our business and understanding of our results of operations and affect the more significant

judgments and estimates that we use in preparation of our condensed consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis