Item 2. Management’s Discussion and Analysis
ITEM
2. 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 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, 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.
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 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.
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 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 June
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).
22
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 “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.
23
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.
The closing
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.
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.
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:
Three Months Ending
June 30,
2026
2026 Percentage of Net Sales
Three Months Ending
June 30,
2025
2025 Percentage of Net Sales
Change
2026 vs 2025
Percent Change
2026 vs 2025
Net sales
$ 11,995,000
100.0 %
$ 12,659,000
100.0 %
$ (664,000 )
-5.25 %
Cost of sales
9,512,000
79.3 %
10,631,000
84.0 %
(1,119,000 )
-10.53 %
Gross profit
2,483,000
20.7 %
2,028,000
16.0 %
455,000
22.44 %
Operating expenses
2,849,000
23.8 %
2,020,000
16.0 %
829,000
41.04 %
Interest expense
500,000
4.2 %
446,000
3.5 %
54,000
12.11 %
Other income, net
38,000
0.3 %
16,000
0.1 %
22,000
137.50 %
Provision for income taxes
18,000
0.2 %
-
0.0 %
18,000
-
Net loss
$ (846,000 )
-7.1 %
$ (422,000 )
-3.3 %
$ (424,000 )
100.47 %
Six Months
Ending
June 30,
2026
2026
Percentage of
Net Sales
Six Months
Ending
June 30,
2025
2025
Percentage of
Net Sales
Change
2026 vs 2025
Percent Change
2026 vs 2025
Net sales
$ 23,601,000
100.0 %
$ 24,802,000
100.0 %
$ (1,201,000 )
-4.84 %
Cost of sales
18,516,000
78.5 %
20,740,000
83.6 %
(2,224,000 )
-10.72 %
Gross profit
5,085,000
21.5 %
4,062,000
16.4 %
1,023,000
25.18 %
Operating expenses
6,016,000
25.5 %
4,800,000
19.4 %
1,216,000
25.33 %
Interest expense
994,000
4.2 %
890,000
3.6 %
104,000
11.69 %
Other income, net
77,000
0.3 %
218,000
0.9 %
(141,000 )
-64.68 %
Provision for income taxes
18,000
0.1 %
-
0.0 %
18,000
-
Net loss
$ (1,866,000 )
-7.9 %
$ (1,410,000 )
-5.7 %
$ (456,000 )
32.34 %
Balance Sheet Data:
June 30,
2026
December 31,
2025
Change
Percent Change
Cash
$ 694,000
$ 680,000
14,000
2.06 %
Working capital
$ 5,413,000
$ 5,238,000
175,000
3.34 %
Total assets
$ 59,216,000
$ 58,329,000
887,000
1.52 %
Total stockholders’ equity
$ 18,102,000
$ 19,201,000
(1,099,000 )
-5.72 %
24
Results
of Operations for the three months ended June 30, 2026
Net
Sales: 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
Customer
2026
2025
Lockheed Martin
28.1 %
27.5 %
RTX (a)
25.4 %
44.3 %
Ontic
10.8 %
2.5 %
(a) RTX includes Collins Landing Systems and Collins Aerostructures
The composition of our net sales by platform or program profiles for
the three months ended June 30, 2026 and 2025 are shown below:
Percentage of Net Sales
Platform or Program
2026
2025
UH-60 Black Hawk Helicopter
27.6 %
13.9 %
Geared Turbo Fan Engine
22.5 %
37.0 %
All other platforms
19.8 %
16.0 %
E-2D Hawkeye
11.8 %
10.5 %
CH-53 Helicopter
8.7 %
16.7 %
F-35 Lightning II
8.6 %
5.7 %
F-18 Hornet
1.0 %
0.2 %
Total
100.0 %
100.0 %
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: 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 : 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: 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.
25
Net
Loss: 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: 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
Customer
2026
2025
Lockheed Martin
31.5 %
33.4 %
RTX (a)
26.9 %
36.7 %
(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
2026
2025
UH-60 Black Hawk Helicopter
29.3 %
20.9 %
Geared Turbo Fan Engine
22.9 %
31.0 %
All other platforms
21.7 %
18.3 %
E-2D Hawkeye
9.4 %
10.3 %
CH-53 Helicopter
8.1 %
13.6 %
F-35 Lightning II
7.3 %
4.3 %
F-18 Hornet
1.3 %
1.6 %
Total
100.0 %
100.0 %
Gross Profit: Gross
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. Our gross
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. The increase
in margin was attributed to changes in the sales across our major platforms, shifts in product mix and overall operating efficiencies.
Operating
Expenses : 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: 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: 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.
26
LIQUIDITY AND CAPITAL
RESOURCES
As of June
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
1.10x. 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
30, 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. 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
securities. 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.
27
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. The monthly
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 of 1.05x. 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. All other covenants remain unchanged. 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 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.
If we are
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.
In addition
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.
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 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.
28
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. Webster
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. 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. Debt.”
Cash Flow
The following
table summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):
Six months ended
June 30,
2026
2025
Cash provided by (used in)
Operating activities
$ 225
$ 1,870
Investing activities
(485 )
(2,113 )
Financing activities
274
(3 )
Net increase in cash
$ 14
$ (246 )
Cash Provided by Operating
Activities
For the
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.
For the
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
Activities
During
the first half of 2026, we continued to make investments to enhance our competitiveness and market position. Cash used in investing activities
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.
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Cash Provided by (Used
in) Financing Activities
For the
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.
OFF-BALANCE
SHEET ARRANGEMENTS
We did
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 judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.
Use of Estimates. The preparation of financial
statements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based
on currently available information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in
these financial statements include inventory valuation, useful lives and impairment of long-lived assets, income tax provision, and allowance
for credit losses. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.