UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K 

☒ Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 

For the fiscal year ended: December 31, 20222023 

or

☐ Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 

For the transition period from ______ to_______

Commission File No. 001-35927 

AIR INDUSTRIES GROUP

(Name of small business issuer in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒ 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐  No ☒ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ No ☒ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large Accelerated Filer ☐ Non-Accelerated Filer ☒ Accelerated Filer ☐ Smaller Reporting Company ☒

Emerging growth company ☐  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐ 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☒☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒ 

As of June 30, 2022,2023, the aggregate market value of our common stock held by non-affiliates was $17,477,754,$8,910,812, based on 2,496,8222,510,088 shares of outstanding common stock held by non-affiliates, and a price of $7.00$3.55 per share, which was the last reported sale price of our common stock on the NYSE American on that date. 

There were 3,259,3673,315,368 shares of the registrant’s common stock outstanding as of May 10, 2023.April 12, 2024.

DOCUMENTS IINCORPORATED BY REFERENCE: None

AIR INDUSTRIES GROUP

FORM 10-K

For the Fiscal Year Ended December 31, 20222023

Cautionary Note Regarding Forward-Looking Statements

This reportAnnual Report on Form 10-K filed by Air Industries Group (herein referred to as “Air Industries”, the “company”. “we”, “us”, or “our”) contains forward-looking statements. Certain of the matters discussed herein concerning, among other items, our operations, cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and the effect of economic conditions, include forward-looking statements.

Forward-looking statements are predictive in nature and can be identified by the fact that they do not relate strictly to historical or current facts and generally include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations, and general economic conditions, these statements and other projections contained herein expressing opinions about future outcomes and non-historical information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved.

Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given these uncertainties, you should not place any reliance on these forward-looking statements which speak only as of the date hereof. See “Risk factors” for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.

We do not intend to update, or revise publicly and undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. You are advised, however, to consult any additional disclosures we make in our reports filed with the Securities and Exchange Commission (“SEC”).

PART I

ITEM 1. BUSINESS

Introduction

AsWe believe we are one of the leading manufacturers of precision components and assemblies for large aerospace and defense prime contractors. Our products include landing gears, flight controls, engine mounts and components for aircraft jet engines, 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.

We specialize in the aerospace and defense markets, operating within a hierarchical network of suppliers. At the top of the supply chain pyramid, is the prime contractor, also known as an Original Equipment Manufacturer (“OEM”). A prime contractor designs, develops and produces the final product for the end-user. We play a critical role in this report, unless otherwise statedecosystem, operating as a “Tier One” supplier, delivering our products directly to prime contractors, or as a “Tier Two” supplier, providing larger complex components to others. In some cases, we ship products directly to the context requires otherwise,U.S. Government. Our strategic position has made us a key partner for many prominent defense prime contractors and global commercial aviation manufacturers, often leading us to become the “Company”exclusive or primary supplier for certain high precision parts and terms such as “we,” “us” “our,” and “AIRI” referassemblies. We often receive Long-Term Agreements (“LTAs”) from our customers, demonstrating their commitment to Air Industries Group, a Nevada corporation, and its wholly-owned subsidiaries.us.

We are a manufacturer of complex machined partsrenowned for our unwavering commitment to genuine quality and assemblies for the Aerospace and Defense (“A&D”) market.exceptional reliability. Our products are used by Original Equipment Manufacturers (“OEM”) in the manufacture of fixed wing aircraft, helicopters jet turbine engines, and other complex sophisticated A&D products. We also manufacturerich 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 mission failure resulting in a fatality. In an era plagued by foreign counterfeit parts, we strategically operate all our facilities within the ground power turbine industryUnited States. Our two state-of-the-art manufacturing centers located in Long Island, New York, and are in discussionsBarkhamsted, Connecticut, allow for rigorous oversight of production and adherence to manufacture productsstringent quality standards. Spanning over 150,000 square feet, our manufacturing centers serve as the operational hubs for submarines.

We are a holding company withour three legal subsidiaries, Air Industries Machining, (“AIM”) Nassau Tool Works (“NTW”) and Sterling Engineering Company (“SEC”STE”). Our subsidiaries have been manufacturers of A&D product for decades; SEC began manufacturing aircraft components in 1941 – over 80-years ago – for use in World War II. NTW was formed in the early 1960’s and AIM has been in business since 1951. Collectively, our subsidiaries have over 200 years of manufacturing experience in the A&D market.

We operateFor 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 business using two main facilities. One is located in Long Island, New York,competitive position. Additionally, we expanded our sales and the other is in Barkhamsted, Connecticut. We have over 150,000 square feetmarketing efforts, with a sharp focus on expanding relationships with customers and cultivating new ones. Fiscal 2023 marked a year of manufacturing space, approximately 75,000 square feet in each location,progress and employ approximately 190 people.positioning for growth.

Historically,We finished 2023 with $51.5 million of net sales. Our backlog, which represents the value of all funded orders received, stood at $98.3 million an increase of 14.7% as compared to our backlog on December 31, 2022. Our marketing efforts bore fruit and we operatedsecured our businessesfirst order with a new foreign-based defense and aerospace prime customer. Despite absorbing a sudden and unexpected increase of interest rates related to our outstanding indebtedness, we were able to make significant investments in capital equipment and related processes. On the bottom-line, we reported their results as two separate segments, with AIM and NTW comprisinga net loss of $2.1 million. As we enter fiscal 2024, we believe our Complex Machining Segment (“CMS”) and our SEC as the Turbine & Engine Component Segment (“TEC”). Our CMS segment specializes in flight critical components including flight controls and landing gear. Our TEC segment focuses on manufacturing components for jet engines. Historically, each segment had different customers and utilized different production facilities.future is looking brighter.

Moving forward, our business strategy is geared towards competing and winning contracts that enable us to achieve sustainable and profitable business growth and delivering high quality reliable products to our customers. At its core, lies a highly trained and close- knit team of over 180 individuals committed to driving excellence and precision in every aspect of our operations. We are firmly focused on securing new contract awards, improving operations and successful execution. With total unfilled contract values amounting to $191.9 million (including our $98.3 million in backlog and all potential orders against LTA agreements previously awarded to us), as of December 31, 2023, we are confident in our ability to boost sales in 2024, attain profitability and improve our financial position.

In recent years the operations of our CMS and TEC segments have become increasingly integrated. In addition, we have made significant capital expenditures to modernize our manufacturing equipment and all of our operations now share the same manufacturing facilities and use most, if not all, of the same sales and marketing functions. We made these changes to take advantage of the long-term growth opportunities we see in the A&D market. In early fiscal 2022, we further changed our management approach and now make decisions regarding the allocation of resources and assess operating performance based on one integrated business rather than two reporting segments. As such, effective with our first quarter ended March 31, 2022, we began to present our operations as one reportable operating segment.

The A&D business is comprised of a small number of OEM’s relying on several “tiers” or layers of many more numerous smaller manufacturers supplying product. Each successive tier supplies increasingly larger, more complex product to the next higher tier and OEM companies. Air Industries is generally either a tier one manufacturer supplying product directly to an OEM, or a tier two manufacturer supplying product to a tier one supplier which delivers to an OEM.

Our business has evolved over the years, our products becoming increasing complex. Where once we manufactured smaller individual components for others to assemble into complex assemblies, we now manufacture those complex assemblies ourselves. For example, in the past we, along with other suppliers, manufactured individual components to be assembled into a landing gear by an OEM customer. Today we manufacture the entire landing gear, assembling over 200 individual parts, most manufactured internally, others sub-contracted or purchased into a complete landing gear delivered directly to an OEM, ready to be installed on an aircraft.

We are predominately a supplier of military aviation product. Defense products were 82.6% and 87.7% of our business in 2022 and 2021 respectively. Our OEM customers in the defense sector include:Customer Profiles

In 2023 and 2022, approximately 82.3% and 82.6% of our net sales were attributed to customers who use our products for end-use on military aircraft. The rest of our net sales are attributable to commercial aviation uses and, to a much lesser extent, ground power electricity generation and other uses.

We have cultivated long-standing relationships with many large and well-known customers including:

In 2023, our sales and marketing strategy to expand our customer base yielded significant results, as we secured an initial $700,000 order from a foreign-based defense and aerospace prime ranked among the world’s leading suppliers of finished landing gears. Our initial order from them was for specialized components with initial deliveries slated to commence in the fourth quarter of 2024. As we continue to develop and strengthen this relationship, we are optimistic about securing additional orders over time.

Platform and Program Profiles

Most of our machined components and assemblies are integral to high-profile platforms and named programs. Platforms generally refer to equipment that is utilized in missions or operations whereas programs are broader initiatives and can encompass the development and production of new platforms, upgrades to existing systems and other initiatives. The following platforms and programs (ranked in descending order by their 2023 net sales), accounted for 85.2% and 81.0% of our net sales in 2023 and 2022, respectfully:

Pratt & Whitney – we manufacture jet turbine engine components for several military and commercial jet engines.

The balance of our business, comprising 17.4% and 12.3% of our business in 2022 and 2021 respectively, is in commercial aviation and to a minor degree in ground power electricity generation. Our OEM customers in the commercial sector include:

Our business is concentrated on five aircraft platforms which comprised 76.9% and 76.6% of our business in 2022 and 2021 respectively.

Our Market

The A&Daerospace and defense industry has become very consolidated, nowis dominated by just a select few very large prime contractors and OEM’s. These includeincluding Airbus, Boeing, General Electric, Lockheed Martin, Northrop Grumman, and Raytheon Technologies. Many if not most ofRTX. These primes oversee large platforms and programs for ultimate end-user for the large prime contractors and OEM’s are our direct Tier One customers, and we also supply product as a Tier two supplier to many of their Tier one suppliers. We also sell directly to the US Department of Defense (“DOD”).U.S. government, foreign governments or global aviation companies.

Our products are incorporatedOnce a supplier is chosen and integrated into a platform or selected for a specific program, replacing them becomes a complex challenge. In many cases, suppliers often become the sole or single source. Being a sole source means being chosen as the exclusive supplier by the customer, whereas being a single source indicates that, despite the availability of other potential manufacturers, only one supplier is currently used. This scenario of single or sole sourcing is especially prevalent with legacy aircraft. While prime contractors generally prefer multiple sources for new aircraft platforms, the majorityproduction lines to mitigate single points of which remain infailure, utilizing a single vendor can lead to higher production today. The demandvolumes, lower average unit costs, and opportunities for after-market productsquality improvements.

Demand for theboth defense and commercial aviation components is based on new production and subsequent maintenance, repair and overhaul (“MRO”) of. Flight critical components are frequently replaced on aircraft on a flight time, or flight cycle basis. The demand for MRO and after-market products can continue for many years, even decades, after the production line for new aircraft is shut-down.shut down.

We target products that are flight critical, whose flawless operation is essential to the safe operation of the aircraft. To qualify to produce these productsAt a manufacturer needs to maintain various accreditations. Obtaining accreditation while not impossible is difficult, time consuming and thus a barrier to entry for competitors. Further, flight critical components are frequently replaced on aircraft on a flight time, or flight cycle basis. Thus, demand for these products arises from both production of new aircraft, and MRO demand based on the flight hours of existing fleets of aircraft.

For many of our productshigh level, we are able to monitor the sole or single source of productDoD budget for our customers. Sole source product means that we are the only manufacturer of the product. Single source means that while other manufacturers could supply the product, we are the only producer currently in the market. Single or sole sourcing is more likely to occur with legacy aircraft. OEM’s generally prefer to have multiple sources of product to support a production line of new aircraft and avoid single point of failure issues, particularly in light of the supply chain disruptions caused by the outbreak of Covid-19.

Our market is predominately military. As such demand for our products is closely aligned with the budget of the DOD. We monitor two components of the DOD budget; procurement which affects demand resulting fromboth new production and operations & maintenance which affects demand resulting from the maintaining of existing aircraft. For Fiscal Year 2022, procurement and operations and maintenance accountedcomponents as well as industry reports to gauge overall industry spending. While large U.S. Government programs are managed through specific budget lines and oversight structures, most, if not all, of our machine parts and assemblies are not explicitly identified in the U.S. Government budget. Therefore, predicting period-to-period demand with precision is challenging. While we primarily rely on our customers to help us project short-term and long-term demand, the timing of receipt of contract awards and related orders is difficult to predict. Consequently, comparative period-to-period net sales for more than 50% of the entire defense budget.any customer or program may not be meaningful.

Sales and Marketing

WeSales and marketing activities in 2023 indicate a return to normalcy compared to the disruptions caused by COVID-19 in 2022 and 2021. Travel restrictions no longer hinder our ability to visit customers, and employees are generally recognized as a Tier 1 or Tier 2 supplier in the A&D industry. We are also recognized as having extensive experience and accreditationmore willing to produce and assemble complex flight safety products.attend trade shows, facilitating our communication efforts.

MostWe primarily rely upon a small team of highly skilled sales and business development professionals with extensive industry experience. Our goal is to cultivate customer relationships akin to partnerships and the concept of customer alignment. For example, our customers heavily rely on suppliers to deliver high-quality parts that meet specifications in a timely and cost-effective manner. They regularly assess suppliers based on various quantitative criteria such as on-time delivery performance, defect rates, adherence to specifications, cost performance, lead times, order processing time, stockout rates, and similar metrics. Therefore, one of our contracts withprimary objectives is to maintain high ratings and leverage these metrics in our customers are in the form of a Long-Term Agreement (“LTA”). These LTA’s specify the numbersales and price of products that the customer may order from us for a period of time. The quantity and price in any year may vary from other years within the LTA. Once awarded, the customer places orders against the LTA. These orders are called releases. Once released the order is a firm order. While a firm order may be cancelled the customer is subject to termination liability and must pay us for the cost of material, labor and other costs incurred up to the date of termination.marketing activities.

Our sales cycle is highly variable,varies significantly, ranging from a few weeks to several years, depending uponon the complexity of the product and manufacturing steps involved. While customers may occasionally engage in spot buys, most of our orders (also known as bookings) stem from LTAs. LTAs outline the numberquantity and price of steps necessaryproducts the customer may order within a specified timeframe. When actual products are needed, the customer places a funded order against the LTA. The value of this funded order is included in our backlog until we ship it. Although cancellations of funded orders are possible, customers are usually subject to complete manufacturing. Contractstermination liability, necessitating payment to us for product can be very short, justcosts incurred up to the termination date. In certain termination cases, the customer is also required to pay us a few months to as long as ten-years.reasonable profit.

We obtainsecure new or follow-on LTA’sLTAs through competitive bidding. We respondbidding in response to a customer’s Request for Quotation (“RFQ”) with proposed. These proposals detail prices based on quantities, sometimes varying quantities per year,which may vary annually, for shipments over a number ofmultiple years. There may beThe bidding process typically entails several rounds of submissions from us and from competitive suppliers, and a period of negotiationnegotiations before an LTAaward is awarded.granted. For defense products, in certain cases, LTAs may be awarded or extended without an RFQ, competitive bidding. In addition to products sold pursuant to LTA’s there are also “spot buys” of productsuch cases, pricing may be determined through cost analysis or audit with ultimate approval by customers.the customer or the U.S. government.

LTA’s, particularly for defense products, may be extended or new orders placed without competitive bidding. In this instance and in some others our price for the product must be supported by an analysis or audit and approval of our costs by the customer or by the Government.

In 2021 and to a lesser extent in the first half of 2022We believe our sales and marketing strategy received significant validation in 2023 when we secured an initial $700,000 order from a foreign-based defense and aerospace prime ranked among the world’s leading suppliers of finished landing gears. While this new customer relationship is in its early stages, we are dedicating substantial efforts were negatively affected by Covid travel restrictions limiting our ability to visit customersfurther develop and strengthen this partnership, with the reluctanceaim of receiving significant orders in the employees of some of our customers to return to the office and attend trade shows, complicating our ability to contact them. As a result of these challenges our “book-to-bill” ratio (new orders booked divided by sales) was 0.75 to 1.00 and 0.9 to 1.00 for the years ended December 31, 2022 and 2021 respectively, below historic levels.

Our approach to sales and marketing can be best understood through the concept of customer alignment. The aerospace industry is dominated by a small number of large prime contractors and OEM’s. These customers rely heavily upon subcontractors to supply quality parts meeting specifications on a timely and cost effective basis. These customers and other customers we supply routinely rate their suppliers based on a variety of performance factors. One of our principal goals is to be highly rated and thus deemed reliable by all of our customers and throughout the industry.future.

The large prime contractors are increasingly seeking subcontractors who can supplyBookings and are qualified to integrate the fabrication of larger, more complex and more complete subassemblies. We seek to position ourselves within the supply chain of these contractors and manufacturers to be selected for subcontracted projects. Successful positioning requires that we qualify to be a preferred supplier by achieving and maintaining independent third party quality approval certifications, specific customer quality system approvals and top supplier ratings through strong performance on existing contracts.Backlog

During our sales and marketing efforts we let customers know thatBookings represent funded orders we have employees withsecured during a given financial period. In fiscal 2023, bookings were $62,262,000 or a 55% increase compared to $40,166,000 in 2022. Our “book-to-bill” ratio, which is our bookings divided by net sales, was 1.20x for 2023, a significant improvement over the talent0.75x ratio of 2022. Although bookings are subject to wide variations in timing, resulting in period-to-period comparisons not necessarily being meaningful, we do use bookings and experience to manage the manufacture of sections of aircraft structures to be delivered to the final assembly phase of the aircraft manufacturing cycle, and customers have now engaged us for these services.

Initial contracts are usually obtained through competitive bidding against other qualified subcontractors, while follow-on contracts are usually retained by successfully performing initial contracts. Our long term business generally benefits from barriers to entry resulting from investments, certifications, familiarization with the needs and systems of customers, and manufacturing techniques developed during the initial manufacturing phase. We endeavor to develop each of our relationships to one of a “partnership” where we participate in the resolution of pre-production design and build issues, and initial contracts are obtained as single source awards and follow-on pricing is determined through negotiations. In response to the impediments to traditional means of marketing our products and services encountered during 2020 and 2021book-to-bill as a resultgauge of the cancellation of industry-wide events and the difficulties in scheduling meetings with our customers, we have adapted our business development efforts to increase our use of social media and online presentations, and will continue to look for new ways to interact with our customers.future net sales.

Our Backlog

The backlog, which can be considered our “funded backlog,” stood at $98.3 million as of December 31, 2023, marking a 14.7% increase from the $85.7 million on December 31, 2022. It represents the net sales we report consists solely of firmexpect to realize from funded orders received and is equivalent to our remaining performance obligations pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from customers. We doContracts with Customers, at the end of each period. These funded orders, approved by customers, come from LTAs, spot-buys, or other contracts and are for essential machined components and assemblies used in the key platforms and programs we serve. Previously, we limited our backlog to items scheduled to ship within an 18-month period. Our new enhanced definition provides visibility into the value of all firm orders. The bulk of our $98.3 million backlog is expected to ship over the next 24 months. but does not estimateinclude possible or probable future orders pursuant to LTA’sexisting LTAs or anticipatedprobable contract renewals. Our backlog exists dueThe total potential net sales under contracts actually awarded to us as of December 31, 2023, was $191.1 million, including the long lead times necessary to produce manyvalue of our products. Our production cycle from ordering raw material to delivering finished product can vary from several weeks to more than one year. Customers must place orders in lightexisting funded backlog of these lead-times creating a back-log of future deliveries. The production cycle for jet engine products is much shorter and accordingly the backlog for jet engine products is much lower. Our total 18-Month firm backlog was $60.1 and $75.0 Million at December 31, 2022 and 2021, respectively.$98.3 million.

Our backlog today is the result of purchase orders for the Sikorsky Black Hawk, the F-25 Joint Strike Fighter, the Northrop Grumman E2-D, the F-18 fighter aircraft and the Pratt & Whitney Geared Turbo-Fan jet engine.

Competition

Winning a new contract award is highly competitive. WeNot only must we have the capabilities to manufacture to customer design specifications. Wespecifications, but we compete against companies that have similar, or better manufacturing capabilities and often greater financial, physical and technical resources in the domestic and, to a lesser degree, in the global marketplace.resources. Our ability to win new contracts generally requires providingus to become a trusted partner to the customer by having the capabilities to deliver superior quality products on a timely basis at competitive prices. This requires thatproduct, more quickly and with lower pricing than our competitors. Accordingly, we strive for continuous improvementmust continually invest in our capabilitiesprocess improvements and capital equipment.

In recent years, we have strategically made significant investments to enhance our competitiveness. To accomplish this,competitiveness and market position. For example, in fiscal 2023 and 2022, we have made significant investments in new machinery and equipment totaling approximately $3,725,000; $1,364,000invested $2,119,000 and $2,361,000 in 2021new property and 2022, respectively. This new equipment improves the productive capacity ofto support our employees, increasesgoals. These investments have increased production efficiency and speed, while maintaining closer tolerances, and increasinghave expanded the size of productproducts we can manufacture with a larger working “envelope”.manufacture. We anticipate spending an additional $1,750,000 to $2,500,000 in 2023plan to continue to expand our productive capacity.this strategy and anticipate investing approximately $2,000,000 in 2024 for new or upgraded equipment.

Our marketing strategy involves developing long-term working relationships with customers. These relationships enable us to develop barriers to entry to competitors by establishing and maintaining advanced quality approvals, certifications and tooling investments that are difficult and expensive to duplicate.

 Among our competitors are:include: Monitor Aerospace, a division of StellexGKN Aerospace; Hydromil, a division of Triumph Aerospace Group; Heroux AerospaceDevetek and Ellanef Manufacturing, a division of Magellan Corporation.

Manufacturing, Raw Materials and Replacement Parts

The manufacturing processOur production cycle spanning from ordering raw materials to delivering finished products, can vary from several weeks to over a year. Consequently, for certain products, particularlyespecially those for whichinvolving finished assemblies, we serve as product integrator, requiresmust procure significant purchasesamounts of raw materials hardware and subcontracted details. As a result, muchbegin processing well ahead of our successactual ship dates. This underscores the importance of efficient subcontract management in profitably meeting customer demand fordelivery deadlines. In some cases, customers may provide us with these products requires efficient and effective subcontract management. Priceraw materials as they may be able to obtain better processing or delivery schedules from other suppliers.

The price and availability of many raw materials utilized in the aerospace industry are subjectsusceptible to volatilefluctuations in global markets and political conditions. Most raw material suppliers of raw materials are unwillinghesitant to commit to long-term contracts at fixed prices. This isprices, posing a substantial risk asgiven our strategy often involves long term fixedentails entering into LTA agreements which require us to commit to long-term price commitments tocommitments. However, many of our customers. LTAs provide pricing protection when there is a large increase in the in the cost of raw materials.

Employees

As of May 1, 2023,March 31, 2024, we employed 185180 people. Of these, 76101 were involved in manufacturing and production activities, 25 were in quality control, 45 were in administration, and the remaining 9 were in sales and procurement, and 100 were in manufacturing.

AIM is a party to a collective bargaining agreement (the “Agreement”) with the United Service Workers, IUJAT, Local 355 (the “Union”) with which we believe we maintain good relations. The Agreement was renewed as of December 31, 2021 and expires on December 31, 2024 and covers the majority of AIM’s personnel, approximately 130 individuals, which equates to approximately 70% of all of our employees.

AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the United Services Worker’s Security Fund. This is the only pension benefit required by the Agreement and the Company is not obligated for any future defined benefit to retirees. The Agreement contains a “no-strike” clause, whereby, during the term of the Agreement, the Union will not strike and AIM will not lockout its employees.

procurement. All of our employees are covered under a co-employment agreement with Insperity Services, LLC, a professional employer organization that provides out-sourced human resource and payroll services.organization. This arrangement allows us to provide employees with comprehensive benefits at a lower cost than we could provide.

Our AIM subsidiary has a collective bargaining agreement with the United Service Workers, IUJAT, Local 355 (the “Union”). This agreement is effective until December 31, 2024 and covers the majority of AIM’s 125 personnel. We are required to make a monthly contribution to Union’s United Welfare Fund and the United Services Worker’s Security Fund, the sole pension benefit for covered employees. We are not obligated to provide any future defined benefits. Additionally, the collective bargaining agreement contains a “no-strike” clause, and a “no-lock-out” clause. We believe we maintain good relationships with the Union and expect to renew the collective bargaining agreement before it expires.

Regulations

We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses and permits required for the operation of our business.  They key regulations impacting our business are further discussed below:

Environmental Regulation; Employee Safety

Environmental Regulation and Employee Safety

:We are subject to regulations administered by the United States Environmental Protection Agency, the Occupational Safety and Health Administration, various state agencies and county and local authorities acting in cooperation with federal and state authorities. Among other things, these regulatory bodies impose restrictions that require us to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous chemicals and substances. The extensiveThis regulatory framework imposes compliance burdens and financial and operating risks on us. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil and criminal fines in the case of violations.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and several liabilities on the present and former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the generation, transportation, treatment, storage and disposal of hazardous waste. New York and Connecticut, the states where our production facilities are located, also have stringent laws and regulations governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the Occupational Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances.

Federal Aviation AdministrationAdministration:

We are subject to regulation by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations. We have never been subject to such fines or disqualifications.

Government Contract ComplianceFederal Acquisition Regulations:

Our All our U.S government contracts and those of many of our customers are subject to the procurement rules and regulations of the United States government, including the Federal Acquisition Regulations. ManyAs such, many of the contract terms are dictated byour LTA agreements require us to adhere to these rules and regulations. During and after the fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed to the project. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquiries and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.

We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses and permits required for the operation of our business. 

More Information About Our Business and Where to Find It

Our Internet website is AirIndustriesGroup.com, at which you can find our filings with the SEC, including press releases, annual reports, quarterly reports, current reports, and any amendments to those filings. We also use our website to disseminate other material information to our investors. We also make announcements regarding company developments and financial and operating performance through social media channels such as at LinkedIn.com/company/air-industries-group to communicate with customers and the public about our Company, our products, services, and other issues. Among other things, we post on our website and social media channels information about our public conference calls (including the scheduled dates, times and the methods by which investors and others can listen to those calls), and we make available for replay webcasts of those calls and other presentations for a limited time. Information and updates about our Annual Meetings will also be posted on our website including on the “Home Page” and in the “Investor Relations” section. None of the information on our website, blog or any other website identified herein is incorporated by reference in this annual report and such information should not be considered a part of this annual report.

ITEM 1A. RISK FACTORS

The purchase of our common stock involves a very high degree of risk.

In evaluating our common stock and our business, you should carefully consider the risks and uncertainties described below and the other information and our consolidated financial statements and related notes included herein. If any of the events described in the risks below actually occurs, our financial condition or operating results may be materially and adversely affected, the price of our common stock may decline, perhaps significantly, and you could lose all or a part of your investment.

The risks below can be characterized into fourthree groups:

The financial statements contained in this Report, as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the result of operations as of December 31, 2022.

Risks Related to Global Events

Disruptive national and international events, such as the outbreak of a public health crisis, an international conflict, a terrorist event, a banking crisis, the possibility of default by the United States on its obligations due to its debt ceiling or the actuality of such an event, and the response of the United States, other countries and the public to such events, and the resulting macroeconomic disruption to the financial markets and the businesses of our customers and suppliers, could have a negative impact on our results of operation and financial condition.

The outbreak of the Covid-19 pandemic, the invasion of Ukraine by the Russian Federation and the measures adopted by various governments and agencies, as well as the decision by many individuals and businesses to voluntarily shut down or self-quarantine and work from home in response to the outbreak of Covid-19 had serious adverse impacts on domestic and foreign economies, the financial markets and our ability, as well as the ability of some of our customers and suppliers, to operate in the ordinary course. While we continued to operate substantially in the normal course of business since the outbreak of Covid-19, we were forced to adjust our sales and marketing practices due to difficulties encountered in contacting our customers to maintain existing programs and win new orders and did not receive new contracts during 2021 and 2022 at a rate consistent with historical levels. Although business has substantially returned to pre-Covid-19 operating levels and our ability to win new orders appears to be returning to historical levels, there is no assurance that there will not be another event, such as a public health crisis, an international conflict, a terrorist event, a banking crisis or the possibility of a default by the United States on its obligations due to its debt ceiling or the actuality of such an event, which will have a material adverse impact on our industry, operations or financial condition. Moreover, although our industry appears to be operating in the normal course, employees of certain customers continue to work from home impacting our ability to communicate with them and the future economic impact of changes in business practices which resulted from Covid-19 or which might result from a future event, cannot be predicted with certainty. Covid-19 caused significant disruption to the commercial travel and aerospace industries. Although air travel has increased, it may take several years for overall economic conditions to return to normal, particularly in the aerospace industry, for air travel and the resulting demand for new and refurbished aircraft to return to normal. If conditions do not improve, or if they worsen, it could make it difficult for us to access debt and equity capital on attractive terms, or at all, and impact our ability to fund business activities and repay debt on a timely basis.

Russia’s invasion of Ukraine, continued tensions between the US and the European Union with China and Russia, may alter countries’ willingness to rely on others as the source of certain products and material.

Historically, prime contractors and OEMs in the United States A & D industry have relied upon suppliers outside the United States for products and raw materials, including suppliers in Russia and China. Supply chain disruptions resulting from China’s initial response to Covid-19, Russia’s invasion of Ukraine and the economic disruption resulting from retaliatory measures, continued tensions between the US and other countries, may cause many companies in the A&D industry and the governments of the countries in which they are located, including the United States, to rethink these strategies and seek or mandate that such companies obtain more reliable sources of supply. To the extent they do so, it could disrupt the markets for raw materials and supplies, our ability and the ability of our suppliers to obtain raw materials and supplies and the market for the skilled laborers we need to manufacture our products.

We cannot forecast with any certainty whether such disruptions, restrictions imposed by various governments in response thereto and resulting changes in business practices, may materially impact our ability and the ability of our suppliers to obtain necessary raw material, our business and our consolidated financial position, results of operations, and cash flows.

In reading the remaining risk factors set forth below, in each case, consider the additional uncertainties caused by the potential for disruptive global events such as a widespread public health crisis, the outbreak of an international conflict, terrorist event or banking crisis and continued rivalries between various countries.

Risks Related to Our Business

We may need additional financing to fund investments in new or upgraded property or equipment.

We may need to obtainrequire additional financing to fund acquisitions of capital items necessary for our growth and to upgradeinvestments in new or upgraded property or equipment, in order to remain competitive. WeIf we do, we may also need to obtain the agreement of holders of portions of our debt to extend or otherwise refinance such debt. WeIn order to gain consent, we may need to offer these holders increases in the rates of interest they receive or otherwise compensate them through payments of cash or issuances of our equity securities. Future financingsSuch additional financing or refinancingsrefinancing may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. Additional fundingsecurities and may not be available to us on reasonable terms, if at all. If we are ableunable to consummate such financingsadditional financing or re-financings,re-financing, the trading price of our common stock could be adversely affected, and the terms of such financingsfinancing may adversely affect the interests of our existing stockholders. Any failure to obtain additionalfund working capital when required would have a material adverse effect on our business and financial condition and may result in a decline in our stock price. 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.

A reduction in government spending on defense could materially adversely impact our revenues, results of operations and financial condition. 

A large percentage of our revenue is derived from products for US military aviation. There are risks associated with programs that are subject to appropriation by Congress, which could be potential targets for reductions in funding. Reductions in United States Government spending on defense or future changes in the mix of defense products required by United States Government agencies could limit demand for our products and may have a materially adverse effect on our operating results and financial condition. For the past several years, our operations have been impacted by volatility in government procurement cycles and spending patterns. There can be no assurance that our financial condition and results of operations will not be materially adversely impacted by future volatility in defense spending or a change in the mix of products purchased by defense departments in the United States or other countries, or the perception on the part of our customers that such changes are about to occur.

A reduction in budgeted or actual U.S. government spending for defense or changes in the mix of defense products could materially adversely impact our business strategy, revenues, operating results and financial condition. 

The ultimate end-user for most of our products is the U.S. Government, with significant use on military aircraft. In certain instances, our products may be exported to allied foreign governments by the U.S. Government. Although we expect to generate net sales from all of our key aerospace and defense platforms and programs for many years, they are subject to significant risk. Congressional appropriation and presidential approval are required for funding leaving our platforms and programs vulnerable to potential budget reductions at any point. For instance, a decrease in U.S. government defense spending or a strategy shift to rocket and drone platforms instead of large military aircraft platforms, could curtail demand for our landing gear parts and other components we provide which would likely have a materially adverse effect on our business strategy, revenues, operating results and financial condition.

Our operations have historically been subject to the fluctuations in government procurement cycles and spending patterns by our customers. There can be no assurance that our financial condition and future results of operations will not be materially adversely impacted by volatility in defense spending or changes in the mix of product favored by the U.S. Government or other nations, or the perception among our customers regarding the likelihood of such shifts.

Although we have cultivated long-standing relationships with many of our customers, the aerospace and defense industry is characterized by a smaller number of large and well-known prime customers. We depend on revenues from a few significant relationships. Anythese relationships and any loss, cancellation, reduction, or interruption in these relationships could harm our business.

We derive most of our revenues from a small number of customers. Four customers represented approximately 77% and three customers represented 75% of total sales for the years ended December 31, 2022 and 2021, respectively. The markets in which we sell ourOur products are dominatedpurchased by a relatively small number of large aerospace and defense customers whichwho incorporate them into larger products for ultimate end-use by the U.S. Government, international governments, and commercial global airlines. Consequently, we have contracts with United States governmental agencies, thereby limiting the numbera high degree of potential customers. sales concentration among specific customers making it challenging to diversify our customer base. In fiscal years 2023 and 2022, four and three customers, respectively, accounted for approximately 64.2% and 76.5% of net sales, respectively.

Our future success dependsrelies heavily on our ability to developnurturing expanding and manage relationships with significant customers. Weeffectively managing these relationships. Nevertheless, we cannot be sure that we will be able to retain our largestassure retention of these customers or that we will be abletheir continuing to attract additional customers, or that our customers will continue to buy our products in the same amounts as in prior years.purchasing at previous levels. The loss of one or more of our largestany key customers, any reductiona decline or interruption in sales to these customers,them, or our inability to successfully developestablish relationships with additionalnew customers, or future price concessions that we may have to make, could significantly harmimpact our business.

We depend on revenues from components for a few aircraft programs and platforms and the cancellation or reduction of either production or usefunding of these aircraft platforms couldthem will harm our business.

We derive a significant portion of our revenuesnet sales from supplying components for a fewselect aircraft programs and platforms, specifically the Sikorsky BlackHawk helicopter, the Northrop Grumman E-2 Hawkeye naval aircraft,such as the F-18 Hornet, and the E-2D Hawkeye, the UH-60 Black Hawk Helicopter, Pratt & Whitney Geared TurboFan Jet engine.Turbo-Fan Engine, the CH-53 Helicopter, the F-35 Lightning II (also known as the Joint Strike Fighter) and the F-15 Eagle Tactical Fighter. A reductiondecrease in demand for our products, as a result of either a reduction in thestemming from reduced aircraft production of newor diminished aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market demand)utilization, would have a material adverse effect onadversely affect our future operating results and financial condition.

IntenseChanges in outsourcing strategies and intense competition in our markets may lead to a reduction in our revenues and market share.

The defense and aerospace component manufacturing market is highly competitivecompetitive. Competition has been increasing and we expect that competition will increaseis expected to intensify further. Our large aerospace and perhaps intensify. In particular, we anticipate that manufacturers which have historically operated predominately in the commercial sector may seek to increase the revenue derived in the defense aerospace market to utilize excess capacity. Manyprime customers, Tier One suppliers and many of our competitors have significantly greater technical, manufacturing, financial and marketing resources than we do. WeIn the future, our defense and aerospace customers could make changes in their supply chain strategies that could adversely impact us. For instance, they could decide to in-source manufacturing, stop purchasing pursuant to existing LTA agreements or seek other sources at any time. If they seek other suppliers, we may not be able to compete successfully against either current or future competitors.competitors (including commercial manufacturers that wish to diversify their revenues and expand into the defense supply chain). Increased competition could result in reduced revenue, lower margins or loss of market share, any of which could significantly harm our business, our operating results and financial condition.

We may lose sales if we fail to timely meet the needs of anyspecifications and requirements of our customers.

OurMost of our customers incorporate our products into larger products such as aircraft assemblies or completed aircraft. They rely upon us to deliver products meeting theirpursuant to existing LTA agreements that include detailed specifications on a timely basis to ensure smooth operation of their assembly lines.and requirements. If a customer were to conclude that it could not rely upon us for timely delivery of quality products,any reason, it could look to dual source a product or rely upon another party altogether. A customerWe could reach suchbe informed of a conclusion even if our failure to timely deliver product was the result of events beyond our control, such as the failure of the customer to place an order for a long lead time product on a timely basischange in sourcing decisions with limited notice or supply us with agreed upon raw materials for processing.not at all. Any decision by a customer to rely upon an alternate supplier for some or all of its needs could significantly harm our business, our operating results and our financial condition.

We may lose sales if our suppliers fail to meet our needs or shipments ofship raw materials are not timely made.to us on timely.

AlthoughWe must deliver our products timely with high quality to ensure smooth operation of our customer production lines. In order to do so, we attempt to procure most of our raw materials, parts and components as well as subcontracted services from multiplevarious sources and rely upon a number of subcontractors to perform detailed services, or believe that these materials, components and services are readily available from numerous sources,utilize multiple subcontractors. However, certain materials, components and services are exclusively available only from a sole or limited number of sourcessuppliers and often needwe are reliant upon them. Additionally, material sourced from overseas are susceptible to be sourced by our customer.supply chain disruptions stemming from global events and political decisions. While we believe that, substitutein many cases, alternative supplies, components, or assemblies, andor subcontractors could be obtained, use ofsecured, sourcing substitutes would requiremay necessitate the development of new suppliers or would require usproduct re-engineering and qualification, potentially leading to re-engineer our products,shipment delays. Any interruptions in raw material shipments or both, which could delay shipment of our products and could have a materially adverse effect on our operating results and financial condition. Any delays in the shipment of raw materials or thesubcontracted service performance of subcontracted services could significantly harm our business, our operating results and our financial condition.

AWe may not be able to improve our gross margin and a reduction in our revenuesfuture sales levels could have a disproportionate effect on our gross profit as a percentage of our net sales.

Our operations havestate-of-the-art manufacturing facilities currently has a large percentage of fixed factory overhead relative to our overall expenses. As a result,Consequently, our gross profit as a percentage of new sales is highly linked with sales volume. AnyIf we do not increase our sales volume, it will be difficult to materially improve our gross profit margin. Although we have plans to improve operating efficiencies at our current sales levels, we may not be able to do so. Further, any reduction in ourfuture sales volume would likely causes us to absorb the fixed overhead costs over a smaller base of sales, likely causing our gross profit marginas a percentage of sales to decrease.decline from current levels. Any reduction in our profit margin adversely impacts our reported performance and would have a material adverse impact on results of operation and consolidatedour financial position.

There are risks associated with the bidding processes in which we compete.

We obtain many LTA and other contracts through a competitive bidding process. We must devote substantial time and resources to prepare bids and proposals and may not have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have bid will be sufficient to allow us to generate a profit from any particular contract. There are significant costs involved with producing a small number of initial units of any new product and it may not be possible to recoup such costs on later production runs.

Due to fixed contract pricing, increasing contract costs expose us to reduced profitability and the potential loss of future business.

The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, supply chain disruptions and the inability to recover any claims included in the estimatesfor added services necessary to complete.complete production. A significant change in costcosts from those on which we based our estimates on one or more programs could have a material effect on our consolidated financial position or results of operations.

The prices of raw materials we use are volatile.

The prices of raw materials used in our manufacturing processes are volatile. Our contracts generallySome LTA agreement with customers allow us to increase our prices due to increases in the price of raw materials. Many contracts, however,However, these LTA agreements generally require that we first absorb all or a portion of the increase in expense resulting from inflationprice increases before passingbeing able to pass on the increase on to the customer. For some LTA agreements, we are at full risk for future price agreements. If the prices of raw materials rise, we may not be able to pass along all of such increases to our customers and this could have an adverse impact on our consolidated financial position and results of operations. It is possible that some of the raw materials we use might become subject to new or increased tariffs. Significant increases in the prices of raw materials could adversely impact our customers’ demand for certain products which could lead to a reduction in our revenues and have a material adverse impact on our revenues and on our consolidated financial position and results of operations.

Some of the products we produce have long lead times.

Some of the products we produce require months to produce and we sometimes produce products in excess of the number ordered intending to sell the excess as spares when orders arise. As a result, our inventory turns slowly and ties up our working capital. Our inventory represented approximately 60%59% of our assets as of December 31, 2022.2023. Any requirement to write down the value of our inventory due to obsolescence, excess and slow moving, or a drop in the price of materials could have a material adverse effect on our consolidated financial position and results of operations and could result in a breach of the financial covenants in our Loan Facility with Webster Bank (“Webster”).operations.

We do not own the intellectual property rights to products we produce.

NearlyAlthough we develop our internal processes, nearly all the parts and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any, related to the product. Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.

There are risks associated with new programs.

New programs typically carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or changing specifications, timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program may experience delays for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs to the customers’ satisfaction or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays or other problems, then our business, financial condition and results of operations could be materially adversely affected. This could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings in excess of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.

To perform on new programs, we may be required to incur material up-front costs which may not have been separately negotiated and may not be recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.

The need to control our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses effectively, our business, results of operations and financial condition may be adversely affected.

There are risks associated with offering new services.services to our customers.

To

From time-to-time in order to reduce our dependence on subcontractors or increase our gross margins we may offer new services to our customers, such as painting and finishing products we manufacture.already manufacture for them. There are risks associated with offering newthese services and even if such services are performed timely and correctly, it is likely that our margins for these new services will be relatively low, or even negative, in the initial phases when volume is low. We may not be successful in achieving positive gross margins for these new services or be able to ultimately meet our customer requirements. If we are unsuccessful, it could hurt our relationship with our customers. 

Attracting and retaining executive talent and other key personnel is an essential element of our future success.

Our future success depends to a significant extent upon our ability to attract executive talent, as well as the continued service of our existing executive officers and other key management and technical personnel. ExperiencedWe are a relatively small company and experienced management and technical, marketing and support personnel in the defense and aerospace industries are in demand and competition for their talents is intense. Our failure to attract executive talent, or retain our existing executive, officerskey management and keytechnical personnel, could have a material adverse effect on our business, financial condition and results of operations.

We are subject to intense competition for the skilled machinists necessary to manufacture our products.

We are subject to intense competition for the services of skilled machinists necessary to manufacture our products and those of other companies in the A & Daerospace and defense industry. Since the outbreak of COVID-19,In recent years, the competition for skilled employees has intensified. Moreover, certain large employers inintensified and we have experienced wage inflation. We have strategically located our industryoperations in the NortheastU.S. and many companies are expanding their domestic production. As such, there is currently seeking to hire a large numbershortage of skilled technicians. We are currently seekingworkers in the U.S. In order to maintain and increase production levels, we must hire new employees and machinists for our Long Island and Connecticuttwo state-of-the art manufacturing facilities and we may not be able to expanddo so or the costs to hire and/or train them may significantly exceed our business. The demand for these individuals may increase as other manufacturers seek to bring to the United States manufacturing processes currently outsourced overseas.budget. If the United StatesU.S. economy undergoes a period ofcontinues to experience inflation, our labor costs may further increase which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense in the event of non-compliance.

We are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we

We are also required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our operations require the use of chemicals and other materials for painting and cleaning that are classified under applicable laws as hazardous chemicals and substances. If we are found to be in violation of any of these rules, regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any of which could result in substantial costs that would adversely impact our business operations and financial condition.

We may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.

We are subject to regulation by the FAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations. We have never been subject to such fines or disqualification.

Cyber security attacks, internal system or service failures, may adversely impactand any unauthorized access to our customer data will have an adverse effect on our business and operations.reputation.

Most of our products are used by large aerospace and prime contractors who ultimately provide them to the U.S. Government, foreign governments and commercial airlines. As such, in most cases, we are required to maintain confidential and proprietary information on our information systems. Hackers, whether they be individuals, entities or hostile enemies, may attempt to penetrate our network or those of our third-party hosting and storage providers, to gain access to confidential and proprietary data. If any of this data is hacked or leaked, obtained by others or destroyed without authorization, it could harm our reputation, we could be exposed to civil and criminal liability, which will materially impact our financial results and financial condition. Any system or service disruptions includingcaused by hackers or even those caused by projects to improve our information technology systems,capabilities, if not anticipated and appropriately mitigated, could significantly disrupt our business and impair our ability to effectively provide products and related services to our customers andproduction assembly could have aan immediate material adverse effect on our business. We could also be subject to systems failures, including network, software or hardware failures, whether caused by us or third-party service providers, intruders or hackers, computer viruses, natural disasters or power shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software, unauthorized attempts toshortages.

If hackers gain access to sensitive, confidential or otherwise protected information, relatedthey may attempt to force us or our products, customers or suppliers, or other acts that could lead to disruptions in our business.pay a ransom before stopping their attack. Any such failureshacker penetration could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs or require us to pay ransom to a hacker which takes over our systems, or subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Although we utilize various procedures and controls to monitor and mitigate the risk of these threats and have increased recent investment to improve our cyber-security posture, there can be no assurance that these procedures and controls or new investments will be sufficient. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results of operations and financial condition. Moreover, expenditures incurred in implementing cyber security and other procedures and controls could adversely affect our results of operations and financial condition.

Terrorist actsWe are subject to an extensive and actshighly-evolving regulatory landscape, and requirements imposed by our customers to secure our communications, and any adverse changes to, or our failure to comply with, any laws and regulations or requirements of war may seriously harm our clients could adversely affect our brand, reputation, business, operating results, of operations and financial condition.

United StatesWe subject to extensive laws, rules and global responsesregulations directed to actualthose who conduct business over the internet, in addition to security requirements imposed by our clients, including those governing privacy, data governance, data protection and cybersecurity. Many LTAs that we sign with our customers also require us to comply with strict vendor clauses including replications of specific sections of the FAR. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, may be modified, interpreted, and applied in an inconsistent manner. To the extent we have not complied with such laws, rules, and regulations, or potential military conflicts such as Russia’s invasion of Ukraine, terrorism, perceived nuclear, biologicalrequirements imposed by our LTAs, we could be subject to significant fines, limitations the products and chemical threatsservices we provide, reputational harm, and other global political crises increase uncertainties with respect to the U.S.regulatory consequences, each of which may be significant and othercould adversely affect our business, operating results, and financial markets. Several factors associated, directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical and cyber threats, and other global political crises and responses thereto, may adversely affect the mix of products purchased by defense departments in the United States or other countries to platforms not serviced by us. A shift in defense budgets to product lines we do not produce could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Indebtedness

Our indebtedness may have a material adverse effect on our operations.

We have substantial indebtedness under our loan facility with Webster (“Loan Facility”). As of December 31, 2022, we had approximately $18,748,000 of indebtedness outstanding under the Loan Facility. All of our indebtedness under the Loan Facility is secured by substantially all of our assets.condition.

WeAny disruptive national or international events, such as potential future public health crises, ongoing or new conflicts, domestic or foreign terrorist activities, banking crises, and responses from the U.S. Government, other nations, and the public to such occurrences, could significantly disrupt the operations of us or our suppliers and impede our ability to procure, receive, or replenish inventory (including raw materials). These disruptions may also have approximately $6,162,000present challenges in communication and lead to sudden and unexpected shifts in product demand by our customers. Furthermore, global financial markets could experience disruptions, affecting our business and our ability to secure future financing, including accessing debt or equity. The occurrence of indebtedness outstandingany of these events could result in the form of subordinated notes payable on July 1, 2026. These notes are held by related parties, specifically Michael N. Taglich (our Chairman)lost sales and Robert F. Taglich (a Director),otherwise adversely affect our business, operating results, and their affiliates.financial condition.

NotesConflicts between nations (such as the ongoing Russia-Ukraine conflict), or between nations and terrorist organizations (such as the ongoing conflict between terrorist groups and Israel), as well as terrorist attacks, natural disasters (such as hurricanes, fires, floods and earthquakes), unusually adverse weather conditions, pandemic outbreaks or a banking crisis could adversely affect our operations and financial performance. If any of these events affect us or our suppliers, it could result in an inability on our part to manufacture products and/or result in lost sales, materially affecting our operations and financial performance.

Additionally, such events could disrupt travel, making it a challenge to communicate with our customers, as evidenced during the coronavirus pandemic. Moreover, they could lead to increases in fuel or other energy prices, fuel shortages, temporary labor shortages, temporary or long-term disruptions in delivery of products from our suppliers and disruption to our information systems, any of which could have an adverse impact on our business, operating results and financial condition. Disruptive events could make it difficult for us to access debt and equity capital on attractive terms, or at all, and impact our ability to service or refinance our debt, fund business activities, and repay debt on a principal valuetimely basis.

Russia’s invasion of Ukraine, the conflict in the Middle East, continued tensions between the US and the European Union with China and Russia, and tension between the US and the European Union with respect to funding Ukraine’s war effort, may alter countries’ willingness to rely on others as the source of certain products and material.

Historically, prime contractors and the entire U.S. aerospace and defense supply chain have relied upon parts, components, and raw materials from foreign suppliers including those located in Russia and China. Geo-political tensions have increased during the past several years and we expect them to continue. Supply chain disruptions resulting from escalating political tensions and the economic disruption resulting from retaliatory measures between any countries could result in production delays and cancellations of programs.

Additionally, any material changes to the current aerospace and defense supplier structure resulting from geo-political tensions or otherwise could disrupt the markets for raw materials and supplies and our ability and the ability of our suppliers to obtain raw materials, may be significantly impacted. We cannot forecast with any certainty whether such disruptions, restrictions imposed by various governments in response thereto and resulting changes in business practices, may materially impact our ability and the ability of our suppliers to obtain necessary raw material, our business and our consolidated financial position, results of operations, and cash flows.

Risks Related to Our Indebtedness

As of December 31, 2023, we have total indebtedness of approximately $2,732,000$23,311,000, large portions of which must be redeemed or refinanced prior to December 30, 2025 and July 1, 2026. We may not be able to achieve favorable financing terms in the future or consummate any refinancing of our existing loans prior to their respective maturity dates. Failure to do so would materially impact our business and our stock price.

As of December 31, 2023, we had approximately $15,849,000 of indebtedness outstanding pursuant to a loan facility that matures on December 30, 2025 with Webster Bank (“Current Credit Facility”). The average interest rate on this indebtedness during fiscal 2023 was 7.55%. This indebtedness is secured by a lien on substantially all our assets.

Additionally, we have approximately $6,162,000 of subordinated notes payables (“Related Party Notes”) that mature on July 1, 2026 and which are held by two directors Michael N. Taglich and Robert F. Taglich, and their affiliates. The Related Party Notes payable carry an interest rate ranging between 7% and 12% per year. 

In addition to $884,000 of 6% per annumfinance lease obligations and are convertible into approximately 182,000 sharesa $22,000 vehicle loan, we also had $393,000 of common stock atborrowings for solar energy systems pursuant to a conversion price of $15.00 per share. Notesfinancing agreement (“Solar Facility”) with CT Green Bank. The Solar Facility requires borrowings for completed projects to be repaid over a principal value of approximately $2,080,000 carry an interest rate of 7% per annum and are convertible into approximately 224,000 shares of common stock at a conversion price of $9.30 per share.20-year level payment term.

If we are unable to pay amounts due under our Loan Facility or the subordinated notesindebtedness when due, our operations may be materially and adversely affected. We may need to offer the holdersmust pay or refinance large portions of this debt increases in theindebtedness prior to December 30, 2025, and July 1, 2026. During fiscal 2024, we initiated steps to refinance this debt. Refinancing may require us to pay higher interest rates of interest they receivethan we currently pay, agree to more restrictive business or otherwise compensate them through payments of cashfinancial covenants or issuances of our equity securities. Future financings or re-financings may involve the issuance of debt, equity and/or new securities convertible into or exercisable or exchangeable for our equity securities. If we are able to consummate such financings or re-financings, the terms of such financingscommon stock which may adversely affect the trading price of our common stock and the interests of our existing stockholders. 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 and may result in a decline in our stock price. 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.

Our current or future leverage may adversely affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may make our results of operations more susceptible to adverse economic conditions. Ultimately, we may not be able to successfully refinance our indebtedness and if we cannot, we would become insolvent.

The weighted average interest rate associated with portions of our current debtwe paid in 2023 on borrowings outstanding on the Current Credit Facility was 7.55% and this interest rate may increase.increase in the future.

The weighted average interest rate paid during the year-ended December 31, 2023 on borrowings outstanding on the Current Credit Facility was 7.55% as compared to 4.50% for the year-ended December 31, 2022, the increase primarily the result of the increase in the target rates set by the Federal Reserve. Under the terms of the Websterour Current Credit Facility, amounts due to Webster bear interest at a per annum rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal (or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum. Consequently, the rate of interest we paid under the Facility did not increase despite the initial increases in the targetmay be susceptible to future increased rates set byif the Federal Reserve though the more recent increases have resulted increases in the interest rate we pay under the Webster Facility. The weighted average interest rate paid during the year-ended December 31, 2022 was 4.50%. Given current interest rates, the interest rate we pay under the Webster Facility will increase as the Federal Reserve continueschooses to increase its target rate of interest. In addition, under

We may not be able to comply with the covenants of the Current Credit Facility and our debt could be called.

Under the terms of the WebsterCurrent Credit Facility, we are required to maintain certain business and financial covenants including a defined Fixed Charge Coverage Ratio of 1.25 to 1.00(as defined) that is determined at the end of each fiscal quarter. IfThis ratio is a financial metric that we use to measure our ability to cover fixed charges such as interest and leases expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (or loss) before interest, taxes, depreciation, and amortization. For the year ended December 31, 2023, we achieved a Fixed Charge Coverage Ratio of 1.31x as compared to the required ratio of 0.95x and were in full compliance with all other covenants. As of March 31, 2024, we were to fail to meet such covenant, Webster would have the right to increase the rate of interest payable on amounts outstanding under the Facility. The Company wasnot in compliance with the covenant atrequired ratio of 1.10x. We are currently in discussions with our lender to obtain waivers, but may not be able to do so.

During our first and third quarters of fiscal 2023, primarily because of the unexpected and dramatic increase in interest rates and the failure to receive certain raw materials from a supplier, we were unable to comply with the Fixed Charge Coverage Ratio. In 2023, our lender provided waivers for these quarters and provided for more relaxed Fixed Charge Coverage ratios for future periods, including the 0.95x as of December 31, 2022. The Company was in default of its covenant to provide its audited financial statements to Webster bank within ninety (90) days of its fiscal year end. The Company has subsequently received2023.

Even if we obtain a waiver fromfor the bank for this default. Anyfailure to meet the fixed charge coverage ratio as of March 31, 2024, if we do not achieve our fiscal 2024 plan and successfully execute our business strategy, we may not be able to comply with future quarterly covenant requirements. If we fail to do so and/or are unable to obtain future waivers, we may have to pay increased interest rates or may be required to immediately pay any outstanding debt. An increase in the interest rate of interest payable under the Webster Facility would increase our interest expense andlikely have a material adverse impact on our on our consolidated financial position and results of operations. If we were required to make immediate repayment, we may not be able to obtain financing to do so and would become insolvent.

Our indebtedness may limit our ability to pay dividends in the future.

We currently do not pay dividends and the terms of our LoanCurrent Credit Facility require that we maintain certain financial covenants.limit our ability to pay dividends.

We currently do not pay dividends and have no foreseeable plans to do so. Additionally, the terms and covenants of our Current Credit Facility do not currently allow us to. In the future should we decide to pay dividends, we would need to seek covenant changes or a waiver under our LoanCurrent Credit Facility. There can be no assurance our lenders would agree to covenant changes or waivers acceptable to us or at all.grant a waiver. In addition, we may in the future incur additional indebtedness or otherwise become subject to agreements whose terms restrict our ability to pay dividends in the future. Even if our lender would agree to allow us to pay a dividend, our Board of Directors may choose to use the amount which could be paid as a dividend to reduce our outstanding indebtedness.

Risks Related to our status as a public company and our common stock

The price of our common stock can fluctuate.

The financial markets have been impacted in various ways by the reactions to the outbreak of the COVID-19 pandemic and government stimulus programs adopted in response to the pandemic, and Russia’s invasion of Ukraine and government responses thereto. The price of our common stock has and is expected to continue to be volatile. We cannot forecast with any certainty whether and to what degree the disruption caused by the COVID-19 pandemic, Russia’s invasion of Ukraine and reactions thereto will continue to adversely impact financial markets and the impact to our common stock. Likewise, we cannot state with certainty the degree to which financial markets were supported by government stimulus programs and whether such support will continue as governments elect not to adopt similar measures in the future.

The ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

Two of our directors, Michael N. Taglich and Robert F. Taglich, and their affiliates own a significant number of shares of our outstanding common stock as well as a significant amount of debt convertible into our common stock, which together with their position as directors of our Company, give them significant influence over the outcome of corporate actions, including those requiring stockholder approval and the terms on which we complete transactions with their affiliates. The interests of these directors may be different from the interests of other stockholders on these and other matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

We can provide no assurance that our common stock will continue to meet NYSE American listing requirements. If we fail to comply with the continuing listing standards of the NYSE American, our common stock could be delisted.

If we fail to satisfy the continued listing requirements of the NYSE American, the NYSE American may take steps to delist our common stock. The delisting of our common stock would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase common stock when you wish to do so.

There is only a limited public market for our common stock.

OurAlthough our common stock is listed on the NYSE American. However,American, there is only a limited number of our shares available in the public float and the related market capitalization of the shares in our publicsuch float is relatively small. The trading volume for our common stock has been limited and a more active public market for our common stock may not develop or be sustained over time. The lack of a robust market may impair a stockholder’s ability to sell shares of our common stock. In the absence of a more active trading market, any attempt to sell our shares could result in a decrease in the price of our stock. Specifically, youour shareholders may not be able to resell yourtheir shares of common stock at or above the price you paid for such shares or at all.

Moreover, sales of our common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our common stock. As a result, youour shareholders may not be able to sell your shares of our common stock in short time periods, or possibly at all, and the price per share of our common stock may fluctuate significantly.

The ownership of our common stock is highly concentrated amongst related parties, and their interests may conflict with the interests of other stockholders.

Two of our directors, Michael N. Taglich and Robert F. Taglich, and their affiliates own a significant portion of our outstanding shares of common stock. They also hold $6,162,000 of Related Party Notes, some of which are convertible into our common stock. Although the Related Party Notes are subordinate to the $15,849,000 of debt outstanding pursuant to the Current Credit Facility, we may require additional concessions from the holders of the Related Party Notes when we seek to refinance the Current Credit Facility. These related parties have significant influence over the outcome of corporate actions, including those requiring stockholder approval. The interests of these related parties may be different from the interests of other stockholders on these and other matters. Additionally, this concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

The market price of our common stock is likely to be highly volatile, which could result in substantial losses to investors.

The market price of our common stock has historically been volatile and is likely to continue to be volatile. The market price of our common stock could fluctuate widely due to factors relating to our operations as well as those beyond our control. Because our common stock is thinly traded, the trading price may be volatile due to factors concerning our operations, such as variations in our operating results, failure to meet the covenants under the Current Credit Facility, news regarding the loss of a major customer or termination or a reduction in funding for a program we are on, the loss of management personnel, the outcome or perception of the potential outcome of any litigation, general industry conditions and significant industry developments. In addition, the market price of our common stock may be affected by factors unrelated to our operations, such as general economic factors, government budgeting decisions affecting our industry and developments in the financial markets and availability of credit.

Disruptive national and international events and the response of the United States, other countries and the public to such events, and the resulting macroeconomic disruption to the financial markets could lead to increased volume and price volatility for publicly traded securities which could adversely impact the price of our common stock.

Disruptive national and international events, such as the outbreak of a public health crisis, conflicts between nations or between nations and terrorist organizations, terrorists acts, natural disasters, a banking crisis, the possibility of default by the U.S. Government on its obligations due to its debt ceiling or the actuality of such an event, and the response of the U.S. Government, other countries and the public to such events, and the resulting macroeconomic disruption to the financial markets could lead to increased volume and price volatility for publicly traded securities which could adversely impact the price of our common stock.

We can provide no assurance that our common stock will continue to be listed on the NYSE American. If we fail to meet the continued listing standards of the NYSE American, our common stock could be delisted. The delisting of our common stock could impair your ability to purchase shares of our common stock or sell your common stock when you wish to do so which could have a negative effect on the price of our common stock.

If we fail to satisfy the continued listing requirements of the NYSE American, it may take steps to delist our common stock. There are measures that can be taken to remain in compliance with certain of the listing requirements of NYSE American which often require the undertaking of a reverse stock split, selling common stock at prices below what the Board of Directors may believe is its true value or completing a merger to acquire a new business. There are other exchanges and trading platforms on which we could choose to list our common stock. Our Board periodically examines the costs and benefits of listing our common stock on the NYSE American with the costs and benefits that would result from an alternative trading platform.  If our Board were to choose to seek another platform for the trading of our common stock, this could entail suspending our obligation to file periodic reports with the SEC and using other means to make information publicly available to shareholders and potential buyers of our common stock.  There can be no assurance that any cost savings and other benefits we might achieve from trading on another platform would outweigh any negative impact to the trading market and price of our common stock that would result from delisting from the NYSE American.

If we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

Our quarterly and annual operating results fluctuate significantly due to a variety of factors, some of which are outside our control. Accordingly, we believe period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause quarterly or annual operating results to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense recognition for contracts, the United StatesU.S. Government contracting and budget cycles, introduction of new government regulations and standards, contract closeouts, variations in manufacturing efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers, general economic conditions and economic conditions specific to the defense market and disruptions caused by global events such as COVID-19 and Russia’s invasion of Ukraine. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business.

Fluctuations in quarterly results or announcements of extraordinary events such as an award of a new contract, acquisitions or litigation, may cause earnings to fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of our common stock, as well as our overall operating results. Consequently, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance.

Future financings or acquisitions may adversely affect the market price of our common stock.

Future sales or issuances of our common stock, including upon conversion of our outstanding convertible notes, upon exercise of our outstanding warrants and options, or as part of future financings or acquisitions, would be substantially dilutive to the outstanding shares of common stock. Any dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the price of common stock.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial timeeffort to compliance requirements, including establishing and maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable to comply with these requirements. Costs to comply may increase in the future.

As a public company, we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these requirements. Moreover, theseif new rules andor regulations are adopted in future periods, they will likely increase our legal and financial compliance costs and will make some activities more time-consuming and costlier.

The Sarbanes-Oxley Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose confidence in the reliability of our financial statements and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.

If we are unable to effectively maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our financial results and our stock price could be adversely affected.

Our management determined that as of December 31, 2022,2023, our disclosure controls and procedures and internal control over financial reporting were not effective due to certaina material weaknesses in our internal control over financial reporting related to our review controls related to the preparation of our income tax provision,weakness regarding appropriate segregation of duties with respect to and validation of data produced by certain portionsmodules of our financial IT systemssystems. We first determined this weakness in fiscal 2022. Although new controls have been implemented during fiscal 2023, they were put in place late in the year which did not allow sufficient time for testing of the effectiveness of such controls. We expect to conclude our testing of effectiveness in fiscal 2024 but we may find that fiscal 2023 remediations were not effective and the establishment of appropriate inventory reserves. Anyhave to incur additional costs to adopt new controls. A significant increase in costs in 2024 or any failure to maintain our controls or operation of these controls, could harm our operations, decrease the reliability of our financial reporting, and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

We regularly review our cybersecurity defenses to assess our vulnerability to cybersecurity attacks from viruses, malware and more sophisticated and targeted cyber-related attacks such as hackers looking to demand ransomware or access our systems to obtain information and data, as well as our vulnerability to cybersecurity failures resulting from human error and technological errors.  We rely upon internal information technology (“IT”) personnel working in conjunction with specialized outside security consultants on a day-to-day basis to conduct reviews and upgrade our systems when determined to be necessary.

Our overall strategy in combatting cybersecurity risks includes a variety of measures, including:

We are not aware of any weakness in our systems or malware embedded in our systems that are likely to would materially affect, or are reasonably likely to materially affect, our operations.

Day-to day management of cybersecurity threats is conducted by our IT department in conjunction with outside service providers, which is charged with identifying and reporting threats to senior management. On a quarterly basis, cybersecurity is reviewed by our Chief Executive Officer and Chief Financial Officer, who are expected to report to the Audit Committee.

Board Oversight

The Audit Committee of our Board of Directors, which is composed of all non-employee directors, is responsible for oversight of our efforts to eliminate cybersecurity risks. The Audit Committee meets regularly with our Chief Executive Officer and Chief Financial Officer and, in turn, reports its finding to the Board of Directors.

ITEM 2. PROPERTIES

We have strategically located our properties in the U.S. We lease a 5.4-acre corporate campusand maintain an approximately 81,0000 square foot state-of-the-art manufacturing facility located in Bay Shore, New York, which housesYork. We maintain our executive offices and a majority of our operations. Thiscorporate headquarter at this facility whose lease expires in September 2026. We also maintainlease a small warehouse lease nearby in Bohemia, New York. That lease term commenced on April 1, 2020 and expires onin May 31, 2025.

The balance of our operations are conducted inWe own a second 74,923 square foot state-of the-art manufacturing facility located in Barkhamsted, Connecticut, which we own.Connecticut.

ITEM 3. LEGAL PROCEEDINGS

On October 2, 2018, Contract Pharmacal Corp. (“Contract Pharmacal”) commenced an action, relating to a Sublease entered into between us and Contract Pharmacal in May 2018 with respect to the property formerly occupied by our subsidiary Welding Metallurgy, Inc. (“WMI”), at 110 Plant Avenue, Hauppauge, New York. In the action, Contract Pharmacal sought damages for an amount in excess of $1,000,000 for our failure to make the entire premises available by what it claims was the Sublease commencement date. On July 8, 2021, the Court denied Contract Phamacal’sPharmacal’s motion for summary judgement. In the Order, the court granted Contract Pharmacal’s Motions to drop its claim for specific performance and to amend its Complaint to reduce its claim for damages to $700,000. Subsequently, Contract PhamacalPharmacal moved to amend its Complaint. We opposed and the Court denied the request to amend the Complaint. Contract Pharmacal filed a Motion to reargue which the Court denied on November 30, 2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division. The Appellate Division which we have opposed.upheld the denial of Contract Pharmacal’s motion for summary judgement and upheld the denial of its motion to amend its Complaint. On March 29, 2023, Contract Pharmacal filed a motion to reargue the appeal previously denied by the Appellate Division. We dispute the validity of the claims asserted by Contract Pharmacal, continue to believe we have a meritorious defense to those claims and intend to dispute the validity of the claim asserted by Contract Pharmacal.

From time to time we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or operating results. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material interest adverse to our interest.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Our Common Stock

Our common stock is listed on the NYSE American under the symbol “AIRI.” 

Holders

On May 10, 2023,April 11, 2024, there were 70 stockholders of record of our common stock. The number of record holders does not include persons who held our Common Stock in nominee or “street name” accounts through brokers.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes shares of our Common Stock to be issued upon exercise of options and warrants, the weighted-average exercise price of outstanding options and warrants and options available for future issuance pursuant to our equity compensation plans as of December 31, 2022:2023:

The provisions of each of our equity compensation plans provide that shares covered by an award that is forfeited, expires or is settled in cash, and shares that are retained by us upon exercise of an award to satisfy the exercise price of such award or withholding taxes due in respect of such award, are available for future issuance under such plan provided the plan has not been terminated or expired. We anticipate that a portion of the option awards that have been granted will expire or be forfeited without having been exercised and will increase the number of shares remaining for issuance under our equity compensation plans.

Recent Sales of Unregistered Equity Securities

Except as previously reported in our periodic reports filed under the Exchange Act, we did not issue any unregistered equity securities during the fiscal year ended December 31, 2022.2023.

Purchases of Our Equity Securities

No repurchases of our common stock were made during the fiscal year ended December 31, 2022.2023.

ITEM 6. [RESERVED]

Not required.

ITEM 7. 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 our audited consolidated financial statements for the years ended December 31, 20222023 and 20212022 and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking statements.

Business Overview

Air Industries Group is a holding company with three legal subsidiaries, AIM, NTWWe believe we are one of the leading manufacturers of precision components and SEC. SEC began manufacturing aircraft components inassemblies for large aerospace and defense contractors. Our rich history dates to 1941, – over 80-years ago –producing parts for use in World War II. NTW was formed in the early 1960’s and AIM has been in business since 1971.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.

We manufacture aerospace components primarily for the defense industry. AIM and NTW, manufacture structural parts and assemblies focusing on flight safety, including aircraftOur products include landing gear, arresting gear,flight controls, engine mounts flight controls, throttle quadrants, and other components. SEC makes components and provides services for aircraft jet engines and ground-power turbines.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.

Products of AIM and NTWAlthough our net sales are currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft. They also make a critical component for the Pratt & Whitney Geared TurboFan (“GTF”) aircraft engine used on commercial airliners. SEC makes products used in jet engines that are used on military and commercial aircraft including the USAF F-15 and F-16, the Airbus A-330 and the Boeing 777, and others, and in addition,concentrated amongst a number of ground-power turbine applications.

The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and majorprime contractors, seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class productscultivated 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 service but also by increasing our ability to produce more complexprograms 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 complete assemblies for our customers.

WeEmbraer E2), the CH-53 Helicopter, the F-35 Lighting II and the F-15 Eagle Tactical Fighter. In many cases, we are focused on maintaining profitabilitythe sole or single supplier of certain parts and positive cash flows from operating activities. We remain resolute on meeting customers’ needs. To take advantage of the long-term growth opportunities we see in our markets, we have made significant capital investments in new equipment in recent years. We believe these investments will increase the velocitycomponents and efficiency of production, increase the size of product we can make and allow us to offer additional services to our customers. Some of our investment expands our capabilities allowing us to internally process product that was previously outsourced to third party suppliers. We are pleased with the positive responsesreceive LTAs from our customers, about these initiatives.

Our abilityboth demonstrating their commitment to operate profitably and generate positive cash flows from operating activities is determined by our ability to win new or renewal contracts and fulfilling these contracts on a timely and cost effective basis. Winning a contract generally requires that we submit a bid containing fixed prices for the product or products covered by the contract for an agreed upon period of time, sometimes for five-years or longer, with negotiated increases to reflect a portion of the impact of inflation. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.us.

WhileWinning 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 revenues are largely determined bycompetitors. Accordingly, we must continually invest in process improvements and capital equipment. Recent investments in new equipment have improved the numberproductive capacity of contractsour employees, increased our efficiency and speed, and expanded the size of products we are awarded,can manufacture. We strategically operate two state-of-the-art manufacturing centers in the volumeU.S. This allows for rigorous oversight of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our variable costs are the cost of materials and supplies, labor, financingproduction and the efficiency at whichadherence to stringent quality standards. Although there is currently a shortage of skilled workers, we can produce our products. The costmaintain a highly trained and close- knit team of materials usedover 180 professionals committed to driving excellence and precision in the aerospace industry is highly volatile. The invasion of the Ukraine by the Russian Federation and retaliatory measures imposed by the United States, United Kingdom, the European Union and other countries, and the responses of Russia to such measures, have negatively impacted the availability and market price of certain minerals, such as titanium, for which Russia was a source of supply. To obtain necessary raw materials at prices deemed acceptable, we are working with thoseevery aspect of our larger customers which have access to sources of metals necessary to manufacture their products not readily available to us or other companies of our size. Nevertheless, there can be no assurance that disruptions in the markets for metals will not adversely impact our ability to timely meet the needs of our customers.operations.

Our period-to-period net sales and operating results are significantly impacted by timing. In addition, the market for the skilled labor we require to operate our plantsgross profit is highly competitive. Changes in the available pool of labor causedaffected by Covid-19 and life-style changes in response to Covid-19 have not materially adversely impacted our ability to meet our production schedules. Nevertheless, as we seek to grow our business, there can be no assurance that the skilled labor we need to operate our machinery will be available to us or that the costs incurred to maintain our current labor force and those we seek to bring on will not increase.

The profit margin of the various products we sell varies based upon a numbervariety of factors, including the mix and complexity of the product, the intensity of theproducts, production efficiencies, price competition for such product and ingeneral business operating environments. In some cases, theour gross profit is impacted by our ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold. Our operations have a large percentage of fixed factory overhead. As a result, our profit margins are also highly variable with sales volumes as under-absorptionvolumes.

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 factory overhead decreases profits.overall progress and positioning for growth. Looking forward to fiscal 2024, 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.

Our revenuesWith total unfilled contract values amounting to $191.9 million (including our $98.3 million in backlog and all potential orders against LTA agreements previously awarded to us), as of December 31, 2023, we are principally determined by orders from our customers for the delivery of product – which we call releases – against LTA’s with those customers. These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact of inflation, though over the term of a LTA prices often increase and not all of the increase is covered b agreed upon price protection clausesconfident in our agreements. Our direct costs of production include costs for material, labor,ability to boost sales in 2024, attain profitability and factory overhead; all of these costs may vary based on the efficiency ofimprove our factory operations. Our gross profit is highly variable due to the mix of products sold, and by sales volume, which can lead to the over absorption or under absorption of factory overhead costs.financial position.

A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements for aircraft already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and decreased usage of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business and our revenue.

RESULTS OF OPERATIONS

Years ended December 31, 20222023 and 2021:2022:

Selected Financial Information:

Balance Sheet Data:

Comparison of Fiscal 2023 to 2022

Net Sales:Net sales in 2023 were $51,516,000, a decrease of $1,722,000, or 3.2%, compared with $53,238,000 that we achieved in 2022. The year-over-year decrease in net sales was primarily due to delays in production associated with supply chain issues caused by one supplier failing to deliver raw materials for a key program as well as overall changes in customer mix and production requirements for other key platforms and programs.

ConsolidatedThe composition of customers that exceeded 10% of our net sales for the year ended December 31,in either 2023 or 2022 were $53,238,000, a decrease of $5,701,000, or 9.7%, compared with $58,939,000 for the year ended December 31, 2021. The decrease in sales resulted principally from the sale of products with lower selling prices and from contracts that expired in 2021 that were not renewed in 2022.are shown below:

As indicated in the table below, four customers represented 76.5% and three customers represented 75.4% of total sales for the years ended December 31, 2022 and 2021, respectively.

As indicated in the table below, three customers represented 70.3% and three customers represented 74.7% of gross accounts receivable at December 31, 2022 and 2021, respectively.

Gross Profit:

Consolidated gross profit from operations for the year ended December 31, 2022 was $7,452,000, a decrease of $2,801,000, or 27.3%, as compared to gross profit of $10,253,000 for the year ended December 31, 2021. Consolidated gross profit as a percentage of sales was 14.0% and 17.4% for the years ended December 31, 2022 and 2021, respectively. These decreases were attributable to lower sales and the mix of products sold during 2022 as compared to 2021. The Company also corrected its policy for determining the reserve for slow-moving and excess inventory which led to an increase in the reserve, further decreasing the gross profit and gross profit percentage.

The composition of our net sales by platform or program profiles for the years ended December 31, 2023 and 2022 are shown below:

Based on the significant easing of the 2023 supply chain issue discussed above and expected delivery dates for products used in all our other platforms and programs, we expect fiscal 2024 sales to increase as compared to the level we achieved in 2023.

Operating Expenses

Gross Profit: Gross profit for the year ended December 31, 2023, amounted to $7,428,000, comparable to the $7,452,000 achieved in 2022. Our gross profit percentage in fiscal 2023 increased to 14.4% from the 14.0% we achieved in 2022. This improvement can be attributable to changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.

Consolidated

Operating Expenses: In fiscal 2023, operating expenses weretotaled $7,723,000, slightly higher than the $7,646,000 and $7,766,000 for fiscal 2022 and 2021, respectively, representing a decrease of $120,000 or 1.5%.recorded in 2022. As a percentage of consolidated net sales, operating expenses wererose to 15.0%, compared to the 14.4% and 13.2% forachieved in fiscal 2022 and 2021, respectively. There were2022. The increase in cost related to employmentboth dollars and percentage was primarily driven by higher professional fees and costs including employee health benefits which were not passed on toassociated with the employees, increases in investor relations and increased travel costs resulting from the resumptionimprovement of travel to customers as Covid-19 restrictions eased. The increased costs were primarily offset by reductions in expenses related toour information technology system and the recovery of bad debt.

Gain on write-off of Accounts Payable

During the year ending December 31, 2022, the Company, reviewed all old outstanding payables that were not paidhardening our cyber-security protection. We continue to look for ways to reduce our costs and based on the statute of limitations, a claim would no longer be enforceable. The Company determined that approximately $317,000 of old payables fell into this category. This adjustment is recorded as Write-off of accounts payable on the accompanying Statement of Operations.

Interestimprove our operating performance and Financing Costs

Our interest and financing costs for the year ended December 31, 2022 totaled $1,338,000, an increase of $73,000 or 5.8% from $1,265,000 in 2021, as a result of higher interest rates on our Loan Facility during 2022. The average interest rate charged was 4.50% and 3.50% for the years ended December 31, 2022 and 2021, respectively.financial results.

Net (Loss) IncomeInterest Expense: Interest expense (which includes amortization of deferred financing costs) was $1,920,000 in fiscal 2023, an increase of $582,000 or 43.5% from $1,338,000 in 2022. The increase is primarily attributable to an increase in the average interest rate on outstanding debt pursuant to our Current Credit Facility which increased to 7.55% in 2023 as compared to 4.50% in 2022.

Net Loss:Net loss for the year ended December 31, 20222023 was $1,076,000,$2,131,000, compared to a net incomeloss of $1,627,000$1,076,000 for the year ended December 31, 2021,2022, for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our material cash requirements are for debt service, capital expenditures and funding working capital/operating costs.

As of December 31, 2022,2023, we have debt service requirements related to:

Under the terms of the Current Credit Facility, 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 leases 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 December 31, 2023, we achieved a Fixed Charge Coverage Ratio of 1.31x as compared to the required ratio of 0.95x and were in full compliance with all other covenants. However, as of March 31, 2024, we were not in compliance with the required ratio of 1.10x.

Although we have started discussions with our lender to receive a waiver with respect to our failure to meet the Fixed Charge Coverage Ratio at March 31, 2024, it is reasonably possible such waiver will not be granted. Even if such waiver is granted, we may fail to achieve the Fixed Charge Coverage Ratio in the future or otherwise fail to meet covenants in the Current Credit Facility. Therefore, we have classified the term loan that expires on December 30, 2025 as current as of December 31, 2023, 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 the opinion of our auditors contained in this report.

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

Although navigating the current business landscape remains challenging and it is difficult to predict period-to-period financial performance, we believe we will be able to meet our financial obligations for the foreseeable future. However, if we are unable to obtain a waiver from our lender and they were to cease lending, we would not be able meet our financial obligations. As of December 31, 2023, we have borrowing capacity of approximately $9,830,000 under the Revolving Loan (including $383,000 pursuant to the Capital Expenditure Line).

In addition to required Term Loan payments of approximately $948,000 in 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.

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, capital expenditures and funding working capital. We have historically met our cashthese 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 and strength of our backlog, we believe that we have sufficient liquidity to meet our short-termcash requirements. However, if we are unable to obtain a waiver from our lender and they were to cease lending we may not have sufficient liquidity to meet our cash requirements overfor the next twelve months. On May 17, 2022, we entered into the Fourth Amendment to the Loan and Security Agreement with Webster. The purpose of the amendment was to increase the Term Loan to $5,000,000, reduce the monthly principal installments to be made in respect to the term loan and establish a capital expenditure line of credit in the amount of $2,000,000 which we can draw uponmonths from time to time to finance purchases of machinery and equipment, thereby increasing the amount of capital expenditures we may make each year. During December 2022 we borrowed $878,000 for a capital expenditure and again in January 2023 we borrowed $739,500 for an additional capital expenditure.

For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any Fiscal Year, we are obligated to pay Webster 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 made to Webster and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such Fiscal Year. As required, we provided the calculation for the Excess Cash Flow payment of $208,000 for fiscal year ended December 31, 2022 to Webster prior to the April 15, 2023 deadline for such payment. Additionally, we authorized such payment to be made from the Revolving Loan. As of the date of issuance of our consolidated financial statements included in this filing, such payment has not been processed by Webster.Report.

Because we believe that our sales in 2023 will be comparable to those of 2022, we believe our liquidity will remain stable, though our borrowing costs would increase if prevailing interest rates increased or we failed to meet our covenant in the Webster Facility. As a result of recent increases in the federal funds borrowing rate, interest rates and related expense under our Webster Facility are expected to increase from current levels, which could be significant. However, such increases are not expected to materially impact our liquidity. Nevertheless, our liquidity may be adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such as a widespread health crisis, the continuation of the war in the Ukraine, the outbreak of another conflict and the ongoing tensions between the United States and China, increases in inflation, disruptions in the labor market and other risks detailed in Part 1, Item 1A of this Annual Report.

In addition to our loan with Webster and Subordinated 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. Substantially all of these obligations are described in the notes to our financial statements included in this report 

Changes in our cash flow during fiscal 2022 are discussed further below.

Cash Flow

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

Cash Provided By Operating Activities

Cash provided by or used in operating activities reflects our net income adjustedFor the year ended December 31, 2023, we generated cash flows from operations of $4,862,000 as compared to only $448,000 for certain non-cash items and changes to working capital items.fiscal 2022.

For the year ended December 31, 2022, net loss of $(1,076,000) and $3,094,000 of non-cash items, consisting primarily of employee and director stock-based compensation of $526,000, amortization of right-of-use assets of $545,000, depreciation of property and equipment of $2,522,000 and Impairment of Goodwill of $163,000 were partially offsetThe substantial increase in cash flows was driven by non-cash other income recognized in the amount of $94,000, a significant reduction in bad debt expense inworking capital required during fiscal 2023, primarily the amountreduction of $313,000both accounts receivable and accounts payable write-offs in the amount of $317,000. Operating assets and liabilities used cash in the net amount of $1,570,000, consisting primarily of the net increases in inventory deposits and other assets and prepaid expenses, taxes and other current assets of $2,289,000, $194,000 and $87,000, respectively, and net decreases in operating lease liabilities,levels. We also benefited from increased customer deposits and deferred payroll tax expense-CARES ACT in the amounts of $686,000, $439,000 and $314,000, which were partially offsetprimarily due to an advance payment by a decrease in accounts receivablecustomer to be used for the procurement of $1,303,000 and an increase in accounts payable in the amount of $1,136,000.long lead time raw materials expected to be utilized during 2024.

Cash Used In Investing Activities

We continue to make significant investments to enhance our competitiveness and market position. Cash used in investing activities consists of cash used$2,112,000 and $2,361,000, in 2023 and 2022, respectively, was for capital expenditures fornew property and equipment.

ForWe continue to make strategic investments in capital equipment to enhance our competitiveness. The investments in 2023 and 2022 increased production efficiency and speed, while maintaining closer tolerances. They also expanded the year ended December 31, 2022, cash usedsize of products we can manufacture. We expect to invest approximately $2,000,000 in investing activities was $2,361,000. This was primarily2024 for the purchase of state-of-the-art machinery.

new or upgraded equipment.

Cash Provided by Financing Activities

Cash provided byFor the year ended December 31, 2023, cash used in financing activities consists of thewas $2,685,000. During fiscal 2023, we reduced borrowings and repayments under our credit facilities with our senior lender, Webster, increasesCurrent Credit Facility by $2,921,000 (consisting of net reduction in Revolving Loan borrowings of $2,548,000 and repaymentsa net decrease of finance$373,000 against the Term Loan). We also made payments of $123,000 pursuant to financing lease obligations and other notes$9,000 on a loan payable. During fiscal 2023, we also took advances of $393,000 against the Solar Facility including originations fees of $25,000.

For the year ended December 31, 2022, cash provided by financing activities was $1,567,000. This was comprisedDuring fiscal 2022, we increased borrowings under our Current Credit Facility by $2,130,000 (consisting of a net increase in Revolving Loan borrowings of $916,000 on our Webster revolving loan, increased borrowingsand a net increase of $2,823,000 under$1,214,000 against the Webster term loan, offset by repayments of $1,609,000 on our Webster term loan, andTerm loan). We also made payments on our financed lease obligations, related party notes and our financed asset note payables in the amounts of $284,000 pursuant to financing lease obligations. $250,000 of Related Loan principal repayments, and $9,000 respectively.

CONTRACTUAL OBLIGATIONSon a loan payable. During fiscal 2022, we paid $20,000 of amendment fees.

For a discussion of our contractual obligations see “Item 8. Financial Statements and Supplementary Data” – “Note 8. Debt” and “Note 9. Operating Lease Liabilities”.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

A critical accounting policyestimate 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 uncertain.

Our consolidatedUse of Estimates. The preparation of financial statements are presented in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP���). All applicable U.S. GAAP accounting standards effective as of December 31, 2022 have been taken into consideration in preparing the consolidated financial statements. The preparation of consolidated financial statements 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 related disclosures. Someour judgment as to the outcome of thosefuture conditions and circumstances. Significant estimates are subjectivein these financial statements include, inventory valuation, useful lives and complex,impairment of long-lived assets, income tax provision, and consequently,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 those estimates. The followingthe estimates and assumptions.

Below is a description of our critical accounting policies and estimates have been highlighted as significant because changes to certain judgements and assumptions inherent in these policies could affect our consolidated financial statements:estimates:

See Note 2 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a more complete description of our significant accounting policies.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

No disclosure is required in response to this Item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

The financial statements required by this item begin on page F-1 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”), our principal executive officer, and Chief Financial Officer (“CFO”), our principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, as of December 31, 2022.2023. Based on that evaluation, the CEO and CFO concluded for the reasons discussed below that our disclosure controls and procedures were not effective as of December 31, 2022,2023 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the required time periods, and that such information is accumulated and communicated to our management to allow timely decisions regardingwhen required.

Management’s Report on Internal Control over Financial Reporting

Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal controlscontrol over financial reporting and include in this Annual Report, as term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act, and include in this Form 10-K a report on management’s assessment of the effectiveness of our internal controlscontrol over financial reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal controlscontrol over financial reporting refers to those policies, procedures and processes that pertain to the maintenance of records that accurately and fairly reflect transactions with respect to our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are made only in accordance with authorizations of our management; and provide reasonable assurance regarding the prevention and timely detection of unauthorized transactions with respect to our assets that could have a material effect on our financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

OurManagement assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, management relies upon theused criteria established in the Internal Control-Integrated Framework issuedset forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in designing a system intended to meet the needs of our Company and provide reasonable assurance for its assessment.Internal Control – Integrated Framework (2013).

In connection with their review of our internal controlscontrol over financial reporting for the fiscal year endedas of December 31, 2022,2023, our Chief Executive Officer and Chief Financial Officer have concluded that our internal controls over financial reporting were not effective as of December 31, 2022,2023 as a result of certaina material weaknesses discovered during the course of their review.weakness identified in 2022 that was considered to not yet be remediated because we have not completed our effectiveness testing.

In particular,Both in 2023 and 2022, we have outsourced certain ITinformation technology (“IT”) related functions to a third-party vendor and havevendor. In 2022, we identified a material weakness with respect to our IT systems in that we did not design and/or implement primary user access controls and program change management systems over key information technologyIT systems to validate that data produced by the relevant IT systems were complete and accurate and to ensure appropriate segregation of duties to adequately restrict user and privileged access to the financially relevant systems and data to the Company’s personnel. Further, we have identified a material weakness with respect to the activities of such vendor in connection with the design and operation of our IT systems in that because this vendor is unable to provide a SOC 1 (Standard Operating Control) Report, we arewere unable to verify and validate the effectiveness of the vendor’s control procedures when implementing changes to our IT systems, including systems affecting our financial IT applications and underlying data account records. We also identified a material weakness related to the effectiveness of management’s review controls over the determination if the methodology used in determining the appropriate reserves to be taken with respect to certain excess quantities and slow moving inventory was operating at a level to prevent or detect a potential material misstatement. The Company determined that the estimates used in prior periods could not be substantiated by actual results and updated it methodology. We have also identified a material weakness relating to the effectiveness of management's review controls over the income tax provision in our financial footnotes, such that management's review procedures were not operating at a level of precision to prevent or detect a potential material misstatement in our consolidated financial statements.

We are currently assessing the actionsIn fiscal 2023, we implemented new IT controls that needrequired our third-party vendor to be taken to remedy each of the material weaknesses identified above. With respect to those weaknesses related to the calculation of our inventory reserve and the review of our tax management provision, we intend to promptly establish written controls and operating procedures to address the issue. With respect to the material weaknesses relatedmake only changes to our IT systems we intend to meetwith specific authorization and a requirement that such change be monitored, in real-time by an employee of our company that is familiar with the changes that are being made by our third-party vendor to determinevendor. Although we implemented this change in the actions to be taken to address eachsecond half of the weaknesses and consider what actions need to be taken if the issues cannot be adequately addressed. Each of the material weaknesses noted will only be deemed tofiscal 2023, we have been remediated after the new controls and procedures have been in place fornot yet had a sufficient period and management has concluded through appropriateof time to perform testing to conclude that the controls arecontrol was operating effectively. As such, because our testing of effectiveness is ongoing and not yet complete, we consider this material weakness not to be remediated as of December 31, 2023.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. The rules of the Securities and Exchange Commission do not require an attestation of the Management’s report by our registered public accounting firm in this annual report.

Change in Internal Control over Financial Reporting

ThereDuring the fourth quarter of 2023, we implemented several new changes in internal control over financial reporting including: (a) new IT controls that require our third-party vendor to make only changes to our IT systems with specific authorization by our IT department and a requirement that such changes be monitored, in real-time by an employee of our company that is familiar with the changes that are being made, (b) enhanced review of our inventory reserve policy to ensure that aged-inventory is appropriately reviewed for obsolescence and excess, and (c) we engaged a new third-party tax consulting firm and implemented new company-level controls over our tax footnote preparation. Except for these items, there have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter ended December 31, 20222023, which is the subject of this report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION

Not Applicable

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 

Our directors and executive officers are:

Luciano (Lou) Melluzzo has beenThe information required by this Item is hereby incorporated by reference from our President and Chief Executive Officer since November 15, 2017. He joined our company on September 11, 2017 as Chief Executive Officer. From November 2003definitive proxy statement to September 2011, Mr. Melluzzo was employed in various capacities by EDAC Technologies Corporation (“EDAC”) risingbe filed with the SEC pursuant to Regulation 14A within 120 days after the level of Chief Operating Officer in 2005. EDAC is a designer, manufacturer and distributor of precision aerospace components and assemblies, precision spindles and complex fixturing, tooling and gauging with design and build capabilities, whose shares were then listed on the Nasdaq Capital Market. From September 2011 to November 2015, Mr. Melluzzo was self-employed in the residential real estate redevelopment industry. From November 2015 to January 2017, he was general manager of Polar Corporation, a privately-held company specializing in computer numeric controlled milling and turning of small hardware components for the aerospace industry.

Michael E. Recca has been our Chief Financial Officer since October 1, 2016. Mr. Recca has been engaged by us since September 2008 in a variety of positions related to our capital finance and acquisition programs. Most recently he served as Chief of Corporate Development & Capital Markets, a position in which he directed our acquisition program and coordinated with our lenders. Mr. Recca received a Bachelor of Arts degree from the SUNY Stony Brook and an MBA from Columbia University.

Michael N. Taglich has been Chairmanclose of our Board of Directors since September 22, 2008. He is Chairman and President of Taglich Brothers, a New York City based securities firm which he co-founded in 1992. Mr. Taglich is currently Chairman of the Board of Mare Island Dry Dock LLC, a company engaged in ship repair services, He also serves as a Director of two other public companies, Bridgeline Digital Inc. and Decision Point Systems Inc., as well as a number of private companies.

Robert F. Taglich has been a director of our Company since 2008. He is a Managing Director of Taglich Brothers, which he co-founded in 1992. Prior to founding Taglich Brothers, Mr. Taglich was a Vice President at Weatherly Securities. Mr. Taglich has served in various positions in the securities brokerage industry for the past 25 years Mr. Taglich holds a Bachelor’s degree from New York University.

David J. Buonanno has been a director of our Company since 2008. He is the Founder and President of Buonanno Enterprises Consulting, providing strategic management, supply chain/operations and recruitment services to aerospace and defense industry clients. Mr. Buonanno has extensive experience in manufacturing, supply management and operations. He was employed by Sikorsky Aircraft, Inc., a subsidiary of United Technologies Corporation, as Vice President, Supply Management and International Offset (from January 1997 to July 2006) and as Director, Systems Subcontracts (from November 1992 to January 1997). From May 1987 to November 1992, he was employed by General Electric Company serving as Operations Manager and Manager, Program Materials Management of GE’s Astro-Space Division. From June 1977 to May 1987, he was employed by RCA and affiliated companies. Mr. Buonanno attended Lehigh University College of Electrical Engineering and holds a B.S. in Business Administration from Rutgers University. He completed the Program for Management Development at Harvard Business School in 1996.fiscal year.

Peter D. Rettaliata has been a director of our Company since 2005. He served as our Acting President and Chief Executive Officer from March 2, 2017 to November 15, 2017 and served as our President and Chief Executive Officer from November 30, 2005 to December 31, 2014. He also served as the President of our wholly-owned subsidiary, AIM, from 1994 to 2008. Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman Aerospace Corporation for twenty-two years, as the Senior Procurement Officer. Professionally, Mr. Rettaliata has served as the Chairman of “ADDAPT”, an organization of regional aerospace companies, as a member of the Board of Governors of the Aerospace Industries Association, and as a member of the Executive Committee of the AIA Supplier Council. He is a graduate of Niagara University where he received a B.A. in History and Harvard Business School where he completed the PMD Program.

Michael Brand has been a director of our Company since 2012.  He enjoyed a successful 32-year career in aerospace manufacturing primarily focused on jet engines and landing gear. In 2005, he joined Goodrich as President of Goodrich Landing Gear. Prior to joining Goodrich, he had senior management roles at GE Aircraft Engines and Teleflex Aerospace.  Mr. Brand has a BS from Clarkson University, with advanced degrees and certificates from Xavier University and the Wharton School.

Michael Porcelain has been a director of our Company since October 23, 2017. Mr. Porcelain has been a CPA since 1996 and is currently the President and CEO of The Independent Adviser Corporation, a privately held company which operates various internet websites including TheAdviser.com, 1800ADVISER.com and IRSADVISER.com, all of which relate to the financial planning and advisory industries. From 2006 through 2022, Mr. Porcelain served in several executive positions including service as a member of the Board of Directors of Comtech Telecommunications Corp., (“Comtech”) a publicly traded company and a leading global provider of next-generation 911 emergency systems and secure wireless communications technologies. He was appointed Chief Executive Officer of Comtech in January 2022 and President of Comtech in January 2020. He also served as Comtech Chief Operating Officer from October 2018 to January 2022. Prior to holding these positions, he served as Comtech’s Chief Financial Officer from 2006 through 2018, and from 2002 to March 2006, he served as Comtech’s Vice President of Finance and Internal Audit.

From 1998 to 2002, Mr. Porcelain was Director of Corporate Profit and Business Planning for Symbol Technologies, a mobile wireless information solutions company. Previously, he spent five years in public accounting holding various positions, including Manager in the Transaction Advisory Services Group of PricewaterhouseCoopers. In March 2021, Mr. Porcelain was elected to the Board of Directors of The Fund for Modern Court, an independent court reform organization that advocates for the improvements of the New York State Court system to ensure a diverse, highly qualified, and independent judiciary. Since 1998, he has owned and operated The Independent Adviser Corporation, a privately held company which holds the rights to use certain intellectual properties and trademarks (including various Internet websites) related to the financial planning and advisory industry. 

Mr. Porcelain has served as an Adjunct Professor at St. John’s University located in New York where he taught graduate level accounting courses. Mr. Porcelain has a B.S. in Business Economics from State University of Oneonta, New York, a M.S. in Accounting and an M.B.A. degree from Binghamton University.

Michael N. Taglich and Robert F. Taglich are brothers.

All directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services as directors. Non-employee directors are entitled to receive compensation for serving as directors and may receive option or stock grants from our company.

Information Concerning the Board of Directors

Board Leadership Structure and Risk Oversight

The Board does not have a policy requiring separation of the roles of Chief Executive Officer and Chairman of the Board. The Board has determined that a non-employee director serving as Chairman is in the best interests of our stockholders at this time. This structure ensures a greater role of non-employee Directors in the active oversight of our business, including risk management oversight, and in setting agendas and establishing Board priorities and procedures. This structure also allows the Chief Executive Officer to focus to a greater extent on the management of our day-to-day operations.

The Board of Directors as a whole is responsible for consideration and oversight of the risks we face and is responsible for ensuring that material risks are identified and managed appropriately. Certain risks are overseen by committees of the Board of Directors and these committees make reports to the full Board of Directors, including reports on noteworthy risk-management issues. Members of the Company’s senior management team regularly report to the full Board about their areas of responsibility and a component of these reports is the risks within their areas of responsibility and the steps management has taken to monitor and control such exposures. Additional review or reporting on risks is conducted as needed or as requested by the Board or one of its committees. 

Board Independence

Our Board of Directors has determined that David Buonanno, Peter Rettaliata, Michael Brand and Michael Porcelain are “independent directors” within the meaning of NYSE American Rule 803A(2).

Director Compensation

Non-employee Directors are entitled to receive compensation for serving as directors and may receive option grants from our company. Each Director also is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our Board of Directors or committees of our Board of Directors or stockholder meetings or otherwise in connection with the discharge of his duties as a Director. The compensation committee will assist the directors in reviewing and approving the compensation structure for our directors.

The following table sets forth certain information regarding the compensation paid to, earned by or accrued for, our directors during the fiscal year ended December 31, 2022.

Board Meetings; Committees and Membership

The Board of Directors held four meetings during the fiscal year ended December 31, 2022 and each of the directors attended more than 75% of the aggregate of (i) the number of meetings of the Board of Directors and (ii) the number of meetings of all committees of the Board on which such director served.

We maintain the following committees of the Board of Directors: the Audit Committee, the Compensation Committee and the Nominating Committee. Each committee is comprised entirely of directors who are “independent” within the meaning of NYSE American Rule 803A(2). Each committee acts pursuant to a separate written charter, and each such charter has been adopted and approved by the Board of Directors. Copies of the committee charters are available on our website at airindustriesgroup.com under the heading “Investor Relations.”

Audit Committee. Messrs. Porcelain, Brand and Buonanno are members of the Audit Committee. Mr. Porcelain serves as Chairman of the Audit Committee and also qualifies as an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K. The Board has determined that each member of our Audit Committee meets the financial literacy requirements under the Sarbanes-Oxley Act and SEC rules and the independence requirements under NYSE American Rule 803A(2).

Our Audit Committee is responsible for preparing reports, statements and charters of audit committees required by the federal securities laws, as well as: