UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



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

For the fiscal year ended: December 31,
2017



oTransition
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)



|Nevada                                                         | 80-0948413                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     

|360 Motor Parkway, Suite 100, Hauppauge, New York 11788
|-------------------------------------------------------
|(Address of Principal Executive Offices                
|                                                       
|(631) 881-4920                                         
|(Registrant’s Telephone Number, Including Area Code)   



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



|Name of Exchange on which Registered
|------------------------------------
|                                    
|NYSE AMERICAN                       
|                                    
|Title of Each Class                 
|                                    
|Common Stock, par value $0.001      



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.  Yeso Nox



Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yeso Nox



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. Yesx
Noo



Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.o



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



Large
Accelerated Filero Non-Accelerated
Filero Accelerated
Filero Smaller
Reporting Companyx

Emerging
growth companyx



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.o



Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). YesoNox



As of June 30, 2017, the aggregate market value of our common
stock held by non-affiliates was $ 11,879,537, based on 6,636,613 shares of outstanding common stock held by non-affiliates, and
a price of $1.79 per share, which was the last reported sale price of our common stock on the NYSE American on that date.



There were a total of 25,213,805 shares of the registrant’s
common stock outstanding as of March 28, 2018.



DOCUMENTS INCORPORATED BY REFERENCE:



Portions of the registrant’s definitive Proxy Statement
relating to its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K
where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the
end of the fiscal year to which this report relates.













AIR INDUSTRIES GROUP

FORM 10-K

For the Fiscal Year Ended December 31,
2017



|                                  |                                                                                                              | Page
    No.
|--------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------
|PART I                            |                                                                                                              |             
|                                  |                                                                                                              |             
|Item 1.                           | Business                                                                                                     | 1           
|Item 1A.                          | Risk Factors                                                                                                 | 4           
|Item 2.                           | Properties                                                                                                   | 12          
|Item 3                            | Legal Proceedings                                                                                            | 12          
|Item 4.                           | Mine Safety Disclosures                                                                                      | 12          
|                                  |                                                                                                              |             
|PART II                           |                                                                                                              |             
|                                  |                                                                                                              |             
|Item 5.                           | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 13          
|Item 6.                           | Selected Financial Data                                                                                      | 14          
|Item 7.                           | Management’s Discussion and Analysis of Financial Condition and Results of Operation                         | 14          
|Item 8.                           | Financial Statements and Supplementary Data                                                                  | 28          
|Item 9.                           | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 28          
|Item 9A.                          | Controls and Procedures                                                                                      | 28          
|Item 9B.                          | Other Information                                                                                            | 29          
|                                  |                                                                                                              |             
|PART III                          |                                                                                                              |             
|                                  |                                                                                                              |             
|Item 10.                          | Directors, Executive Officers, and Corporate Governance                                                      | 30          
|Item 11.                          | Executive Compensation                                                                                       | 30          
|Item 12.                          | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 30          
|Item 13                           | Certain Relationships and Related Transactions and Director Independence                                     | 30          
|Item 14                           | Principal Accountant Fees and Services                                                                       | 30          
|                                  |                                                                                                              |             
|PART IV                           |                                                                                                              |             
|                                  |                                                                                                              |             
|Item 15.                          | Exhibits and Financial Statement Schedules                                                                   | 30          
|Consolidated Financial Statements | F-1                                                                                                         





(i)


Table of Contents




Cautionary Note Regarding Forward-Looking
Statements



This report 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 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”).



We are an Emerging Growth Company



We qualify as an "emerging
growth company" as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company
may take advantage of reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions
include:



• a requirement to have
only two years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial
Condition and Results of Operations disclosure; and



• an exemption from the
auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley
Act of 2002.



We may take advantage
of these provisions until the end of the fiscal year ending after the fifth anniversary of our initial public offering, December
31, 2018, or such earlier time that we are no longer an emerging growth company and if we do, the information that we provide stockholders
may be different than you might get from other public companies in which you hold equity. We would cease to be an emerging growth
company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of
common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.



The JOBS Act permits an "emerging
growth company" like us to take advantage of an extended transition period to comply with new or revised accounting standards
applicable to public companies.





(ii)


Table of Contents




PART I



ITEM 1.  BUSINESS



Introduction



As used in this report,
unless otherwise stated or the context requires otherwise, the "Company" and terms such as "we," "us"
"our," and "AIRI" refer to Air Industries Group, a Nevada corporation, and its directly and indirectly wholly-owned
subsidiaries.



We are an aerospace
and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear,
arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal
fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile
military and commercial aircraft including Sikorsky’s UH-60 Black Hawk and CH-47 Chinook helicopters, Lockheed Martin’s
F-35 Joint Strike Fighter, Northrop Grumman’s E2 Hawkeye, Boeing’s 777, Airbus’ 380 commercial airliners and
the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the
USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.



We became a public company
in 2005 when our net sales were approximately $30 million. At that time we had been manufacturing components and subassemblies
for the defense and commercial aerospace industry for over 45 years and had established long term relationships with leading defense
and aerospace manufacturers. We have capabilities and expertise in metal fabrication, welding and tube bending; the production
of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment and printed circuit boards;
the machining of turbine engine components; and the assembly of packages or “kits” containing supplies for all branches
of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical and electrical assemblies.



As of December 31, 2017,
our three operating segments consisted of:



Complex Machining:comprised of Air Industries Machining (“AIM”) and Nassau Tool Works (“NTW”). Since the lease for the
premises occupied by NTW expires in October 2018, we are relocating and consolidating the operations of NTW into the facilities
of AIM in Bay Shore, New York, approximately six miles from the premises presently occupied by NTW on Long Island.



Aerostructures &
Electronics: comprised of Welding Metallurgy (“WMI”), Eur-Pac, Electronic Connections (“ECC”) and Compac
Development (“Compac”). We previously relocated the operations of Miller Stuart, and Compac from their locations on
Long Island to Welding Metallurgy’s facility in Hauppauge, Long Island NY, and merged Woodbine Products and Miller Stuart
into WMI.



On March
21, 2018, we entered into a Stock Purchase Agreement (“SPA”) with CPI Aerostructures, Inc. (“CPI”)
for the sale of Welding Metallurgy and related assets of our Aerostructures & Electronics segment, for a purchase price
of $9,000,000, subject to a working capital adjustment. The SPA also provides for contingent payments of up to an aggregate
of $1,000,000 if WMI enters into specified agreements by May 31, 2018 and July 31, 2018, respectively (the
“Specified Dates”), which contingent payments are subject to reduction by $100,000 for each calendar month after
the Specified Dates which passes before WMI enters into the specified agreements. The sale is subject to certain conditions,
including CPI obtaining financing for the amount of the purchase price, and requires an escrow deposit of $2,000,000 to cover
the working capital adjustment and our obligation to indemnify CPI against damages arising out of the breach of our
representations and warranties and obligations under the SPA. It is anticipated that the sale will close in May or June of
2018.



Turbine Engine Components:
comprised of The Sterling Engineering Corporation and, until its sale in January 2017, included AMK Welding.



Given the pending sale
of WMI and our repositioning to achieve profitability and growth, in the future we may reallocate our business into different
operating and reporting segments.





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Our Market



We operate primarily
in the military and, to a lesser degree, commercial aviation industries. Defense revenues represent a preponderance of our sales.
Our principal customers include Sikorsky Aircraft, Goodrich Landing Gear Systems, Northrop Grumman, the United States Department
of Defense, GKN Aerospace, Lockheed, Boeing, Raytheon, Piper Aircraft, M7 Aerospace, Vought Aerospace, Ametek/Hughes-Treitler and
Airbus.



Our products are incorporated
into many aircraft platforms, the majority of which remain in production, and of which there are a substantial number of operating
aircraft in the fleets maintained by the military and commercial airlines. We believe that we are the largest supplier of flight
critical parts to Sikorsky’s Black Hawk helicopter. We have made, or currently make, or have been awarded, products for the
CH-47 Chinook helicopter, Lockheed Martin’s F-35 Joint Strike Fighter, Northrop Grumman’s E2 Hawkeye, Boeing’s
777, Airbus’ 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine Components
segment makes components for jet engines that are used on the USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition
to a number of non-military ground turbine applications.



Many of our products
are “flight critical,” essential to aircraft performance and safety on takeoff, during flight and when landing. These
products require advanced certifications as a condition to being a supplier. For many of our products we are the sole or one of
a limited number of sources of supply. Many of the parts we supply are subject to wear and tear or fatigue and are routinely replaced
on aircraft on a time of service or flight cycle basis. Replacement demand for these products will continue, albeit at perhaps
a lower rate, so long as an aircraft remains in service, which is usually many years after production has stopped.



Sales and Marketing



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 equipment manufacturers. 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 relied upon
by all of our customers.



The large prime contractors
are increasingly seeking subcontractors who can supply 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. We believe that the various capabilities we have acquired through our
acquisition program increase the likelihood we will qualify for and be awarded larger, more complex projects.



During our sales and
marketing efforts we let customers know that we  have employees with the talent 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. The long term business of each of our current operating segments 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.





2


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Our Backlog



Within our Complex Machining
and Turbine Engine Components segments, the production cycle of products can extend from several months to a year or longer. This
gives rise to significant backlogs as customers must order product with sufficient lead time to ensure timely delivery.



We have a number of
long-term multi-year General Purchase Agreements or GPA’s with several of our customers. These agreements specify part numbers,
specifications and prices of the covered products for a specified period, but do not authorize immediate production and shipment.
Shipments are authorized periodically by the customer to fit their production schedule. We recently received a renewal of our multi-year
contract with Sikorsky, MY9, for the years 2018 to 2023. This contract is for $47 million worth of product during this period.
This is the third multi-year contract award we have received from Sikorsky.



Our “firm backlog”
includes only fully authorized orders received for products to be delivered within the forward 18-month period. As of February
28, 2018, our 18-month “firm funded backlog” was approximately $106 million.



Competition



Winning a new
contract is highly competitive. For the most part we manufacture to customer design specifications, and we compete
against companies that have similar manufacturing capabilities in a global marketplace. Consequently, the ability to obtain
contracts requires providing quality products at competitive prices. To accomplish this requires that we strive for
continuous improvement in our capabilities to assure our competitiveness and provide value to our customers. Our marketing
strategy involves developing long-term ongoing working relationships with customers. These relationships enable us to develop
entry barriers to would-be competitors by establishing and maintaining advanced quality approvals, certifications and tooling
investments that are difficult and expensive to duplicate. Many of our competitors are
well-established subcontractors engaged in the supply of aircraft parts and components to prime military contractors and
commercial aviation manufacturers. Among our competitors are: Monitor Aerospace, a division of Stellex Aerospace; Hydromil, a
division of Triumph Aerospace Group; Heroux Aerospace and Ellanef Manufacturing, a division of Magellan Corporation.



Many of our competitors
are larger enterprises or divisions of significantly larger companies having greater financial, physical and technical resources,
and the capabilities to timelier respond under much larger contracts.



Raw Materials and Replacement Parts



The manufacturing
process for certain products, particularly those for which we serve as product integrator, requires significant purchases of
raw materials, hardware and subcontracted details. As a result, much of our success in profitably meeting customer demand for
these products requires efficient and effective subcontract management. Price and availability of many raw materials utilized
in the aerospace industry are subject to volatile global markets and political conditions. Most suppliers of raw materials are unwilling
to commit to long-term contracts at fixed prices. This is a substantial risk as our strategy often involves long term fixed
price commitments to our customers. Recently, we have had difficulties in securing timely shipments of raw materials from
certain vendors due to our liquidity problems. Once the sale of WMI is closed, we are optimistic that our supply chain
difficulties will alleviate.



Employees



As of March 31, 2018 we employed approximately 275 people.
Of these, approximately 45 were in administration, 20 were in sales and procurement, and 211 were in manufacturing. We estimate
that if the sale of WMI is completed, we will employ approximately 208 people, 25 in administration, 18 in sales and procurement
and 165 in manufacturing.



Air Industries Machining,
one of the components of our Complex Machining segment, 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, dated January 1, 2016, expires December 31, 2018 and covers all of AIM’s production personnel, of which there
are approximately 104 people. 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.





3


Table of Contents




All of our employees are covered under a
co-employment agreement with Extensis, Inc., a professional employer organization that provides out-sourced human resource services.



Regulations



Environmental Regulation; 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 extensive 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 liability 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 all of 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 Administration



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 Compliance



Our 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. Many of the contract terms are dictated by 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.



ITEM 1A.  RISK FACTORS



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



In evaluating us 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.





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The risks below can be characterized into three groups:



| | 1) | Risks related to our business, including risks specific to the defense and aerospace industry:
| | -- | ----------------------------------------------------------------------------------------------

| | 2) | Risks arising from our indebtedness; and
| | -- | ----------------------------------------

| | 3) | Risks related to our common stock.
| | -- | ----------------------------------



Risks Related to Our Business



We incurred substantial net losses in 2017 and 2016 and
may not be able to continue to operate as a going concern.



We suffered net
losses from operations of $12,758,000 and $10,135,000 and net losses of $ 22,551,000 and
$15,623,000 for the years ended December 31, 2017 and 2016, respectively. We also had negative cash flows from
operations for the years ended December 31, 2017 and 2016. In 2015 we ceased paying dividends on our common stock and in 2016
we disposed of the real estate on which one of our operating subsidiaries is located through a sale leaseback transaction.
In January 2017, we sold one of our operating subsidiaries. Recently we have entered in a Stock Purchase Agreement to sell
our operating subsidiaries constituting our Aerostructures & Electronics segment. During the year ended December 31, 2016
and subsequent thereto, we sold in excess of $ 29,856,000 in debt and equity securities to secure funds to operate our
business. Since February 2017 we have issued additional convertible notes in lieu of cash payment of accrued interest on
our outstanding convertible notes. Furthermore, as of December 31, 2017, we were not in compliance with financial covenants
under our Amended and Restated Revolving Credit, Term Loan and Security Agreement with PNC Bank (the “Loan
Facility”). The report of our independent registered public accountants on our financial statements for the year ended
December 31, 2017 states that these factors raise uncertainty about our ability to continue as a going concern.



Unless we are able to
generate positive cash flows from operations, we will continue to depend upon further issuances of debt, equity or other financings
to fund ongoing operations. In November 2017 through January 2018, we issued 1,577,390 shares of common stock and warrants to purchase
an additional 480,000 shares of common stock in a private placement for gross proceeds of $2,000,000. We may continue to incur
additional operating losses and we cannot assure you that we will continue as a going concern.



In late fiscal
2017, we initiated a repositioning of our business to obtain profitability and improve our liquidity. We named a new CEO and
on March 21, 2018, we entered into an SPA for the sale of WMI and related operations for a purchase price of $9,000,000,
subject to a working capital adjustment. Although we believe the proceeds of this disposition will improve our liquidity, we
still may need to depend on further issuances of debt or equity to fund ongoing operations until we achieve sustainable
profitability and positive cash flow.



Risk that sale of WMI may not close.



We are depending upon
the sale of WMI to improve our cash position. The sale is anticipated to close in May or June 2018, although it is possible the
disposition may be delayed. The sale is subject to certain conditions and both parties have limited termination provisions. Nevertheless
management expects that the sale will be consummated, though there is no guarantee it will occur.



We may need additional financing.



In the past, we have
funded a portion of our operating losses through borrowings from two of our principal shareholders who are also directors. As
of December 31, 2017, related party notes payable to Michael and Robert Taglich (and their affiliated entities), totaled $2,388,000.
In the future, we may need additional cash to fund operational losses and bridge financing until the sale of WMI closes. Additional
funding may not be available to us on reasonable terms, if at all, from third parties or our two principal shareholders. If we
are unable to fund such losses from third parties or our principal shareholders, we may become insolvent.



We may need to raise additional
capital in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable
or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as
we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected
and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to 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.



We have identified deficiencies and material weaknesses
in our internal controls and we may not be successful in remediating these deficiencies and weakness in the near future.



In connection with our
review of our disclosure controls and internal controls over financial reporting for the fiscal year ended December 31, 2017, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and internal controls over financial
reporting were not effective as of such dates. In particular, certain portions of our inventory control system have not been integrated
into the system used by the balance of our company which could result in a failure to properly account for the costs associated
with work in process, slow moving inventory and the value of inventory on hand, and the enterprise reporting system used to track
employee hours. Accordingly, costs to be included in work in process, may not be sufficiently automated to ensure compliance at
all times. In addition, our Chief Executive Officer and Chief Financial Officer concluded that our quarterly closing process was
deficient at our subsidiaries and that our consolidating process and period end reporting and disclosure procedures were materially
weak. They also concluded that our system for administering and disclosing stock compensation was deficient and that we lacked
the accounting personnel necessary to account for complex accounting matters and unusual and nonstandard transactions. We intend
to remediate these conditions. In the event we do not remediate these deficiencies and material weaknesses in our internal controls,
our operations may be adversely affected and the market price of our common stock could decline. In addition, if we are unable
to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to maintain our listing on the NYSE American.



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.





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We depend on revenues from a few significant relationships.
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. Three customers represented approximately 62% and 52.3% of total sales for
the years ended December 31, 2017 and 2016, respectively. The markets in which we sell our products are dominated by a relatively small
number of customers which have contracts with United States governmental agencies, thereby limiting the number of potential
customers. Our success depends on our ability to develop and manage relationships with significant customers. We cannot be
sure that we will be able to retain our largest customers or that we will be able to attract additional customers, or that
our customers will continue to buy our products in the same amounts as in prior years. The loss of one or more of our
largest customers, any reduction or interruption in sales to these customers, our inability to successfully develop
relationships with additional customers or future price concessions that we may have to make, could significantly harm our
business.



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



Our Complex Machining
segment derives most of its revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter,
the Northrop Grumman E-2 Hawkeye naval aircraft, the McDonnell Douglas (Boeing) C-17 Globemaster, the F-16 Falcon and the F-18
Hornet. Boeing closed its C-17 production line in 2015. A reduction in demand for our products as a result of either a reduction
in the production of new aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market demand) would
have a material adverse effect on our operating results and financial condition.



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 competitive and we expect that competition will increase and perhaps intensify. Many
competitors have significantly greater technical, manufacturing, financial and marketing resources than we do. We may not be able
to compete successfully against either current or future competitors. 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 our suppliers fail to meet our needs
or shipments of raw materials are not timely made.



Although we procure
most of our parts and components from multiple sources or believe that these components are readily available from numerous sources,
certain components are available only from a sole or limited number or sources. While we believe that substitute components or
assemblies could be obtained, use of substitutes would require development of new suppliers or would require us to re-engineer
our products, or both, which could delay shipment of our products and could have a materially adverse effect on our operating results
and financial condition. Recently, we have had difficulties in securing timely shipments of raw materials from certain vendors
due to our liquidity problems. Our results of operations for the past few years have been negatively impacted by disruptions in
receipt of materials and such disruptions may continue. Any delays in the shipment of raw materials could significantly harm our
business, our operating results and our financial condition.



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



We obtain many 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.





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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, and the inability to recover
any claims included in the estimates to complete. A significant change in cost 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. If the prices of raw materials rise we may not be able to pass along 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, particularly those of our Complex Machining segment, 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 51% of our assets as of December 31, 2017. Any requirement
to write down the value of our inventory due to obsolescence or a drop in the price of materials could have a material adverse
effect on our consolidated financial position, results of operations and could result in a breach of the financial covenants in
our Loan Facility.



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



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.





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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. 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 officers and key personnel, 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 are 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 Federal Aviation Administration 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.



Terrorist acts and acts of war may seriously harm our
business, results of operations and financial condition.



United States and global
responses to actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats and other global
political crises increase uncertainties with respect to U.S. and other business and financial markets. Several factors associated,
directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical 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. As of December 31, 2017, we had approximately $19,926,000 of indebtedness outstanding under
the Loan Facility. All of our indebtedness under the Loan Facility is secured by substantially all of our assets.



We also
have outstanding a significant amount of indebtedness in the form of 8% Notes. To the extent we are not able to pay
accrued interest on the 8% Notes in cash due to restrictions set forth in the Loan Facility or otherwise, we may issue
additional 8% Notes in payment of such accrued interest in lieu of cash (“PIK Notes”). If we are unable to pay
the outstanding principal and accrued interest on the 8% Notes when due, our operations may be materially and
adversely affected.





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Our 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.



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



We currently do not
pay dividends and the terms of our Loan Facility require that we maintain certain financial covenants. Unless we are in compliance
with our Loan Facility in the future, we would need to seek covenant changes under our Loan Facility to pay dividends in the future.
There can be no assurance our lenders would agree to covenant changes acceptable to us or at all. In addition, we may in the future
incur indebtedness or otherwise become subject to agreements whose terms restrict our ability to pay dividends in the future.



Risks Related to our common stock



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 beneficially own approximately 24.70% of our outstanding common
stock. Accordingly, these directors have significant influence over the outcome of corporate actions requiring stockholder approval.
Accordingly, these directors have significant influence over the outcome of corporate actions requiring stockholder approval. The
interests of these directors may be different from the interests of other stockholders on these 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.



A large number of shares may be sold in the market as
a result of the Public Offering and the resale of the Shares offered in our public offering and resale Prospectus of July and August
2017, respectively. This may depress the market price of our common stock.



A substantial number
of our shares of common stock, including 5,175,000 shares sold in a public offering in July 2017 and 1,293,938 shares issued upon
conversion of our bridge notes issued in May 2018, are freely tradable without restriction or further registration under the Securities
Act. In addition, 8,629,606 shares issued in October 2017 upon the automatic conversion of our Series A Preferred Stock held by
non-affiliates, are eligible for sale in accordance with Rule 144, without restriction. As a result, a substantial number of shares
of our common stock may be sold in the public market, which may cause the market price of our common stock to decline.



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.



However, we may fail
to timely file a periodic report or other required SEC filing in the future and as a result may fail to be in compliance in the
future. 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.



Our common stock is
listed on the NYSE American. However, trading volume 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 a substantial number of our shares could result
in a decrease in the price of our stock. Specifically, you may not be able to resell your shares of common stock at or above the
price you paid for such shares or at all.





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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, you 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.



Our future revenues are inherently unpredictable; our
operating results are likely to fluctuate from period to period and if we fail to meet the expectations of securities analysts
or investors, our stock price could decline significantly.



Our quarterly and annual
operating results are likely to fluctuate significantly due to a variety of factors, some of which are outside our control. Accordingly,
we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications
of 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 States
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. 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, competition or announcements of extraordinary events such as 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.



We are currently unable to pay cash dividends on our common
stock and are not likely to do so for the foreseeable future



Our ability to pay
cash dividends on our common stock is limited by the terms of our Loan Facility (and the terms of any future indebtedness or other
agreements), under applicable law, and our status as a holding company. Given our current cash needs, it is not likely we will
pay cash dividends in the foreseeable future.



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 the 8% Notes, upon exercise of our outstanding warrants 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.



Future issuances of additional 8% Notes in lieu of cash
interest payments on our 8% Notes will dilute existing holders of our common stock and may adversely affect the market price of
our common stock.



We are obligated to
pay accrued interest quarterly to holders of our 8% Notes. To date, we have issued additional 8% Notes in lieu of cash payments
of accrued interest (“PIK Notes”). If for any future interest periods we are unable to pay accrued interest on the
8% Notes in cash due to restrictions in our Loan Facility or liquidity constraints, we may issue additional PIK Notes to holders
of our 8% Notes. The conversion of PIK Notes into common stock will dilute the interests of our common stockholders and may adversely
affect the market price of our common stock.





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We are an “emerging growth company” and we
cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less
attractive to investors.



The JOBS Act permits
“emerging growth companies” like us to rely on some of the reduced disclosure requirements that are already available
to companies having a public float of less than $75 million, for as long as we qualify as an emerging growth company. During that
period, we are permitted to omit the auditor’s attestation on internal control over financial reporting that would otherwise
be required by the Sarbanes-Oxley Act. Companies with a public float of $75 million or more must otherwise procure such an attestation
beginning with their second annual report after their initial public offering. For as long as we qualify as an emerging growth
company, we also are excluded from the requirement to submit “say-on-pay”, “say-on-pay frequency” and “say-on-parachute”
votes to our stockholders and may avail ourselves of reduced executive compensation disclosure compared to larger companies. In
addition, as described in the following risk factor, as an emerging growth company we can take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public companies.



Until such time as we
cease to qualify as an emerging growth company, investors may find our common stock less attractive because we may rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and our stock price may be more volatile.



As an “emerging growth company” we may take
advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.



Section 107 of the JOBS
Act also provides that, as an emerging growth company, we can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We can therefore delay the adoption of
certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage
of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards. Please refer to “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” for further discussion
of the extended transition period for complying with new or revised accounting standards.



At such time as we cease to qualify as an “emerging
growth company” under the JOBS Act, the costs and demands placed upon management will increase.



We will continue to
be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual
gross revenues of $1,000,000,000 (as indexed for inflation), (ii) December 31, 2018 (the last day of the fiscal year following
the fifth anniversary of the date of the first sale of common stock under a registration statement under the Securities Act,) (iii)
the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv)
the date on which we are deemed to be a ‘large accelerated filer’ as defined by the SEC, which would generally occur
upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and
demands placed upon management to increase, as we would have to comply with additional disclosure and accounting requirements,
particularly if our public float should exceed $75 million.



We incur significant costs as a result of
operating as a public company, and our management is required to devote substantial time 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.



As a public company,
we will 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, these rules and regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly.





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The Sarbanes-Oxley Act
requires, among other things, 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.



ITEM 2.  PROPERTIES



Our executive offices
are located at 360 Motor Parkway, Suite 100, Hauppauge, New York 11788. We occupy our executive offices under a lease with  term which ends January 2022. The annual rent was $103,000 for the lease year which began in January
2016, and increases by approximately 3% per annum each year thereafter until the seventh year of the lease.



The operations of a
portion of our Complex Machining segment are conducted on a 5.4-acre corporate campus in Bay Shore, New York. We occupy three buildings
on the campus, consisting of 76,000 square feet. On October 24, 2006, we entered into a “sale/leaseback” transaction
whereby we sold the buildings and real property located at the corporate campus and entered into a 20-year triple-net lease for
the property. Base annual rent for 2017 was approximately $305,111 and increases by 3% each subsequent year. The lease grants us
an option to renew the lease for an additional five years. Under the terms of the lease, we are required to pay all of the costs
associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance.



The remaining portion
of the operations of our Complex Machining segment are conducted in a 60,000 square foot facility in West Babylon, New York. The
space is occupied under a lease which provides for an annual base rent of approximately $360,000 through October 30, 2018. We are
in the process of relocating the operations of NTW conducted at this location to AIM’s facilities in Bay Shore, New York.



The operations WMI,
a component of our Aerostructures & Electronics segment are principally conducted in an 81,035 square foot facility located
in Hauppauge, New York. This space is occupied under a lease which provides for an annual base rent of approximately $ 650,000
per year through December 31, 2025. The operations at this location are under contract to be sold to CPI. As part of the sale,
CPI will sublet the space for three months, with up to three one-month extensions. We will remain obligated under this lease following
the closing of WMI, while we will be seeking a sub-tenant for the space, there can be no assurance that we will be successful.



The
balance of our Aerostructures & Electronics segment are located in a 16,000 square foot facility in Waterbury, Connecticut.
The space is occupied under a lease which has an annual base rent of approximately $115,000 and expires May 31, 2019.



The operations of our
Turbine Engine Components segment are conducted in a 74,923 square foot facility on a 24 acre parcel in Barkhamsted, Connecticut.



ITEM 3.  LEGAL PROCEEDINGS



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. We, however, have had claims brought against us by a
number of vendors due to our liquidity constraints.  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.





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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.” The prices set forth below reflect the quarterly high and
low  prices of a share of our common stock for the periods indicated as reported by Yahoo Finance.



|2016:                            |   |      |  |  |   |      | 
|-------------------------------- | - | ---- |  |  | - | ---- | 
|Quarter Ended March 31, 2016     | $ | 8.27 |  |  | $ | 5.90 | 
|Quarter Ended June 30, 2016      | $ | 6.18 |  |  | $ | 4.12 | 
|Quarter Ended September 30, 2016 | $ | 5.08 |  |  | $ | 3.85 | 
|Quarter Ended December 31, 2016  | $ | 4.49 |  |  | $ | 2.21 | 
|                                 |   |      |  |  |   |      | 
|2017:                            |   |      |  |  |   |      | 
|Quarter Ended March 31, 2017     | $ | 4.60 |  |  | $ | 2.75 | 
|Quarter Ended June 30, 2017      | $ | 3.60 |  |  | $ | 1.79 | 
|Quarter Ended September 30, 2017 | $ | 1.75 |  |  | $ | 1.20 | 
|Quarter Ended December 31, 2017  | $ | 1.69 |  |  | $ | 1.30 | 



Dividend Policy



The declaration and
payment of dividends on our common stock is subject to the discretion of our Board of Directors and depends on a number of factors,
including future earnings, capital requirements, restrictions under our Loan Facility, financial conditions and future prospects
and other factors the Board of Directors may deem relevant.



Holders



On March 28, 2018 there
were 279 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, 2017:





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|Plan Category                                               |  | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights |  | Weighted Average Exercise Price Of Outstanding Options, Warrants and Rights |  | Number of Remaining Shares Available for Future Securities Issuance Under Equity Compensation Plans
|----------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security  holders     |  | 1,048,627                                                                                   |  | 3.20                                                                        |  | 818,658                                                                                            
|Equity compensation plans not approved by security  holders |  | 1,704,102                                                                                   |  | 3.62                                                                        |  | None                                                                                               
|                                                            |  |                                                                                             |  |                                                                             |  |                                                                                                    
|Total                                                       |  | 2,752,730                                                                                   |  |                                                                             |  | 818,658                                                                                            









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, 2017.



Purchases of Our Equity Securities



No repurchases of our common stock were
made during the fiscal year ended December 31, 2017.



ITEM 6.  SELECTED FINANCIAL DATA



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, 2017 and 2016 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



We are an
aerospace company operating primarily in the defense industry, though the proportion of our business represented by the commercial
and industrial sector is increasing. We manufacture and design structural parts and assemblies that focus on flight safety, including
landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. Our Turbine Engine Components
segment makes components and provides services for jet engines and ground-power turbines. Our products are currently deployed on
a wide range of high profile military and commercial aircraft including Sikorsky's UH-60 Blackhawk and CH-47 Chinook helicopters,
Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter aircraft, Boeing’s
777 and Airbus' 380 commercial airliners. Our Turbine Engine segment makes components for jet engines that are used on the USAF
F-15 and F-16, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground-power turbine applications.



Air Industries
Machining, Corp. (“AIM”) became a public company in 2005 when its net sales were approximately $30 million. AIM has
manufactured components and subassemblies for the defense and commercial aerospace industry for over 45 years and has established
long-term relationships with leading defense and aerospace manufacturers. Since becoming public, we have completed a series of
acquisitions of defense aerospace and commercial aerospace businesses which have enabled us to broaden the range of products and
services beyond those which were provided by AIM.





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In response to recent operating losses and
lack of adequate working capital, we have and continue to reposition our business including:





| | 1) | In January 2017 we sold AMK Welding, Inc., for $4.5 million, net of a working capital adjustment of ($163,000) plus additional
payments based on net revenue not to exceed $1.5 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | In November 2017 we hired a new CEO, Lou Melluzzo, and increased our focus on reducing costs and achieving profitability.
| | -- | -------------------------------------------------------------------------------------------------------------------------



| | 3) | On March 21, 2018, we entered into an SPA for the sale of WMI and related operations for a
                                                                              purchase                                                                               price of
                                                                              $9,000,000, subject to a working                                                                               capital
                                                                              adjustment. The SPA also provides for contingent payments of up to an aggregate of
                                                                              $1,000,000 if WMI enters into specified agreements by May 31, 2018 and July 31, 2018, respectively (the “Specified
                                                                              Dates”), which contingent payments are subject to reduction by $100,000 for each calendar month after the Specified
                                                                              Dates which passes before WMI enters into the specified agreements. It is anticipated that the sale will occur in May or June
                                                                              of 2018.                                                                               Once
                                                                              the                                                                                                                  sale of
                                                                              WMI is complete, we will be more
                                                                              focused on the production of complex, machined products for aircraft landing gear and
                                                                              jet                                                                               engines.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





In addition to repositioning
our business to obtain profitability and positive cash flow, we remain resolute on meeting customers’ needs and have and
continue to align production schedules to meet the needs of customers. We believe that an unyielding focus on our customers will
allow us to execute on our existing backlog in a timely fashion and take on additional commitments. We are pleased with our progress
and the positive responses received from our customers.



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 major 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 service but also by increasing our ability to produce more complex and complete
assemblies for our customers.



Our ability
to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these
contracts on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract
generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed
upon period of time. 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.



While our
revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product
under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of
materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in
the aerospace industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly
competitive. The profit margin of the various products we sell varies based upon a number of factors, including the complexity
of the product, the intensity of the competition for such product and, in some cases, the 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. Many of 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-absorption of factory overhead can
decrease profits.



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 have reduced the demand for both new production and replacement spares. This has reduced
our sales, particularly in our complex machining segment. In response to the reduction in military sales, we are focusing greater
efforts on the civilian aircraft market though we still remain dependent upon the military for an overwhelming portion of our revenues.





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Public Offering



On July 12, 2017,
we sold 5,175,000 shares of common stock at a price of $1.50 per for gross proceeds of $7,762,500 in a firm commitment underwritten
public offering (the “Public Offering”). We received net proceeds of approximately $6,819,125 from the sale of
our shares in the Public Offering. For additional information concerning the Public Offering and the related restructuring transactions
(the “Restructuring Transactions”), see the discussion under the caption “Liquidity,” below.



Segment Data



We
follow Financial Accounting Standards Board ("FASB”) ASC 280, “Segment Reporting”
(“ASC 280”), which establishes standards for reporting information about operating segments in annual and interim
financial statements, ASC 280 requires that companies report financial and descriptive information about their reportable
segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and
services, geographic areas and major customers.



We currently
divide our operations into three operating segments: Complex Machining; Aerostructures and Electronics; and Turbine Engine Components.
We separately report our corporate overhead (which was comprised of certain operating costs that were not directly attributable
to a particular segment). Effective January 1, 2015, all operating costs are allocated to the Company’s three operating
segments. In light of the pending sale of WMI and our focus on complex, machined parts to achieve profitability and growth, in
the future we may change our reportable operating segments.



The accounting
policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate
performance based on revenue, gross profit contribution and assets employed.



RESULTS OF OPERATIONS-CONTINUING OPERATIONS



Years ended December 31, 2017 and 2016:



In March 2018,
we announced our intention to divest WMI and related operations. These operations are part of our Aerostructures
& Electronics operating segment.Once the sale is completed, our Company will be more focused on complex,
machined products for aircraft landing gear and jet turbine applications. Although WMI and the related operations have been
classified as a discontinued operation, we will continue to operate these businesses until the sale is closed which is
anticipated to occur in May or June 2018. We anticipate that from January 2018 through the closing date, these operations
will generate a net loss. For purposes of the following discussion of our selected financial information and operating
results, we have presented our financial information based on our continuing operations unless otherwise noted.



Selected Financial Information:



|                                                    |  | 2017 |             | 2016
|--------------------------------------------------- |  | ---- | ----------- | ----
|Net sales                                           |  | $    | 49,869,000  |     
|Cost of sales                                       |  |      | 45,002,000  |     
|Gross profit                                        |  |      | 4,867,000   |     
|Operating expenses and interest and financing costs |  |      | 14,808,000  |     
|Other income (expense) net                          |  |      | (22,000     | )   
|(Benefit from) provision for income taxes           |  |      | (197,000    | )   
|Net loss from continuing operations                 |  | $    | (15,873,000 | )   

Balance Sheet Data:



|                           |  | December 31, 2017 |            | December 31, 2016
|-------------------------- |  | ----------------- | ---------- | -----------------
|Cash and cash equivalents  |  | $                 | 630,000    |                  
|Working capital            |  |                   | 9,531,000  |                  
|Total assets               |  |                   | 60,755,000 |                  
|Total stockholders’ equity |  | $                 | 17,766,000 |                  





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The following
sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:



|                                          |  | Year Ended December 31,
|----------------------------------------- |  | -----------------------
|                                          |  | 2017                   
|COMPLEX MACHINING                         |  |                        
|Net Sales                                 |  | $                      
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|AEROSTRUCTURES & ELECTRONICS              |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|TURBINE ENGINE COMPONENTS                 |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|CORPORATE                                 |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|CONSOLIDATED                              |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|(Benefit from) provision for Income Taxes |  |                        
|Loss from Discontinued Operations         |  |                        
|Assets Held for Sale                      |  |                        
|Net Loss                                  |  |                        
|Assets                                    |  | $                      



Net Sales:



Consolidated net sales
for the year ended December 31, 2017 were $49,869,000, a decrease of $1,452,000, or 2.8%, compared with $51,321,000 for the year
ended December 31, 2016. Net sales of our Complex Machining segment were $38,489,000, an increase of $1,365,000, or 3.7%,
from $37,124,000 in the prior year. Net sales of our Aerostructures & Electronics segment, after elimination of discontinued
operations, were $4,574,000, an increase of $1,350,000, or 41.9%, from $3,224,000 in the prior year. This increase can be attributed
to increased volume at EUR-PAC. Net sales in our Turbine Engine Components segment were $6,806,000, a decrease of $4,167,000,
compared with $10,973,000 for the year ended December 31, 2016. This decrease was due almost entirely to the sale of AMK in January
2017 which had sales of $4,511,000 in 2016 and $417,000 in 2017. Excluding the results of AMK in both annual periods, consolidated
net sales would have been $49,452,000 in 2017 or an increase of 5.6% as compared to $46,810,000 in 2016.



As indicated in the
table below, three customers represented 62.0% and three customers represented 52.3% of total sales for the years ended December
31, 2017 and 2016, respectively.



|Customer                            |  | Percentage of Sales
|----------------------------------- |  | -------------------
|                                    |  | 2017               
|Sikorsky Aircraft                   |  |                    
|Goodrich Landing Gear Systems       |  |                    
|United States Department of Defense |  |                    





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As indicated in
the table below, three customers represented 68.7% and two customers represented 35.3% of gross accounts receivable at December
31, 2017 and 2016, respectively.



|Customer                      |  | Percentage of Receivables
|----------------------------- |  | -------------------------
|                              |  | 2017                     
|Goodrich Landing Gear Systems |  |                          
|Rohr                          |  |                          
|Sikorsky Aircraft             |  |                          



|* | Customer was less than 10% of Gross Accounts Receivable at December 31, 2016.
|- | -----------------------------------------------------------------------------



Gross Profit:



Consolidated gross
profit from operations for the year ended December 31, 2017 was $4,867,000, an increase of $598,000, or 14.0%, as compared to
gross profit of $4,269,000 for the year ended December 31, 2016. Consolidated gross profit as a percentage of sales was 9.8% and
8.3% for the years ended December 31, 2017 and 2016, respectively. Gross profit from operations for AMK, which was sold in January
2017, for the year ended December 31, 2016 was approximately $169,000. Excluding AMK from the Company’s 2016 results would
result in gross profit of $4,100,000 or 8.8% of sales of $46,810,000. The increase in gross profit from 8.8% to 9.8% after removing
results of AMK was due to the implementation of cost reduction and productivity improvement initiatives.



Interest and Financing Costs



Our interest and financing costs increased from $2,500,000 in 2016 to $3,378,000 in 2017.



Impairment Charges



In fiscal
2017, we recorded a goodwill  impairment charge of $6,195,000 and a loss on assets held for sale of $1,563,000, each of which
amounts are included in the loss from continuing operations. In addition, in connection with
the sale of WMI, we recorded a goodwill impairment charge of $3,417,000 and an impairment of intangible asset write-down
of $1,085,000, both of these amounts are included in the loss from discontinued operations.



Operating Expense



Consolidated operating expenses for
the year ended December 31, 2017 totaled $11,430,000 and decreased by $2,974,000 or 20.6% compared to $14,404,000 for the year
ended December 31, 2016. The decrease in operating expenses is primarily due to staff reduction measures and cost reduction initiatives.



Net Loss



Net loss for
the year ended December 31, 2017 was $22,551,000, an increase of $6,928,000, compared to a net loss $15,623,000 for the
year ended December 31, 2016, for the reasons discussed above. Our net loss in 2017 and 2016 includes a net loss from
the discontinued operations of WMI and related operations of $6,678,000 and $756,000, respectively. In addition, our net
loss for 2017 includes an impairment charge related to ongoing operations of approximately $6,195,000. Excluding such
amounts, our net loss in 2017 would have been $9,678,000 and in 2016 would have been $14,867,000.



Impact of Inflation



Inflation has not had a material effect
on our results of operations.



LIQUIDITY
AND CAPITAL RESOURCES



We are highly leveraged
and rely upon our ability to continue to borrow under our Loan Facility with PNC or to raise debt and equity from our principal
stockholders and third parties to support operations and acquisitions. Substantially all of our assets are pledged as collateral
under our Loan Facility. We are required to maintain a lockbox account with PNC, into which substantially all of our cash receipts
are paid. If PNC were to cease providing revolving loans to us under the Loan Facility, we would lack funds to continue our operations.
Over the past eighteen months we have also relied upon our ability to borrow money from certain stockholders and raise debt and
equity capital to support our operations. Should we continue to need to borrow funds from our principal stockholders or raise
debt or equity, there is no assurance that we will be able to do so or that the terms on which we borrow funds or raise equity
will be favorable to us or our existing shareholders.



The Loan Facility has
been amended many times during its term, most recently in January 2017 (the “Fourteenth Amendment”) and June 2017 (the
“Fifteenth Amendment”).



The Loan Facility provides
for a $33,000,000 revolving loan and a term loan with the initial principal amount of $7,387,854.





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Under the terms of
the Loan Facility, as amended, the revolving loan bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters
of one percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent
(4.50%) with respect to LIBOR Rate Loans. The advance rate with respect to our inventory is an amount equal to the lesser of (i)
75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, subject to
the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper.



The amount outstanding
under the revolving loan was $16,455,000 and $24,393,000, as of December 31, 2017 and 2016 (including excess advances at December
31, 2016), respectively.



The repayment terms of the Term Loan provide
for monthly principal installments in the amount of $123,133 payable on the first business day of each month, with a final payment
of any unpaid balance of principal and interest payable on the last business day of June, 2021.



The terms of the Loan
Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA (as
defined in the Loan Facility) for specified periods. In addition, we are limited in the amount of Capital Expenditures we can
make. We are also limited to the amount of dividends we can pay our shareholders as defined in the Loan Facility.



In connection with
the sale of AMK to Meyer Tool, Inc., on January 27, 2017 we, together with our wholly-owned subsidiaries, entered into the Fourteenth
Amendment to the Loan Facility which amended certain terms and conditions of the Loan Facility and released AMK from its obligations
under the Loan Facility.



The proceeds of the
sale of AMK, net of a working adjustment in the amount of ($163,000), were applied as follows: $1,700,000 to the payment of the
Term Loan, $1,800,000 to the payment of outstanding revolving loans, and $500,000 to the payment of existing accounts payable.
The remaining $500,000 will be applied to outstanding accounts payable on a future date to be determined by PNC or used to reduce
the revolving loans. The Fourteenth Amendment to the Loan Facility required that we maintain a Fixed Charge Coverage Ratio of not
less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis; however, for the quarter ending
June 30, 2017, which was to be tested based upon the prior six (6) months, we were required to maintain a Fixed Charge Coverage
Ratio of not less than 1.00 to 1.00 and for the quarter ending September 30, 2017, which was to be tested based upon the prior
nine (9) months, we were required to maintain a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00. The amendment also reduced
the amount to be paid weekly in repayment of excess advances under the revolving credit facility from $100,000 to $50,000 for each
Monday during the months of January, February and March of 2017. Thereafter, the weekly payments were to return to $100,000 until
such excess advances were repaid in full.



On June 19, 2017, we
entered into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant
for the periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December
31, 2016. The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated
basis beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the
prior three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months
and (iii) 1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine (9) months and that we maintain
EBITDA of not less than $345,000 for the period ending June 30, 2017. The amendment also provided that we were not required to
maintain a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending
December 31, 2016 and March 31, 2017 and that we were not required to maintain a Fixed Charge Coverage Ratio and no testing was
required of the Fixed Charge Coverage Ratio for the period ending June 30, 2017. In addition, the amendment reduces the weekly
payments we are required to make to reduce our $2,244,071 over-advance under the revolving credit facility as of June 19, 2017
from $100,000 to $25,000 per week during the period commencing May 22, 2017 through and including July 10, 2017. We paid $50,000
to PNC in connection with the amendment and reimbursed PNC’s counsel fees.



As
of December 31, 2017, we were not in compliance with our Fixed Charge Coverage Ratio  covenant.



As of December 31,
2017, our outstanding indebtedness to PNC was $19,926,000 and consisted of revolving loans in the amount of $16,455,000 and the
term loan of $3,471,000, as compared to December 31, 2016, when our debt to PNC was $31,042,000 and consisted of revolving loans
of $24,393,000 and the term loan of $6,649,000. In addition, as of December 31, 2017 we had capitalized lease obligations to third
parties of $3,073,000, as compared to capitalized lease obligations of $4,215,000 as of December 31, 2016.





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Table of Contents




Significant Transactions Since January 1, 2017 Which Have
Impacted Our Liquidity



Dispositions



On January 27,
2017, we sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January
27, 2017, for a purchase price of $4,500,000, net of a working capital adjustment of $(163,000), plus additional quarterly
payments, not to exceed $1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. In June 2017,
we agreed to a final working capital adjustment with the buyer reducing the gain on sale from $451,000 to $200,000. The gain
on sale was the difference between the non-contingent payments and the carrying value of the disposed business. The Company
has made an accounting policy decision to record the contingent consideration as it is determined to be realizable. The
proceeds of the sale were applied in accordance with the terms of the Fourteenth Amendment to the Loan Facility, as discussed
above.



On March
21, 2018, we entered into a Stock Purchase Agreement (“SPA”) for the sale of WMI and related operations, for
a purchase price of $9,000,000, subject to a working capital adjustment. The SPA also provides for contingent payments of up
to an aggregate of $1,000,000 if WMI enters into specified agreements by May 31, 2018 and July 31, 2018, respectively (the
“Specified Dates”), which contingent payments are subject to reduction by $100,000 for each calendar month after
the Specified Dates which passes before WMI  enters into the specified agreements. The sale is subject to certain conditions,
including the buyer obtaining financing for the amount of the purchase price, and requires an escrow deposit of $2,000,000
to cover the working capital adjustment and our obligation to indemnify the buyer against damages arising out of the breach
of our representations and warranties and obligations under the SPA. It is anticipated that the sale will occur in May or
June of 2018.



Series A Preferred Stock



Pursuant to the restructuring
completed in connection with our July 2017 public offering, all outstanding shares of Series A Preferred Stock were converted into
8,629,606 shares of our common stock.



Private Placements of 8% Subordinated Convertible Notes



From November 23,
2016 through March 21, 2017, we received gross proceeds of $4,775,000 from the sale of our 8% Notes, together with warrants
to purchase a total of 383,080 shares of our common stock, in private placement transactions with accredited investors (the
“8% Note Offerings”). In connection with the 8% Notes offerings, we issued 8% Notes in the aggregate principal
amount of $382,000 to Taglich Brothers, placement agent for the 8% Note Offerings, in lieu of payment of cash compensation
for sales commissions, together with warrants to purchase a total of 180,977 shares of our common stock. Payment of the
principal and accrued interest on the 8% Notes are junior and subordinate in right of payment to our indebtedness under the
Loan Facility.



Interest on the outstanding
principal of the 8% Notes is payable quarterly at the annual rate of 8%, in cash, or if we are prohibited by applicable law or
PNC, our principal lender under our Loan Facility, from paying interest in cash, or we otherwise elect to do so, we may pay accrued
interest, in additional 8% Notes (“PIK Notes”), provided that if accrued interest with respect to the 8% Notes is paid
in additional 8% Notes, interest for that quarterly interest payment will be calculated at the rate of 12% per annum. Upon the
occurrence and continuation of an event of default, interest shall accrue at the rate of 12% per annum.





During the year ended December 31, 2017, we issued
$354,238 principal amount of 8% Notes in lieu of cash payment of accrued interest. As of December
31, 2017, we had outstanding $5,525,000 principal amount of 8% Notes, of which $3,003,000 principal amount is due on November
30, 2018 and $2,522,000 principal amount is due on February 28, 2019.





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Table of Contents




The outstanding principal
amount plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock at conversion
prices ranging from $2.25 to $4.00 per share, subject to certain anti-dilution and other adjustments, including stock splits, and
in the event of certain fundamental transactions such as mergers and other business combinations.



The exercise price of
the warrants issued in connection with the 8% Note Offerings ranges from $3.00 to $4.45 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the common stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November
30, 2021 and 246,182 warrants may be exercised until January 31, 2022.



Loans
from Principal Stockholders



Related party notes
payable to Michael and Robert Taglich, and their affiliated entities, totaled $2,126,000 and $1,086,000, as of December 31, 2017
and December 31, 2016, respectively.



On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael Taglich and Robert Taglich, respectively, and issued promissory notes in
the principal amounts of $200,000 and $300,000 to Michael Taglich and Robert Taglich, respectively (the “Taglich Notes”).
The Taglich Notes bore interest at the rate of 7% per annum. Pursuant to the restructuring completed in connection with out, July
2017 public offering, the Taglich Notes have been converted into 346,992 shares of common stock



On May 2, and May 10,
2017, we borrowed an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. This indebtedness, together with accrued
interest, were converted into May 2018 Notes on May 12, 2017.



In April 2018, Michael
and Robert Taglich advanced an aggregate of $1,150,000 which funds are to be applied to a private placement on terms yet to be
determined.



Taglich Brothers acted
as a placement agent in connection with the sale of the May 2018 Notes and warrants discussed below for which they are to be paid
commissions in the aggregate amount of $176,000.



As compensation
for its services as placement agent for the offering of the 12% Notes discussed below, we paid Taglich Brothers a fee of
$295,400 and issued to Taglich Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise
price of $6.15, subject to certain anti-dilution and other adjustments.



May Note Financing



On May 12 and May 19,
2017, we issued and sold to 17 accredited investors (including Michael N. Taglich and Robert F. Taglich individually and a partnership
of which they are partners), our “May 2018 Notes” in the aggregate principal amount of $4,158,624, together with warrants
to purchase an aggregate of 501,039 shares of common stock, for gross proceeds (net of the exchange of indebtedness totaling $1,503,288
due to Michael N. Taglich and Robert F. Taglich of $2,534,196, Roth Capital LLC and Taglich Brothers acted as placement agents
in connection with the sale of the May 2018 Notes and warrants for which they are to be paid commissions in the aggregate amount
of $191,155.



The May 2018 Notes
and warrants were issued for a purchase price equal to 97% of the principal amount of the May 2018 Notes purchased. In connection
with our July public offering, approximately $1,754,215 principal amount of the May 2018 Notes were converted into 1,240,605 shares
of common stock and $463,501 principal amount of May 2018 Notes were redeemed. The balance of the May 2018 Notes were converted
into 1,222,809 shares of common stock pursuant to the restructuring approved by our stockholders at our October 3rd Annual Meeting.
Consequently, no May 2018 Notes remain outstanding.



We issued warrants
to purchase 501,039 shares of common stock as part of the private placement of the May 2018 Notes. The warrants, when issued, were
exercisable at an initial exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a
lesser number of shares based upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations,
mergers and other business combination transactions. In accordance with the terms of the warrants, the exercise price was reduced
to $1.50 per share, the public offering price of the shares of common stock sold in the Public Offering.





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We early adopted the
provisions of ASU 2017-11 in recognizing the warrants. As a result, the exercise price reset provisions were excluded from the
assessment of whether the warrants are considered indexed to our own stock. The warrants otherwise meet the requirements for equity
classification, as such were initially classified in Stockholders’ Equity. We will recognize the value of the exercise price
reset provision if and when it becomes triggered, by recognizing the value of the effect of the exercise price reset as a deemed
dividend and a reduction of income available to common shareholders in computing basic earnings per share.



The proceeds
received upon issuing the May 2018 Notes and warrants was allocated to each instrument on a relative fair value basis. The allocation
resulted in an effective conversion price for the May 2018 Notes that was below the quoted market price of our common stock. As
such, we recognized a beneficial conversion feature equal to the intrinsic value of the conversion feature on each issuance date,
resulting in an additional discount to the initial carrying value of the May 2018 Notes with a corresponding credit to additional
paid-in capital.



We
recognized an aggregate debt discount on the May 2018 Notes of approximately $2.5 million, comprised of the allocation of
proceeds to the warrants and recognition of the beneficial conversion feature. The debt discount is presented net of the May
2018 Note balance in the Condensed Consolidated Balance Sheets and is amortized to interest expense over the term of the May
2018 Notes using the effective interest method. We amortized approximately $739,000 to interest expense in the year  ended December 31, 2017.



Public Offering and Restructuring



On July 12, 2017, we
sold 5,175,000 shares of common stock at a price of $1.50 per for gross proceeds of $7,762,500 in the Public Offering. We received
net proceeds of approximately $6,819,125 of which approximately $4,000,000 was used to pay outstanding trade payable, $463,501
was used to redeem an equal principal amount of May 2018 Notes at a redemption price of 100% of the principal amount thereof and
approximately $2,355,624 was added to our working capital.



In connection with
the Public Offering, approximately $1,860,908 aggregate principal amount of the May 2018 Notes were converted into an aggregate
of 1,240,605 shares of our common stock at a conversion price of $1.50 per share, the public offering price of the shares sold
in the Public Offering.



In addition, we issued
shares of common stock in connection with the Restructuring Transactions, described below, contemplated by the Public Offering,
at a conversion price of $1.50 per share, upon obtaining stockholder approval at our Annual Meeting of Stockholders on October
3, 2017:



| | · | May 2018 Notes in the aggregate principal amount of $1,834,214 were converted into 1,222,809 shares.
| | - | ----------------------------------------------------------------------------------------------------



| | · | All of the outstanding 1,294,441 shares of Series A Preferred Stock were converted into 8,629,606 shares.
| | - | ---------------------------------------------------------------------------------------------------------



| | · | The Taglich Notes in the principal
amount of $500,000, together with accrued interest thereon, were converted into 346,992 shares.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Equity
Private Placement



On November 29, 2017,
December 5, 2017, December 29, 2017 and January 9, 2018, we issued and sold to 44 accredited investors, including Michael Taglich
and Robert Taglich, an aggregate of 1,577,390 shares of common stock and warrants to purchase an additional 480,000 shares of common
stock, for gross proceeds of $2,000,000, in a private placement exempt from the registration requirements of the Securities Act.
Michael Taglich and Robert Taglich purchased 144,927 shares and 72,463 shares, respectively, together with warrants to purchase
an additional 48,000 shares and 24,000 shares, respectively, of common stock, for a purchase price of $200,000 and $100,000, respectively.
The purchase price for the shares and warrants was $1.25 per share, except that the purchase price paid by Michael Taglich and
Robert Taglich was $1.38 per share, the closing price of a share of common stock immediately prior to the purchase. The warrants
have an exercise price of $1.50 per share, subject to certain anti-dilution and other adjustments, including stock splits, and
in the event of certain fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless
basis for a lesser number of shares depending upon prevailing market prices at the time of exercise. The warrants may be exercised
until November 30, 2022.



If prior to July 1,
2018, we complete a placement of shares of our common stock or securities convertible into or exercisable for shares of our common
stock at an effective price or conversion rate (the “Subsequent Price”) less than $1.25 per share of common stock,
we have agreed to issue to the purchasers of the shares and warrants (other than Michael Taglich and Robert Taglich), such additional
number of shares of common stock as would have been received had the purchase price been equal to the greater of the Subsequent
Price and $1.00 per share. If we complete more than one placement of shares of common stock or securities convertible into or exercisable
for shares of common stock prior to July 1, 2018, the Subsequent Price will be the lowest of the prices at which such offerings
are completed.





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Taglich Brothers, Inc., of which Michael
Taglich and Robert Taglich are principals, acted as placement agent for the sale of the shares and warrants received a placement
agent fee equal to $56,000 (8% of the amounts invested), payable at the Company’s option, in cash or additional shares
of common stock and warrants having the same terms and conditions as the shares and warrants issued in the offering.



After giving effect to the
foregoing transactions, we had outstanding approximately 25,034,084 shares of common stock and no shares of preferred stock.
In addition, other than the indebtedness under our Loan Facility and  the indebtedness represented by our 8% Notes,  our only
other indebtedness for money borrowed was the   $1,150,000 advanced by Michael and Robert Taglich on terms to
be determined.



Cash Flow



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



|                                                     |  | Year Ended December 31,
|---------------------------------------------------- |  | -----------------------
|                                                     |  | 2017                   
|Cash provided by (used in)                           |  |                        
|Operating activities                                 |  | $                      
|Investing activities                                 |  |                        
|Financing activities                                 |  |                        
|Net (decrease) increase in cash and cash equivalents |  | $                      



Cash Provided By (Used In) Operating Activities



Cash used in operating
activities primarily consists of our net loss adjusted for certain non-cash items and changes to working capital items.



For the year ended
December 31, 2017, net cash was impacted by a net loss of $22,551,000, offset by $19,172,000 of non-cash items consisting primarily
of goodwill impairment of $9,612,000, depreciation of property and equipment of $2,723,000, amortization of debt discount on convertible
notes payable of $2,301,000, amortization of capitalized engineering costs and intangibles of $1,096,000. Operating assets and
liabilities further used cash in the net amount of $607,000 consisting primarily of the net decrease of accounts payable and accrued
expenses in the amount $3,527,000 and a decrease in accounts receivable of $1,004,000, partially offset primarily by decreases
in inventory of $905,000 prepaid taxes of $360,000 and an increase in deferred revenue of $410,000.



For the year ended
December 31, 2016, our net cash used in operating activities of $692,000 was comprised of a net loss of $15,623,000 plus $6,712,000
of cash provided by changes in operating assets and liabilities plus adjustments for non-cash items of $8,219,000. Adjustments
for non-cash items consisted primarily of depreciation of property and equipment of $3,347,000, amortization of capitalized engineering
costs, intangibles and other items of $2,229,000, bad debt expense of $274,000, representing amounts reserved for as potentially
uncollectible, and non-cash compensation of $167,000, deferred income taxes of $2,063,000, loss on sale of fixed assets held for
sale of $5,000, loss on extinguishment of debt of $172,000, and prepaid taxes of $126,000. These non-cash items were offset by
$38,000 of deferred gain on the sale of real estate. The increase in operating assets and liabilities consisted of a net decrease
in Operating Assets of $2,045,000 and a net increase in Operating Liabilities of $4,667,000. The increase in Operating Assets was
comprised of an increase in inventory of $2,902,000, and a net decrease in prepaid expenses and other current assets, and deposits
and other assets of $394,000, partially offset by a decrease in accounts receivable of $4,616,000. The net increase in Operating
Liabilities was comprised of increases in accounts payable and accrued expenses of $4,495,000 due to the timing of the receipt
and payment of invoices, an increase in deferred rent of $82,000, and an increase in deferred revenue of $84,000, partially offset
by an increase in income taxes payable of $6,000.





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Cash Provided By (Used in) Investing Activities



Cash provided by investing
activities consists of the cash received from the businesses we sold, reduced by capital expenditures for property and equipment
and capitalized engineering costs. A description of capitalized engineering costs can be found below and in Note 3 Summary of Significant
Accounting Policies in our Consolidated Financial Statements for the year ended December 31, 2017.



For the year ended
December 31, 2017, cash provided by investing activities was $1,761,000. This was comprised of the proceeds from the sale of the
AMK subsidiary of $4,260,000, offset by $985,000 for capitalized engineering costs and $1,514,000 for the purchase of property
and equipment.



For the year December
31, 2016, cash used in investing activities was $924,000. This was comprised of $963,000 of capitalized engineering costs, $1,632,000
used for the purchase of property and equipment, offset by the proceeds of the sale of fixed assets of $1,671,000.



Cash Provided By Financing Activities



Cash provided by (used
in) financing activities consists of the borrowings and repayments under our credit facilities with our senior lender, increases
in and repayments of capital lease obligations and other notes payable, and the proceeds from the sale of our equity.



For the year ended
December 31, 2017, cash provided by financing activities was $1,551,000. This was comprised of repayments of $3,178,000 on our
term loan, $7,938,000 on our revolving loans, $1,397,000 on our capital lease obligations, payments of notes payable issuances
of $463,000, and deferred financing costs of $50,000, offset by proceeds from notes payable issuances of $2,660,000 to related
parties and $4,184,000 to third parties and proceeds from the issuance of common stock of $7,733,000.



For the year ended
December 31, 2016, cash provided by financing activities was $2,391,000. This was comprised of repayments of $5,211,000 under our
revolving credit facility, as well as repayments on our term loans of $3,184,000, proceeds from note payable of $4,500,000, as
well as repayments under our capital leases of $1,226,000, proceeds from notes payable of $3,695,000, expense for issuance of preferred
stock of $ 663,000, expense for issuance of debt offering $547,000, proceeds from the issuance of preferred stock of $5,250,000,
and deferred financing costs of $223,000.



CONTRACTUAL OBLIGATIONS



The following table sets forth our
future contractual obligations as of December 31, 2017:



|                        |  | Payment due by period (in thousands)
|----------------------- |  | ------------------------------------
|                        |  | Total                               
|Debt and capital leases |  | $                                   
|Operating leases        |  |                                     
|Total                   |  | $                                   



| | * | The revolving loans and term loans with our senior lender are classified as due in less than 1 year, see Note 11 to our Consolidated Financial Statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



OFF-BALANCE SHEET ARRANGEMENTS



We did not have any off-balance sheet arrangements
as of December 31, 2017.





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Going Concern





We suffered losses
from operations of $12,758,000 and $10,135,000 and net losses of $22,551,0000 and $15,623,000, respectively,
for the years ended December 31, 2017 and 2016. We also had negative cash flows from operations for the year ended December 31,
2017. In addition, in 2016 we disposed of the real estate on which one of our operating subsidiaries was located through a sale
leaseback transaction, and in January 2017 we sold that operating subsidiary. We have had to sell debt and equity securities to
secure funds to operate our business and may have to continue to do so. From September 2016 through June 2017, we issued additional
shares of Series A Preferred Stock in lieu of cash payment of accrued dividends on outstanding shares of Series A Preferred Stock
and in February 2017, May 2017 and August 2017, we issued additional convertible notes in lieu of cash payment of accrued interest
on outstanding convertible notes.



On June 19, 2017, we
entered into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant
for the periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December
31, 2016. The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated
basis beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the
prior three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months
and (iii) 1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine (9) months and that we maintain
EBITDA of not less than $345,000 for the period ending June 30, 2017. The amendment also provided that we were not required to
maintain a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending
December 31, 2016 and March 31, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing
will be required of the Fixed Charge Coverage Ratio for the period ending September 30, 2017.



In late fiscal 2017,
we initiated a repositioning of our business to obtain profitability and improve our liquidity position. We named a new CEO and
on March 21, 2018, we entered into a Stock Purchase Agreement for the sale of WMI, for a purchase price of $9,000,000, subject
to a working capital adjustment. The sale is subject to certain conditions, including the buyer obtaining financing and is anticipated
to close in May or June 2018 although it is possible that that closing may be delayed. In addition, although management believes
such event is unlikely, the SPA does provide for certain limited termination rights by either party. Although we believe the proceeds
of this acquisition will improve our liquidity position, we still may need further issuances of debt, equity or financing to fund
ongoing operations until we achieve sustainable profitability.



The continuation of
our business is dependent upon our ability to achieve profitability and positive cash flow and, pending such achievement, future
issuances of equity or other financing to fund ongoing operations. The consolidated financial statements do not include any adjustments
that might be necessary if we are unable to continue as a going concern.



Critical Accounting Policies



We have identified the
policies below as critical to our business operations and the understanding of our financial results.



Inventory Valuation



The Company does not
take physical inventories at interim quarterly reporting periods. The majority of the inventory been estimated using a gross profit
percentage based on sales of previous periods to the net sales of the current period, as management believes that the gross profit
percentage on these items are materially consistent from period to period.



The remainder of the
inventory value is estimated based on the Company's standard cost perpetual inventory system, as management believes the perpetual
system computed value for these items provides a better estimate of value for that inventory.



For annual reporting,
the Company values inventory at the lower of cost on a first-in-first-out basis or market.



We generally purchase
raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable
contracts for orders have been received for finished goods. We occasionally produce larger more complex products, such as landing
gear, in excess of purchase order quantities in anticipation of future purchase order demand. Historically this excess has been
used in fulfilling future purchase orders. We purchase supplies and materials useful in a variety of products as deemed necessary
even though orders have not been received. The Company periodically evaluates inventory items that are not secured by purchase
orders and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow-moving goods,
and for other impairments of value.



The Company presents
inventory net of progress billings in accordance with the specified contractual arrangements with the United States Government,
which results in the transfer of title of the related inventory from the Company to the United States Government, when such progress
payments are received.





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Capitalized Engineering Costs



The Company has contractual
agreements with customers to produce parts, which the customers design. Though the Company has not designed and thus has no proprietary
ownership of the parts, the manufacturing of these parts requires pre-production engineering and programming of our machines. The
pre-production costs associated with a particular contract are capitalized and then amortized beginning with the first shipment
of product pursuant to such contract. These costs are amortized on a straight line basis over the shorter of the estimated length
of the contract, or three years.



If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as progress billings (a reduction of the associated inventory) until the appropriate revenue recognition criteria have been met.
The Terms and Conditions contained in customer purchase orders may provide for liquidated damages in the event that a stop-work
order is issued prior to the final delivery of the product.



Revenue Recognition



During fiscal
2017 and 2016, the Company recognized revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue
Recognition.” The Company recognizes revenue when products are shipped and/or the customer takes ownership and assumes
risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales
price is fixed or determinable. Payments received in advance from customers for products delivered are recorded as customer
deposits until earned, at which time revenue is recognized. The Terms and Conditions contained in our customer purchase
orders often provide for liquidated damages in the event that a stop work order is issued prior to the final delivery. The
Company utilizes a Returned Merchandise Authorization or RMA process for determining whether to accept returned products.
Customer requests to return products are reviewed by the contracts department and if the request is approved, a credit is
issued upon receipt of the product. Net sales represent gross sales less returns and allowances. Freight out is included in
operating expenses.



The Company recognizes
certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement,
the Company makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition. The customer must
initiate the request for the bill and hold arrangement. The customer must have made this request in writing in addition to their
fixed commitment to purchase the item. The risk of ownership has passed to the customer, payment terms are not modified and payment
will be made as if the goods had shipped.



Income Taxes



The Company accounts
for income taxes in accordance with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires
that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected
to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities.
A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.



The Company accounts
for uncertainties in income taxes under the provisions of FASB ASC 740-10-05, “Accounting for Uncertainty in Income Taxes.”
The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The
ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.



Stock-Based Compensation



The Company accounts
for stock-based compensation expense in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under
the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair
value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option
pricing model.





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Goodwill



Goodwill represents
the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill is not amortized,
but is tested at least annually for impairment, or if circumstances change that will more likely than not reduce the fair value
of the reporting unit below its carrying amount.



The Company accounts
for the impairment of goodwill under the provisions of ASU 2011-08 (“ASU 2011-08”), “Intangibles Goodwill and
Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 updated the guidance on the periodic testing of goodwill
for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount.



The Company performs
impairment testing for goodwill annually, or more frequently when indicators of impairment exist, using a three-step approach.
Step “zero” is a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Step one compares the fair value of the net assets of the relevant reporting unit (calculated
using a discounted cash flow method) to its carrying value, a second step is performed to compute the amount of the impairment.
In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to
its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.



Long-Lived and Intangible Assets



Identifiable intangible
assets are amortized using the straight-line method over the period of expected benefit. Long-lived assets and intangible assets
subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that
the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found
to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying
amount of the asset to fair value. As of December 31, 2017, the intangible assets have been fully amortized and there has been
no impairment.



Recently Issued Accounting Pronouncements



In January 2017, the
FASB issued ASU 2017-01 (“ASU 2017-01”), Business Combinations, which clarifies the definition of a business, particularly
when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first
part of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.



In January 2017, FASB
issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step
2 of the goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit with
its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities having one
or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting units, (2) the amount
of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU No. 2017-04 is effective
as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard
on our financial statements.



In July 2017, the FASB
issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and
Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the
Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception.The ASU allows companies to exclude a down round feature when determining
whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result,
financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted classified
as liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been
adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of
the effect of the down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities
will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU
2017-11is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption
is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company adopted this guidance in
the current quarter, effective April 1, 2017.  As a result, the warrants issued on May 12, 2017, in connection with the bridge
financing, were equity-classified.





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In April
2016, the FASB issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606) (“ASU 2016-10”). The core principle
of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The amendments in ASU 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is
not yet effective. The effective date and transition requirements of ASU 2016-10 are the same as the effective date and transition
requirements of ASU 2014-09. They are effective prospectively for reporting periods beginning after December 15, 2017 and early
adoption is not permitted. The Company is currently assessing the impact of the adoption of these amendments on its consolidated
financial statements.



The Company does
not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.



JOBS Act



On April 5, 2012, the
JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements
for qualifying public companies. As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities
Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise
apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that
we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of this extended transition
period. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements
may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date
that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our consolidated financial
statements and that has a different effective date for public and private companies, we will disclose the date on which adoption
is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.



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 the Company’s management, including the Chief Executive Officer (“CEO”),
its principal executive officer, and Chief Financial Officer (“CFO”), its 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, 2017. Based on that evaluation, the CEO and CFO concluded that for the reasons discussed
below our disclosure controls and procedures were not effective as of December 31, 2017.



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 controls over financial reporting
and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal controls
over financial reporting.





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Management is responsible
for establishing and maintaining adequate internal control over financial reporting for the Company. Internal controls over financial
reporting refers to the process designed by, or under the supervision of our Chief Executive Officer and our Chief Accounting Officer,
and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies
and procedures that:



(1) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;



(2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with the authorization of our management and directors; and



(3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect
on the 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.



Our management relies
upon the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in designing a system intended to meet the needs of our Company and provide reasonable assurance for
its assessment.





In connection with their review of our internal controls
over financial reporting for the fiscal year ended December 31, 2017, our Chief Executive Officer and Chief Financial Officer
have concluded that our internal controls over financial reporting were not effective as of December 31, 2017. In particular,
certain portions of our inventory control system have not been integrated into the system used by the balance of the Company
which could result in a failure to properly account for the costs associated with work in process, slow moving inventory and
the value of inventory on hand and the enterprise reporting system used to track employee hours and, hence, costs to be
included in work in process, is not sufficiently automated to ensure compliance at all times. In addition, our Chief
Executive Officer and Chief Financial Officer concluded that our quarterly closing process was deficient at our subsidiaries
and that our consolidating process and period end reporting and disclosure procedures were materially weak. They also
concluded that our system for administering and disclosing stock compensation was deficient and that we lacked the accounting
personnel necessary to account for complex accounting matters and unusual and non-standard transactions and were deficient in
supervision and internal control monitoring.



To remedy these weaknesses, when financially able, we
plan to supplement our accounting staff with additional experienced financial professionals, redefining and realigning
responsibilities and by defining additional controls, reporting processes and procedures to address the accounting
requirements and disclosures for non-standard and unusual transactions. In addition, until we locate and engage appropriate
accounting personnel, we will engage third party consultants to assist in accounting for non-recurring complex transactions.



The material weaknesses discussed above will not be considered remediated until the necessary personnel have been engaged and
the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that
these controls are operating effectively.



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



There have been no
changes in our internal control over financial reporting that occurred during our fiscal quarter and year ended December 31, 2017
that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.



ITEM 9B.  OTHER INFORMATION.



None





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PART III



Item 10.  Directors, Executive Officers, and Corporate
Governance



Incorporated by reference
from the information in our Proxy Statement for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within
120 days of the end of the fiscal year to which this Annual Report relates.



Item 11.  Executive Compensation



Incorporated by reference
from the information in our Proxy Statement for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within
120 days of the end of the fiscal year to which this Annual Report relates.



Item 12.  Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters



Incorporated by reference
from the information in our Proxy Statement for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within
120 days of the end of the fiscal year to which this Annual Report relates.



Item 13.  Certain Relationships and Related Transactions
and Director Independence



Incorporated by reference
from the information in our Proxy Statement for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within
120 days of the end of the fiscal year to which this Annual Report relates.



Item 14.  Principal Accountant Fees and Services



Incorporated by reference
from the information in our Proxy Statement for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within
120 days of the end of the fiscal year to which this Annual Report relates.



PART IV



ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



The following exhibits
are included as part of this report. References to “the Company” in this Exhibit List mean Air Industries Group, a
Nevada corporation.



|Exhibit No. | Description                                                                                                                                                                                                                                                          
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                                      
|2.1         | Agreement and Plan of Merger dated July 29, 2013 between Air Industries Group, Inc. and Air Industries Group (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed August 30, 2013).                                    
|            |                                                                                                                                                                                                                                                                      
|2.2         | Articles of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 28, 2013 (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed August 30, 2013).   
|            |                                                                                                                                                                                                                                                                      
|2.3         | Certificate of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 29, 2013 (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed August 30, 2013).
|            |                                                                                                                                                                                                                                                                      
|3.1         | Articles of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed August 30, 2013).                                                                                               
|            |                                                                                                                                                                                                                                                                      
|3.2         | Certificate of Designation authorizing the issuance of the Series A Preferred Stock (incorporated herein by reference to exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                                                             





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|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.3 | Certificate of Amendment increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).                                 
|    |                                                                                                                                                                                                                                                                                              
|3.4 | Amendment to Certificate of Designation (incorporated herein by reference to the Company’s Registration Statement on Form S-1 (Amendment No. 2) filed on June 19, 2017 declared effective on July 6, 2017).                                                                                  
|    |                                                                                                                                                                                                                                                                                              
|3.5 | Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).                                                                                      
|    |                                                                                                                                                                                                                                                                                              
|4.1 | Form of specimen common stock certificate (incorporated herein by reference to exhibit 4.1 to the Company’s Registration Statement on Form S-3 (Registration No. 333-191748) filed on August 26, 2014 and declared effective on August 26, 2014).                                            
|    |                                                                                                                                                                                                                                                                                              
|4.2 | Form of Placement Agent’s Warrant Agreement (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 29, 2014).                                                                                                                                
|    |                                                                                                                                                                                                                                                                                              
|4.3 | Form of Warrant issued to Taglich Brothers, Inc. in connection with Capital Market Advisory Agreement dated as of January 1, 2014 (incorporated herein by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).
|    |                                                                                                                                                                                                                                                                                              
|4.4 | Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                                  
|    |                                                                                                                                                                                                                                                                                              

|4.5  | Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                             
|4.6  | Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 3, 2016).                
|     |                                                                                                                                                                                                                                                                             
|4.7  | Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 3, 2016).                        
|     |                                                                                                                                                                                                                                                                             
|4.8  | Form of Warrant issued to purchasers of 12% Notes in connection with 12% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 22, 2016).                                                              
|     |                                                                                                                                                                                                                                                                             
|4.9  | Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with 12% Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).
|     |                                                                                                                                                                                                                                                                             
|4.10 | Form of 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 23, 2016).                                                                                   
|     |                                                                                                                                                                                                                                                                             
|4.11 | Form of Warrant issued to purchasers of the 2018 Notes in connection with 8% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 23, 2016).                                                        
|     |                                                                                                                                                                                                                                                                             
|4.12 | Form of Placement Agent Warrant issued to Taglich Brothers, Inc. in connection with the 2019 Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 17, 2017).                                        
|     |                                                                                                                                                                                                                                                                             
|4.13 | Form of 8% Subordinated Convertible Note due January 31, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2017).                                                                                    





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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.14 | Form of Warrant issued to purchasers of 2019 Notes in connection with the 8% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 17, 2017).                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.15 | The Company’s 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 23, 2016).                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | Agreements Relating to PNC Loan Facility                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.1 | Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “PNC Loan Agreement”) dated June 27, 2013 by and among PNC Bank, National Association, as Lender and Agent, and Air Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc. and Air Industries Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 3, 2013).
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.2 | Guarantor’s Ratification by Air Industries Group, Inc. under PNC Agreement (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed July 3, 2013).                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.3 | First Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 25, 2014 (the “2013 Form 10-K”).                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.4 | Second Amendment To PNC Loan Agreement (incorporated herein by reference from Exhibit 10.23 to the Company’s 2013 Form 10-K).                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  

|10.5  | Amended and Restated Revolving Credit Note issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.24 to the Company’s 2013 Form 10-K).                             
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                   
|10.6  | Amended and Restated Term Note in the principal amount of $1,947,603.50 issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.25 to the Company’s 2013 Form 10-K).
|      |                                                                                                                                                                                                   
|10.7  | Third Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 2, 2014).                                         
|      |                                                                                                                                                                                                   
|10.8  | Sixth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed October 2, 2014).                                       
|      |                                                                                                                                                                                                   
|10.9  | Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed October 2, 2014).                             
|      |                                                                                                                                                                                                   
|10.10 | Eighth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 10, 2015).                                       
|      |                                                                                                                                                                                                   
|10.11 | Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 10, 2015).                              
|      |                                                                                                                                                                                                   
|10.12 | Tenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 23, 2015).                                     
|      |                                                                                                                                                                                                   
|10.13 | Fifth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 23, 2015).                          
|      |                                                                                                                                                                                                   
|10.14 | Eleventh Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 12, 2016).                                  
|      |                                                                                                                                                                                                   
|10.15 | Sixth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed February 12, 2016).                          
|      |                                                                                                                                                                                                   
|10.16 | Twelfth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                                     





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|      |                                                                                                                                                                                                                                               
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 | Term Loan in the principal amount of $7,388,000 (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                                                                         
|      |                                                                                                                                                                                                                                               
|10.18 | Thirteenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2016).                                                                        
|      |                                                                                                                                                                                                                                               
|10.19 | Fourteenth Amendment to the Amended and Restated Revolving Credit, Term Loan and Security Agreement with PNC Bank, N.A. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 30, 2017).
|      |                                                                                                                                                                                                                                               
|      | Agreements Relating to Acquisitions                                                                                                                                                                                                           
|      |                                                                                                                                                                                                                                               
|10.20 | Stock Purchase Agreement dated as of April 1, 2014 by and among WMI and the shareholders of Woodbine Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 2, 2014).       
|      |                                                                                                                                                                                                                                               
|10.21 | Stock Purchase Agreement dated as of June 4, 2014, by and among the Registrant and the shareholders of Eur-Pac Corporation (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 5, 2014). 
|      |                                                                                                                                                                                                                                               

|10.22 | Stock
        Purchase Agreement dated as of October 1, 2014, among the Company, AMK Welding, Inc. and Dynamic Materials Corporation
        (incorporated herein         by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed (October 2,
        2014).                                                                        
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.23 | Promissory Note of Registrant payable to AMK Welding, Inc. in the principal amount of $2,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 2, 2014).                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.24 | Mortgage and Security Agreement in favor of Dynamic Materials Corporation (incorporated herein  by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed October 2, 2014).                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.25 | Agreement and Plan of Merger dated as of February 27, 2015, by and among the Registrant, SEC Acquisition Corp., The Sterling Engineering Corporation (“Old Sterling”) and the shareholders of Old Sterling (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 5, 2015).                             
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.26 | Open End Mortgage Deed and Security Agreement with respect to South Windsor, Connecticut premises (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 10, 2015).                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.27 | Collateral Assignment of Rents, Leases and Profits with respect to South Windsor, Connecticut premises (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 10, 2015).                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.28 | Open End Mortgage Deed and Security Agreement with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed March 10, 2015).                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.29 | Collateral Assignment of Rents, Leases and Profits with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed March 10, 2015).                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.30 | Asset Purchase Agreement dated as of August 31, 2013 between the Company, on the one hand, and Compaq Development Corporation, Peter C. Rao and Vito Valenti, the shareholders of Compaq Development Corporation, on the other hand (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 1, 2015).
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.31 | Stock Purchase Agreement dated as of January 27, 2017, between Air Industries Group, AMK Welding, Inc., Air Industries Group Poland, LLC and Meyer Tool, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 30, 2017).                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                            
|      | Agreements Relating to Real Property                                                                                                                                                                                                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                            
|10.32 | Contract of Sale, dated as of November 7, 2005, by and between KPK Realty Corp. and Gales Industries Incorporated for the purchase of the property known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore, NY (incorporated herein by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed December 6, 2005).    





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|10.33  | Real Estate Purchase and Sale Agreement for the sale of 283 Sullivan Avenue, South Windsor, CT (“South Windsor Contract”), dated as of December 7, 2015 (incorporated herein by reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                                                            
|10.34  | First Amendment to South Windsor Contract dated as of January 26, 2016 (incorporated herein by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).                                                                                 
|       |                                                                                                                                                                                                                                                                                                                            
|10.35  | Second Amendment to South Windsor Contract dated as of February 24, 2016 (incorporated herein by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).                                                                               
|       |                                                                                                                                                                                                                                                                                                                            
|10.436 | Third Amendment to South Windsor Contract dated as of April 6, 2016 (incorporated herein by reference to Exhibit 10.49 to the Company’s Current Report on Form 8-K filed on April 14, 2016).                                                                                                                               
|       |                                                                                                                                                                                                                                                                                                                            
|10.37  | Lease dated April 11, 2016 for the premises located at 283 Sullivan Avenue, South Windsor, CT (incorporated herein by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K filed on April 14, 2016).                                                                                                     



|      | Agreements With Officers, Directors and Related Persons                                                                                                                                                                                                                      
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                              
|10.38 | Capital Market Advisory Agreement dated as of January 1, 2014 between the Registrant and Taglich Brothers, Inc. (incorporated herein by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).
|      |                                                                                                                                                                                                                                                                              
|10.39 | Offer Letter to Daniel R. Godin (incorporated herein by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).                                                                                
|      |                                                                                                                                                                                                                                                                              
|10.40 | Promissory Note dated as of September 8, 2015 payable to Michael N. Taglich in the principal amount of $350,000 (incorporated herein by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 4, 2016). 
|      |                                                                                                                                                                                                                                                                              
|10.41 | Promissory note dated April 8, 2016 in the principal amount of $350,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.51 to the Company’s Current Report on Form 8-K filed on April 14, 2016).                                               
|      |                                                                                                                                                                                                                                                                              
|10.42 | Promissory note dated April 8, 2016 in the principal amount of $350,000 payable to Robert F. Taglich (incorporated herein by reference to Exhibit 10.52 to the Company’s Current Report on Form 8-K filed on April 14, 2016).                                                
|      |                                                                                                                                                                                                                                                                              
|10.43 | Promissory note in the principal amount of $400,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.53 to the Company’s Current Report on Form 8-K filed on May 10, 2016).                                                                     
|      |                                                                                                                                                                                                                                                                              
|10.44 | Promissory note in the principal amount of $300,000 payable to Robert F. Taglich (incorporated herein by reference to Exhibit 10.54 to the Company’s Current Report on Form 8-K filed on May 10, 2016).                                                                      
|      |                                                                                                                                                                                                                                                                              





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|10.45 | Promissory note in the principal amount of $500,000 payable to Michael Taglich (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 5, 2016).                                                               
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                      
|10.46 | Promissory note in the principal amount of $1,000,000 payable to Michael Taglich (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 5, 2016).                                                             
|      |                                                                                                                                                                                                                                                                      
|      | Agreements Relating to Issuance of Securities                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                      
|10.47 | Form of Subscription Agreement, dated as of May 28, 2014 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 29, 2014).                                                                                          
|      |                                                                                                                                                                                                                                                                      
|10.48 | Placement Agent Agreement, dated as of May 28, 2014, between the Company and Taglich Brothers, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 29, 2014).                                            
|      |                                                                                                                                                                                                                                                                      
|10.49 | Placement Agency Agreement dated May 25, 2016 between the Company, Craig-Hallum Capital Group LLC and Taglich Brothers, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                   
|      |                                                                                                                                                                                                                                                                      
|10.50 | Securities Purchase Agreement dated as of May 25, 2016 by and among Air Industries Group and the purchasers named therein (incorporated herein by reference to Exhibit A included in Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 1, 2016).
|      |                                                                                                                                                                                                                                                                      
|10.51 | Registration Rights Agreement (incorporated herein by reference to Exhibit B included in Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 1, 2016).                                                                                            
|      |                                                                                                                                                                                                                                                                      
|10.52 | Placement Agency Agreement dated August 19, 2016 between the Company and Taglich Brothers, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2016).                                             
|      |                                                                                                                                                                                                                                                                      
|10.53 | Securities Purchase Agreement by and among the Company and the purchasers named therein (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 22, 2016).                                                     
|      |                                                                                                                                                                                                                                                                      
|10.54 | The Company’s 12% Subordinated Convertible Note due December 31, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 22, 2016).                                                                       
|      |                                                                                                                                                                                                                                                                      
|10.55 | Joinder Agreement among the purchasers of the Notes and the Company (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 22, 2016).                                                                         
|      |                                                                                                                                                                                                                                                                      
|10.56 | Amendment to Registration Rights Agreement (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on August 22, 2016).                                                                                                  
|      |                                                                                                                                                                                                                                                                      
|10.57 | Placement Agency Agreement with Taglich Brothers, Inc. for the offering of the 2018 Notes (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 23, 2016).                                                 
|      |                                                                                                                                                                                                                                                                      

|10.58 | Form of Subscription Agreement for the 2019 Notes (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 17, 2017).                                                                
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                             
|10.59 | Placement Agency Agreement with Taglich Brothers, Inc. for the offering of the 2019 Notes issued in February 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2017).





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|      |                                                                                                                                                                                                                                                                  
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.60 | Placement Agency Agreement with Taglich Brothers, Inc. for the offering of the 2019 Notes issued in March 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 22, 2017).                           
|      |                                                                                                                                                                                                                                                                  
|10.61 | Placement Agency Agreement with Taglich Brothers, Inc. dated November 29, 2017 for the offering of shares of common stock and warrants (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 12, 2017).
|      |                                                                                                                                                                                                                                                                  
|10.62 | Subscription Agreement for the offering of shares of common stock and warrants (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 12, 2017).                                                        
|      |                                                                                                                                                                                                                                                                  
|10.63 | 2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.24 to the Company’s Registration Statement on Form 10 filed on October 2, 2012).                                                                                                      
|      |                                                                                                                                                                                                                                                                  
|10.64 | 2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-191560) filed on October 4, 2013).                                                                        
|      |                                                                                                                                                                                                                                                                  
|10.65 | 2015 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-206341) filed on August 13, 2015).                                                                        
|      |                                                                                                                                                                                                                                                                  
|10.66 | 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).                                                       
|      |                                                                                                                                                                                                                                                                  
|10.67 | 2017 Equity Incentive Plan incorporated herein by reference to Exhibit 10.79 to the Company’s Registration Statement on Form S-1 (Registration No. 333-219490) filed July 26, 2017 and declared effective August 4, 2017.                                        
|      |                                                                                                                                                                                                                                                                  
|14.1  | Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2003 filed on April 14, 2004 (the Company was then known as Health & Nutrition Systems International).               
|      |                                                                                                                                                                                                                                                                  
|21.1  | Subsidiaries.                                                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                  
|23.1  | Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C.                                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                                  
|31.1  | Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934.                                                                                                                                          
|      |                                                                                                                                                                                                                                                                  
|31.2  | Certification of principal financial officer pursuant to Rule 13a-14 or Rule 15d-14 of the Exchange Act of 1934.                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                  
|32.1  | Certification of principal executive officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                     
|      |                                                                                                                                                                                                                                                                  
|32.2  | Certification of principal financial officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                     

|101.SCH | XBRL Taxonomy Extension Schema Document*               
|------- | -------------------------------------------------------
|101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* 
|101.DEF | XBRL Taxonomy Extension Definition Linkbase Document*  
|101.LAB | XBRL Taxonomy Extension Label  Linkbase Document*      
|101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*



_______________

* To be filed by amendment





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SIGNATURES



Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.



Dated: April 17, 2018



| | AIR INDUSTRIES GROUP
| | --------------------
| |                     
| | By:                 
| |                     
| |                     
| |                     
| | By:                 
| |                     



Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
on April 17, 2018 in the capacities indicated.



|Signature               |  | Capacity                                    
|----------------------- |  | --------------------------------------------
|                        |  |                                             
|/s/ Luciano Melluzzo    |  |                                             
|Luciano Melluzzo        |  | President and CEO                           
|                        |  | (principal executive officer)               
|/s/ Michael E. Recca    |  |                                             
|Michael E. Recca        |  | Chief Financial Officer                     
|                        |  | (principal financial and accounting officer)
|/s/ Michael N. Taglich  |  |                                             
|Michael N. Taglich      |  | Chairman of the Board                       
|                        |  |                                             
|/s/ Peter D. Rettaliata |  |                                             
|Peter D. Rettaliata     |  | Director                                    
|                        |  |                                             
|/s/ Robert F. Taglich   |  |                                             
|Robert F. Taglich       |  | Director                                    
|                        |  |                                             
|/s/ David J. Buonanno   |  |                                             
|David J. Buonanno       |  | Director                                    
|                        |  |                                             
|/s/ Robert Schroeder    |  |                                             
|Robert Schroeder        |  | Director                                    
|                        |  |                                             
|/s/ Michael Brand       |  |                                             
|Michael Brand           |  | Director                                    
|                        |  |                                             
|/s/ Michael Porcelain   |  | Director                                    
|Michael Porcelain       |  |                                             





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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Stockholders
of Air Industries Group



Opinion on the Financial Statements



We have audited the accompanying consolidated
balance sheets of Air Industries Group and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of
America.



Basis for Opinion



These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities law and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.



Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.



Going Concern



The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, among other going concern matters discussed, the Company has suffered a net loss in 2017 and has had negative
cash flows from operating activities, and is dependent upon future issuances of equity or other financing to fund ongoing operations,
all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these
matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





We have served as the Company’s auditors
since 2008.



Saddle Brook, NJ



April 17, 2018








Table of Contents




AIR INDUSTRIES
GROUP

|Consolidated Balance Sheets                                                                                                                                                                                                                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                       
|ASSETS                                                                                                                                                                                                                                                                                 
|Current Assets                                                                                                                                                                                                                                                                         
|Cash and Cash Equivalents                                                                                                                                                                                                                                                              
|Accounts Receivable, Net of Allowance for Doubtful Accounts                                                                                                                                                                                                                            
|of $494,000 and $403,000, respectively                                                                                                                                                                                                                                                 
|Inventory                                                                                                                                                                                                                                                                              
|Prepaid Expenses and Other Current Assets                                                                                                                                                                                                                                              
|Prepaid Taxes                                                                                                                                                                                                                                                                          
|Assets Held for Sale                                                                                                                                                                                                                                                                   
|Total Current Assets                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                       
|Property and Equipment, Net                                                                                                                                                                                                                                                            
|Capitalized Engineering Costs - Net of Accumulated Amortization                                                                                                                                                                                                                        
|of $5,380,000 and $4,957,000, respectively                                                                                                                                                                                                                                             
|Deferred Financing Costs, Net, Deposits and Other Assets                                                                                                                                                                                                                               
|Intangible Assets, Net                                                                                                                                                                                                                                                                 
|Goodwill                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                       
|TOTAL ASSETS                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                   
|Current Liabilities                                                                                                                                                                                                                                                                    
|Notes Payable and Capitalized Lease Obligations - Current Portion                                                                                                                                                                                                                      
|Notes Payable – Related Party – Current Portion                                                                                                                                                                                                                                        
|Accounts Payable and Accrued Expenses                                                                                                                                                                                                                                                  
|Deferred Gain on Sale - Current Portion                                                                                                                                                                                                                                                
|Deferred Revenue                                                                                                                                                                                                                                                                       
|Liabilities Directly Associated with Assets Held for Sale                                                                                                                                                                                                                              
|Income Taxes Payable                                                                                                                                                                                                                                                                   
|Total Current Liabilities                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                       
|Long Term Liabilities                                                                                                                                                                                                                                                                  
|Notes Payable and Capitalized Lease Obligations - Net of Current Portion                                                                                                                                                                                                               
|Notes Payable – Related Party – Net of Current Portion                                                                                                                                                                                                                                 
|Deferred Gain on Sale - Net of Current Portion                                                                                                                                                                                                                                         
|Deferred Rent                                                                                                                                                                                                                                                                          
|TOTAL LIABILITIES                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                       
|Commitments and Contingencies                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                       
|Stockholders' Equity                                                                                                                                                                                                                                                                   
|Preferred Stock, par value $.001 - Authorized 3,000,000 shares, Designated
    as Series A Convertible Preferred Stock – par value $0.001, Authorized 0  at December 31, 2017 and 2,000,000
    shares at December 31, 2016;  0 and 1,202,548 outstanding at December 31, 2017 and 2016
|Common Stock - Par Value $.001 - Authorized 50,000,000 Shares, 25,213,805 and 7,650,165 Shares Issued and Outstanding as of December 31, 2017 and December 31, 2016, respectively                                                                                                      
|Additional Paid-In Capital                                                                                                                                                                                                                                                             
|Accumulated Deficit                                                                                                                                                                                                                                                                    
|TOTAL STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                       
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                             



|See Notes to Consolidated Financial Statements
|----------------------------------------------



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|AIR INDUSTRIES GROUP                                                  
|----------------------------------------------------------------------
|Consolidated Statements of Operations For the Years Ended December 31,



|                                              |  | 2017 |             | 2016
|--------------------------------------------- |  | ---- | ----------- | ----
|                                              |  |      |             |     
|Net Sales                                     |  | $    | 49,869,000  |     
|                                              |  |      |             |     
|Cost of Sales                                 |  |      | 45,002,000  |     
|                                              |  |      |             |     
|Gross Profit                                  |  |      | 4,867,000   |     
|                                              |  |      |             |     
|Operating Expenses                            |  |      | 11,430,000  |     
|                                              |  |      |             |     
|Impairment of goodwill                        |  |      | (6,195,000  | )   
|                                              |  |      |             |     
|Loss from Operations                          |  |      | (12,758,000 | )   
|                                              |  |      |             |     
|Interest and Financing Costs                  |  |      | (3,378,000  | )   
|                                              |  |      |             |     
|Loss on Extinguishment of Debt                |  |      | (112,000    | )   
|Gain on Sale of Subsidiary                    |  |      | 200,000     |     
|Other Expenses, Net                           |  |      | (22,000     | )   
|                                              |  |      |             |     
|Loss before Provision for Income Taxes        |  |      | (16,070,000 | )   
|                                              |  |      |             |     
|(Benefit from) Provision for Income Taxes     |  |      | (197,000    | )   
|Loss from Continuing Operations               |  |      | (15,873,000 | )   
|Loss from Discontinued Operations, net of tax |  |      | (6,678,000  | )   
|Net Loss                                      |  | $    | (22,551,000 | )   
|Net Loss per share - basic                    |  |      |             |     
|Continuing operations                         |  |      | (1.20       | )   
|Discontinued operations                       |  | $    | (0.50       | )   
|Net Loss per share – diluted                  |  |      |             |     
|Continuing operations                         |  |      | (1.20       | )   
|Discontinued operations                       |  | $    | (0.50       | )   
|                                              |  |      |             |     
|Weighted average shares outstanding – basic   |  |      | 13,230,775  |     
|Weighted average shares outstanding – diluted |  |      | 13,230,775  |     



|See Notes to Consolidated Financial Statements
|----------------------------------------------





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|AIR INDUSTRIES GROUP                           
|-----------------------------------------------
|Consolidated Statements of Stockholders' Equity
|For the Years Ended December 31, 2017 and 2016 





|                                          |  |                 |            |              |  |         |        |        |             | Additional |            |               |         |   |        | Total 
|----------------------------------------- |  | --------------- | ---------- | ------------ |  | ------- | ------ | ------ | ----------- | ---------- | ---------- | ------------- | ------- | - | ------ | ------
|                                          |  | Preferred Stock |            | Common Stock |  | Paid-in |        |        | Accumulated |            |            | Stockholders'
|                                          |  | Shares          |            | Amount       |  | Shares  |        | Amount |             | Capital    |            |               | Deficit |   |        | Equity
|Balance, January 1, 2016                  |  |                 | —          |              |  |         | —      |        |             |            | 7,560,040  |               |         | $ | 7,000  |       
|Issuance of Preferred Stock               |  |                 | 1,202,548  |              |  | $       | 1,000  |        |             |            | —          |               |         |   | —      |       
|Fair Value Allocation of Warrants         |  |                 | —          |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Issuance of Restricted Stock              |  |                 | —          |              |  |         | —      |        |             |            | 42,000     |               |         |   | —      |       
|Exercise of Options and Warrants          |  |                 | —          |              |  |         | —      |        |             |            | 24,905     |               |         |   | —      |       
|                                          |  |                 |            |              |  |         |        |        |             |            |            |               |         |   |        |       
|Stock Compensation Expense                |  |                 | —          |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Net Loss                                  |  |                 | —          |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Balance, December 31, 2016                |  |                 | 1,202,548  |              |  | $       | 1,000  |        |             |            | 7,626,945  |               |         | $ | 7,000  |       
|Issuance of Preferred stock               |  |                 | 91,893     |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Fair Value Allocation of Warrants         |  |                 | —          |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Issuance of Common stock                  |  |                 | —          |              |  |         | —      |        |             |            | 5,900,390  |               |         |   | 6,000  |       
|Common stock issued for directors fees    |  |                 | —          |              |  |         | —      |        |             |            | 154,463    |               |         |   | —      |       
|Common stock issued for legal fees        |  |                 | —          |              |  |         | —      |        |             |            | 92,000     |               |         |   | —      |       
|Conversion of preferred  to common        |  |                 | (1,294,441 | )            |  |         | (1,000 |        |             |            | 8,629,606  |               |         |   | 9,000  |       
|Common stock issued for convertible notes |  |                 | —          |              |  |         | —      |        |             |            | 2,810,401  |               |         |   | 3,000  |       
|Stock Compensation Expense                |  |                 | —          |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Net Loss                                  |  |                 | —          |              |  |         | —      |        |             |            | —          |               |         |   | —      |       
|Balance, December 31, 2017                |  |                 | —          |              |  |         | —      |        |             |            | 25,213,805 |               |         | $ | 25,000 |       





|See Notes to Consolidated Financial Statements
|----------------------------------------------





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Table of Contents




|AIR INDUSTRIES GROUP                                                  
|----------------------------------------------------------------------
|Consolidated Statements of Cash Flows For the Years Ended December 31,





|                                                                  |  | 2017 |             | 2016
|----------------------------------------------------------------- |  | ---- | ----------- | ----
|                                                                  |  |      |             |     
|CASH FLOWS FROM OPERATING ACTIVITIES                              |  |      |             |     
|Net Loss                                                          |  | $    | (22,551,000 | )   
|Adjustments to reconcile net loss to net                          |  |      |             |     
|cash used in operating activities                                 |  |      |             |     
|Depreciation of property and equipment                            |  |      | 2,723,000   |     
|Amortization of intangible assets                                 |  |      | 673,000     |     
|Amortization of capitalized engineering costs                     |  |      | 423,000     |     
|Loss on Impairment of goodwill – continuing operations            |  |      | 6,195,000   |     
|Loss on Impairment of goodwill – discontinued operations          |  |      | 3,417,000   |     
|Bad debt expense (recovery)                                       |  |      | 87,000      |     
|Non-cash employee compensation expense                            |  |      | 332,000     |     
|Non-cash directors compensation expense                           |  |      | 232,000     |     
|Amortization of deferred financing costs                          |  |      | 267,000     |     
|Deferred gain on sale of real estate                              |  |      | (38,000     | )   
|Loss on sale of fixed assets held for sale                        |  |      | —           |     
|(Gain) loss on sale of subsidiary                                 |  |      | (200,000    | )   
|Deferred income taxes                                             |  |      | —           |     
|Loss on impairment of intangible assets – discontinued operations |  |      | 1,085,000   |     
|Loss on Assets Held for Sale                                      |  |      | 1,563,000   |     
|Loss on extinguishment of debt                                    |  |      | 112,000     |     
|Amortization of convertible notes payable                         |  |      | 2,301,000   |     
|Changes in Assets and Liabilities                                 |  |      |             |     
|(Increase) Decrease in Operating Assets:                          |  |      |             |     
|Assets held for sale - AMK Cash                                   |  |      | 39,000      |     
|Accounts receivable                                               |  |      | 1,004,000   |     
|Inventory                                                         |  |      | 905,000     |     
|Prepaid expenses and other current assets                         |  |      | 281,000     |     
|Prepaid taxes                                                     |  |      | 360,000     |     
|Deposits and other assets                                         |  |      | (113,000    | )   
|Increase (Decrease) in Operating Liabilities:                     |  |      |             |     
|Accounts payable and accrued expense                              |  |      | (3,527,000  | )   
|Deferred rent                                                     |  |      | 34,000      | )   
|Deferred revenue                                                  |  |      | 410,000     | )   
|Income taxes payable                                              |  |      | —           |     
|NET CASH USED IN OPERATING ACTIVITIES                             |  |      | (3,986,000  | ))  
|                                                                  |  |      |             |     
|CASH FLOWS FROM INVESTING ACTIVITIES                              |  |      |             |     
|Capitalized engineering costs                                     |  |      | (985,000    | )   
|Purchase of property and equipment                                |  |      | (1,514,000  | )   
|Proceeds from the sale of fixed assets                            |  |      | —           |     
|Proceeds from sale of subsidiary                                  |  |      | 4,260,000   |     
|NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES                |  |      | 1,761,000   |     
|                                                                  |  |      |             |     
|CASH FLOWS FROM FINANCING ACTIVITIES                              |  |      |             |     
|Note payable – revolver – net                                     |  |      | (7,938,000  | )   
|Payments of note payable – term notes                             |  |      | (3,178,000  | )   
|Capital lease obligations                                         |  |      | (1,397,000  | )   
|Proceeds from note payable – related party                        |  |      | 2,660,000   |     
|Proceeds from notes payable – third parties                       |  |      | 4,184,000   |     
|Payments of notes payable – third parties                         |  |      | (463,000    | )   
|Deferred financing costs                                          |  |      | (50,000     | )   
|Expense for issuance of preferred stock                           |  |      | —           |     
|Expenses for issuance of debt offering                            |  |      | —           |     
|Proceeds from issuance of common stock                            |  |      | 7,733,000   |     
|Proceeds from the issuance of preferred stock                     |  |      | —           |     
|NET CASH PROVIDED BY FINANCING ACTIVITIES                         |  |      | 1,551,000   |     
|                                                                  |  |      |             |     
|NET (DECREASE) INCREASE IN CASH AND CASH  EQUIVALENT              |  |      | (674,000    | )   
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                    |  |      | 1,304,000   |     
|CASH AND CASH EQUIVALENTS AT END OF YEAR                          |  | $    | 630,000     |     



See Notes to Consolidated Financial Statements





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|AIR INDUSTRIES GROUP                                                              
|----------------------------------------------------------------------------------
|Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued)



|                                                                     |  | 2017 |            | 2016
|-------------------------------------------------------------------- |  | ---- | ---------- | ----
|                                                                     |  |      |            |     
|Supplemental cash flow information                                   |  |      |            |     
|Cash paid during the period for interest                             |  | $    | 2,035,000  |     
|Cash paid during the period for income taxes                         |  | $    | 8,000      |     
|                                                                     |  |      |            |     
|Supplemental schedule of non-cash investing and financing activities |  |      |            |     
|Common Stock issued for notes payable - related party                |  |      | 2,254,000  |     
|Common Stock issued for notes payable - third parties                |  |      | 1,941,000  |     
|Placement agent warrants issued                                      |  |      | 85,000     |     
|                                                                     |  |      |            |     
|Preferred stock issued for notes payable – related party             |  | $    | —          |     
|                                                                     |  |      |            |     
|Preferred stock issued for notes payable – other                     |  | $    | —          |     
|                                                                     |  |      |            |     
|Preferred stock issued for PIK dividends                             |  | $    | 913,000    |     
|                                                                     |  |      |            |     
|Acquisition of property and equipment financed by capital lease      |  | $    | 225,000    |     
|                                                                     |  |      |            |     
|Classification of assets held for sale                               |  | $    | 10,082,000 |     
|                                                                     |  |      |            |     
|Liabilities directly associated with assets held for sale            |  | $    | (2,795,000 | )   



See Notes to Consolidated Financial Statements





F-5


Table of Contents




AIR INDUSTRIES GROUP

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Note 1. FORMATION AND BASIS
OF PRESENTATION



Organization



On August 30, 2013, Air Industries
Group, Inc. (“Air Industries Delaware”) changed its state of incorporation from Delaware to Nevada as a result of a
merger with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation (“Air Industries
Nevada” or “AIRI”) and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation
was approved by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is
deemed to be the successor.



The accompanying consolidated
financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (“AIM”),
Welding Metallurgy, Inc. ("WMI" or “Welding”), Miller Stuart, Inc. (“Miller Stuart”), Nassau
Tool Works, Inc. (“NTW”), Woodbine Products, Inc. (“Woodbine” or “WPI”), Decimal Industries,
Inc. ("Decimal"), Eur-Pac Corporation (“Eur-Pac” or “EPC”), Electronic Connection Corporation
(“ECC”), AMK Welding, Inc. (“AMK”), Air Realty Group, LLC ("Air Realty") The Sterling Engineering
Corporation ("Sterling"), and Compac Development Corporation (“Compac”), (together, the “Company”).



Going Concern



The Company suffered a
net loss from operations  of $12,758,000 for the year ended December 31, 2017, and net losses of
$22,551,000 and and $15,623,000 for the years ended December 31, 2017 and 2016, respectively. The Company also had negative
cash flows from operations for the years ended December 31, 2017 and 2016. In 2015 the Company ceased paying dividends on its
common stock and in 2016 disposed of the real estate on which an operating subsidiary was located through a sale
leaseback transaction. In January 2017, the Company sold one of its operating subsidiaries. The Company has entered in a
Stock Purchase Agreement to sell a majority of its Aerostructures & Electronics segment. During the year ended December
31, 2016 and subsequent thereto, the Company sold in excess of $29,856,000 in debt and equity securities to secure funds to
operate its business. Furthermore, as of December 31, 2017, the Company was not in compliance with financial covenants under
its Amended and Restated Revolving Credit, Term Loan and Security Agreement with PNC Bank (the “Loan
Facility”).



The continuation of the Company’s
business is dependent upon its ability to achieve profitability and positive cash flow and, pending such achievement, future issuances
of equity or other financing to fund ongoing operations. The consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.



Sale of AMK



On January 27, 2017, the Company
sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017 for
a purchase price of $4,500,000, net of a working capital adjustment of ($163,000), plus additional quarterly payments, not to exceed
$ 1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. The Company recorded a $200,000 gain on
the sale of AMK. The gain on sale was the difference between the non-contingent payments and the carrying value of the disposed
business. The Company has made an accounting policy decision to record the contingent consideration as it is determined to be realizable.



At December 31, 2016, AMK’s
assets and liabilities have been reclassified as Assets Held for Sale and Liabilities Directly Associated with Assets Held for
Sale, respectively. The carrying value of the assets, net of liabilities, held for sale was less than the contract sales price
and accordingly no loss or impairment was recorded for the year ended December 31, 2016.



In connection with the sale of
AMK to Meyer Tool, Inc., on January 27, 2017, the Company, together with its wholly-owned subsidiaries, entered into the Fourteenth
Amendment to the Amended and Restated Revolving Credit, Term Loan And Security Agreement with PNC Bank, N. A. (the “PNC Loan
Agreement”) which amends certain terms and conditions of the PNC Loan Agreement and releases AMK from its obligations under
the PNC Loan Agreement.





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Table of Contents




The proceeds of the sale of AMK
were applied as follows: $1,700,000 to the payment of the Term Loan (as defined in the PNC Loan Agreement), $1,800,000 to the payment
of outstanding Revolving Advances (as defined in the PNC Loan Agreement), and $500,000 to the payment of existing accounts payable.
The remaining $500,000 will be applied to outstanding accounts payable on a future date to be determined by PNC or used to reduce
the amount of the Revolving Advance. The amendment also waives the noncompliance at September 30, 2016 with the Fixed Charge Coverage
Ratio and the Minimum EBITDA covenants for the period then ended, and requires that the Company maintain a Fixed Charge Coverage
Ratio of not less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis; however, for the quarter
ending June 30, 2017, which shall be tested based upon the prior six (6) months, the Fixed Charge Coverage Ratio shall not be less
than 1.00 to 1.00 and for the quarter ending September 30, 2017, which shall be tested based upon the prior nine (9) months, the
Fixed Charge Coverage Ratio shall not be less than 1.10 to 1.00. The amendment also reduces the amount to be paid weekly in repayment
of excess advances in the amount of $5,294,071 under the revolving credit facility from $100,000 to $50,000 for each Monday during
the months of January, February and March of 2017. Thereafter, the weekly payments will return to $100,000 until such excess advances
have been repaid in full.



Subsequent Events



Management has evaluated subsequent
events through the date of this filing.



Sale of Welding Metallurgy
Inc.



On March 21, 2018, the Company
signed an agreement to sell all of the outstanding shares of WMI including its wholly owned subsidiaries Miller Stuart, Woodbine,
Decimal and Compac Development Corp to CPI Aerostructures, Inc., pursuant to a Stock Purchase Agreement (SPA) for a purchase price
of $9,000,000, subject to a customary working capital adjustment. The SPA also provides for contingent payments of up to an aggregate
of $1,000,000 if WMI enters into specified agreements, long-term agreements with certain customers, by May 31, 2018 and July 31,
2018, respectively (the “Specified Dates”), which contingent payments are subject to reduction if subsequent to the
Specified Dates WMI enters into those specified agreements by $100,000 for each calendar month after the Specified Date. The sale
is subject to certain conditions, including CPI obtaining financing for the amount of the purchase price, and requires an escrow
deposit of $2,000,000 to cover the working capital adjustment and our obligation to indemnify CPI against damages arising out of
the breach of our representations and warranties and obligations under the SPA. It is anticipated that the sale will occur in May
or June of 2018.



Sale of Unregistered Equity
Securities



On January 9, 2018 the Company issued and sold to 35 accredited investors an aggregate of 852,000 shares of its common stock
(the “Shares”) and warrants to purchase an additional 255,600 shares of common stock (the “Warrants”),
for gross proceeds of $1,065,000 pursuant to a private placement (the “Offering”). The purchase price for the Shares
and Warrants was $1.25 per Share. The Company had previously sold a total of 725,390 shares of common stock and warrants to purchase
an additional 224,400 shares of common stock for gross proceeds of $935,000 on November 29, 2017, December 5, 2017 and December
29, 2017 pursuant to the Offering.



The Warrants have an exercise
price of $1.50 per share, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser
number of shares depending upon prevailing market prices at the time of exercise. The Warrants may be exercised until November
30, 2022.



If prior to July 1, 2018, the
Company should complete a placement of shares of its common stock or securities convertible into or exercisable for shares of its
common stock at an effective price or conversion rate (the “Subsequent Price”) less than $1.25 per share of common
stock, there shall be issued to the purchasers in the Offering, such additional number of shares of common stock as would have
been received had the Purchase Price thereunder been equal to the greater of the Subsequent Price and $1.00 per share, provided
further that no adjustment shall be made for those subscribers who are officers, directors or otherwise deemed to be affiliates
of the Company under the rules of the NYSE American. If the Company shall complete more than one placements of shares of its common
stock or securities convertible into or exercisable for shares of its common stock prior to July 1, 2018, the Subsequent Price
will be the lowest of the prices at which such offerings are completed.



Taglich Brothers, Inc., a related
party (see related party footnote for definition), which acted as placement agent for the sale of the Shares and Warrants, is entitled
to a placement agent fee equal to $85,200 (8% of the amounts invested), payable at the Company’s option, in cash or additional
shares of common stock and warrants having the same terms and conditions as the Shares and Warrants.  Michael Taglich and
Robert Taglich, directors of the Company, are principals of Taglich Brothers, Inc.





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Related Party Transactions



In April 2018, Michael and
Robert Taglich advanced an aggregate of $1,150,000 to be applied to a private placement on terms to be determined.



Note 2. — DISCONTINUED OPERATIONS



In March 2018, the Company entered
into an agreement to sell WMI and related operations to CPI Aerostructures, Inc. pursuant to a Stock Purchase Agreement (SPA)
for a purchase price of $9,000,000, subject to a working capital adjustment. The SPA also provides for contingent payments of
up to an aggregate of $1,000,000 if WMI enters into specified agreements by May 31, 2018 and July 31, 2018, respectively (the
“Specified Dates”), which contingent payments are subject to reduction by $100,000 for each calendar month which pause
often after the Specified Date WMI enters into the specified agreements. The sale is subject to certain conditions, including
CPI obtaining financing for the amount of the purchase price, and requires an escrow deposit of $2,000,000 to cover the working
capital adjustment and our obligation to indemnify CPI against damages arising out of the breach of our representations and warranties
and obligations under the SPA. It is anticipated that the sale will occur in May or June of 2018. At December 31, 2017, the Company has included a loss on impairment on the
assets held for sale of $2,648,000.



The following table presents
a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net income
(loss) from discontinued operations presented separately in the consolidated statement of operations:





|                                                      |  | December 31,
|----------------------------------------------------- |  | ------------
|                                                      |  | 2017        
|Net revenue                                           |  | $           
|Cost of goods sold                                    |  |             
|Gross profit                                          |  |             
|Operating expenses:                                   |  |             
|Selling, general and administrative                   |  |             
|Loss on assets held for sale                          |  |             
|Impairment of Goodwill                                |  |             
|Total operating expenses                              |  |             
|Interest expense                                      |  |             
|Other income (expense)                                |  |             
|Loss from discontinued operations before income taxes |  |             
|                                                      |  |             
|Provision for income taxes                            |  |             
|Net income (loss) from discontinued operations        |  | $           





The following table presents a reconciliation of the WMI and subsidiaries net cash flow from operating, investing and financing
activities for the periods indicated below:



|                                                                    |  | 2017 |            | 2016
|------------------------------------------------------------------- |  | ---- | ---------- | ----
|Net cash used in operating activities - discontinued operation      |  | $    | (2,765,055 | )   
|Net cash used in investing activities - discontinued operation      |  | $    | (33,244    | )   
|Net cash provided by financing activities - discontinued operations |  | $    | 2,664,689  |     
|                                                                    |  |      |            |     
|Depreciation and amortization                                       |  | $    | 374,871    |     
|Capital expenditures                                                |  | $    | (33,244    | )   



See Note 8 for a reconciliation
of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the total assets and liabilities
of the disposal group classified as held for sale that are presented separately in the consolidated balance sheets.





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Note 3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES



Principal Business Activity



The Company through its AIM subsidiary
is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace
industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter
aircraft. Welding Metallurgy is a specialty welding and products provider whose significant customers include the world's largest
aircraft manufacturers, subcontractors, and original equipment manufacturers. Miller Stuart is a manufacturer of aerospace components
whose customers include major aircraft manufacturers and the US Military. Miller Stuart specializes in electromechanical systems,
harness and cable assemblies, electronic equipment and printed circuit boards. Woodbine is a manufacturer of aerospace components
whose customers include major aircraft component suppliers. Eur-Pac specializes in military packaging and supplies. Eur- Pac s
primary business is “kitting” of supplies for all branches of the United States Defense Department including ordnance
parts, hose assemblies, hydraulic, mechanical and electrical assemblies. Compac specializes in the manufacture of RFI/EMI (Radio
Frequency Interference Electro-Magnetic Interference) shielded enclosures for electronic components. The Company’s customers
consist mainly of publicly traded companies in the aerospace industry.



If the sale of WMI closes,
the Company will be more focused on complex machined products for aircraft landing gear and jet turbines.



Principles of Consolidation



The accompanying consolidated
financial statements include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.



Discontinued Operations



In March 2018, the Company entered into an agreement
to sell WMI. WMI is classified as a discontinued operation (see "Note 2 - Discontinued Operations"). As required, the
Company has retrospectively recast its consolidated statements of operations and balance sheets for all periods presented to reflect
these businesses as discontinued operations. The Company has not segregated the cash flows of these businesses in the consolidated
statements of cash flows. Management was also required to make certain assumptions and apply judgment to determine historical expenses
related to the discontinued operations presented in prior periods. Unless noted otherwise, discussion in the Notes to Consolidated
Financial Statements refers to the Company’s continuing operations.



Cash and Cash Equivalents



Cash and cash equivalents include
all highly liquid instruments with an original maturity of three months or less.



Accounts Receivable



Accounts receivable are reported
at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances
for uncollectible receivables based on management's estimate of uncollectible amounts considering age, collection history, and
any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible.



Inventory Valuation



The Company values inventory
at the lower of cost on a first - in -first-out basis or market.



The Company
generally purchases raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing
gear, only when non-cancellable contracts for orders have been received for finished goods. It occasionally produces larger more
complex products, such as landing gear, in excess of purchase order quantities in anticipation of future purchase order demand.
Historically this excess has been used in fulfilling future purchase orders. The Company purchases supplies and materials useful
in a variety of products as deemed necessary even though orders have not been received. The Company periodically evaluates inventory
items that are not secured by purchase orders and establishes reserves for obsolescence accordingly. The Company also reserves
for excess quantities, slow-moving goods, and for other impairments of value.





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Assets Held for Sale and Liabilities
Directly Associated



Assets held for sale are reported
at the lower of their carrying amount or fair value less cost to sell and included in current assets. Liabilities associated to
business units held for sale are classified as a current liability.



Capitalized Engineering Costs



The Company has contractual agreements
with customers to produce parts, which the customers design. Even though the Company has not designed and thus has no proprietary
ownership of the parts, the manufacturing of these parts requires pre- production engineering and programming of the Company’s
machines. The pre-production costs associated with a particular contract are capitalized and then amortized beginning with the
first shipment of product pursuant to such contract. These costs are amortized on a straight-line basis over the estimated length
of the contract, or if shorter, three years.



If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as deferred revenues until the appropriate revenue recognition criteria have been met. The Terms and Conditions contained in customer
purchase orders may provide for liquidated damages in the event that a stop-work order is issued prior to the final delivery of
the product.



Property and Equipment



Property and equipment are carried
at cost net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred. Property, equipment,
and improvements are depreciated using the straight-line method over the estimated useful lives of the assets or the particular
improvements. Expenditures for repairs and improvements in excess of $1,000 that add to the productive capacity or extend the useful
life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts
and any related gain or loss is reflected in earnings.



Long-Lived and Intangible
Assets



Identifiable intangible assets
are amortized using the straight-line method over the period of expected benefit.



Long-lived assets and intangible
assets subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate
that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows
are found to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce
the carrying amount of the asset to fair value. There has been no impairment as of December 31, 2017 and 2016.



Deferred Financing Costs



Costs incurred with obtaining
and executing revolving debt arrangements are capitalized and amortized using the effective interest method over the term of the
related debt. The amortization of such costs are included in interest and financing costs. Costs incurred with obtaining and executing
other debt arrangements are presented as a direct deduction from the carrying value of the associated debt.





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Derivative Liabilities



In connection with the issuances
of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these
options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain
embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required
to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company
accounts for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging.



Revenue Recognition



For 2017 and 2016 the
Company recognized revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." The
Company recognizes revenue when products are shipped and/or the customer takes ownership and assumes risk of loss, collection
of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed
or determinable.



The Company recognizes certain
revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement, the Company
makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition as follows:



| | · | The customer requests that the
        transaction be on a bill and hold basis. A customer must initiate the request for any bill and hold arrangement. Upon request for
        a bill and hold, the Company requires a signed letter from the customer upon which the customer specifically requests the bill
        and hold arrangement. Upon receipt of the letter, the Company begins its evaluation process to determine whether a bill and hold
        arrangement can be granted.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | The customer has made fixed commitment
        to purchase in written documentation. All customers’ orders are through firm written purchase orders.                                                                                                                                                                                                                                                                                                                                        
| | · | The goods are segregated from
        other inventory and are not available to fill any other customers’ orders. The Company’s goods are made to customers’
        or their customer’s specifications and could not be sold to others.                                                                                                                                                                                                                                                     
| | · | The risk of ownership has passed
        to the customer. The product is complete and ready for shipment. The earnings process is complete. An internal evaluation is made
        as to whether the product is complete and ready for shipment. This involves a review of the purchase order and a completed inspection
        process by the Company’s quality control department.                                                                                                       
| | · | The date is determined by which
        the Company expects payment and the Company has not modified its normal billing and credit terms for this buyer. Payment is expected
        as if the goods had been shipped.                                                                                                                                                                                                                                                                      
| | · | The customer has the expected risk of loss in the event of a decline in the market value of goods. All goods are made to firm purchase orders with fixed prices. Any decline in value would not affect the pricing of the goods. The Company has not at any point, agreed to a price reduction on a bill and hold arrangement.                                                                                                                                                              



The Company had approximately
$619,000 and $2,914,000 of net sales that were billed but not shipped under such bill and hold arrangements as of December 31,
2017 and 2016, respectively.



Payments received in advance
from customers for products delivered are recorded as deferred revenue until earned, at which time revenue is recognized. The Terms
and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop work order
is issued prior to the final delivery.



The Company utilizes a Returned
Merchandise Authorization or RMA process for determining whether to accept returned products. Customer requests to return products
are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt of the product. Net sales
represent gross sales less returns and allowances.





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Use of Estimates



In preparing the financial statements,
management is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying
notes. The more significant management estimates are the allowance for doubtful accounts, useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and whether to accrue for various contingencies. Actual results could differ
from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which
they become known.



Credit and Concentration Risks



There were three customers that
represented 62.0% of total sales, and three customers that represented 52.3% of total sales for the years ended December 31, 2017
and 2016, respectively. This is set forth in the table below.



|Customer |  | Percentage of Sales
|-------- |  | -------------------
|         |  | 2017               
|         |  |                    
|1        |  | 25.5               
|2        |  | 20.5               
|3        |  | 16.0               



There were three customers that
represented 68.7% of gross accounts receivable and two customers that represented 35.3% of gross accounts receivable at December
31, 2017 and 2016, respectively. This is set forth in the table below.



|Customer |  | Percentage of Receivables
|-------- |  | -------------------------
|         |  | December                 
|         |  | 2017                     
|1        |  | 41.9                     
|2        |  | 14.6                     
|3        |  | 12.2                     



*Customer was less than 10% of gross accounts
receivable at December 31, 2017.



During the year, the Company
had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced
any losses on these accounts.



The Company has several key sole-source
suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts
and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business
could be severely harmed.



Income Taxes



The Company accounts for income
taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires that the Company
recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the
tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.





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The provision for, or benefit
from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using
the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities.
Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available
under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income
tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred
tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration
of all available evidence, both positive and negative, regarding historical operating results including recent years with reported
losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive
of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an
operating loss or tax credit carryforward from expiring unused.



The Company accounts for uncertainties
in income taxes under the provisions of FASB ASC 740-10-05, "Accounting for Uncertainty in Income Taxes." The ASC clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.



Effective July 1, 2016, the Company
adopted FASB Accounting Standards Update 2015 - 17, Balance Sheet Classification of Deferred Taxes. The ASU is part of the Board's
simplification initiative aimed at reducing complexity in accounting standards. To simplify presentation, the new guidance requires
that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. Importantly, the guidance
does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still prohibited
from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The amendments
in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period
of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively
adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period
of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the
accounting change on prior periods. The Company has applied this guidance prospectively and has not restated prior period balances.



Earnings per share



Basic earnings per share is computed
by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding
for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share calculations
for all periods when the effect of their inclusion is dilutive.



The following is a reconciliation
of the denominators of basic and diluted earnings per share computations:



|                                                                                                        |  | 2017 |            | 2016
|------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ----
|                                                                                                        |  |      |            |     
|Weighted average shares outstanding used to compute basic earnings per share                            |  |      | 13,230,775 |     
|Effect of dilutive stock options and warrants                                                           |  |      | —          |     
|Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share |  |      | 13,230,775 |     



The following securities have
been excluded from the calculation as the exercise price was greater than the average market price of the common shares:



|              |  | December 31, |           | December 31,
|------------- |  | ------------ | --------- | ------------
|              |  | 2017         |           | 2016        
|Stock Options |  |              | 354,000   |             
|Warrants      |  |              | 1,480,000 |             
|              |  |              | 1,834,000 |             





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The following securities have
been excluded from the calculation even though the exercise price was less than the average market price of the common shares because
the effect of including these potential shares was anti-dilutive due to the net loss incurred during the years:



|              |  | December 31, |         | December 31,
|------------- |  | ------------ | ------- | ------------
|              |  | 2017         |         | 2016        
|Stock Options |  |              | 146,000 |             
|Warrants      |  |              | 41,000  |             
|              |  |              | 187,000 |             



Stock-Based Compensation



The Company accounts for stock-based
compensation in accordance with FASB ASC 718, "Compensation – Stock Compensation." Under the fair value recognition
provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company
estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model.



Goodwill



Goodwill represents the excess
of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $272,000
at December 31, 2017 relates to the acquisitions of NTW $163,000 and ECC $109,000. The goodwill amount of $9,884,000 at December
31, 2016 relates to the acquisitions of Welding $292,000, NTW $163,000, Woodbine $2,565,000, Eur-Pac $1,655,000, ECC $109,000,
Sterling $4,540,000 and Compac $560,000.



The Company accounts for the
impairment of goodwill under the provisions of ASU 2011-08 (“ASU 2011-08”), “Intangibles Goodwill and Other (Topic
350): Testing Goodwill for Impairment.” ASU 2011-08 updated the guidance on the periodic testing of goodwill for impairment.
The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying amount.



The Company performs impairment
testing for goodwill annually, or more frequently when indicators of impairment exist. As discussed above, the Company adopted
ASU 2011-08 and performs a qualitative assessment in the fourth quarter of each year to determine whether it was more likely than
not that the fair value of each of Welding, including Woodbine, NTW, Eur-Pac, ECC, AMK, Sterling, Eur-Pac and Compac was less than
its carrying amount.



During 2017 the Company determined
that goodwill for Welding, Woodbine, Compac, Eur-Pac and Sterling in the amounts of $291,000, $2,565,000, $560,000, $1,656,000 and
$4,540,000, respectively, had been impaired. Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances
occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.



Goodwill is not
amortized, but is tested at least annually for impairment, or if circumstances occur that more likely than not reduce the
fair value of the reporting unit below its carrying amount.



During 2017, the
Company determined that goodwill for Eur-Pac and Sterling in the amounts of $1,655,000 and $4,540,000, respectively, had been
impaired. The total of $6,195,000 is included loss from continuing operations.



During 2017, the
Company determined that goodwill for Welding, Woodbine and Compac in the amounts of $292,000, $2,565,000, $560,000,
respectively, had been impaired. The total of $3,417,000 is included in loss from discontinued operations.



Freight Out



Freight out is included in operating
expenses and amounted to $196,000 and $180,000 for the years ended December 31, 2017 and 2016, respectively.





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JOBS Act



On April 5, 2012, the JOBS Act
was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying
public companies. As an “emerging growth company,” the Company may, under Section 7(a)(2)(B) of the Securities Act,
delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply
to private companies. An “emerging growth company” is one with less than $1.0 billion in annual sales, has less than
$700 million in market value of its shares of common stock held by non-affiliates and issues less than $1.0 billion of non-convertible
debt over a three year period. The Company may take advantage of this extended transition period until the first to occur of the
date that it (i) is no longer an "emerging growth company" or (ii) affirmatively and irrevocably opts out of this extended
transition period. The Company has elected to take advantage of the benefits of this extended transition period. Until the date
that it is no longer an "emerging growth company" or affirmatively and irrevocably opts out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to its consolidated financial
statements and that has a different effective date for public and private companies, the Company will disclose the date on which
adoption is required for non-emerging growth companies and the date on which the Company will adopt the recently issued accounting
standard.



Recently Issued Accounting
Pronouncements



In January 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-01, Recognition
and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) (“ASU 2016-01”). The main objective
of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company does not expect the adoption of this amendment to have a significant impact on its consolidated financial statements.



In February 2016, the FASB issued
ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The main objective of ASU 2016-02 is to increase transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification
and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company does not expect the adoption of this amendment to have a significant impact on its
consolidated financial statements.



In April 2016, the FASB issued
ASU 2016-10 Revenue from Contracts with Customers (Topic 606) (“ASU 2016-10”). The core principle of the guidance in
Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments
in ASU 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective. The effective
date and transition requirements of ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09.
They are effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The
Company is currently assessing the impact of the adoption of these amendments on its consolidated financial statements.



In May 2016, the FASB issued
Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow -Scope Improvements and Practical
Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying
guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same date that Topic
606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including
interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for nonpublic entities
one year later. The Company is currently assessing the impact of the adoption of the amendments to Topic 606 and these amendments
on its consolidated financial statements.



In August 2016, the FASB issued
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard provides
guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including beneficial
interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables. The
standard is intended to reduce current diversity in practice. Early adoption is permitted, including adoption in an interim period.
The Company does not expect the adoption of these amendments to have a significant impact on its consolidated financial statements.





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In November 2016, the FASB issued
ASU 2016-18, Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted cash within
the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included
in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents,
restricted cash or restricted cash equivalents are presented in more than one-line item within the statement of financial position,
an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement
of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal
years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company
is currently in the process of evaluating the impact of the adoption of this standard on our financial statements.



In January 2017, the FASB issued
ASU 2017-01 (“ASU 2017-01”), Business Combinations, which clarifies the definition of a business, particularly when
evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first part
of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.



In January 2017, FASB issued
ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step 2 of
the goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit with
its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities having one
or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting units, (2) the amount
of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU No. 2017-04 is effective
as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard
on our financial statements.



In July 2017, the FASB issued
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. The ASU allows companies to exclude a down round feature when determining whether a financial
instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments
(or embedded conversion features) with down round features may no longer be required to be accounted classified as liabilities.
A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward.
For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the
down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings
per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize
the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11is effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted,
and the guidance is to be applied using a full or modified retrospective approach. The Company adopted this guidance in the current
quarter, effective April 1, 2017. As a result, the warrants issued on May 12, 2017, in connection with the bridge financing, were
equity-classified.



The Company does not believe
that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on
the accompanying consolidated financial statements.



Reclassifications



Reclassifications
occurred to certain 2016 amounts to conform to the 2017 classification.





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Note 4. ACCOUNTS RECEIVABLE



The components of accounts receivable
at December 31, are detailed as follows:



|                                |  | December 31, |           | December 31,
|------------------------------- |  | ------------ | --------- | ------------
|                                |  | 2017         |           | 2016        
|                                |  |              |           |             
|Accounts Receivable Gross       |  | $            | 5,958,000 |             
|Allowance for Doubtful Accounts |  |              | (494,000  | )           
|Accounts Receivable Net         |  | $            | 5,464,000 |             



The allowance for doubtful accounts
for the years ended December 31, 2017 and 2016 is as follows:



|                                |  | Balance at Beginning of Year |         | Charged to Costs and Expenses |  | Deductions from Reserves |         | Balance at End of Year
|------------------------------- |  | ---------------------------- | ------- | ----------------------------- |  | ------------------------ | ------- | ----------------------
|Year ended December 31, 2017    |  |                              |         |                               |  |                          |         |                       
|Allowance for Doubtful Accounts |  | $                            | 403,000 |                               |  | $                        | 91,000  |                       
|Year ended December 31, 2016    |  |                              |         |                               |  |                          |         |                       
|Allowance for Doubtful Accounts |  | $                            | 196,000 |                               |  | $                        | 274,000 |                       



Note 5. INVENTORY



The
components of inventory at December 31, consisted of the following:



|                  |  | December 31, |            | December 31,
|----------------- |  | ------------ | ---------- | ------------
|                  |  | 2017         |            | 2016        
|                  |  |              |            |             
|Raw Materials     |  | $            | 5,346,000  |             
|Work In Progress  |  |              | 19,947,000 |             
|Finished Goods    |  |              | 10,122,000 |             
|Inventory Reserve |  |              | (4,274,000 | )           
|Total Inventory   |  | $            | 31,141,000 |             



The Company periodically evaluates
inventory and establishes reserves for obsolescence, excess quantities, slow-moving goods, and for other impairment of value.



|                             |  | Balance at Beginning of Year |            | Additions to Reserve |  | Deductions from Reserves |          | Balance at End of Year
|---------------------------- |  | ---------------------------- | ---------- | -------------------- |  | ------------------------ | -------- | ----------------------
|Year ended December 31, 2017 |  |                              |            |                      |  |                          |          |                       
|Reserve for Inventory        |  | $                            | (3,776,000 | )                    |  | $                        | (503,000 | )                     
|Year ended December 31, 2016 |  |                              |            |                      |  |                          |          |                       
|Reserve for Inventory        |  | $                            | (3,181,000 | )                    |  | $                        | (681,000 | )                     





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Note 6. PROPERTY AND EQUIPMENT



The components of property and
equipment at December 31, consisted of the following:



|                                      |  | December 31, |             | December 31, |  |  
|------------------------------------- |  | ------------ | ----------- | ------------ |  | -
|                                      |  | 2017         |             | 2016         |  |  
|                                      |  |              |             |              |  |  
|Land                                  |  | $            | 300,000     |              |  | $
|Buildings and Improvements            |  |              | 1,650,000   |              |  |  
|Machinery and Equipment               |  |              | 11,554,000  |              |  |  
|Capital Lease Machinery and Equipment |  |              | 6,534,000   |              |  |  
|Tools and Instruments                 |  |              | 8,538,000   |              |  |  
|Automotive Equipment                  |  |              | 172,000     |              |  |  
|Furniture and Fixtures                |  |              | 311,000     |              |  |  
|Leasehold Improvements                |  |              | 528,000     |              |  |  
|Computers and Software                |  |              | 406,000     |              |  |  
|Total Property and Equipment          |  |              | 29,993,000  |              |  |  
|Less: Accumulated Depreciation        |  |              | (19,943,000 | )            |  |  
|Property and Equipment, net           |  | $            | 10,050,000  |              |  | $



Depreciation expense for the
years ended December 31, 2017 and 2016 was approximately $1,868,000 and $3,175,000, respectively. Assets held under capitalized
lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation
of assets under capital leases is included in depreciation expense for 2017 and 2016. Accumulated depreciation on these assets
was approximately $3,595,000 and $2,320,000 as of December 31, 2017 and 2016, respectively.



Note 7. INTANGIBLE ASSETS



The components of the intangibles
assets at December 31, consisted of the following:



|                               |  | December 31, |            | December 31, |  |  
|------------------------------ |  | ------------ | ---------- | ------------ |  | -
|                               |  | 2017         |            | 2016         |  |  
|                               |  |              |            |              |  |  
|Customer Relationships         |  | $            | 4,925,000  |              |  | $
|Trade Names                    |  |              | —          |              |  |  
|Technical Know-how             |  |              | —          |              |  |  
|Non-Compete                    |  |              | 50,000     |              |  |  
|Professional Certifications    |  |              | —          |              |  |  
|Total Intangible Assets        |  |              | 4,975,000  |              |  |  
|Less: Accumulated Amortization |  |              | (4,975,000 | )            |  |  
|Intangible Assets, net         |  | $            | —          |              |  | $



The expense for amortization
of the intangibles for the years ended December 31, 2017 and 2016 was approximately $471,000 and $995,000, respectively. As of
December 31, 2017 Intangible Assets have been fully amortized.



Note 8. ASSETS HELD FOR SALE
AND LIABILITES DIRECTLY ASSOCIATED



AMK



As discussed in Note 1, on January 27,
2017, the Company sold all of the outstanding shares of AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., pursuant to
a Stock Purchase Agreement dated January 27, 2017 (“the Stock Purchase Agreement”) for a purchase price of $4,500,000,
subject to a working capital adjustment, plus additional quarterly payments, not to exceed $1,500,000, equal to five percent (5%)
of Net Revenues of AMK commencing April 1, 2017. At December 31, 2016, the Company had reclassified its assets held for sale and
the liabilities directly associated to these assets. The components of these assets and liabilities are as follows:





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|Components of Assets Held for Sale and Liabilities Directly Associated
|----------------------------------------------------------------------
|                                                                      
|Assets Held for Sale                                                  
|Cash                                                                  
|Accounts Receivable, net of allowance for doubtful accounts           
|Inventory, net of reserves                                            
|Prepaid and other assets                                              
|Property and equipment, net of accumulated depreciation               
|Intangible Assets, net of accumulated amortization                    
|Goodwill                                                              
|                                                                      
|Assets Held for Sale                                                  
|                                                                      
|Accounts payable and accrued expenses                                 
|Capital lease obligations                                             
|Deferred revenues                                                     
|                                                                      
|Liabilities directly associated to Assets Held for Sale               



Additionally, AMK's operations were previously reported in the Company's Turbine Engine Components segment. The amounts below
represent AMK's operations that have been excluded from this segment for the year ended December 31, 2016:



|Segment Data              |  |     
|------------------------- |  | ----
|Turbine Engine Components |  | 2016
|Net Sales                 |  | $   
|Gross Profit              |  |     
|Pre Tax (Loss)  Income    |  |     
|Assets                    |  |     



WMI



As discussed in Note 1, on March 21, 2018, the Company
signed a Stock Purchase Agreement to sell all of the outstanding shares of WMI to CPI for a purchase price of $9,000,000, subject
to a working capital adjustment, and a contingent payment of $1,000,000. At December 31, 2017 and 2016, the Company reclassified
its assets held for sale and the liabilities directly associated to these assets. The components of these assets and liabilities
are as follows:

Components
of Assets Held for Sale and Liabilities Directly Associated



|Assets Held for Sale                                        |  | December
    31, 2017 |            | December
    31, 2016
|----------------------------------------------------------- |  | --------------------- | ---------- | ---------------------
|Accounts Receivable, net of allowance for doubtful accounts |  | $                     | 2,217,000  |                      
|Inventory, net of reserves                                  |  |                       | 8,065,000  |                      
|Prepaid and other assets                                    |  |                       | 485,000    |                      
|Property and equipment, net of accumulated depreciation     |  |                       | 878,000    |                      
|Intangible Assets, net of accumulated amortization          |  |                       | —          |                      
|Impairment of Assets Held for Sale                          |  |                       | (1,563,000 | )                    
|Goodwill                                                    |  |                       | —          |                      
|                                                            |  |                       |            |                      
|Assets Held for Sale                                        |  | $                     | 10,082,000 |                      
|                                                            |  |                       |            |                      
|Accounts payable and accrued expenses                       |  |                       | 2,138,000  |                      
|Deferred Revenue                                            |  |                       | 521,000    |                      
|Notes Payable & Capital lease obligations                   |  |                       | 11,000     |                      
|Deferred rent                                               |  |                       | 125,000    |                      
|                                                            |  |                       |            |                      
|Liabilities directly associated to Assets Held for Sale     |  | $                     | 2,795,000  |                      





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Additionally, WMI's operations were previously reported in the Company's Aerostructures & Electronics segment. The amounts
below represent WMI's operations that have been excluded from this segment for the years ended December 31, 2017 and 2016,
respectively:



|Segment Data                 |  |   |            |   |  |   |            |  
|---------------------------- |  | - | ---------- | - |  | - | ---------- | -
|Aerostructures & Electronics |  |   | 2017       |   |  |   | 2016       |  
|Net Sales                    |  | $ | 13,129,000 |   |  | $ | 15,594,000 |  
|Gross Profit                 |  |   | 1,884,000  |   |  |   | 2,451,000  |  
|Pre Tax (Loss) Income        |  |   | (6,678,000 | ) |  |   | (756,000   | )
|Assets                       |  |   | 10,082,000 |   |  |   | 15,247,000 |  



Note 9. ACCOUNTS PAYABLE AND
ACCRUED EXPENSES



The components of accounts payable
at December 31, are detailed as follows:



|                 |  | December 31, |            | December 31,
|---------------- |  | ------------ | ---------- | ------------
|                 |  | 2017         |            | 2016        
|                 |  |              |            |             
|Accounts Payable |  | $            | 8,634,000  |             
|Accrued Expenses |  |              | 2,238,000  |             
|                 |  | $            | 10,872,000 |             



Note 10. SALE AND LEASEBACK
TRANSACTION



On April 11, 2016, the Company
executed a Sale - Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor, Connecticut
(the “South Windsor Property”) for a purchase price of $1,700,000. The net proceeds from the sale of the property were
applied to the amounts owed to PNC Bank.



Simultaneous with the closing
of the sale of the South Windsor Property, the Company entered into a 15-year lease (the “Lease”) with the purchaser
for the property. Base annual rent is approximately $155,000 for the first year and increases approximately 3% per year, each year
thereafter. The Lease grants the Company an option to renew the Lease for an additional period of five years. Pursuant to the terms
of the Lease, the Company is required to pay all of the costs associated with the operation of the facilities, including, without
limitation, insurance, taxes and maintenance. The Lease also contains representations, warranties, obligations, conditions and
indemnification provisions in favor of the purchaser and grants the purchaser remedies upon a breach of the Lease by the Company,
including the right to terminate the Lease and hold the Company liable for any deficiency in future rent.



On October 24, 2006, the Company
consummated a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New
York (the “Bay Shore Property”) for a purchase price of $6,200,000. The Company realized a gain on the sale of $1,051,000
of which $300,000 was recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized ratably over
the remaining term of the twenty - year lease at approximately $38,000 per year. The gain is included in Other Income in the accompanying
Consolidated Statements of Operations. The unrecognized portion of the gain in the amount of $333,000  and $371,000 as of December
31, 2017 and 2016, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets.





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Simultaneous with the closing
of the sale of the Bay Shore Property, the Company entered into a 20-year triple- net lease (the “Lease”) with the
purchaser for the property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year, and
thereafter increases 3% per year. The Lease grants the Company an option to renew the Lease for an additional period of five years.
The Company has on deposit with the purchaser $89,000 as security for the performance of its obligations under the Lease. In addition,
the Company has on deposit $150,000 with the landlord as security for the completion of certain repairs and upgrades to the Bay
Shore Property. This amount is included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the accompanying
Consolidated Balance Sheets. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated with
the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also contains customary
representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary remedies
upon a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency
in future rent. See Note 14 Commitments and Contingencies.



The Company accounted for these
transactions under the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions”.



On January 27, 2017, the Company
entered into an agreement to sell the stock of AMK. Included in this agreement was the transfer of the capital lease obligation
on the South Windsor Property transferred to the purchaser of AMK. At December 31, 2016, the Company reclassified the capital asset
of $1,700,000 and lease obligation of $1,680,000 to Assets Held for Sale and Liabilities Held for Sale, respectively. See Note
1 for additional discussion regarding the sale of AMK.



Note 11. NOTES PAYABLE AND
CAPITAL LEASE OBLIGATIONS



Notes payable and capital lease
obligations consist of the following:



|                                                                    |  | December 31, |             | December 31,
|------------------------------------------------------------------- |  | ------------ | ----------- | ------------
|                                                                    |  | 2017         |             | 2016        
|                                                                    |  |              |             |             
|Revolving credit note payable to PNC Bank N.A. ("PNC")              |  | $            | 16,455,000  |             
|Term loans, PNC                                                     |  |              | 3,471,000   |             
|Capital lease obligations                                           |  |              | 3,073,000   |             
|Related party notes payable, net of debt discount                   |  |              | 1,912,000   |             
|Other note payable                                                  |  |              | 1,930,000   |             
|Subtotal                                                            |  |              | 26,841,000  |             
|Less:  Current portion of notes and capital obligations             |  |              | (23,393,000 | )           
|Notes payable and capital lease obligations, net of current portion |  | $            | 3,448,000   |             



PNC Bank N.A. ("PNC")



The Company has a Loan Facility
with PNC secured by substantially all of its assets. The Loan Facility has been amended many times during its term. The Loan Facility
was amended in June 2016 (the “Twelfth Amendment”) and September 2016 (the “Thirteenth Amendment”). In
connection with the Twelfth Amendment, the Company paid PNC a fee of $100,000 and reimbursed it for the fees and expenses of its
counsel. The Twelfth Amendment provides for a $33,000,000 revolving loan. In addition, in the Twelfth Amendment the four term loans
(Term Loan A, Term Loan B, Term Loan C and Term Loan D) then outstanding were consolidated into a single term loan with the initial
principal amount of $7,387,854. Further, in the Twelfth Amendment the Company acknowledged that there were then outstanding excess
advances under the revolving loan in the amount of $12,500,000.





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Under the terms of the Loan Facility,
as amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three- quarters of one
percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent (4.50%)
with respect to LIBOR Rate Loans. The amount outstanding under the revolving loan, inclusive of the excess advance, was $16,455,000
and $24,393,000, as of December 31, 2017 and December 31, 2016, respectively. Because the revolving loans contain a subjective
acceleration clause which could permit PNC to require repayment prior to maturity, all of the loans outstanding with PNC are classified
with the current portion of notes and capital lease obligations.



The Loan Facility
was further amended pursuant to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be
the lesser of (i) 75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the
eligible inventory, an increase from 85%, subject to the inventory sublimit of $12,500,000 and such reserves as PNC may deem
proper. In addition, in the Thirteenth Amendment the lender waived any default resulting from the Company’s obligation
to comply with the minimum EBITDA (as defined in the Loan Facility) covenant for the period ended June 30, 2016, consented to
the issuance of the Company’s 12% Subordinated Convertible Notes and the amendment to the Company’s Articles
of Incorporation to increase the authorized number of shares of Preferred Stock and Series A Preferred Stock.



The repayment terms of the Term
Loan provided for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first fifty-nine
(59) of which shall be in the amount of $123,133 commencing on the first business day of July, 2016, and continuing on the first
business day of each month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal and interest
payable on the last business day of June, 2021.



At the closing of the Twelfth
Amendment, the Company paid $1,500,000 to reduce the outstanding excess under the revolving loan from $12,500,000 to $11,000,000.
It also agreed that the excess advances will be paid down by $100,000 each week commencing the second week after the closing of
the Twelfth Amendment.



To the extent that the Company
disposes of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws on the
credit facility in the amount equal to the net proceeds of such sale.



The terms of the Loan Facility
require that among other things, the Company maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA. In
addition, the Company is limited in the amount of capital expenditures it can make. The Company also is limited as to the amount
of dividends it can pay its shareholders, as defined in the Loan Facility.



On June 19, 2017, we entered
into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant for the
periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December 31, 2016.
The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated basis
beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the prior
three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months and (iii)
1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine months and that we maintain EBITDA of not
less than $345,000 for the period ending September 30, 2017. The amendment also provided that we were not required to maintain
a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending December
31, 2016 and June 30, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing will be required
of the Fixed Charge Coverage Ratio for the period ending June 30, 2017. As of December 31, 2017, the Company was not in compliance
with our Fixed Charge Coverage Ratio covenant. The failure to satisfy the foregoing covenants would constitute a default under
the Loan Facility and PNC at its option could give notice to the Company that all amounts under the Loan Facility are immediately
due and payable, and accordingly all amounts due under the loan facility have been classified as current, as of December 31, 2017.
In addition, the amendment reduced the weekly payments we are required to make to reduce our $2,244,071 over-advance under the
revolving credit facility as of June 19, 2017 from $100,000 to $25,000 per week during the period commencing May 22, 2017 through
and including July 10, 2017. At December 31, 2017, the over-advance had been paid in full. We paid $50,000 to PNC in connection
with the amendment and reimbursed PNC’s counsel fees.





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As of December 31, 2017, our
debt to PNC in the amount of $19,926,000 consisted of the revolving credit loan in the amount of $16,455,000 and the term loan
in the amount of $3,471,000. As of December 31, 2016, our debt to PNC in the amount of $31,042,000 consisted of the revolving credit
note due to PNC in the amount of $24,393,000 and the term loan due to PNC in the amount of $6,649,000.



Each day, the Company’s
cash collections are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing
base formula. The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan
Facility). PNC may use some elements of subjective business judgment in determining whether a material adverse change has occurred
in the Company's condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of
the Loan Facility.



As of December 31, 2017 the future
minimum principal payments for the term loans are as follows:



|For the year ending    |  | Amount
|---------------------- |  | ------
|December 31, 2018      |  | $     
|December 31, 2019      |  |       
|December 31, 2020      |  |       
|December 31, 2021      |  |       
|December 31, 2022      |  |       
|Thereafter             |  |       
|                       |  |       
|PNC Term Loans payable |  |       
|Less: Current portion  |  |       
|Long-term portion      |  | $     



Interest expense related to these
credit facilities amounted to approximately $2,122,000 and $1,908,000 for the years ended December 31, 2017 and 2016, respectively.



During the year ended
December 31, 2017, the Company discovered that PNC Bank had been improperly calculating interest expense on a monthly basis
since 2007. The result was a net overcharge of approximately $1,500,000 through December 31, 2017. On a monthly basis, PNC
Bank had allocated the Company’s line of credit balances between each of the Company’s subsidiaries, based on
their individual entity balance. Some of these accounts held debit balances, while others carried credit balances. PNC
charged interest to the Company for its entities with debit balances without offsetting credit balances. This method of segregating
the Company’s debt balances by entity by PNC Bank has  ceased. As of the date of this filing, the Company has recovered
all of its identified overcharged interest  and has not noted any further discrepancies.



Capital Leases Payable –
Equipment



The Company is committed under
several capital leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at the termination
of each lease. Capital lease obligations totaled $3,073,000 and $4,215,000 as of December 31, 2017 and 2016, respectively, with
various interest rates ranging from approximately 4% to 14%.



As of December 31, 2017, the
aggregate future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:



|For the year ending                 |  | Amount
|----------------------------------- |  | ------
|December 31, 2018                   |  | $     
|December 31, 2019                   |  |       
|December 31, 2020                   |  |       
|December 31, 2021                   |  |       
|December 31, 2022                   |  |       
|Thereafter                          |  |       
|Total future minimum lease payments |  |       
|Less: imputed interest              |  |       
|Less: current portion               |  |       
|Total Long Term Portion             |  | $     





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Related Party Notes Payable



Taglich Brothers, Inc. is a corporation
co-founded by two directors of the Company, Michael and Robert Taglich. In addition, a third director of the Company is a vice
president of Taglich Brothers, Inc.



Taglich Brothers, Inc. has acted as placement
agent for various debt and equity financing transactions and has received cash and equity compensation for their services. In addition,
Michael and Robert Taglich have also invested in the Company through various debt and equity financings.



Related party notes payable to Michael
and Robert Taglich, and their affiliated entities, totaled $2,126,000 and $1,086,000, as of December 31, 2017 and December 31,
2016, respectively.



On April 8, 2016, the Company
issued a promissory note (“the Taglich Note B”) to Michael Taglich in the principal amount of $350,000. The
Taglich Note B bore interest at the rate of 7% per annum. The Company’s obligation under the Taglich Note B was
subordinated to its indebtedness to PNC. This note has been repaid in full.



On April 8, 2016, the Company issued a
promissory note (“the Taglich Note C”) to Robert Taglich in the principal amount of $350,000. The Taglich Note C bore
interest at the rate of 7% per annum. The Company’s obligation under the Taglich Note C was subordinated to its indebtedness
to PNC. This note has been repaid in full.



On May 6, 2016, the Company issued a promissory
note (“the Taglich Note D”) to Michael Taglich in the principal amount of $400,000. The Taglich Note D bore interest
at the rate of 7% per annum. The Company’s obligation under the Taglich Note D was subordinated to its indebtedness to PNC.
This note has been repaid in full.



On May 6, 2016, the Company issued a promissory
note (“the Taglich Note E”) to Robert Taglich in the principal amount of $300,000. The Taglich Note E bore interest
at the rate of 7% per annum. The Company’s obligation under the Taglich Note E was subordinated to its indebtedness to PNC.
This note has been repaid in full.



On May 25, 2016, the Company issued 110,000
and 65,000 shares of Series A Preferred Stock to Michael Taglich and Robert Taglich, respectively upon surrender of Taglich Notes
D and E, in the aggregate principal of $1,100,000 and $650,000, respectively.



On August 1, 2016, the Company issued a
promissory note (the “Taglich Note F”) to Michael Taglich, in the principal amount of $1,000,000. The Taglich Note
F bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note F was subordinated to its indebtedness
to PNC.



On August 4, 2016, the Company issued a
promissory note (the “Taglich Note G”) to Michael Taglich, in the principal amount of $500,000. The Taglich Note G
bore interest at the rate of 7% per annum. The Company’s obligation under the Taglich Note G was subordinated to its indebtedness
to PNC.



On August 19, 2016, the Company issued
to Michael Taglich its 12% Subordinated Convertible Notes due December 31, 2017 (the “12% Notes”) in the principal
amount of $1,520,703, together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of Taglich
Notes F & G in the aggregate principal amount of $1,500,000, together with accrued interest thereon and on notes previously
exchanged for Series A Preferred Stock of $20,703. In addition, the Company issued to Robert Taglich a 12% Note in the principal
amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness of interest
of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.



On March 17, 2017, the Company borrowed
$200,000 and $300,000 from each of Michael Taglich and Robert Taglich, respectively, directors and principal stockholders of our
company, and issued promissory notes in the principal amounts of $200,000 and $300,000 to Michael Taglich and Robert Taglich, respectively,
to evidence our obligation to repay that indebtedness. The notes bore interest at the rate of 7% per annum. The notes have been
converted into 346,992 shares of common stock as of December 31, 2017.





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On May 2, and May 10, 2017, the
Company borrowed an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. This indebtedness, together with accrued
interest, were converted into May 2018 Notes on May 12, 2017.



In April 2018, Michael and Robert
Taglich advanced an aggregate of $1,150,000 to be applied to a private placement on terms yet to be determined.



Taglich Brothers acted as a placement
agent in connection with the sale of the May 2018 Notes and warrants discussed below for which they are to be paid commissions
in the aggregate amount of $176,000.



As compensation for its services as placement
agent for the offering of the 12% Notes discussed below, the Company paid Taglich Brothers a fee of $295,400 and issued to Taglich
Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15, subject to certain
anti-dilution and other adjustments.



12% Subordinated Convertible Notes



On August 19, 2016, the Company entered
into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the “Placement Agent”), pursuant
to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $4,250,000 of the Company’s
12% Subordinated Convertible Notes due December 31, 2017 (the “12% Notes”) to accredited investors (“the Offering”),
together with five-year warrants to purchase 4,065 shares of common stock (the “Warrants”) for each $100,000 principal
amount of 12% Notes purchased, in a private placement exempt from the registration requirements of the Securities Act of 1933,
as amended (the Securities Act ) .



The 12% Notes were convertible, at the
option of the holders, into shares of the Company’s common stock at an initial conversion price of $4.92 per share, subject
to adjustment for certain events. The 12% Notes were automatically convertible into shares of the Company’s Series A Convertible
Preferred Stock (“Series A Preferred Stock”) at a price of $10.00 per share, the stated value of the Series A Preferred
Stock, upon the filing of a certificate of amendment to the Company’s Articles of Incorporation increasing the number of
shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon conversion of the 12%
Notes and for issuance in lieu of payment of cash dividends (the “Certificate of Amendment”) in accordance with the
provisions of the certificate of designation authorizing the issuance of the Series A Preferred Stock. The amendment was subject
to the approval of the Company’s stockholders.



Under the terms of the Placement Agency
Agreement, the Placement Agent is entitled to a placement agent fee equal to 7% of the gross proceeds of the offering, five year
warrants to purchase 8% of the number of shares of the Company’s common stock issuable upon conversion of the 12% Notes at
an exercise price of $6.15 per share, equal to 125% of the initial conversion price per share of the 12% Notes, and reimbursement
for its actual out-of-pocket expenses not to exceed in the aggregate $25,000.



In August 2016, the Company issued and
sold a total of $2,720,000 principal amount of the 12% Notes, together with Warrants to purchase an aggregate of 110,556 shares
of common stock, yielding net proceeds to the Company of approximately $2,320,000, pursuant to a Securities Purchase Agreements
with accredited investors. The Company also issued to Michael Taglich a 12% Note in the principal amount of $1,520,703, together
with Warrants to purchase 61,817 shares of common stock at an initial exercise price of $6.15, subject to anti-dilution and other
adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations,
upon surrender for cancellation of Taglich Notes F and G in the aggregate principal amount of $1,500,000, together with accrued
interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,703. In addition, the Company issued to
Robert Taglich a 12% Note in the principal amount of $4,373, together with Warrants to purchase 177 shares of common stock, in
consideration of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.



The Warrants including those issued to
the placement agent are classified within stockholders equity, pursuant to ASC 480, Distinguishing Liabilities from Equity and
ASC 815-40, Derivatives and Hedging: Contracts in Own Equity. The 12% Notes contained a contingent put that results in early settlement
of the 12% Notes upon the filing of a certificate of amendment to the Company’s Articles of Incorporation, increasing the
number of shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon conversion of
the 12% Notes. The embedded put feature is required to be separately measured at fair value with changes in value recognized in
the statement of operations, pursuant to ASC 815-15, Derivatives and Hedging: Embedded Derivatives, as the put feature is not clearly
and closely related to the convertible promissory note.



The proceeds received upon issuing the
12% Notes and Warrants was allocated to each instrument on a relative fair value basis. The initial fair value of the Warrants
was determined using the Black Scholes Merton valuation model with the following assumptions: expected term of 5 years; risk free
interest rate of 1.2%; and volatility of 90%. The allocated value of the 12% Notes was further reduced for the initial fair value
of the embedded put of approximately $755,000. The resulting discount to the 12% Notes, including the allocated transactions costs,
is amortized to interest expense using the effective interest method over the term of the Notes.





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As compensation for its services as placement
agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400.



On November 30, 2016, the Company’s
stockholders approved the amendment to the Company’s Articles of Incorporation, and consequently the Company issued a total
of 438,770 shares of its Series A Preferred Stock to holders of its 12% Notes upon the automatic conversion of the principal amount
of, and accrued interest on, the 12% Notes at the rate of $10.00 per share.



Private Placements of 8% Subordinated
Convertible Notes



From November 23, 2016
through March 21, 2017, the Company received gross proceeds of $4,775,000, of which $1,950,000 were received from Robert and
Michael Taglich, from the sale of an equal principal amount of our 8% Subordinated Convertible Notes (the “8%
Notes”), together with warrants to purchase a total of 383,080 shares of our common stock, in private placement
transactions with accredited investors (the “8% Note Offerings”). In connection with the offering of the 8%
Notes, the Company issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc., placement agent
for the 8% Note Offerings, in lieu of payment of cash compensation for sales commissions, together with warrants to purchase
a total of 180,977 shares of our common stock.  Payment of the principal and accrued interest on the 8% Notes are junior and subordinate in right
of payment to our indebtedness under the Loan Facility.



Interest on the 2018 Notes is
payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in
cash, or at our option, in additional 2018 Notes, provided that if accrued interest payable on $1,269,000 principal amount of the
2018 Notes issued in December 2016 is paid in additional 2018 Notes, interest for that quarterly interest payment shall be calculated
at the rate of 12% per annum. Upon the occurrence and continuation of an event of default, interest shall accrue at the rate of
12% per annum.



During the year ended December 31, 2017, we issued $354,238 principal amount of 8% Notes in lieu of cash payment of accrued
interest. As of December 31, 2017, we had outstanding $5,525,000 principal amount of 8% Notes, of
which $3,003,000 principal amount is due on November 30, 2018 and $2,522,000 principal amount is due on February 28, 2019.



The outstanding principal amount
plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock conversion prices
ranging from $2.25 to $4.45 per share, subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations.



An event of default under the
8% Notes will occur (i) if the Company fails to make any payment under the 8% Notes within ten days after the date first due, or
(ii) if the Company files a petition in bankruptcy or under any similar insolvency law, makes an assignment for the benefit of
its creditors, or if any voluntary petition in bankruptcy or under any similar insolvency law is filed against the Company and
such petition is not dismissed within sixty (60) days after the filing thereof. Upon the occurrence and continuation of an event
of default, holders of a majority of the outstanding principal amount of the 8% Notes then outstanding, upon notice to the Company
and the holders of the Senior Indebtedness (as defined in the 8% Notes), may demand immediate payment of the unpaid principal amount
of the 8% Notes, together with accrued interest thereon and all other amounts payable under the 8% Notes, subject to the subordination
provisions of the 8% Notes.





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The exercise price of the warrants
issued in connection with the 8% Note Offerings ranges from $3.00 to $4.53 per share, subject to certain anti-dilution and other
adjustments, including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions
such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending
upon prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November 30,
2021 and 243,307 warrants may be exercised until January 31, 2022.



May Note Financing



On May 12 and May 19, 2017, the
Company issued and sold to 17 accredited investors (including Michael N. Taglich and Robert F. Taglich individually and a partnership
of which they are partners), its “May 2018 Notes” in the aggregate principal amount of $4,158,624, together with warrants
to purchase an aggregate of 501,039 shares of common stock, for gross proceeds (net of the exchange of indebtedness totaling $1,503,288
due to Michael N. Taglich and Robert F. Taglich for working capital advances made on May 2 and 10, 2017) of $2,534,196. Roth Capital
LLC and Taglich Brothers acted as placement agents in connection with the sale of the May 2018 Notes and warrants for which they
are to be paid commissions in the aggregate amount of $191,155.



The May 2018 Notes and warrants
were issued for a purchase price equal to 97% of the principal amount of the May 2018 Notes purchased. The principal amount of
each May 2018 Note will be increased by 2% for each 30 days it remains outstanding commencing August 1, 2017. Upon the occurrence
of, and during the continuance of an Event of Default (as defined in the May 2018 Notes), the May 2018 Notes will accrue late interest
at the rate of 10% per annum. Payment of the principal and accrued interest, if any, on the May 2018 Notes is junior and subordinate
in right of payment to the Company’s indebtedness under the Loan Facility.



The principal amount, together
with accrued interest, if any, of the May 2018 Notes, when issued, were convertible into shares of common stock until November
12, 2017 at a conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock splits and certain
fundamental transactions, including recapitalizations, mergers and other business combination transactions (the “Fixed Conversion
Price”), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5) Weighted Average Prices (as defined
in the May 2018 Notes) of the common stock during the five consecutive trading day period ending on the trading day immediately
preceding the day of a request by the holder for conversion of the May 2018 Note. The Company has the right to redeem all, or a
portion of (on a pro rata basis), of the May 2018 Notes upon written notice to the holders not less than three trading days prior
to the applicable redemption date. In connection with the Company’s July 2017 public offering of its common stock, approximately
$1,754,215 principal amount of the May 2018 Notes were converted into 1,240,605 shares of common stock and $463,501 principal amount
of May 2018 Notes were redeemed. The balance of the May 2018 Notes were converted into 1,222,809 shares of common stock pursuant
to the restructuring approved by the Company’s stockholders at the Company’s Annual Meeting on October 3, 2017. Consequently,
no May 2018 Notes remain outstanding.



The Company issued warrants to
purchase 501,039 shares of common stock as part of the private placement of the May 2018 Notes. The warrants, when issued, were
exercisable at an initial exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a
lesser number of shares based upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations,
mergers and other business combination transactions. In accordance with the terms of the warrants, the exercise price was reduced
to $1.50 per share, the public offering price of the shares of common stock sold in the Public Offering.



The Company early adopted the
provisions of ASU 2017-11 in recognizing the warrants. As a result, the exercise price reset provisions were excluded from the
assessment of whether the warrants are considered indexed to the Company’s own stock. The warrants otherwise meet the requirements
for equity classification, as such were initially classified in Stockholders’ Equity. The Company will recognize the value
of the exercise price reset provision if and when it becomes triggered, by recognizing the value of the effect of the exercise
price reset as a deemed dividend and a reduction of income available to common shareholders in computing basic earnings per share.





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The proceeds received upon issuing
the May 2018 Notes and warrants was allocated to each instrument on a relative fair value basis. The allocation resulted in an
effective conversion price for the May 2018 Notes that was below the quoted market price of the Company’s common stock. As
such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion feature on each issuance
date, resulting in an additional discount to the initial carrying value of the May 2018 Notes with a corresponding credit to additional
paid-in capital.



On
October 3, 2017, holders  of $1,834,214 aggregate principal
amount of the Company’s May 2018 Notes agreed to convert their 2018 Notes into 1,222,809 shares of common stock. The May
2018 Notes were convertible at a fixed conversion price per share of $2,49, through November 12, 2017. The conversion that occurred
on October 3, 2017 was at a lower conversion price of $1.50 per share (the offering price of the shares of common stock in the
Public Offering).



Note 12. STOCKHOLDERS' EQUITY



Issuance of Series A Preferred
Stock and Related Financings



On May 25, 2016, and June 1,
2016, the Company completed a private placement of 700,000 shares of our Series A Preferred Stock for $10.00 per share and received
gross cash proceeds of $5,250,000, net of $1,750,000 principal amount of our promissory notes exchanged by Michael Taglich and
Robert Taglich, two of our principal stockholders, for shares of Series A Preferred Stock. The Company had issued the promissory
notes to Michael Taglich and Robert Taglich for amounts borrowed from September 2015 through May 2016. The September 2015 loan
bore interest at the rate of 4% per annum and was to be paid on September 7, 2016. The other loans bore interest at the rate of
7% per annum and were to be repaid on June 30, 2016, or, if earlier, upon the sale of the Company’s equity from which it
derived proceeds of $1,800,000 or $2,000,000 depending upon the promissory notes issued.



Preferred Stock



The shares of Series A Preferred
Stock have a stated value of $10.00 per share and are initially convertible into shares of common stock at a price of $4.92 per
share (subject to adjustment upon the occurrence of certain events). When issued, the dividend rate on the Series A Preferred Stock
was 12% per annum, payable quarterly and was to increase to 15% per annum if we were to issue PIK Shares in lieu of payment of
cash dividends payable until June 15, 2018. The dividend rate on the Series A Preferred Stock was originally to increase to 16%
per annum after June 2018, 19% per annum to the extent dividends were paid in PIK Shares. In July 2017, the Company amended the
Certificate of Designation authorizing the issuance of the Series A Preferred Stock to provide for the automatic conversion of
the outstanding shares of Series A Preferred Stock into common stock at a conversion price of $1.50 per share, the offering price
of the shares of common stock in the Public Offering, subject to stockholder approval in accordance with the applicable rules of
the NYSE MKT. In addition, the amendment to the Certificate of Designation eliminated the liquidation preference and quarterly
dividend payable to holders of the Series A Preferred Stock. Under the terms of the amendment, holders of the Series A Preferred
Stock were to share ratably with the holders of the common stock on an as-converted basis (2.0325 shares of common stock for each
share of Series A Preferred Stock held of record) with respect to dividends declared, paid or set aside for payment, assets available
for distribution to stockholders upon the liquidation, dissolution or winding up of the Company’s affairs, in addition to
voting upon the election of directors and other matters submitted to stockholders for approval, except for matters requiring a
class vote of the holders of the Series A Preferred Stock specified in the Certificate of Designation or under applicable law.



The Company has the right to
redeem the Series A Preferred Stock after May 26, 2018 for a redemption price of $10.00, plus accrued and unpaid dividends; however,
the Company may not have sufficient cash available to effect such redemption.



In connection with the placement
we incurred approximately $606,000 of direct offering costs and $57,000 in legal expenses and granted to the placement agents warrants
to purchase 8% of the number of shares of our common stock (113,820 shares) issuable upon conversion of the Series A Preferred
Stock sold in the offering. The warrants are exercisable in whole or in part, at an initial exercise price per share of $6.15,
and are exercisable for cash or on a cashless basis commencing on November 26, 2016 and expiring on May 26, 2021. The exercise
price and number of shares of common stock issuable under the warrants are subject to adjustments for stock dividends, splits,
combinations and similar events.





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Of the proceeds generated by
the sale of our shares of Series A Preferred Stock, $1,500,000 was paid to PNC to reduce the amount outstanding under our Loan
Facility.



In August 2016, the Company completed
the private placement of $2,720,000 principal amount of our 12% Subordinated Convertible Notes due December 31, 2017 (the “12%
Notes”), together with warrants to purchase an aggregate of 110,658 shares of common stock, for a total purchase price of
$2,720,000, from which we derived net proceeds of approximately $2,319,800, which was used to pay down the Company’s indebtedness
under the Loan Facility and for working capital. The Company also issued to Michael Taglich a 12% Note in the principal amount
of $1,520,713, together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of promissory
notes in the aggregate principal amount of $1,500,000, together with accrued interest thereon and on notes previously exchanged
for Series A Preferred Stock of $20,713. The Company had issued the promissory notes to Michael Taglich for amounts borrowed in
August 2016. The promissory notes bore interest at the rate of 7% per annum and were to be repaid on December 31, 2016, or, if
earlier, upon the sale of our equity securities from which we derived proceeds of $2,000,000. In addition, the Company issued to
Robert Taglich a 12% Note in the principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in
consideration of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.



The 12% Notes provided for the
automatic conversion of the principal and accrued interest of the 12% Notes into shares of Series A Preferred Stock at a price
of $10.00 per share, the stated value of the Series A Preferred Stock, upon the filing of an amendment to the Company’s Articles
of Incorporation increasing the number of shares of preferred stock we are authorized to issue from 1,000,000 shares to 3,000,000
shares, including 2,000,000 shares of Series A Preferred Stock (the “Charter Amendment”). The Company issued 438,770
shares of Series A Preferred Stock to the holders of the 12% Notes on November 30, 2016, the date the Company’s stockholders
approved the Charter Amendment and the Company filed the certificate of amendment effecting the Charter Amendment with the Office
of the Secretary of State of Nevada. As a result of the automatic conversion of the 12% Notes into shares of Series A Preferred
Stock, no 12% Notes are outstanding.



As compensation for its services
as placement agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400 and issued to Taglich
Brothers, Inc. five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15, subject to certain
anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers
and other business combinations.



On July 12, 2017, the Company
filed an amendment to the certificate of designation authorizing the issuance of its Series A Convertible Preferred Stock (“Series
A Preferred Stock”). The Amendment provides for the automatic conversion of shares of Series A Preferred Stock into shares
of common stock upon the consummation of the Offering at a conversion price of $1.50 per share, subject to receiving stockholder
approval of such conversion in accordance with the applicable rules of the NYSE MKT. In addition, the amendment changes the liquidation
preference and dividend rights of the holders of Series A Preferred Stock to be on a pari passu basis with the Company’s
common stock on an as converted basis based upon a conversion price of $4.92 per share. As a result of the consummation of the
Offering, once stockholder approval has been obtained, the conversion price of the Series A Preferred Stock will automatically
be reduced from $4.92 per share to $1.50 per share, which was the offering price of the shares of common stock in the Offering,
and the conversion rate for each share of Series A Preferred Stock converted will be increased from 2.0325 shares of common stock
to 6.6667 share of common stock. On October 3, 2017, holders of 1,294,441 outstanding shares of the Company’s Series A Preferred
Stock automatically converted into 8,629,606 shares of common stock.



As of December 31, 2017 and 2016,
the Company had outstanding 0 and 1,202,548 shares of Series A Preferred Stock outstanding.





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Common Stock



On July 12, 2017, the Company
sold 5,175,000 shares of common stock at a price of $1.50 per for gross proceeds of $7,762,500 in an underwritten public offering
(“Public Offering”) from which it derived net proceeds of $6,819,125, of which approximately $4,000,000 was used to
pay outstanding trade payables, $463,501 was used to redeem an equal principal amount of the $4,158,624 principal amount of the
May 2018 Notes and $2,355,624 was added to the Company’s working capital.



On November 29, 2017, Air Industries
Group (the “Company”) entered into a Placement Agency Agreement with  Taglich Brothers, Inc. as placement agent
(the “Placement Agent”), pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best
efforts basis, up to 1,600,000 shares of the Company’s common stock (the “Shares”) to accredited investors (the
“Offering”), together with five-year warrants to purchase 24,000 shares of common stock for each $100,000 of shares
purchased (the Warrants”), in a private placement exempt from the registration requirements of the Securities Act. The Offering
commenced November 29, 2017 and was completed in four closings for gross proceeds of $2,000,000 as follows:



|               | Shares           | Warrants   
|-------------- | ---------------- | -----------
|Date           | Total Investment | # of shares
|11/29/2017     | $300,000         | 217,390    
|12/5/2017      | 400,000          | 320,000    
|12/29/2017     | 235,000          | 188,000    
|Subtotal- 2017 | 935,000          | 725,390    
|1/9/2018       | 1,065,000        | 852,000    
|Total Offering | $2,000,000       | 1,577,390  



During the year ended December
31, 2017, the Company issued 246,463 shares of common stock in lieu of cash payment for various services provided to the Company.



Note 13. EMPLOYEE BENEFITS
PLANS



The Company employs both union
and non-union employees and maintains several benefit plans.



Union



Substantially the entire workforce
at AIM is subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the "Union").
The contract expires on December 31, 2018.



Medical benefits for union employees
are provided through a policy with Extensis, the costs of which are substantially borne by the Company. In addition, the Company
is obligated to make contributions for union dues and a security fund (defined contribution plan) for the benefit of each union
employee. Contributions to the security fund amounted to $136,000 and $263,000 for the years ended December 31, 2017 and 2016,
respectively.



The Company adopted ASU No. 2011-09,
"Compensation - Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in
a Multiemployer Plan" ("ASU 2011-09"). ASU 2011-09 requires additional disclosures about an employer's participation
in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans.
ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. The Union’s retirement plan is a
defined contribution plan. As such, the Company is not responsible for the obligations of other companies in the Union’s
retirement plan and no further disclosures are required.





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Others



All other Company employees,
are covered under a co-employment agreement with Extensis.



The Company has two defined contribution
plans under Section 401(k) of the Internal Revenue Code (the "Plans"). Pursuant to the Plans, qualified employees may
contribute a percentage of their pre-tax eligible compensation to the Plan. The Company does not match any contributions that employees
may make to the Plans.



Note 14. COMMITMENTS AND CONTINGENCIES



Real Estate Leases



The
Company leases its facilities under various operating lease agreements, which contain renewal options and escalation provisions.
Rent expense was $1,305,000 and $2,429,000 for the years ended December 31, 2017 and 2016, respectively. The Company is responsible
for paying all operating costs under the terms of the leases. As of December 31, 2017, the aggregate future minimum lease payments
are as follows:



|                    |  | Fifth Avenue |           | Lamar Street |  | Motor Parkway |         | Porter Street |  |            
|------------------- |  | ------------ | --------- | ------------ |  | ------------- | ------- | ------------- |  | -----------
|For the year ending |  | Annual Rent  |           | Annual Rent  |  | Annual Rent   |         | Annual Rent   |  | Total Rents
|December 31, 2018   |  | $            | 769,000   |              |  | $             | 300,000 |               |  | $          
|December 31, 2019   |  |              | 792,000   |              |  |               | —       |               |  |            
|December 31, 2020   |  |              | 817,000   |              |  |               | —       |               |  |            
|December 31, 2021   |  |              | 842,000   |              |  |               | —       |               |  |            
|December 31, 2022   |  |              | 866,000   |              |  |               | —       |               |  |            
|Thereafter          |  |              | 3,501,000 |              |  |               | —       |               |  |            
|Total Rents         |  | $            | 7,587,000 |              |  | $             | 300,000 |               |  | $          



The leases provide for scheduled
increases in base rent. Rent expense is charged to operations using the straight-line method over the term of the lease which results
in rent expense being charged to operations at inception of the lease in excess of required lease payments. This excess is shown
as deferred rent in the accompanying consolidated balance sheets.



On April 11, 2016, the Company
executed a Sale-Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor, Connecticut
(the “Property”) for a purchase price of $1,700,000. The net proceeds from the sale of the property were applied to
the amounts owed to PNC Bank.



Simultaneous with the closing
of the sale of the Property, the Company entered into a 15- year lease (the “Lease”) with the purchaser for the property.
Base annual rent was approximately $155,000 for the first year and increases approximately 3% per year each year thereafter. The
Lease granted the Company an option to renew the Lease for an additional period of five years. Pursuant to the terms of the Lease,
the Company was required to pay all of the costs associated with the operation of the facilities, including, without limitation,
insurance, taxes and maintenance. The Lease also contained representations, warranties, obligations, conditions and indemnification
provisions in favor of the purchaser and grants the purchaser remedied upon a breach of the Lease by the Company, including the
right to terminate the Lease and hold the Company liable for any deficiency in future rent.





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On March 21, 2018, the Company entered
into an agreement to sell the stock of WMI. Included in this agreement, the operating lease obligation for the Plant Ave. facility
would transfer to the purchaser of WMI upon the sale of WMI. See Note 1 Subsequent Events for additional discussion regarding the
sale of WMI. At December 31, 2017, the Company has excluded this lease commitment from the table above.



Loss Contingencies



During 2016, a number of actions
were commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result of an
injury suffered on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts included
in accounts payable they are not specifically discussed herein.



Westbury Park Associates, LLC
commenced an action on or about January 11, 2017 against Air Industries Group in the NYS Supreme Court, County of Suffolk, seeking
the recovery of approximately $31,000 for past rent arrears, and for an unidentified sum representing all additional rent due under
an alleged commercial lease through the end of its term, plus attorney’s fees. The Company believes that it has a meritorious defense,
and there was no lease on the property and that its subsidiary Compac Development Corp was a hold-over tenant occupying the space
on month-to-month tenancy.



On January 18, 2018, REP B-2,
LLC filed a petition for a warrant of eviction and a money judgement of approximately $56,000 against Air Industries Group arising
from rent arrears on commercial space. On January 18, 2018, 360 Motor Parkway, LLC filed a petition for a warrant of eviction and
a money judgement of approximately $12,000 against Air Industries Group arising from rent arrears on commercial space. Each proceeding
has resulted in a stipulation of settlement providing monthly repayment schedules to bring those rent arrears current, the last
of which are due on May 1, 2018, at which time the proceedings may be dismissed.



An employee of the Company commenced
an action against, among others, Rechler Equity B-2, LLC and Air Industries Group, in the Supreme Court State of New York, Suffolk
County, seeking compensation in an undetermined amount for injuries suffered while leaving the premises occupied by Welding Metallurgy,
Inc. Rechler Equity B-2, LLC, has served a Third Party Complaint in this action against Air Industries Group, Inc. and Welding
Metallurgy, Inc. The action remains in the early pleading stage. The Company believes it is not liable to the employee and any
amount it might have to pay would be covered by insurance.



An employee of the Company commenced
an action against, among others, Sterling Engineering and Air Industries Group, in Connecticut Commission on Human Rights and Opportunities,
seeking lost wages in an undetermined amount for the employee’s termination. The action remains in the early pleading stage.
The Company believes it is not liable to the employee and any amount it might have to pay would be covered by insurance.



Note 15. INCOME TAXES



The provision for (benefit from)
income taxes as of December 31, is set forth below:



|                                              |  | 2017 |          | 2016
|--------------------------------------------- |  | ---- | -------- | ----
|                                              |  |      |          |     
|Current                                       |  |      |          |     
|Federal tax refund                            |  | $    | (178,000 | )   
|State                                         |  |      | 8,000    |     
|Prior Year overaccruals                       |  |      |          |     
|Federal                                       |  |      | —        |     
|State                                         |  |      | (27,000  | )   
|                                              |  |      |          |     
|Total (Benefit) Expense                       |  |      | (197,000 | )   
|Deferred Tax Benefit                          |  |      | —        |     
|Valuation Allowance                           |  |      | —        |     
|Net Provision for (Benefit from) Income Taxes |  | $    | (197,000 | )   





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The following is a reconciliation
of our income tax rate computed using the federal statutory rate to our actual income tax rate as of December 31,



|                                                             |  | 2017 |        | 2016
|------------------------------------------------------------ |  | ---- | ------ | ----
|U.S. statutory income tax rate                               |  |      | 34.00  | %   
|State taxes                                                  |  |      | 0.09   | %   
|Permanent differences, overaccruals and non-deductible items |  |      | -0.22  | %   
|Rate change and provision to return true-up                  |  |      | -22.60 | %   
|Expired stock options                                        |  |      | -0.19  | %   
|Deferred tax valuation allowance                             |  |      | -10.09 | %   
|Total                                                        |  |      | 0.99   | %   



The components of net deferred
tax assets at December 31, 2017 and December 31, 2016 are set forth below:





|                                                                 |  | December 31, |            | December 31,
|---------------------------------------------------------------- |  | ------------ | ---------- | ------------
|                                                                 |  | 2017         |            | 2016        
|Deferred tax assets                                              |  |              |            |             
|Current:                                                         |  |              |            |             
|Net operating losses                                             |  | $            | 7,730,000  |             
|Bad debts                                                        |  |              | 135,000    |             
|Inventory - 263A adjustment                                      |  |              | 591,000    |             
|Accounts payable, accrued expenses and reserves                  |  |              | —          |             
|Total current deferred tax assets before valuation allowance     |  |              | 8,456,000  |             
|Valuation allowance                                              |  |              | (8,456,000 | )           
|Total current deferred tax assets after valuation allowance      |  |              | —          |             
|                                                                 |  |              |            |             
|                                                                 |  |              |            |             
|Non-current:                                                     |  |              |            |             
|Section 1231 loss carry forward                                  |  |              | —          |             
|Stock based compensation - options and restricted stock          |  |              | 124,000    |             
|Capitalized engineering costs                                    |  |              | 281,000    |             
|Deferred rent                                                    |  |              | 299,000    |             
|Amortization - NTW Transaction                                   |  |              | 519,000    |             
|Inventory reserves                                               |  |              | 960,000    |             
|Deferred gain on sale of real estate                             |  |              | 80,000     |             
|Other                                                            |  |              | 114,000    |             
|Total non-current deferred tax assets before valuation allowance |  |              | 2,377,000  |             
|Valuation allowance                                              |  |              | (758,000   | )           
|Total non-current deferred tax assets after valuation allowance  |  |              | 1,619,000  |             
|                                                                 |  |              |            |             
|Deferred tax liabilities:                                        |  |              |            |             
|Property and equipment                                           |  |              | (1,619,000 | )           
|Amortization – NTW Goodwill                                      |  |              | —          |             
|Amortization – Welding Transaction                               |  |              | —          |             
|Total non-current deferred tax liabilities                       |  |              | (1,619,000 | )           
|                                                                 |  |              |            |             
|Net non-current deferred tax asset                               |  | $            | —          |             







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During the years ended December
31, 2017 and December 31, 2016, the Company recorded a valuation allowance equal to its net deferred tax assets. The Company determined
that due to a recent history of net losses, that at this time, sufficient uncertainty exists regarding the future realization of
these deferred tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not
that these deferred tax benefits will be realized, the valuation allowances will be reduced or eliminated. With a full valuation
allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance.
At December 31, 2017 and 2016, the Company provided a valuation allowance on its deferred tax assets of $9,214,000 and $7,025,000,
respectively.



At December 31, 2017 and 2016,
the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company
does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes
interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2017 and 2016, the Company has
not recorded any provisions for accrued interest and penalties related to uncertain tax positions.



In certain cases, the Company's
uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The Company
files federal and state income tax returns in jurisdictions with varying statutes of limitations. The 2014 through 2017 tax years
generally remain subject to examination by federal and state tax authorities.



Note 16. STOCK OPTIONS AND
WARRANTS



Stock-Based Compensation



Stock Options



On March 30, 2015, the Board
of Directors adopted the Company’s 2015 Equity Incentive Plan (“2015 Plan”) which was approved by affirmative
vote of the Company’s stockholders on June 25, 2015. The Plan authorized the grant of rights with respect to up to 350,000
shares.



In June 2016, the Board of Directors
adopted the Company’s 2016 Equity Incentive Plan (“2016 Plan”) which authorized the grant of rights with respect
to up to 350,000 shares. The 2016 Plan was approved by affirmative vote of the Company’s stockholders on November 30, 2016.



In July 2017, the Board of Directors
adopted the Company’s 2017 Equity Incentive Plan (“2017 Plan”) which authorized the grant of rights with respect
to up to 1,200,000 shares. The 2017 Plan was approved by affirmative vote of the Company’s stockholders on October 3, 2017.



During the year ended December
31, 2017, the Company granted options to purchase 695,000 shares of common stock to certain of its employees and directors. The
weighted average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 1.72% to 1.81%; expected volatility factors of 82% to 85%; expected dividend yield of 0%;
and estimated option term of 5 years.



During the year ended December
31, 2016, the Company granted options to purchase 100,000 shares of common stock to certain of its employees. The weighted average
fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions: risk
free interest rate of 0.73% to 2.04%; expected volatility factors of 31% to 59%; expected dividend yield of 0%; and estimated option
term of 5 years.



During the year ended December
31, 2016, the Board of Directors approved the issuance of 18,000 options, to non-employee members of the Company’s Board
of Directors. These options vested quarterly as to 25% of the shares subject to the options, commencing June 2, 2016.





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The Company recorded stock based
compensation expense of $323,000 and $167,000 in its consolidated statement of operations for the years ended December
31, 2017 and 2016, respectively, and such amounts were included as a component of general and administrative expense.



The fair values of stock options
granted were estimated using the Black-Sholes option-pricing model with the following assumptions for the years ended December
31:



|                                                 | 2017        |   |  | 2016         |   
|------------------------------------------------ | ----------- | - |  | ------------ | --
|Risk-free interest rates                         | 1.72 – 1.81 | % |  | 0.73% - 2.04 | % 
|Expected life (in years)                         | 4.9         |   |  | 5            | .0
|Expected volatility                              | 82%-85      | % |  | 31%-59       | % 
|Dividend yield                                   | 0.0         | % |  | 0.0          | % 
|                                                 |             |   |  |              |   
|Weighted-average grant date fair value per share | $0.90       |   |  | $1.88        |   



The expected life is the number
of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture.
Expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin No. 107. In addition
to the inputs referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for
estimated forfeiture rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based
on the Company’s experience.



A summary of the status of the
Company's stock options as of December 31, 2017 and 2016, and changes during the two years then ended are presented below.



|                                     |  | Options |           | Wtd. Avg. Exercise Price
|------------------------------------ |  | ------- | --------- | ------------------------
|Balance, December 31, 2015           |  |         | 564,342   |                         
|Granted during the period            |  |         | 128,000   |                         
|Exercised during the period          |  |         | (24,905   | )                       
|Terminated/Expired during the period |  |         | (31,095   | )                       
|Balance, December 31, 2016           |  |         | 636,342   |                         
|Granted during the period            |  |         | 695,000   |                         
|Exercised during the period          |  |         | (0        | )                       
|Terminated/Expired during the period |  |         | (282,715  | )                       
|Balance, December 31, 2017           |  |         | 1,048,627 |                         
|                                     |  |         |           |                         
|Exercisable at December 31, 2017     |  |         | 416,125   |                         



The following table summarizes
information about stock options at December 31, 2017:



|Range
of Exercise Prices |  | Number Outstanding |  | Wtd. Avg. Life |  | Wtd. Avg. Exercise Price
|------------------------ |  | ------------------ |  | -------------- |  | ------------------------
|$0.00 - $5.00            |  | 842,978            |  | 5.6 years      |  | $1.99                   
|$5.01 - $20.00           |  | 205,655            |  | 2.7 years      |  | 8.14                    
|$0.00 - $20.00           |  | 1,048,633          |  | 5.1 years      |  | $3.20                   



As of December 31, 2017, there
was $470,233 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining
weighted average vesting period of three years.





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The aggregate intrinsic value
at December 31, 2017 was based on the Company's closing stock price of $1.69 was $166,050. The aggregate intrinsic value was calculated
based on the positive difference between the closing market price of the Company’s Common Stock and the exercise price of
the underlying options. The total number of in-the-money options exercisable as of December 31, 2017 was 695,000.



The weighted average fair value
of options granted during the years ended December 31, 2017 and 2016 was $0.90 and $1.88 per share, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2017 and 2016 was $0 and $34,050, respectively. The total fair value
of shares vested during the years ended December 31, 2017 and 2016 was $235,550 and $63,830, respectively.



Warrants



During the year ended December
31, 2017 and 2016, the Company issued 971,611 and 571,871 warrants, respectively, in connection with convertible notes payable
and common stock issuances.



The following tables summarize
the Company's outstanding warrants as of December 31, 2017 and changes during the two years then ended:



|                                     |  | Warrants |           | Wtd. Avg. Exercise Price |  | Wtd. Ave. Remaining Contractual Life (years)
|------------------------------------ |  | -------- | --------- | ------------------------ |  | --------------------------------------------
|Balance, December 31, 2015           |  |          | 164,585   |                          |  | $                                           
|Issued                               |  |          | 675,691   |                          |  |                                             
|Exercised during the period          |  |          | —         |                          |  |                                             
|Terminated/Expired during the period |  |          | —         |                          |  |                                             
|Balance, December 31, 2016           |  |          | 840,276   |                          |  |                                             
|Granted during the period            |  |          | 971,611   |                          |  |                                             
|Terminated/Expired during the period |  |          | (107,785  | )                        |  |                                             
|Balance, December 31, 2017           |  |          | 1,704,102 |                          |  | $                                           
|                                     |  |          |           |                          |  |                                             
|Exercisable at December 31, 2017     |  |          | 1,704,102 |                          |  | $                                           



The fair values of warrants granted
were estimated using the Black-Sholes option-pricing model with the following assumption for the years ended December 31:



|                                                 | 2017        |  | 2016         
|------------------------------------------------ | ----------- |  | -------------
|Risk-free interest rates                         | 1.85%-2.20% |  | 1.40% - 2.04%
|Expected life (in years)                         | 5           |  | 5            
|Expected volatility                              | 63%-115%    |  | 33%-59%      
|Dividend yield                                   | 0           |  | 0            
|Weighted-average grant date fair value per share | $1.10-$2.89 |  | $0.81-$1.40  



Note 17. SEGMENT REPORTING



In accordance with FASB ASC 280,
“Segment Reporting” ("ASC 280"), the Company discloses financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about which separate financial information is available
and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.





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The Company follows ASC 280,
which establishes standards for reporting information about operating segments in annual and interim financial statements, and
requires that companies report financial and descriptive information about their reportable segments based on a management approach.
ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.



The Company currently divides
its operations into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures and Electronics which
consists of WMI, WPI, MSI, Eur-Pac, ECC, and Compac; and Turbine Engine Components which consists of AMK and Sterling. Along with
our operating subsidiaries, we report the results of our corporate division as an independent segment.



The accounting policies of each
of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance
based on revenue, gross profit contribution and assets employed. Corporate level operating costs are allocated to segments. These
costs include corporate costs such as legal, audit, tax and other professional fees including those related to being a public company.



Given the pending sale of WMI,
in the future, the Company may change its reportable operating segments.



Financial information about the
Company’s reporting segments for the years ended December 30, 2017 and December 31, 2016 are as follows:



|                                          |  | Year Ended December 31,
|----------------------------------------- |  | -----------------------
|                                          |  | 2017                   
|                                          |  |                        
|COMPLEX MACHINING                         |  |                        
|Net Sales                                 |  | $                      
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|AEROSTRUCTURES & ELECTRONICS              |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|TURBINE ENGINE COMPONENTS                 |  |                        
|Net Sales                                 |  |                        
|Gross Loss                                |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|CORPORATE                                 |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|Assets                                    |  |                        
|                                          |  |                        
|CONSOLIDATED                              |  |                        
|Net Sales                                 |  |                        
|Gross Profit                              |  |                        
|Pre Tax Loss                              |  |                        
|(Benefit from) provision for Income Taxes |  |                        
|Loss from Discontinued Operations         |  |                        
|Assets Held for Sale                      |  |                        
|Net (Loss) Income                         |  |                        
|Assets                                    |  | $                      



F-37