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Item 2. Management’s Discussion and Analysis

2025-11-14 compared with 2025-08-13 · 454 added, 518 removed, 443 unchanged (69% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

following discussion and analysis of our financial condition and results of operations should be read in conjunction with the

audited consolidated financial statements as of December 31, 2024 and 2023 and for each of the two years in the period ended

December 31, 2024, together with related notes thereto, included in the Company’s final prospectus, dated June 12, 2025, filed

with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on June 16,

2025 (the “Prospectus”), and the unaudited condensed consolidated financial statements as of June 30, 2025 and for the

three and six-month periods ended June 30, 2025 and 2024 included in this Quarterly Report on Form 10-Q, which have been prepared in

accordance with GAAP.

Some of the information contained in this discussion and analysis includes forward-looking statements that

involve risks and uncertainties.

You should review the sections titled “Note Regarding Forward-Looking Statements” and

“Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important

factors that could cause actual results to differ materially from the results described in or implied by the forward-looking

statements contained in the following discussion and analysis.

following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited

consolidated financial statements as of December 31, 2024 and 2023 and for each of the two years in the period ended December 31, 2024,

together with related notes thereto, included in the Company’s final prospectus, dated June 12, 2025, filed with the SEC pursuant

to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on June 16, 2025 (the “Prospectus”),

and the unaudited condensed consolidated financial statements as of September 30, 2025 and for the three and nine-month periods ended

September 30, 2025 and 2024 included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with GAAP.

the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties.

should review the sections titled “Note Regarding Forward-Looking Statements” and “Risk Factors” in this Quarterly

Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially

from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

are a technologically differentiated aerospace, autonomy, and air mobility platform targeting 21 st century aerospace and defense

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of our commercialization efforts, with passenger applications serving as a longer-term secondary initiative.

Initial Public Offering

On June 16, 2025, we completed the initial public offering of

6.9 million shares of our common stock (the “IPO”), which included an additional 0.9 million shares of common stock pursuant

to the full exercise of the underwriters’ option to purchase additional shares, at an initial public offering price of $10.00 per share.

Our common stock began trading on the Nasdaq Global Market under the ticker symbol “AIRO” on June 13, 2025.

The net proceeds to

AIRO from the IPO, after deducting $7.5 million of underwriting discounts and commissions, and issuance costs paid were $61.5 million.

Public Offering, Follow-on Offering and Repurchase

June 16, 2025, we completed the initial public offering of 6.9 million shares of our common stock (the “IPO”), which included

an additional 0.9 million shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional

shares, at an initial public offering price of $10.00 per share.

Our common stock began trading on the Nasdaq Global Market under the

ticker symbol “AIRO” on June 13, 2025.

The net proceeds to AIRO from the IPO, after deducting $10.7 million of underwriting

discounts and commissions, and issuance costs paid were $58.3 million.

September 12, 2025, the Company completed its Follow-on Offering of 4.8 million shares of its common stock, which included an additional

0.6 million shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares, at

an offering price of $18.50 per share.

The net proceeds to AIRO from the Follow-on Offering, after deducting $6.8 million of underwriting

discounts and commissions were $82.6 million.

September 12, 2025, the Company repurchased 1.1 million shares, which included an additional 0.1 million shares of common stock as a result

of the underwriters’ option described above, from certain existing shareholders, including certain directors and executive officers

and their affiliates at an offering price of $17.39 per share.

The proceeds to shareholders paid were $19.4 million.

Combination Agreement

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(iv) Electric Air Mobility, through our subsidiary, Jaunt.

acquired Agile Defense on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among

Agile Defense, AIRO Group, Inc., n/k/a Old AGI, Inc., a Delaware corporation (“Legacy AIRO”), us, Agile Defense Merger

Sub, LLC, and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the

form of a promissory note in the amount of $2.3 million (the “Agile Defense Promissory Note”).

The Agile Defense

Promissory Note bears no interest and was originally payable within five business days following the commencement of public trading

of our common stock.

On October 2, 2023, the parties signed a promissory note termination agreement (the “Agile Defense

Promissory Note Termination Agreement”) whereby six of the seven note holders agreed to convert $1.4 million of the principal

owed to them under the Agile Defense Promissory Note into 34,360 shares of our common stock immediately prior to the closing of the

BCA Transactions, with the remaining principal of $0.2 million owed to such holders to be paid at the closing of the BCA

Transactions.

Given that the BCA Transactions were not consummated, in connection with the closing of the IPO, we issued

34,360 shares of our common stock to partially satisfy our obligations pursuant to the Agile Defense Promissory Note Termination

Agreement and used proceeds of $0.8 million from the IPO to satisfy our obligations to the remaining holder under the Agile

Defense Promissory Note during the quarter ended June 30, 2025.

In July 2025, we used proceeds of $0.2 million to satisfy

the remaining obligations to the holders pursuant to the Agile Defense Promissory Note Termination Agreement.

acquired AIRO Drone on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among AIRO

Drone, Legacy AIRO, us, AIRO Drone Merger Sub, LLC and Joseph Burns as target representative, dated as of October 6, 2021, as

amended, in exchange for consideration in the form of a promissory note in the amount of $2.1 million (the “AIRO Drone

Promissory Note”).

The AIRO Drone Promissory Note bears no interest and was originally payable within five business days

following the commencement of public trading of our common stock.

On October 2, 2023, the parties signed a promissory note

termination agreement (the “AIRO Drone Promissory Note Termination Agreement”) whereby nine of the ten note holders

agreed to convert approximately $1.5 million of the principal owed to them under the AIRO Drone Promissory Note into 37,080 shares

of our common stock immediately prior to the closing of the BCA Transactions, with the remaining principal of $0.2 million owed to

such holders to be paid at the closing of the BCA Transactions.

Given that the BCA Transactions were not consummated, in connection

with the closing of the IPO, we issued 37,080 shares of our common stock to partially satisfy our obligations pursuant to the

AIRO Drone Promissory Note Termination Agreement and used proceeds of $0.4 million from the IPO to satisfy our obligations to

the remaining holder under the AIRO Drone Promissory Note and the other holders pursuant to the AIRO Drone Promissory Note

Termination Agreement during the quarter ended June 30, 2025.

In July 2025, we used proceeds of $0.2 million to satisfy the remaining

obligations to the holders pursuant to the AIRO Drone Promissory Note Termination Agreement.

acquired Agile Defense on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Agile

Defense, AIRO Group, Inc., n/k/a Old AGI, Inc., a Delaware corporation (“Legacy AIRO”), us, Agile Defense Merger Sub, LLC,

and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory

note in the amount of $2.3 million (the “Agile Defense Promissory Note”).

The Agile Defense Promissory Note bears no interest

and was originally payable within five business days following the commencement of public trading of our common stock.

On October 2,

2023, the parties signed a promissory note termination agreement (the “Agile Defense Promissory Note Termination Agreement”)

whereby six of the seven note holders agreed to convert $1.4 million of the principal owed to them under the Agile Defense Promissory

Note into 34,360 shares of our common stock immediately prior to the closing of the BCA Transactions, with the remaining principal of

$0.2 million owed to such holders to be paid at the closing of the BCA Transactions.

Given that the BCA Transactions were not consummated,

in connection with the Closing, we issued 34,360 shares of our common stock to satisfy our obligations pursuant to the Agile Defense

Promissory Note Termination Agreement and used proceeds of $1.0 million from the IPO to satisfy our obligations to the remaining holder

under the Agile Defense Promissory Note during the nine months ended September 30, 2025.

acquired AIRO Drone on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among AIRO Drone,

Legacy AIRO, us, AIRO Drone Merger Sub, LLC and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange

for consideration in the form of a promissory note in the amount of $2.1 million (the “AIRO Drone Promissory Note”).

AIRO Drone Promissory Note bears no interest and was originally payable within five business days following the commencement of public

trading of our common stock.

On October 2, 2023, the parties signed a promissory note termination agreement (the “AIRO Drone Promissory

Note Termination Agreement”) whereby nine of the ten note holders agreed to convert approximately $1.5 million of the principal

owed to them under the AIRO Drone Promissory Note into 37,080 shares of our common stock immediately prior to the closing of the BCA

Transactions, with the remaining principal of $0.2 million owed to such holders to be paid at the closing of the BCA Transactions.

that the BCA Transactions were not consummated, in connection with the Closing, we issued 37,080 shares of our common stock to satisfy

our obligations pursuant to the AIRO Drone Promissory Note Termination Agreement and used proceeds of $0.6 million from the IPO to satisfy

our obligations to the remaining holder under the AIRO Drone Promissory Note and the other holders pursuant to the AIRO Drone Promissory

Note Termination Agreement during the nine months ended September 30, 2025.

acquired Jaunt on March 10, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Jaunt, Legacy

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consideration in the form of 3,143,001 shares of our common stock.

As part of this acquisition, we acquired a contingent obligation

originating from Jaunt’s acquisition of certain patents, licenses, and other intellectual property from Carter Aviation, a

former member of Jaunt, in April 2019 (the “Jaunt Contingent Arrangement”).

Under the Jaunt Contingent Arrangement, 10%

of any cash receipt, including all income, receipts, proceeds, debt or equity investment, earnings, sales, or winnings, up to $50

million is payable to Carter Aviation.

As part of this acquisition, we acquired a contingent obligation originating

from Jaunt’s acquisition of certain patents, licenses, and other intellectual property from Carter Aviation, a former member of

Jaunt, in April 2019 (the “Jaunt Contingent Arrangement”).

Under the Jaunt Contingent Arrangement, 10% of any cash receipt,

including all income, receipts, proceeds, debt or equity investment, earnings, sales, or winnings, up to $50 million is payable to Carter

As of the acquisition date, $49.6 million in future payments remained on this obligation.

original terms of the Jaunt Contingent Arrangement provided that upon the completion of a business combination, the contingent

consideration assumed from Jaunt would be replaced by promissory notes, the first of which would be for $23.0 million due one day

after the closing of such business combination, and the second would be for the remaining portion of the contingent consideration

and would be paid over three years subsequent to such closing.

On October 27, 2023, we signed a satisfaction of indebtedness and

satisfaction of covenant agreement (the “Jaunt Satisfaction of Indebtedness and Satisfaction of Covenant Agreement”),

whereby the holder agreed to convert $44.6 million of the obligations owed to it as part of the Jaunt acquisition into 1,122,437

shares of our common stock immediately prior to the closing of the BCA Transactions, with the remaining portion of the contingent

consideration of $5.0 million owed to such holders to be paid at the closing of the BCA Transactions.

Given that the BCA

Transactions were not consummated, in connection with the closing of the IPO, we issued 1,122,437 shares of our common stock

to partially satisfy our obligations pursuant to the Jaunt Satisfaction of Indebtedness and Satisfaction of Covenant Agreement

during the quarter ended June 30, 2025.

In July 2025, we used proceeds of $3.9 million from the IPO to partially

satisfy our obligations to the holders under the Jaunt Satisfaction of Indebtedness and Satisfaction of Covenant

Agreement and signed an agreement to fund the remaining $1.1 million, subject to 10% per year in interest, on September 10,

The original terms of the Jaunt Contingent

Arrangement provided that upon the completion of a business combination, the contingent consideration assumed from Jaunt would be replaced

by promissory notes, the first of which would be for $23.0 million due one day after the closing of such business combination, and the

second would be for the remaining portion of the contingent consideration and would be paid over three years subsequent to such closing.

On October 27, 2023, we signed a satisfaction of indebtedness and satisfaction of covenant agreement (the “Jaunt Satisfaction of

Indebtedness and Satisfaction of Covenant Agreement”), whereby the holder agreed to convert $44.6 million of the obligations owed

to it as part of the Jaunt acquisition into 1,122,437 shares of our common stock immediately prior to the closing of the BCA Transactions,

with the remaining portion of the contingent consideration of $5.0 million owed to such holders to be paid at the closing of the BCA

Transactions.

Given that the BCA Transactions were not consummated, in connection with the Closing, we issued 1,122,437 shares of our

common stock and funded $5.0 million to satisfy our obligations pursuant to the Jaunt Satisfaction of Indebtedness and Satisfaction of

Covenant Agreement during the nine months ended September 30, 2025.

acquired Sky-Watch on March 28, 2022, pursuant to the terms and conditions of an Equity Purchase Agreement by and among Sky-Watch, Legacy

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balance of $3.1 million as of December 31, 2024.

During the quarter ended June 30, 2025, we funded $2.3 million and funded the remaining $1.0 million related

to the final earnout in July 2025.

During the nine months ended September 30, 2025, we funded $3.2 million to satisfy our

obligations under these agreements.

acquired Aspen Avionics on April 1, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger (the “Aspen Merger

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to the Aspen Carveout Contingency and $1.9 million attributable to future allowable services or to be payable to the former Aspen Avionics

shareholders at the closing of the IPO (“Aspen Contingent Debt”).

shareholders at the Closing (“Aspen Contingent Debt”).

October 6, 2023, we signed a satisfaction of indebtedness and satisfaction of covenant agreement (the “Aspen Satisfaction of Indebtedness

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Given that the BCA Transactions were not consummated, in connection

with the closing of the IPO, we issued an aggregate of 484,096 shares of our common stock to partially satisfy our obligations to the

holders under the Aspen Satisfaction of Indebtedness and Satisfaction of Covenant Agreement.

During July 2025, we issued the 71,319 shares

of our common stock based on the amended Satisfaction of Indebtedness and Satisfaction of Covenant Agreement dated June 30, 2025 and

used proceeds of $0.1 million to satisfy our obligations to the participants in the Aspen Carveout Plan.

During August 2025, we

funded $1.5 million of the $1.9 million remaining balance of the Aspen Bridge Notes and signed an agreement to fund the remaining $0.2

million related to the Aspen Contingent Debt by October 1, 2025.

acquired CDI on April 26, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among CDI, Legacy

AIRO, us, Coastal Merger Sub, Inc.

and Jeffrey Parker as target representative, dated as of October 6, 2021, as amended, in exchange

for consideration in the form of a promissory note in the amount of $10.1 million (the “CDI Promissory Note”) and

1,069,514 shares of our common stock.

The CDI Promissory Note bears no interest and was originally payable within five business days

following the commencement of public trading of our common stock.

On October 17, 2023, the parties signed a promissory note

termination agreement (the “CDI Promissory Note Termination Agreement”), as amended on March 7, 2025, whereby all of the

holders agreed to convert $8.1 million of the principal owed to them under the CDI Promissory Note into 203,707 shares of our common

stock immediately prior to the closing of an initial public offering, with the remaining principal of $2.0 million owed to such

holders to be paid at the closing of an initial public offering.

During the quarter ended June 30, 2025, we issued 203,707 shares and funded $2.0 million to fully satisfy

our obligations to the holders of the CDI Promissory Note Termination Agreement.

with the Closing, during the nine months ended September 30, 2025, we issued an aggregate of 484,096 shares of our common stock to partially

satisfy our obligations to the holders under the Aspen Satisfaction of Indebtedness and Satisfaction of Covenant Agreement.

2025, we issued the 71,319 shares of our common stock based on the amended Satisfaction of Indebtedness and Satisfaction of Covenant

Agreement dated June 30, 2025 and used proceeds of $0.1 million to satisfy our obligations to the participants in the Aspen Carveout

During the nine months ended September 30, 2025, we funded $1.9 million of the Aspen Bridge Notes and signed an agreement to fund

the remaining $0.2 million related to the Aspen Contingent Debt by December 1, 2025.

acquired CDI on April 26, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among CDI, Legacy AIRO,

us, Coastal Merger Sub, Inc.

and Jeffrey Parker as target representative, dated as of October 6, 2021, as amended, in exchange for consideration

in the form of a promissory note in the amount of $10.1 million (the “CDI Promissory Note”) and 1,069,514 shares of our common

The CDI Promissory Note bears no interest and was originally payable within five business days following the commencement of public

trading of our common stock.

On October 17, 2023, the parties signed a promissory note termination agreement (the “CDI Promissory

Note Termination Agreement”), as amended on March 7, 2025, whereby all of the holders agreed to convert $8.1 million of the principal

owed to them under the CDI Promissory Note into 203,707 shares of our common stock immediately prior to the closing of an initial public

offering, with the remaining principal of $2.0 million owed to such holders to be paid at the closing of an initial public offering.

During the nine months ended September 30, 2025, we issued 203,707 shares and funded $2.0 million to fully satisfy our obligations to

the holders of the CDI Promissory Note Termination Agreement.

Factors Affecting Our Performance

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costs which adversely affected our performance.

These disruptions impacted our ability to procure raw materials, microelectronics,

and certain commodities on a timely basis and/or at expected prices, and have been driven by supply chain market constraints and macroeconomic

These disruptions impacted our ability to procure raw materials, microelectronics, and

certain commodities on a timely basis and/or at expected prices, and have been driven by supply chain market constraints and macroeconomic

conditions, including inflation and labor market shortages.

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will continue to face such challenges for the foreseeable future.

The supply chain disruptions discussed above did not materially impact our outlook, business goals, results of operations

or capital resources during 2024 or the first six months of 2025.

The supply chain disruptions discussed above did not materially impact

our outlook, business goals, results of operations or capital resources during 2024 or the first six months of 2025.

the quarter ended September 30, 2025, a key customer requested a configuration change to dual-band antennas on certain RQ-35 systems.

Under our revenue recognition policy, transfer of control had not occurred for the affected units as of September 30, 2025.

We are qualifying

additional antenna suppliers and are implementing dual-sourcing to reduce component risk.

The antenna update also requires incremental

retrofit and related services which are accounted for as a separate performance obligation.

operate in a complex and evolving global security environment, and our business is affected by geopolitical and security issues.

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and services as well as our supply chain.

Government’s Continuing Resolution

March 2025, President Trump signed a continuing resolution that funds federal agencies through September 30, 2025.

A continuing resolution

authorizes federal agencies to operate generally at the same funding levels from the prior year, but typically does not authorize new

spending initiatives during this period.

If Congress is unable to enact formal fiscal year 2026 appropriation bills by September 30,

2025, it may pass another continuing resolution.

However, if Congress fails to pass the formal appropriations bills or a continuing resolution,

then the U.S.

government would shut down during which federal agencies would cease all non-essential functions.

the event of a U.S.

government shutdown, our business, program performance and results of operations could be impacted by the resulting

disruptions to federal government offices, workers, and operations, including risks relating to the funding of certain programs, stop

work orders, as well as delays in contract awards, new program starts, payments for work performed, and other actions.

We also may experience

similar impacts in the event of an extended period of continuing resolutions.

Generally, the significance of these impacts will primarily

be based on the length of the continuing resolution or shutdown.

of the Electric Air Mobility Market

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and Development

and development (“R&D”) expenses consist primarily of personnel expenses, including salaries, benefits,

costs of consulting, equipment and materials, direct allocable overhead costs, including staff development cost, travel costs and

technology costs, and amortization of intangible assets.

We expect our R&D expenses to increase as we continue to invest in our

infrastructure and technology and seek to develop new products and services.

and development (“R&D”) expenses consist primarily of personnel expenses, including salaries, benefits, costs of consulting,

equipment and materials, direct allocable overhead costs, including staff development cost, travel costs and technology costs, and amortization

of intangible assets.

We expect our R&D expenses to increase as we continue to invest in our infrastructure and technology and seek

to develop new products and services.

and Marketing

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third-party notes, net of interest income earned on invested cash balances.

Gain on Debt Extinguishment, Net

Gain on debt extinguishment, net includes gains and losses on debt extinguishments.

on Debt Extinguishment, Net

on debt extinguishment, net includes gains and losses on debt extinguishments.

Income (Expense), Net

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Financial Measures

supplement our condensed consolidated financial statements prepared and presented in accordance with GAAP, we use EBITDA, Adjusted

EBITDA and Adjusted EBITDA margin, as described below, to facilitate analysis of our financial and business trends and for internal

planning and forecasting purposes.

define (1) EBITDA as net income (loss) before interest expense, income tax expense or provision, depreciation and amortization, (2)

Adjusted EBITDA as net income (loss) before interest expense, income tax expense or provision, depreciation and amortization,

stock-based compensation, contingent consideration fair value adjustments and impairments, and (3) Adjusted EBITDA margin as

Adjusted EBITDA divided by revenue.

The above items are excluded from our Adjusted EBITDA measure because these items are either

non-cash in nature, or because the amount and timing of these items is unpredictable, or because they are not driven by core results

of operations, thereby rendering comparisons with prior periods and competitors less meaningful.

We believe Adjusted EBITDA provides

useful information to investors and others in understanding and evaluating our results of operations, as well as provides a useful

measure for period-to-period comparisons of our business performance.

Moreover, we have included Adjusted EBITDA in this Quarterly

Report on Form 10-Q because it is a key measurement used by our management internally to make operating decisions, including those

related to analyzing operating expenses, evaluating performance, and performing strategic planning and annual budgeting.

supplement our condensed consolidated financial statements prepared and presented in accordance with GAAP, we use EBITDA, Adjusted EBITDA

and Adjusted EBITDA margin, as described below, to facilitate analysis of our financial and business trends and for internal planning

and forecasting purposes.

define (1) EBITDA as net income (loss) before interest expense, income tax expense or provision, depreciation and amortization, (2) Adjusted

EBITDA as net income (loss) before interest expense, income tax expense or provision, depreciation and amortization, stock-based compensation,

contingent consideration fair value adjustments and impairments, and (3) Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.

The above items are excluded from our Adjusted EBITDA measure because these items are either non-cash in nature, or because the amount

and timing of these items is unpredictable, or because they are not driven by core results of operations, thereby rendering comparisons

with prior periods and competitors less meaningful.

We believe Adjusted EBITDA provides useful information to investors and others in

understanding and evaluating our results of operations, as well as provides a useful measure for period-to-period comparisons of our

business performance.

Moreover, we have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measurement

used by our management internally to make operating decisions, including those related to analyzing operating expenses, evaluating performance,

and performing strategic planning and annual budgeting.

non-GAAP financial measures should not be considered as alternatives to performance measures derived in accordance with GAAP.

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including net income (loss) and our other GAAP results.

A reconciliation of EBITDA and Adjusted EBITDA to net income (loss), and Adjusted EBITDA Margin

to net income (loss) margin, the most directly comparable financial measures stated in accordance with GAAP, is provided below.

Investors are

encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measure to their most directly

comparable GAAP financial measure.

A reconciliation of EBITDA and Adjusted EBITDA to net income (loss), and Adjusted

EBITDA Margin to net income (loss) margin, the most directly comparable financial measures stated in accordance with GAAP, is provided

Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measure

to their most directly comparable GAAP financial measure.

Three Months Ended

Six Months Ended

September 30,

Ended September 30,

(in thousands, except percentages)

June 30, 2025

June 30, 2024

June 30, 2025

June 30, 2024

Net income (loss)

Depreciation and amortization

Income tax expense

Interest expense, net

Gain on extinguishment of debt

Income tax (benefit) expense

Interest (income) expense, net

Gain on extinguishment

Stock-based compensation

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Warrant fair value adjustment

Goodwill impairment

IPO contingencies 1

Adjusted EBITDA

Net income (loss) margin

Net loss margin

Adjusted EBITDA Margin

1 IPO contingencies are made up of $1.0 million related to

Kipps, $0.8 million related to the legal settlement, $0.5 million legal accrual, $0.2 million for NGA, $0.3 million bonus, $0.6

million Aspen contingent debt, $0.1 million cash portion of the Aspen carve-out, net of a $1.4 million gain on deferred

compensation.

IPO contingencies for the three months ended September 30, 2025 are made up of a $1.2 million charge related to the Libertas warrants,

net of a $4.5 million gain on deferred compensation.

IPO contingencies for the nine months ended September 30, 2025 are made up of $1.0

million related to Kipps, $0.8 million related to the legal settlement, $0.5 million legal accrual, $0.2 million for NGA, $0.3 million

bonus, $0.6 million Aspen contingent debt, $1.2 million charge related to the Libertas warrants, $0.1 million cash portion of the Aspen

carve-out, net of a $5.9 million gain on deferred compensation.

of Operations

and Six Months Ended June 30, 2025 and 2024

following table shows our consolidated financial results for the three and six months ended June 30, 2025 and 2024:

and Nine Months Ended September 30, 2025 and 2024

following table shows our consolidated financial results for the three and nine months ended September 30, 2025 and 2024:

Three months ended

September 30,

Period over period change

(in thousands)

(in thousands, except percentages)

Cost of revenue

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General and administrative

Goodwill impairment

Total operating expenses

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Other income (expense):

Interest expense, net

Gain (loss) on extinguishment of debt

Interest income (expense)

Other income (expense), net

Total other income (expense)

Loss before income tax expense

Income tax expense

Net income (loss)

Six Months Ended June 30,

Total other income

Net loss before income tax benefit

Income tax benefit (expense)

Nine months ended

September 30,

Period over period change

(in thousands)

(in thousands, except percentages)

Cost of revenue

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General and administrative

Goodwill impairment

Total operating expenses

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Other income (expense):

Interest expense, net

Gain (loss) on extinguishment of debt

Other income (expense), net

Interest income (expense)

Gain on debt extinguishment

Total other income (expense)

Income (loss) before income tax expense

Income tax expense

Net income (loss)

Net loss before income tax benefit

Income tax benefit (expense)

– Not meaningful

For the three months ended June 30, 2025 compared to 2024, the $14.8 million

increase in revenue was due to a $15.0 million increase in the Drones segment and a $0.5 million increase in the Training segment offset

by a $0.8 million decrease in the Avionics segment.

For the six months ended June 30, 2025 compared to 2024, the $12.8 million increase

in revenue was due to a $14.1 million increase in the Drones segment and a $0.3 million increase in the Training segment offset by a $1.5

million decrease in the Avionics segment.

The increase in revenue in the Drones segment was due to the continued success of market entry

strategies that target NATO member countries that have resulted in increased shipments.

The increase in the Training segment was largely

due to a specific government contract which occurs every two years that has higher profit margins as we provide training using ground

target vehicles.

The decrease in revenue in the Avionics segment reflects our strategic decision to delay investments in R&D and the commercialization of higher-margin products, particularly those targeting the general aviation

and multi-engine aircraft markets, while prioritizing resources toward drone production.

Training segment revenue continues to be impacted

by our decision to defer aircraft acquisitions necessary to conduct certain programs as we focus capital on scaling our drone operations

in response to growing market demand.

We expect to resume investment in the Avionics and Training segments now that we have completed

our initial public offering.

the three months ended June 30, 2025 compared to 2024, cost of revenue increased by $5.5 million primarily due to a $6.0 million and

a $0.1 million increase in cost of revenue within the Drones and Training segment, respectively, offset by a decrease of $0.6

million within the Avionics segment.

Gross margin was 61.2% during the three months ended June 30, 2025 compared to 59.0% during the

same period in 2024.

This 2.2% point increase in gross margin was primarily attributable to a 30.5% increase in the Training segment

margin due to the higher profitability of the ground target vehicles contract and a 7.2% increase in the Avionics segment margin due

to favorable operating variances.

These increases were offset by an 8.7% decrease in the margin within the Drones segment primarily

due to product discounting and the mix of products sold during the period.

For the six months ended June 30, 2025 compared to 2024, cost of revenue

increased by $5.1 million primarily due to a $6.1 million and a $0.1 million increase in cost of revenue within the Drones and Training

segment, respectively, offset by a decrease of $1.1 million within the Avionics segment.

Gross margin remained relatively flat at approximately

60.4% and 60.6% during the six months ended June 30, 2025 and 2024, respectively, with the increases in margins within the Training and

Avionics segment being partially offset by the decrease in the Drones segment margin as discussed above.

the three months ended September 30, 2025 compared to 2024, the $17.4 million decrease in revenue was due to a $17.8 million

decrease in the Drones segment and a $0.5 million decrease in the Avionics segment partially offset by a $0.9 million increase in

the Training segment.

For the nine months ended September 30, 2025 compared to 2024, the $4.6 million decrease in revenue was due to

a $3.7 million decrease in the Drones segment and a $2.0 million decrease in the Avionics segment partially offset by a $1.2 million

increase in the Training segment.

The Drones decline was driven primarily by shipment timing as the planned third quarter deliveries

were delayed after a key customer requested a configuration change to dual-band antennas.

Our incumbent supplier was unable to

provide the required units in time to complete deliveries scheduled to be delivered during the quarter ended September 30, 2025.

Avionics revenue reflects deliberate sequencing of R&D and commercialization activities during the period to prioritize drone

Training revenue continues to reflect deferred aircraft acquisitions;

the segment benefited from a biennial government

contract with higher margins associated with ground target vehicle programs.

Following the Company’s completed equity

offerings, we have begun reinitiating targeted investments in Avionics and Training.

the three months ended September 30, 2025 compared to 2024, cost of revenue decreased by $3.9 million primarily due to a $4.3 million

and a $0.4 million decrease in cost of revenue within the Drones and Avionics segments, respectively, offset by an increase of $0.7 million

in cost of revenue within the Training segment.

Gross margin was 44.4% during the three months ended September 30, 2025 compared to 68.7%

during the same period in 2024.

This 24.3% point decrease in gross margin was primarily attributable to an 8.4% decrease in the margin

within the Drones segment primarily due to product discounting and the mix of products sold during the period.

The Training segment margin

increased 4.7% due to the higher profitability of the ground target vehicles contract and the Avionics segment had a 2.5% increase in

margin due to favorable operating variances.

the nine months ended September 30, 2025 compared to 2024, cost of revenue increased by $1.2 million primarily due to a $1.8 million

and a $0.9 million increase in cost of revenue within the Drones and Training segments, respectively, offset by a decrease of $1.5 million

within the Avionics segment.

Gross margin decreased from 64.7% to 58.1% during the nine months ended September 30, 2025 and 2024, respectively,

with the decrease in the Drones segment margin partially offset by increases in margins within the Training and Avionics segments as

discussed above.

and Development

For the three months ended June 30, 2025 compared to 2024, R&D expense

increased $0.9 million primarily due to a $1.1 million increase in personnel costs within the Drones segment with offsetting decreases

in personnel costs within the Electric Air Mobility and Avionics segments.

For the six months ended June 30, 2025 compared to 2024, R&D

expense increased $1.5 million primarily due to a $1.7 million increase in personnel costs within the Drones segment with offsetting decreases

in personnel costs within the Electric Air Mobility and Avionics segments.

Sales and Marketing

the three months ended June 30, 2025 compared to 2024, sales and marketing expense increased $0.3 million primarily due to a $0.3 million

increase in personnel costs within the Drones segment.

For the six months ended June 30, 2025 compared to 2024, sales and marketing

expense increased $0.5 million primarily due to a $0.5 million increase in personnel costs within the Drones segment.

the three months ended September 30, 2025 compared to 2024, R&D expense increased $0.9 million primarily due to a $0.6 million increase

and a $0.3 million increase within the Drones segment and Avionics segment, respectively.

For the nine months ended September 30, 2025

compared to 2024, R&D expense increased $2.3 million primarily due to increases within the Drones segment.

Increases within the Drones

segment were primarily due to increased personnel and other costs.

and Marketing

the three months ended September 30, 2025 compared to 2024, sales and marketing expense remained relatively flat at $1.6 million.

the nine months ended September 30, 2025 compared to 2024, sales and marketing expense increased $0.6 million primarily due to a $0.5

million increase within the Drones segment.

Increases within the Drones segment were primarily due to increased personnel costs.

and Administrative

the three months ended June 30, 2025 compared to 2024, general and administrative expense increased $25.0 million primarily due to a

$13.3 million increase due to corporate costs which included $6.8 million of equity compensation, $0.5 million of bonus

compensation, $1.0 million of advisory services and $1.3 million of legal settlement accruals, all of which were contingent upon the

IPO, $2.0 million increase in incentive and consulting fees at the corporate level related to the expansion of the Drones segment and $1.7

million of other corporate costs.

There was also a $10.1 million increase within the Training segment that was primarily

attributable to equity compensation, a $1.6 million increase within the Avionics segment that was primarily attributable to equity

compensation, and a $0.4 million increase within the Drones segment, partially offset by a $0.4 million decrease within the Electric

Air Mobility segment.

the six months ended June 30, 2025 compared to 2024, general and administrative expense increased $25.3 million primarily due to a $13.1

million increase due to corporate costs which included $6.8 million of equity compensation, $0.5

million of bonus compensation, $1.0 million of advisory services and $1.3 million of legal settlement accruals, all of which were contingent

upon the IPO, $2.6 million increase in incentive and consulting fees at the corporate

level related to the expansion of the Drones segment and $0.9 million of other corporate costs.

There was also a $1.5 million increase within the Drones segment, a $10.0 million

increase within the Training segment, and a $1.5 million increase within the Avionics segment partially offset by a $0.

million decrease within the Electric Air Mobility segment.

Increases within the Drones segment were primarily due to a $1.5 million increase in personnel and other costs.

the three months ended September 30, 2025 compared to 2024, general and administrative expense increased $5.2 million primarily due to

a $4.1 million increase in corporate costs such rent, insurance, and recruiting fees as well as $1.3 million of compensation and $0.9

million of equity compensation.

the nine months ended September 30, 2025 compared to 2024, general and administrative expense increased $30.5 million primarily due to

a $17.1 million increase in corporate costs which included $7.7 million of equity compensation, $0.5 million of bonus compensation, $1.0

million of advisory services and $1.3 million of legal settlement accruals, all of which were contingent upon the IPO, $2.1 million increase

in incentive and consulting fees at the corporate level related to the expansion of the Drones segment, $1.0 million of bonus compensation

and $3.5 million of other corporate costs.

There was also a $2.1 million increase within the Drones segment, a $10.3 million increase

within the Training segment, and a $1.8 million increase within the Avionics segment partially offset by a $0.8 million decrease within

the Electric Air Mobility segment.

Increases within the Drones segment were primarily due to increases in personnel and other costs.

Increases within the Avionics segment and Training segment were primarily attributable to equity compensation.

The $0.8 million decrease within the Electric Air Mobility segment was due to cost reduction initiatives in the business.

the three months ended June 30, 2025 and 2024, we had interest expense, net, of $8.0 million and $1.0 million, respectively.

six months ended June 30, 2025 and 2024, we had interest expense, net, of $9.3 million and $1.2 million, respectively.

The 2025 interest

was primarily attributable to the interest paid in shares on the investor notes which totaled $6.7 million and additional interest paid

on borrowings with WebBank and Libertas.

The 2024 interest was primarily attributable to interest accrued on investor

The $0.8 million decrease

within the Electric Air Mobility segment was due to cost reduction initiatives in the business.

the three months ended September 30, 2025, we had interest income of $0.1 million compared to interest expense of $1.7 million for

the three months ended September 30, 2024 which was primarily due to the interest of the amounts due to Sky Watch as described in

Note 12 to our unaudited condensed consolidated financial statements.

For the nine months ended September 30, 2025 and 2024, we had interest expense, net, of $9.2 million and $2.9 million,

respectively.

The interest for the nine months ended September 30, 2025 was primarily attributable to the interest paid in shares on

the investor notes which totaled $6.7 million and additional interest paid on borrowings with WebBank and Libertas.

interest was primarily attributable to interest accrued on investor notes.

on extinguishment of debt, net

the three months and six months ended June 30, 2025, we had a gain on debt extinguishment, net of $15.6 million which was the result

of the partial settlement in equity of the Aspen bridge notes which resulted in a $13.1 million gain and a $5.7 million gain on

settlement of certain investor notes at fair value, partially offset by losses on debt extinguishment of a combined $3.2 million for

WebBank and Libertas.

the nine months ended September 30, 2025, we had a gain on debt extinguishment, net of $15.6 million which was the result of the partial

settlement in equity of the Aspen bridge notes which resulted in a $13.1 million gain and a $5.7 million gain on settlement of certain

investor notes at fair value, partially offset by losses on debt extinguishment of a combined $3.2 million for WebBank and Libertas.

Income (Expense), Net

the three months ended June 30, 2025 compared to 2024, we had $20.1 million of other income, primarily due to $17.5 million of

income from fair value adjustments on contingent consideration that was resolved in conjunction with the IPO and $1.8 million of

income from a fair value adjustment on the Libertas warrants, net of a $0.6

million contingency recorded related to the Aspen contingent debt as compared to $1.5 million of other expense during the three

months ended June 30, 2024, which was primarily due to the increase in the fair value of the Jaunt Contingent

For the six months ended June 30, 2025

compared to 2024, we had $22.7 million of other income, primarily due to $20.3 million of income from fair value adjustments on

contingent consideration, $1.8 million of income from a fair value adjustment on the Libertas warrants, net of a $0.6 million

contingency recorded related to the Aspen contingent debt as compared to $1.8 million of other expense during the six months ended

June 30, 2024, which was primarily due to the increase in the fair value of the Jaunt Contingent Arrangement.

the three months ended June 30, 2025 and 2024, our income tax expense was $2.1 million and $0.4 million, respectively.

months ended June 30, 2025 and 2024, our income tax expense was $2.3 million and $1.4 million, respectively.

Tax expense for both

periods was primarily attributable to Sky-Watch generating positive pre-tax income.

the three months ended September 30, 2025 compared to 2024, we had $3.3 million of other income, primarily due to $4.5 million of income

from the settlement of deferred compensation offset by a $1.2 million charge related to Libertas warrants as compared to $4.1 million

of other income during the three months ended September 30, 2024, which was primarily due to the decrease in the fair value of the Jaunt

Contingent Arrangement.

the nine months ended September 30, 2025 compared to 2024, we had $26.1 million of other income, primarily due to $20.3 million of income

from fair value adjustments on contingent consideration, $1.8 million of income from a fair value adjustment on the Libertas warrants

and $4.5 million of income from the settlement of deferred compensation offset by a $1.2 million charge related to Libertas warrants

and a $0.6 million contingency recorded related to the Aspen contingent debt as compared to $2.3 million of other income during the nine

months ended September 30, 2024, which was primarily due to the decrease in the fair value of the Jaunt Contingent Arrangement.

the three months ended September 30, 2025, our income tax benefit was $0.6 million as compared to $2.4 million of income tax expense

for the three months ended September 30, 2024.

For the nine months ended September 30, 2025 and 2024, our income tax expense was $1.7

million and $3.8 million, respectively.

Tax expense for both nine month periods ended September 30, 2025 and 2024 as well as for the

three months ended September 30, 2024 was primarily attributable to Sky-Watch generating positive pre-tax income.

The tax benefit for

the three months ended September 30, 2025 was attributable to lower pre-tax income.

and Capital Resources

of June 30, 2025, we had cash and restricted cash of $40.5 million, of which $0.2 million was either restricted or was designated exclusively

for Sky-Watch operations, and working capital of $12.6 million.

Based on its current operating plan and available

liquidity, management believes that the Company has sufficient cash and resources to meet its obligations and continue its operations

for at least the next 12 months from the date of issuance of the financial statements.

The Company is opportunistically pursuing

additional capital through equity or debt financing to support growth initiatives.

Management believes the Company’s current liquidity

is sufficient to fund ongoing operations for at least the next twelve months.

Any additional capital, if raised, would be directed toward

expanding the Company’s market position, pursuing strategic opportunities, and supporting revenue growth and long-term profitability.

of June 30, 2025, we had third party obligations of $3.0 million of Investor Notes as described within Note 2 to our unaudited

condensed consolidated financial statements, of which $0.2 million was repaid in July of 2025 and the remaining $2.8 million is due

190 days from the IPO;

$3.8 million of Investor Notes as described in Note 12 to our unaudited condensed consolidated financial

statements which are due 190 days from the IPO;

and $3.8 million of Investor Notes which we have elected to record using the fair

value election as further described in Note 2 to our unaudited condensed consolidated financial statements.

During July 2025, we

repaid $2.1 million of the Investor notes at fair value and amended the remaining Investor Notes such that the remaining $1.8

million, inclusive of a $0.1 million extension fee, is due December 16, 2025.

During the quarter ended June 30, 2025, we issued 1.1

million shares related to the Investor Notes and paid $0.6 million out of IPO proceeds.

of September 30, 2025, we had cash and restricted cash of $83.7 million, of which $0.2 million was either restricted or was designated

exclusively for Sky-Watch operations, and working capital of $74.5 million.

on its current operating plan and available liquidity, management believes that the Company has sufficient cash and resources to meet

its obligations and continue its operations for at least the next 12 months from the date of issuance of the financial statements.

Company is evaluating opportunistic debt financing to support growth initiatives;

any proceeds, if obtained, would be used to expand

our market position, pursue strategic opportunities, and support revenue growth and long-term profitability.

of September 30, 2025, we had third party obligations of $2.8 million of Investor Notes as described within Note 2 to our unaudited condensed

consolidated financial statements which is due 190 days from the IPO;

$3.8 million of Investor Notes as described in Note 12 to our unaudited

condensed consolidated financial statements which are due 190 days from the IPO;

and $1.7 million of Investor Notes which we have elected

to record using the fair value election as further described in Note 2 to our unaudited condensed consolidated financial statements.

During July 2025, we amended certain Investor Notes such that $1.8 million inclusive of a $0.1 million extension fee, is due December

During the nine months ended September 30, 2025, we issued 1.1 million shares related to the Investor Notes and paid $3.0 million

out of IPO proceeds.

Incentive Agreement

In June 2024, we entered the Dangroup Incentive Agreement

with Dangroup, whereby we agreed to pay Dangroup 20% of Sky-Watch’s EBITDA as an incentive bonus for their continued involvement

in Sky-Watch’s governance, management and/or other operations, commencing on January 1, 2025 for an initial term of five years,

which shall renew upon mutual agreement of the parties.

In December 2024, we amended the Dangroup Incentive Agreement, whereby we agreed

to transfer to Dangroup shares of our common stock immediately prior to the completion of the IPO such that Dangroup’s ownership

would be increased to 5% of our capital stock on a fully diluted basis.

During the three months ended June 30, 2025, we issued

0.5 million shares to Dangroup in satisfaction of this agreement.

June 2024, we entered the Dangroup Incentive Agreement with Dangroup, whereby we agreed to pay Dangroup 20% of Sky-Watch’s EBITDA

as an incentive bonus for their continued involvement in Sky-Watch’s governance, management and/or other operations, commencing

on January 1, 2025 for an initial term of five years, which shall renew upon mutual agreement of the parties.

In December 2024, we amended

the Dangroup Incentive Agreement, whereby we agreed to transfer to Dangroup shares of our common stock immediately prior to the completion

of the IPO such that Dangroup’s ownership would be increased to 5% of our capital stock on a fully diluted basis.

During the nine

months ended September 30, 2025, we issued 0.5 million shares to Dangroup in satisfaction of this agreement.

following summarizes our cash flows for the periods indicated:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Net cash used in investing activities

Net cash provided by financing activities

Net Cash Used in Operating Activities

Net cash used in operations for the six months ended

June 30, 2025 totaled $30.8 million, and was primarily due to net income of $3.9 million and positive non-cash adjustments including stock-based

compensation, non-cash interest, legal settlement, and depreciation and amortization, offset by negative non-cash adjustments of gains

of IPO transactions, debt extinguishment and fair value adjustments of contingent consideration and warrant liability and working capital

adjustments, primarily consisting of the changes in accounts receivable, accounts payable, accrued expenses and other long-term liabilities

and deferred revenue.

Net cash used in operations for the six months ended June 30, 2024 totaled $7.8 million which was due to a net loss

of $7.6 million and a change in working capital adjustments, primarily the change in deferred revenue, which was partially offset primarily

by a positive non-cash adjustment of depreciation and amortization.

Net cash provided by (used in) financing activities

Cash Used in Operating Activities

cash used in operations for the nine months ended September 30, 2025 totaled $36.5 million, and was primarily due to positive non-cash

adjustments including stock-based compensation, non-cash interest, legal settlement, charge related to Libertas warrants, and depreciation

and amortization, offset by negative non-cash adjustments of gains of IPO transactions, debt extinguishment and fair value adjustments

of contingent consideration and warrant liability and working capital adjustments, primarily consisting of the changes in accounts receivable,

prepaid expenses and other assets, inventory, accounts payable, accrued expenses and other long-term liabilities and deferred revenue.

Net cash used in operations for the nine months ended September 30, 2024 totaled $2.5 million which was due to a net loss of $37.9 million

and a change in working capital adjustments, primarily the change in deferred revenue, accounts receivable, inventory, prepaid expenses,

net of changes in accounts payable, accrued expenses and other long-term liabilities and deferred compensation and by positive non-cash

adjustments of goodwill impairment, depreciation and amortization, interest, and stock- based compensation, net of a negative non-cash

adjustment for change in fair value of the contingent consideration.

Cash Used in Investing Activities

of $1.0 million and $0.5 million was used in investing activities during the six months ended June 30, 2025 and 2024, respectively, to purchase property

and equipment and intangible assets.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during

the six months ended June 30, 2025 was $49.6 million primarily due to $61.5 million of proceeds from the IPO net of issuance costs,

$8.5 million of proceeds from the Libertas warrants and WebBank loans that were partially offset by $14.8 million of debt repayments

on borrowings and related borrowings, $3.3 million of contingent consideration payments and $2.2 million in payments due to seller.

Net cash provided by financing activities during the six months ended June 30, 2024 of $0.7 million was primarily due to $2.5

million proceeds from Investor Notes offset by repayments on borrowings and amounts paid to seller.

of $2.0 million and $0.6 million was used in investing activities during the nine months ended September 30, 2025 and 2024, respectively,

to purchase property and equipment and intangible assets.

Cash Provided by (Used in) Financing Activities

cash provided by financing activities during the nine months ended September 30, 2025 was $97.5 million primarily due to $58.3 million

of proceeds from the IPO net of issuance costs, $83.3 million of proceeds from the Follow-on Offering net of issuance costs, $8.5 million

of proceeds from the Libertas warrants and WebBank loans that were partially offset by $20.0 million of stock repurchases, $20.9 million

of debt repayments on borrowings and related borrowings, $8.5 million of contingent consideration payments and $3.2 million in payments

due to seller.

Net cash used in financing activities during the nine months ended September 30, 2024 was $1.4 million, primarily due

to payments made to the sellers of Sky-Watch that were partially offset primarily by the proceeds from borrowings and related party borrowings,

net of repayments.

Accounting Policies and Estimates

condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United

The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that

affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

On an ongoing basis, we

evaluate our estimates and assumptions.

Our actual results may differ from these estimates under different assumptions or

We believe that of our significant accounting policies, which are described in Note 1 “The Company and Summary of

Significant Accounting Policies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, the

following accounting policies and specific estimates involve a greater degree of judgment and complexity.

Accordingly, these are the

policies and estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial

condition and results of operations:

the standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple performance obligations;

the fair value of assets acquired and liabilities assumed for business combinations;

goodwill impairment;

impairment of indefinite lived and long-lived assets;

valuation of debt;

stock-based compensation;

inventory valuation;

the recognition, measurement and valuation of current and deferred income taxes and uncertain tax positions.

condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported

amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

On an ongoing basis, we evaluate our estimates

and assumptions.

Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our

significant accounting policies, which are described in Note 1 “The Company and Summary of Significant Accounting Policies”

to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, the following accounting

policies and specific estimates involve a greater degree of judgment and complexity.

Accordingly, these are the policies and estimates

we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:

standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple performance obligations;

fair value of assets acquired and liabilities assumed for business combinations;

of indefinite lived and long-lived assets;

compensation;

recognition, measurement and valuation of current and deferred income taxes and uncertain tax positions.

described more fully below, these estimates bear the risk of change due to the inherent uncertainty of the estimate.

3 unchanged sentences

that are not readily apparent from other sources.

estimates may change, as new events occur and additional information is obtained, and such changes will be recognized in the

condensed consolidated financial statements as soon as they become known.

Actual results could differ from these estimates and any

such differences may be material to our condensed consolidated financial statements.

estimates may change, as new events occur and additional information is obtained, and such changes will be recognized in the condensed

consolidated financial statements as soon as they become known.

Actual results could differ from these estimates and any such differences

may be material to our condensed consolidated financial statements.

recognize revenue when, or as, we satisfy performance obligations by transferring promised products or services to our customers in an

39 unchanged sentences

account for acquired businesses using the purchase method of accounting.

Under the purchase method, our condensed consolidated

financial statements include the financial results of an acquired business starting from the date the acquisition is completed.

addition, the assets acquired, liabilities assumed, and any contingent consideration must be recorded at the date of acquisition at

their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets

acquired recorded as goodwill.

Significant judgment is required in estimating the fair value of contingent consideration and

intangible assets and in assigning their respective useful lives.

Accordingly, we typically obtain the assistance of third-party

valuation specialists for significant acquisitions.

The fair value estimates are based on available historical information and on

future expectations and assumptions deemed reasonable by management but are inherently uncertain.

Under the purchase method, our condensed consolidated financial

statements include the financial results of an acquired business starting from the date the acquisition is completed.

In addition, the

assets acquired, liabilities assumed, and any contingent consideration must be recorded at the date of acquisition at their respective

estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.

Significant judgment is required in estimating the fair value of contingent consideration and intangible assets and in assigning their

respective useful lives.

Accordingly, we typically obtain the assistance of third-party valuation specialists for significant acquisitions.

The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by

management but are inherently uncertain.

use a discounted cash flow analysis given probability and estimated timing of payout to determine the fair value of contingent consideration

18 unchanged sentences

operating segments.

is not amortized and is tested at the reporting unit level for impairment on an annual basis or whenever events or changes in

circumstances indicate that the carrying value may not be recoverable.

We have selected October 1 st as the date to

perform our annual impairment test.

In the valuation of goodwill, management must make assumptions regarding estimated future cash

flows to be derived from our business.

If these estimates or their related assumptions change in the future, we may be required to

record an impairment for these assets.

Management may first evaluate qualitative factors to assess if it is more likely than not

that the fair value of a reporting unit is less than its carrying amount and to determine if an impairment test is necessary.

Management may choose to proceed directly to the evaluation, bypassing the initial qualitative assessment.

The impairment test

involves comparing the fair value of the reporting unit to which goodwill is allocated to its net book value, including goodwill.

goodwill impairment loss would be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the

loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

No goodwill impairment charges were recorded for the three or six months ended June 30,

2025 and 2024.

is not amortized and is tested at the reporting unit level for impairment on an annual basis or whenever events or changes in circumstances

indicate that the carrying value may not be recoverable.

We have selected October 1 st as the date to perform our annual impairment

In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from our business.

If these estimates or their related assumptions change in the future, we may be required to record an impairment for these assets.

may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its

carrying amount and to determine if an impairment test is necessary.

Management may choose to proceed directly to the evaluation, bypassing

the initial qualitative assessment.

The impairment test involves comparing the fair value of the reporting unit to which goodwill is

allocated to its net book value, including goodwill.

A goodwill impairment loss would be the amount by which a reporting unit’s

carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that

reporting unit.

No goodwill impairment charges were recorded for the three or nine months ended September 30, 2025.

We recorded goodwill

impairment charges of $38.0 million during the three and nine months ended September 30, 2024.

Impairment Test

a result of the termination of our Business Combination Agreement and related transactions (the “BCA Transactions”) in August 2024 and the continued delays in securing financing, we determined it appropriate

to test the fair value of each reporting unit for goodwill impairment as of September 30, 2024 for all of our reporting units except

Avionics as no goodwill had been allocated to this reporting unit.

We determined that the fair value of the Drones reporting unit substantially

exceeded its respective carrying value.

The Electric Air Mobility and Training reporting unit fair values indicated goodwill impairment

as detailed below.

Electric AirMobility

Goodwill carrying value as of September 30, 2024

115.8 million

451.4 million

Fair value of reporting unit as of September 30, 2024

185.1 million

510.2 million

Carrying value of reporting unit as of September 30, 2024

133.5 million

527.2 million

Impairment as of September 30, 2024

a result of the termination of our Business Combination Agreement and related transactions (the “BCA Transactions”) in August

2024 and the continued delays in securing financing, we determined it appropriate to test the fair value of each reporting unit for goodwill

impairment as of September 30, 2024 for all of our reporting units except Avionics as no goodwill had been allocated to this reporting

We determined that the fair value of the Drones reporting unit substantially exceeded its respective carrying value.

Air Mobility and Training reporting unit fair values indicated goodwill impairment as detailed below.

carrying value as of September 30, 2024

value of reporting unit as of September 30, 2024

as of September 30, 2024

and assumptions varied between each reporting unit depending on the facts and circumstances specific to that reporting unit.

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of the Jaunt Journey remained consistent with prior year projections.

projections as of September 30, 2024 and October 1, 2023 were developed using estimates of manufacturing costs, production hours per

unit, learning curves and subsequent efficiencies, and operating costs.

While mid-term and long-term EBITDA projections at maximum capacity

have not significantly changed compared to our prior year testing date of October 1, 2023, the impact of delaying the projected cash

flows from the Jaunt Journey as a result of a later expected commercialization date resulted in a decrease in the fair value of the Electric

Air Mobility segment, which indicated impairment.

Projected EBITDA as of October 1, 2023 gave effect to net research and development

costs expected to be incurred between 2024 and 2027 leading up to the commercialization of the Jaunt Journey aircraft and assumed positive

EBITDA during the two years following commercialization.

Projected EBITDA as of September 30, 2024 gave effect to net research and development

costs expected to be incurred (i) between 2025 and 2028 leading up to the commercialization of the cargo UAV and (ii) between 2029 and

2031 leading up to the commercialization of the Jaunt Journey and assumed positive EBITDA during the two years following commercialization.

Mid-term and long-term EBITDA margin projections at full rate production were reduced slightly (1-2%) compared to our prior year testing

date of October 1, 2023.

projections as of September 30, 2024 were developed using estimates of manufacturing costs, production hours per unit, learning curves

and subsequent efficiencies, and operating costs.

While mid-term and long-term EBITDA projections at maximum capacity have not significantly

changed compared to our prior year testing date of October 1, 2023, the impact of delaying the projected cash flows from the Jaunt Journey

as a result of a later expected commercialization date resulted in a decrease in the fair value of the Electric Air Mobility segment,

which indicated impairment.

Projected EBITDA as of October 1, 2023 gave effect to net research and development costs expected to be incurred

between 2024 and 2027 leading up to the commercialization of the Jaunt Journey aircraft and assumed positive EBITDA during the two years

following commercialization.

Projected EBITDA as of September 30, 2024 gave effect to net research and development costs expected to

be incurred (i) between 2025 and 2028 leading up to the commercialization of the cargo UAV and (ii) between 2029 and 2031 leading up

to the commercialization of the Jaunt Journey and assumed positive EBITDA during the two years following commercialization.

and long-term EBITDA margin projections at full rate production were reduced slightly (1-2%) compared to our prior year testing date

of October 1, 2023.

projections as of September 30, 2024 were also revised to incorporate estimates of manufacturing costs of the cargo UAV, which reduced

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however, significant changes in any one of our assumptions

could produce a different result and result in additional impairment charges that could be material to our condensed consolidated

financial statements.

For example, the fair value of the Electric Air Mobility segment could be adversely affected and may result in

an additional impairment of goodwill if this reporting unit is not able to advance the development of our aircraft and other

products, obtain regulatory approvals, and launch and commercialize our products at scale, if the estimated production costs are

significantly higher than estimated or if the WACC discount rate is increased.

could produce a different result and result in additional impairment charges that could be material to our condensed consolidated financial

For example, the fair value of the Electric Air Mobility segment could be adversely affected and may result in an additional

impairment of goodwill if this reporting unit is not able to advance the development of our aircraft and other products, obtain regulatory

approvals, and launch and commercialize our products at scale, if the estimated production costs are significantly higher than estimated

or if the WACC discount rate is increased.

to the Training segment’s projections as of September 30, 2024, we noted a significant decrease in sales and gross margins as a

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however, significant changes in any one of our assumptions

could produce a different result and result in additional impairment charges that could be material to our condensed consolidated

financial statements.

For example, the fair value of the Training segment could be adversely affected and may result in an

additional impairment of goodwill if this reporting unit is not able to purchase the needed aircraft, if the estimated costs for

managing the flight schools are significantly higher than estimated or if the WACC discount rate is increased.

could produce a different result and result in additional impairment charges that could be material to our condensed consolidated financial

For example, the fair value of the Training segment could be adversely affected and may result in an additional impairment

of goodwill if this reporting unit is not able to purchase the needed aircraft, if the estimated costs for managing the flight schools

are significantly higher than estimated or if the WACC discount rate is increased.

perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates

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estimated useful lives for our intangible assets are as follows:

Estimated useful life

Developed technology

8 to 13 years

Tradenames – definite-lived

Customer relationships

up to 20 years

– definite-lived

relationships

addition to the long-lived intangible assets, we also had $8.8 million of indefinite lived intangible assets which is primarily the $8.7

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with ASC 350-20 last.

ASC 350-30-35-18A specifies that

an entity may first perform a qualitative assessment, as described in this paragraph and paragraphs 350-30-35-18B through 35-18F, to

determine whether it is necessary to perform the quantitative impairment test.

As a result of the termination of our Business Combination Agreement in August 2024 and the continued delays in financing, we determined it appropriate to perform a qualitative assessment

considering factors listed in ASC 350, which includes cost factors, financial performance, legal, regulatory, contractual, political,

business, or other factors.

Based on our review of these factors, there was no indication of impairment for the Avionics or Drones segments.

However, we determined it appropriate to perform a quantitative analysis on intangible and long-lived assets within the Electric Air

Mobility and Training segments.

The fair value of the undiscounted cashflows of both the Electric Air Mobility and Training segments

was significantly higher than the respective asset group’s carrying value and therefore no impairment charges were required to

be recorded for the year ended December 31, 2024.

No impairment charges were recorded

during the three or six months ended June 30, 2025 or 2024.

Impairment of Long-Lived Assets

We evaluate long-lived assets,

including property and equipment and intangible assets, for impairment in accordance with ASC 360 whenever events or changes in circumstances

indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets held and used is measured by a comparison

of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the

asset or asset group.

If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment

loss would be equal to the amount the carrying value exceeds the fair value.

As a result of the

termination of our Business Combination Agreement in August 2024 and the continued delays in financing, we determined it was

appropriate to perform a qualitative assessment considering factors listed in ASC 350 Intangibles—Goodwill and Other

(“ASC 350”) which includes cost factors, financial performance, legal, regulatory, contractual, political, business, or

other factors.

350-30-35-18A specifies that an entity may first perform a qualitative assessment, as described in this paragraph and paragraphs 350-30-35-18B

through 35-18F, to determine whether it is necessary to perform the quantitative impairment test.

a result of the termination of our Business Combination Agreement in August 2024 and the continued delays in financing, we determined

it appropriate to perform a qualitative assessment considering factors listed in ASC 350, which includes cost factors, financial performance,

legal, regulatory, contractual, political, business, or other factors.

Based on our review of these factors, there was no indication

of impairment for the Avionics or Drones segments.

However, we determined it appropriate to perform a quantitative analysis on intangible

and long-lived assets within the Electric Air Mobility and Training segments.

The fair value of the undiscounted cashflows of both the

Electric Air Mobility and Training segments was significantly higher than the respective asset group’s carrying value and therefore

no impairment charges were required to be recorded for the year ended December 31, 2024.

impairment charges were recorded during the three or nine months ended September 30, 2025 or 2024.

of Long-Lived Assets

evaluate long-lived assets, including property and equipment and intangible assets, for impairment in accordance with ASC 360 whenever

events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets held

and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows

expected to be generated by the asset or asset group.

If such evaluation indicates that the carrying amount of the asset or the asset

group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value.

a result of the termination of our Business Combination Agreement in August 2024 and the continued delays in financing, we determined

it was appropriate to perform a qualitative assessment considering factors listed in ASC 350 Intangibles—Goodwill and Other (“ASC

350”) which includes cost factors, financial performance, legal, regulatory, contractual, political, business, or other factors.

Based on our review of these factors, there was no indication of impairment for the Avionics or Drones segments.

However, we determined it was appropriate to perform a quantitative analysis on intangible and long-lived assets within the Electric

Air Mobility and Training segments.

The fair value of the undiscounted cashflows of both the Electric Air Mobility and Training

segments was significantly higher than the respective asset group’s carrying value and therefore no impairment charges were

required to be recorded in 2024.

No impairment charges were recorded

during the three or six months ended June 30, 2025 or 2024.

Valuation of Debt

During 2024, certain Investor

Notes were amended which resulted in significant modifications of debt.

In accordance with ASC 470-50, as this significant modification

was considered an extinguishment and created an election date for the fair value option and as the fair value election is applied on

an instrument-by-instrument basis, we chose to record these Investor Notes at fair value beginning on the modification date in October

Investor Notes have historically included various interest features in the form of both stock and cash upon the closing of an initial

public offering or qualified financing.

In conjunction with the IPO, common stock was issued to partially settle the Investor Notes at fair value.

June 30, 2025, the valuation of the Investor Notes was limited to unpaid cash amounts.

Inventory Valuation

We write down our inventory for

estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable

value based upon assumptions about future demand and market conditions.

Reductions to the carrying value of inventory are charged to

cost of revenue and a new, lower cost basis for that inventory is established.

Subsequent changes to facts or circumstances do not result

in the restoration or increase in the related inventory value.

If actual market conditions are less favorable than those projected by

management, additional inventory write-downs may be required.

Stock-based Compensation

We recognize compensation expense

for stock-based awards based on the grant-date estimated fair value of the awards.

Options and restricted stock awards may be granted

as time-based awards, performance-based awards or combinations of the time-based and performance-based awards.

We expense the fair value

of our options to employees and non-employees on a straight-line basis over the associated service period for time-based awards, which

is generally the vesting period.

The performance-based awards begin their period of ratable vesting at the time that we determine that

the achievement of the performance thresholds is probable.

We account for forfeitures as they occur and does not estimate forfeitures

at the time of grant.

Ultimately, the actual expense recognized over the vesting period will be for only those options that vest.

We account for income taxes

in accordance with the asset and liability approach method.

Deferred tax assets and liabilities are recognized for future tax

consequences attributable to temporary differences between the condensed consolidated financial statements carrying amounts of

existing assets and liabilities and their respective tax bases, as well as for net operating losses and tax credit carryforwards.

Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are

expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in

income in the period that includes the enactment date.

A valuation allowance reduces the deferred tax assets to the amount that is

more-likely-than-not to be realized.

We evaluate our tax positions

taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions will more-likely-than-not

be sustained by the applicable tax authority.

Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as

a tax benefit or expense in the current year.

Interest and penalties, if applicable, are recorded in the period assessed as income tax

Off-Balance Sheet Arrangements

As of June 30, 2025 and December

31, 2024, we have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed

any debt or commitments of other entities, or purchased any non-financial assets.

We do not participate in transactions that create relationships

with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established

for the purpose of facilitating off-balance sheet arrangements.

However, we determined

it was appropriate to perform a quantitative analysis on intangible and long-lived assets within the Electric Air Mobility and Training

The fair value of the undiscounted cashflows of both the Electric Air Mobility and Training segments was significantly higher

than the respective asset group’s carrying value and therefore no impairment charges were required to be recorded in 2024.

impairment charges were recorded during the three or nine months ended September 30, 2025 or 2024.

2024, certain Investor Notes were amended which resulted in significant modifications of debt.

In accordance with ASC 470-50, as this

significant modification was considered an extinguishment and created an election date for the fair value option and as the fair value

election is applied on an instrument-by-instrument basis, we chose to record these Investor Notes at fair value beginning on the modification

date in October 2024.

Investor Notes have historically included various interest features in the form of both stock and cash upon the

closing of an initial public offering or qualified financing.

In conjunction with the IPO, common stock was issued to partially settle

the Investor Notes at fair value.

As of September 30, 2025, the valuation of the Investor Notes was limited to unpaid cash amounts.

write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and

the estimated net realizable value based upon assumptions about future demand and market conditions.

Reductions to the carrying value

of inventory are charged to cost of revenue and a new, lower cost basis for that inventory is established.

Subsequent changes to facts

or circumstances do not result in the restoration or increase in the related inventory value.

If actual market conditions are less favorable

than those projected by management, additional inventory write-downs may be required.

recognize compensation expense for stock-based awards based on the grant-date estimated fair value of the awards.

Options and restricted

stock awards may be granted as time-based awards, performance-based awards or combinations of the time-based and performance-based awards.

We expense the fair value of our options to employees and non-employees on a straight-line basis over the associated service period for

time-based awards, which is generally the vesting period.

The performance-based awards begin their period of ratable vesting at the time

that we determine that the achievement of the performance thresholds is probable.

We account for forfeitures as they occur and does not

estimate forfeitures at the time of grant.

Ultimately, the actual expense recognized over the vesting period will be for only those options

account for income taxes in accordance with the asset and liability approach method.

Deferred tax assets and liabilities are recognized

for future tax consequences attributable to temporary differences between the condensed consolidated financial statements carrying amounts

of existing assets and liabilities and their respective tax bases, as well as for net operating losses and tax credit carryforwards.

Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected

to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the

period that includes the enactment date.

A valuation allowance reduces the deferred tax assets to the amount that is more-likely-than-not

to be realized.

evaluate our tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions

will more-likely-than-not be sustained by the applicable tax authority.

Tax positions not deemed to meet the more-likely-than-not threshold

are not recorded as a tax benefit or expense in the current year.

Interest and penalties, if applicable, are recorded in the period assessed

as income tax expense.

Sheet Arrangements

of September 30, 2025 and December 31, 2024, we have not entered into any off-balance sheet financing arrangements, established any special

purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

We do not participate

in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest

entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis