AIRO Group Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Contents Report of Independent Registered Public Accounting Firm (PCAOB ID: 207 ) F-2 Consolidated Balance Sheets as of December 31, 2025 and 2024 F-3 Consolidated Statements of Operations for the years ended December 31, 2025 and 2024 F-4 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2025 and 2024 F-5 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2025 and 2024 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2025 and 2024 F-7 Notes to Consolidated Financial Statements F-8 F- 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of AIRO Group Holdings, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of AIRO Group Holdings, Inc. (a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2025, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 laws 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BPM LLP We have served as the Company’s auditor since 2022. San Jose, California March 30, 2026 F- 2 AIRO Group Holdings, Inc. Consolidated Balance Sheets (Amounts in thousands, except par value amounts) December 31, 2025 December 31, 2024 ASSETS Current assets: Cash $ 74,358 $ 20,741 Restricted cash 193 170 Accounts receivable, net 12,385 8,961 Related party receivables 393 791 Accounts receivable, net 393 791 Inventory 11,639 8,823 Prepaid expenses and other current assets 7,508 2,310 Deferred offering costs - 799 Total current assets 106,476 42,595 Property and equipment, net 8,986 6,834 Right-of-use operating lease assets 3,278 352 Goodwill 571,653 557,508 Intangible assets, net 83,487 93,502 Other assets 259 208 Total assets $ 774,139 $ 700,999 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,599 $ 16,440 Related party payables 8,892 2,183 Accounts payable $ 8,892 $ 2,183 Accrued expenses 7,624 16,374 Operating lease liabilities, current 902 213 Deferred revenue 4,497 10,340 Related party borrowings 1,161 5,971 Revolving lines of credit - 127 Current maturities of debt 1,190 27,992 Investor notes at fair value - 13,819 Due to seller - 3,148 Total current liabilities 30,865 96,607 Long-term debt, net of current maturities 500 688 Deferred compensation - 11,219 Deferred tax liability 1,046 767 Long-term deferred revenue 8 10 Operating lease liabilities, noncurrent 2,478 146 Other long-term liabilities 50 50 Contingent consideration - 42,782 Total liabilities 34,947 152,269 Commitments and contingencies (Note 12) - - Stockholders’ equity: Common stock, $ 0.000001 par value; 1,000,000 shares authorized; 32,594 issued and 31,376 outstanding as of December 31, 2025 and 16,387 shares issued and outstanding as of December 31, 2024 - - Additional paid-in capital 963,022 764,692 Treasury shares, 1,218 and 0 shares as of December 31, 2025 and 2024, respectively ( 21,220 ) - Accumulated other comprehensive income (loss) 7,947 ( 9,509 ) Accumulated deficit ( 210,557 ) ( 206,453 ) Total stockholders’ equity 739,192 548,730 Total liabilities and stockholders’ equity $ 774,139 $ 700,999 The accompanying notes are an integral part of these consolidated financial statements. F- 3 AIRO Group Holdings, Inc. Consolidated Statements of Operations 2025 2024 Year ended December 31, (Amounts in thousands, except per share amounts) 2025 2024 Revenue $ 90,907 $ 86,935 Cost of revenue 36,492 28,618 Gross profit 54,415 58,317 Operating expenses: Research and development 17,918 13,133 Sales and marketing 6,618 6,422 General and administrative 58,644 18,201 Goodwill impairment - 37,994 Total operating expenses 83,180 75,750 Loss from operations ( 28,765 ) ( 17,433 ) Other income (expense): Interest expense, net ( 9,800 ) ( 3,764 ) Gain (loss) on extinguishment of debt 15,559 ( 10,461 ) Other income, net 25,945 2,173 Total other income (expense) 31,704 ( 12,052 ) Income (loss) before income tax expense 2,939 ( 29,485 ) Income tax expense ( 7,043 ) ( 9,209 ) Net loss $ ( 4,104 ) $ ( 38,694 ) Net loss per share - basic and diluted $ ( 0.17 ) $ ( 2.36 ) Weighted-average number of common shares used in computing net loss per share, basic and diluted 23,678 16,387 The accompanying notes are an integral part of these consolidated financial statements. F- 4 AIRO Group Holdings, Inc. Consolidated Statements of comprehensive income (loss) 2025 2024 Year ended December 31, (Amounts in thousands) 2025 2024 Net loss $ ( 4,104 ) $ ( 38,694 ) Other comprehensive income (loss): Foreign currency translation, net of tax 17,456 ( 8,748 ) Total other comprehensive income (loss) 17,456 ( 8,748 ) Comprehensive income (loss) $ 13,352 $ ( 47,442 ) The accompanying notes are an integral part of these consolidated financial statements. F- 5 AIRO Group Holdings, Inc. Consolidated Statements of Stockholders’ Equity Shares Amount Capital Shares Amount (Loss) Deficit Equity Common Stock Additional Paid-In Treasury Stock Accumulated Other Comprehensive Income Accumulated Total Stockholders’ (Amounts in thousands) Shares Amount Capital Shares Amount (Loss) Deficit Equity Balance as of January 1, 2024 16,387 $ - $ 763,976 - - $ ( 761 ) $ ( 167,759 ) $ 595,456 Stock-based compensation - - 716 - - - - 716 Foreign currency translation adjustment - - - - - ( 8,748 ) - ( 8,748 ) Net loss - - - - - - ( 38,694 ) ( 38,694 ) Balance as of December 31, 2024 16,387 - 764,692 - - ( 9,509 ) ( 206,453 ) 548,730 Balance 16,387 $ - $ 764,692 - - $ ( 9,509 ) $ ( 206,453 ) $ 548,730 Conversion of Coastal Defense promissory note 204 - 2,037 - - - - 2,037 Conversion of Aspen Bridge notes 441 - 4,406 - - - - 4,406 Conversion of Jaunt Carter debt 1,122 - 11,224 - - - - 11,224 Issuance of investor note interest shares 1,126 - 11,260 - - - - 11,260 Conversion of Airo Drone debt 37 - 371 - - - - 371 Conversion of Agile Defense debt 34 - 344 - - - - 344 Conversion of Aspen Contingent Debt 44 - 435 - - - - 435 Conversion of Jaunt severance 46 - 460 - - - - 460 Reclassification of Libertas Warrants - - 1,042 - - - - 1,042 Exercise of Libertas Warrants 104 - 2 - - - - 2 Issuance of Underwriter Warrants - - 2,030 - - - - 2,030 Sale of common stock in initial public offering, including over-allotment, net of $ 12,686 offering costs 6,900 - 56,314 - - - - 56,314 Sale of common stock in initial public offering, including over-allotment, net of offering costs 6,900 - 56,314 - - - - 56,314 Shares issued to NGA 34 - 340 - - - - 340 Shares issued to Dangroup 546 - 5,462 - - - - 5,462 Stock issued in connection with the Management Carveout Plan, net of shares withheld for taxes 63 - - 8 ( 175 ) - - ( 17 5 ) Conversion of Jaunt deferred compensation, net of shares withheld for taxes 185 - 4,210 19 ( 423 ) - - 3,787 Issuance and exercise of Libertas warrants 52 - 1,153 - - - - 1,153 RSA and RSU vesting, net of shares withheld for taxes 319 - - 25 ( 506 ) - - ( 506 ) Sale of common stock in Follow-on Offering, including over-allotment, net of $ 6,793 offering costs 4,830 - 82,562 - - - - 82,562 Sale of common stock in Follow-on Offering, including over-allotment, net of offering costs 4,830 - 82,562 - - - - 82,562 Repurchase of common stock ( 1,116 ) - - 1,116 ( 19,413 ) - - ( 19,413 ) Option exercises, net of shares withheld for taxes 18 - 574 50 ( 703 ) - - ( 129 ) Stock-based compensation - - 14,104 - - - - 14,104 Foreign currency translation adjustment - - - - - 17,456 - 17,456 Net loss - - - - - - ( 4,104 ) ( 4,104 ) Balance as of December 31, 2025 31,376 $ - $ 963,022 1,218 $ ( 21,220 ) $ 7,947 $ ( 210,557 ) $ 739,192 Balance 31,376 $ - $ 963,022 1,218 $ ( 21,220 ) $ 7,947 $ ( 210,557 ) $ 739,192 The accompanying notes are an integral part of these consolidated financial statements. F- 6 AIRO Group Holdings, Inc. Consolidated Statements of Cash Flows 2025 2024 Year ended December 31, (Amounts in thousands) 2025 2024 Cash flows from operating activities: Net loss $ ( 4,104 ) $ ( 38,694 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 19,906 716 Non-cash gain on IPO transactions ( 5,476 ) - Note issuance for legal settlement 750 - Provision for credit losses 18 ( 42 ) Non-cash interest 1,112 1,422 Non-cash charge for Libertas warrants 1,152 - Non-cash investor note interest 6,731 - Change in investor notes at fair value 186 353 Non-cash (gain) loss on debt extinguishment ( 15,559 ) 10,461 Depreciation and amortization 12,009 12,640 Amortization of right-of-use lease assets 581 352 Change in fair value of contingent consideration ( 20,272 ) ( 2,400 ) Change in fair value of warranty liability ( 1,843 ) Change in deferred taxes 279 ( 654 ) Goodwill impairment - 37,994 Changes in operating assets and liabilities: Accounts receivable ( 2,301 ) ( 7,908 ) Related party receivables 398 ( 346 ) Prepaid expenses and other assets ( 3,672 ) ( 1,524 ) Inventory ( 1,712 ) ( 6,363 ) Accounts payable, accrued expenses and other long-term liabilities ( 19,200 ) 12,796 Related party payables 6,691 1,226 Lease liabilities ( 552 ) ( 359 ) Deferred revenue ( 6,916 ) ( 76 ) Deferred compensation ( 638 ) 1,891 Net cash (used in) provided by operating activities ( 32,432 ) 21,485 Cash flows from investing activities: Purchase of property and equipment and investment in intangible assets ( 3,074 ) ( 789 ) Net cash used in investing activities ( 3,074 ) ( 789 ) Cash flows from financing activities: Proceeds from sale of common stock, net 140,908 - Repurchase of common stock ( 19,413 ) - Change in lines of credit ( 127 ) ( 621 ) Proceeds from borrowings 8,500 6,950 Repayments on borrowings ( 25,355 ) ( 1,542 ) Proceeds from related party borrowings 231 1,374 Repayments on related party borrowings ( 5,150 ) ( 50 ) Debt issuance costs paid ( 170 ) ( 475 ) Proceeds from the exercise of warrants 3 - Taxes paid related to net share settlements of common stock ( 1,233 ) - Payment of contingent consideration ( 8,535 ) - Cash paid to seller ( 3,246 ) ( 16,219 ) Net cash provided by (used in) financing activities 86,413 ( 10,583 ) Effect of exchange rate changes 2,733 ( 2,304 ) Net increase in cash and restricted cash 53,640 7,809 Cash and restricted cash as of beginning of period 20,911 13,102 Cash and restricted cash as of end of period $ 74,551 $ 20,911 Supplemental disclosures of non-cash information: Deferred compensation settled in common stock $ 4,670 $ - Reclass between accrued expenses and notes payable $ 622 $ - Reclass between accrued expenses and contingent consideration $ 5,268 $ - Financing of insurance premiums $ 1,176 $ 268 Purchases of property and equipment included in accounts payable $ 305 $ - Return of property and cancellation of corresponding accounts payable $ - $ 2,594 Right-of-use assets obtained in exchange for operating lease liabilities $ 3,451 $ 381 Initial recognition of warrant liability $ 2,885 $ - Reclass of warrants to equity $ 1,042 $ - Debt settled in common stock $ 8,935 $ - Contingent consideration settled in common stock $ 13,976 $ - Issuance of Underwriter Warrants $ 2,030 $ - Conversion of accounts payable to debt $ - $ 357 Extinguishment of the carrying value of principal and interest $ - $ 1,405 The accompanying notes are an integral part of these consolidated financial statements. F- 7 AIRO Group Holdings, Inc. Notes to Consolidated Financial Statements 1. The Company and Summary of Significant Accounting Policies Nature of Operations AIRO Group Holdings, Inc., a Delaware corporation (“Holdings” or the “Company”), is a technologically differentiated aerospace, autonomy, and air mobility platform targeting 21st century aerospace and defense opportunities. The Company is organized into four operating segments: (i) Drones, (ii) Avionics, (iii) Training, and (iv) Electric Air Mobility. The Drones segment develops, manufactures, and sells drones and expects to provide drone services, such as Drone as a Service (“DaaS”), for military and commercial end users. The Avionics segment develops, manufactures, and sells avionics for military and general aviation aircraft, drones, and electric vertical takeoff and landing (“eVTOL”) aircraft. The Training segment currently provides military pilot training and expects to provide commercial pilot training in the future. The Electric Air Mobility segment is developing a rotorcraft eVTOL for cargo and passenger use for fixed-route flights, on-demand trips, and cargo operations. In October 2021, Holdings entered into agreements and plans of merger (the “Merger Agreements”) with AIRO Drone, LLC (“AIRO Drone”), Agile Defense, LLC (“Agile Defense”), Coastal Defense, Inc. (“Coastal Defense”), Jaunt Air Mobility, LLC (“Jaunt”), and Aspen Avionics, Inc. (“Aspen Avionics”). Holdings also entered into an equity purchase agreement (“Equity Purchase Agreement”) with Sky-Watch A/S (“Sky-Watch”). AIRO Drone, Agile Defense, Coastal Defense, Jaunt, Aspen Avionics, and Sky-Watch together represent the “Merger Entities.” Under the Merger Agreements and the Equity Purchase Agreement, the parties entered into a series of transactions in which Holdings acquired all of the equity of the Merger Entities. The acquisitions of the Merger Entities by Holdings were completed between February and April 2022. On March 3, 2023, the Company entered into a Business Combination Agreement, as amended by that certain First Amendment to the Business Combination Agreement, dated August 29, 2023, that certain Second Amendment to the Business Combination Agreement, dated January 16, 2024, that certain Third Amendment to the Business Combination Agreement, dated February 5, 2024, and that certain Fourth Amendment to the Business Combination Agreement, dated June 24, 2024, with Kernel Group Holdings, Inc., a Cayman Islands exempted company (“Kernel”), AIRO Group, Inc., a Delaware corporation (“ParentCo”), Kernel Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ParentCo, AIRO Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ParentCo, VKSS Capital, LLC, a Delaware limited liability company, in the capacity as the representative for the stockholders of Kernel and ParentCo and also in the capacity as Kernel’s sponsor, and Dr. Chirinjeev Kathuria, in the capacity as the representative for the stockholders (the “Business Combination Agreement”), pursuant to which a series of transactions would have occurred that would have resulted in the Company becoming a wholly-owned subsidiary of ParentCo with ParentCo becoming a publicly listed company (collectively, the “BCA Transactions”). On August 5, 2024, the Business Combination Agreement was terminated, and as a result, none of the BCA Transactions were effectuated. On June 16, 2025, the Company completed its initial public offering of 6.9 million shares of its 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. The shares 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. On September 12, 2025, the Company completed a public offering of 4.8 million shares of its common stock (the “Follow-on Offering”), 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 the Company from the Follow-on Offering after deducting $ 6.8 million of underwriting discounts and commissions were $ 82.6 million. F- 8 Also on September 12, 2025, the Company repurchased 1.1 million shares of its common stock, which included an additional 0.1 million shares of common stock as a result of the exercise of the underwriters’ option described above, from certain existing stockholders, including certain directors and executive officers and their affiliates, at a price of $ 17.39 per share for an aggregate purchase price of $ 19.4 million (the “Repurchase”). Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries, including Old AGI, Inc. f/k/a AIRO Group, Inc. (“AIRO Group”), AIRO Drone, Agile Defense, Jaunt, Sky-Watch, Coastal Defense, and Aspen Avionics. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the consolidated financial statements contain all adjustments necessary for a fair presentation of the Company’s financial position as of the date reported. All intercompany balances and transactions are eliminated in consolidation. Reclassifications Certain items on the consolidated financial statements and notes for the prior year have been reclassified to conform to the 2025 presentation. In particular, the Company reclassified $ 1.1 million previously included in accrued expenses to related party payables on the consolidated balance sheets. This amount relates to consulting fees payable under the 2.5 % consulting agreement with a shareholder and former board member of Sky-Watch, as further described in Note 18. This reclassification also impacted the presentation in Note 9 and within the consolidated statement of cash flows, however, there was no change to net cash provided by operating activities and no impact on the consolidated statement of operations for the year ended December 31, 2024. In addition, the Company reclassified $ 10.5 million of loss on debt extinguishment previously included in interest expense, net to gain (loss) on extinguishment of debt in the consolidated statement of operations. This reclassification also impacted the presentation in Note 13, however, there was no impact on net loss in the consolidated statement of operations for the year ended December 31, 2024. Reverse Stock Split On March 7, 2025, the Board of Directors approved a 1-for-1.7 reverse stock split (“Stock Split”) of the Company’s issued and outstanding shares of common stock and options to purchase common stock. The Stock Split reduced the number of shares of the Company’s issued and outstanding common stock, as well as the number of shares reserved and available for future issuance and underlying outstanding options to purchase common stock. No fractional shares were distributed as a result of the reverse stock split, and stockholders were entitled to a cash payment in lieu of fractional shares. The Stock Split did not affect the par value per share or total authorized common stock. Accordingly, all share and per share amounts for all periods presented in the consolidated financial statements have been adjusted retroactively, where applicable, to reflect this Stock Split. Liquidity The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. On June 16, 2025, the Company completed its IPO of common stock, which resulted in net proceeds of $ 58.3 million after deducting underwriting discounts and commissions and issuance costs of $ 10.7 million. On September 12, 2025, the Company completed the Follow-on Offering and the Repurchase, which resulted in net proceeds to the Company of $ 63.1 million, after deducting underwriting discounts and commissions of $ 6.8 million and $ 19.4 million related to the Repurchase. As of December 31, 2025, the Company had cash and restricted cash of $ 74.6 million of which $ 0.2 million was either restricted or was designated to only being used for Sky-Watch operations and working capital of $ 75.6 million. Management believes that the existing cash on hand is sufficient to meet its obligations and fund planned operations for at least the next twelve months from the date these consolidated financial statements are issued. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments, estimates, and assumptions are used to determine litigation and claims and other asset and liability amounts. The Company bases its estimates and judgments on historical experience along with other pertinent information available at the time the estimate is made. However, future events are subject to change and the estimates and judgments may require adjustments. Actual results could differ from these estimates, and these differences may be material. F- 9 Business Risk and Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and accounts receivable. Cash is maintained with financial institutions and its composition and maturities are regularly monitored by management. Deposits at any time may exceed federally insured limits. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. A large portion of the Company’s sales result in partial prepayments prior to shipment from customers. Otherwise, customer invoices generally have payment terms of net 30 days and do not contain a significant financing component. For the year ended December 31, 2025, two customers accounted for 79 % of the Company’s revenue. For the year ended December 31, 2024, two customers accounted for 72 % of the Company’s revenue. As of December 31, 2025, two customers accounted for 82 % of accounts receivable. As of December 31, 2024, one customer accounted for 86 % of accounts receivable. The Company’s operational structure includes an existing operating business and early-stage businesses in emerging and developing markets that are concentrated in an industry characterized by rapid technological advances, changes in customer requirements, and evolving regulatory requirements and industry standards. Any significant delays in the development or introduction of products or services, or any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements, or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company’s business and operating results. The Company’s business, results of operations, and financial condition for the foreseeable future will likely continue to depend on sales to a relatively small number of customers. In the future, these customers may decide not to purchase the Company’s products, may purchase fewer products than in previous years, or may alter their purchasing patterns. Further, the amount of revenue attributable to any single customer or customer concentration generally may fluctuate in any given period. In addition, a decline in the production levels of one or more of the Company’s major customers could reduce revenue. The loss of one or more key customers, a reduction in sales to any key customer, or the Company’s inability to attract new significant customers could negatively impact revenue and adversely affect the Company’s business, results of operations, and financial condition. F- 10 Supply Risk During the years ended December 31, 2025 and 2024, purchases from three vendors constituted 45 % and 61 %, respectively, of the Company’s total inventory purchases. Cash Equivalents The Company considers all highly liquid investments with an original or remaining maturity of three months or less from the date of purchase to be cash equivalents. The Company had no cash equivalents as of December 31, 2025 and 2024. Restricted Cash The Company had $ 0.2 million in restricted cash as of December 31, 2025 and 2024. As of December 31, 2025 and 2024, restricted cash primarily consisted of deposits from a customer contract that were placed in an escrow account to be released upon shipment of orders. Accounts Receivable, Net Accounts receivable are reported on the accompanying consolidated balance sheets at the gross outstanding amount adjusted for a provision for credit losses. The Company determines the provision for credit losses by regularly evaluating expected loss as well as individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. As of December 31, 2025 and 2024, the Company provided a provision for credit losses of $ 0.1 million for amounts that may ultimately be uncollectible. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Inventory Inventory is stated at the lower of cost or net realizable value. Cost is primarily determined based on standard cost which approximates actual cost on a first-in, first-out basis. Work-in-process and finished goods include materials, labor, and allocated overhead. The Company writes down its 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. Deferred Offering Costs The Company capitalizes certain legal, professional, accounting, and other third-party fees that are directly associated with in-process equity issuances as deferred offering costs until such equity issuances are consummated. After consummation of the equity issuance, these costs are recorded as a reduction in the capitalized amount associated with the equity issuance. Should the equity issuance be delayed or abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations. During the year ended December 31, 2025, $ 12.7 million of offering costs, including $ 2.0 million of non-cash warrants, were recorded as a reduction to the net proceeds received from the IPO, and $ 6.8 million of offering costs were recorded as a reduction to the net proceeds received from the Follow-on Offering. As of December 31, 2025 and 2024, zero and $ 0.8 million of offering-related costs were capitalized and included on the consolidated balance sheets. F- 11 Fair Value Measurements The Company applies the requirements of the fair value measurement framework, which establishes a hierarchy for measuring fair value and requires enhanced disclosures about fair value measurements. The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement guidance also requires disclosures about how fair value is determined for assets and liabilities and establishes a hierarchy in which these assets and liabilities must be grouped based on significant levels of inputs, as follows: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability. Level 3: Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions. The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a summary of the financial liabilities measured at fair value on a recurring basis by caption and by level within the fair value hierarchy as of December 31, 2024: Schedule of the Financial Liabilities Measured at Fair Value on a Recurring Basis Level 1 Level 2 Level 3 Total Fair value as of December 31, 2024 (In Thousands) Level 1 Level 2 Level 3 Total Liabilities: Contingent consideration $ — $ — $ 42,782 $ 42,782 Investor Notes at fair value — — 13,819 13,819 Total financial liabilities $ — $ — $ 56,601 $ 56,601 There were no financial liabilities measured at fair value on a recurring basis as of December 31, 2025 nor were there any financial assets measured at fair value on a recurring basis as of December 31, 2025 and 2024. There were no transfers between Levels 1, 2, or 3 within the fair value hierarchy during the years ended December 31, 2025 and 2024. Contingent Consideration As of December 31, 2024, contingent consideration includes an obligation assumed from the Jaunt acquisition that is contingent on future cash receipts (the “Jaunt Contingent Arrangement”) and promissory notes issued in conjunction with the acquisitions of Agile Defense, AIRO Drone, and Coastal Defense. The contingent consideration liabilities are measured at fair value on a recurring basis for which there were no available quoted market prices or principal markets. The inputs for this measurement were unobservable and were, therefore, classified as Level 3 inputs. The Jaunt Contingent Arrangement was valued using discounted cash flow models. As of December 31, 2024, the significant inputs included discount factors ranging from 21 % to 45 % and a 67 % initial public offering (“IPO”) likelihood to arrive at a total fair value of $ 33.4 million. The fair value of the contingent consideration promissory notes issued to the former equity holders of Agile Defense, AIRO Drone, and Coastal Defense totaled $ 9.4 million as of December 31, 2024. The valuations were based on a 67 % probability of the IPO closing and a discount rate of 3 % as of December 31, 2024 based on proximity to an estimated closing date. F- 12 During the year ended December 31, 2025, 1.4 million shares were issued, $ 8.5 million in cash was paid, and $ 17.5 million of income was recorded to other income, net, related to settlement of these obligations. Investor Notes at fair value The Company has historically issued unsecured promissory notes to certain investors (the “Investor Notes”), which have included various interest features in the form of both stock and cash and were contingently payable upon the closing of the IPO or qualified financing. The Company has evaluated these features and determined that they do not meet the criteria to be accounted for as an embedded derivative under Accounting Standards Codification (“ASC”) 815. During the fourth quarter of 2024, certain Investor Notes were amended such that when the Company performed a significance test as of the modification date in accordance with ASC 470-50, the Company determined that the change in terms of these Investor Notes were substantially different than the previous terms, and accordingly, the Company recorded a loss on extinguishment of $ 10.5 million. As this significant modification created an election date for the fair value option and as the fair value election is applied on an instrument-by-instrument basis, the Company chose to record these Investor Notes at fair value beginning on the modification date in October 2024 (“Investor Notes at fair value”). Significant judgment was required in estimating the fair value of debt prior to the IPO. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. To determine the fair value of Investor Notes at fair value, the Company estimated stock pricing and incorporated the probability of both the IPO and non-IPO scenario with the IPO probability being 67 % as of December 31, 2024. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows. The Company used a present value model for the expected cash payments, and a probability-weighted calculation to fair value the contingent interest shares to be paid. This probability-weighted calculation incorporated expectations to complete the IPO as well as a probability derived from a lattice model with key assumptions being equity volatility and discount for lack of marketability (“DLOM”). Equity volatility rates utilized were 70 % and the DLOM rates selected were 10 % for December 31, 2024. As described in Note 2, the terms of the Investor Notes at fair value were further amended and then partially settled through the issuance of common stock and cash payments of $ 2.1 million during the year ended December 31, 2025. During July 2025, the Company modified the remaining notes which totaled $ 1.7 million such that $ 1.8 million, inclusive of a $ 0.1 million fee, would be due by December 16, 2025 . The Investor Notes at fair value were fully settled as of December 31, 2025. Warrant liability During the quarter ended March 31, 2025, the Company entered into two warrant agreements whereby Libertas Funding, LLC (“Libertas”) agreed to purchase an aggregate of 0.5 % of the fully diluted number of shares of common stock of the Company immediately before the closing of the Company’s IPO at an exercise price of $ 0.02 per share (“Libertas Warrants”). At inception, prior to the IPO, the Libertas Warrants did not meet the indexation criteria in ASC 815-40; accordingly, the Libertas Warrants were recorded as a liability measured at fair value as of March 31, 2025. During the three months ended March 31, 2025, in conjunction with the Libertas Agreements, as defined in Note 2, the Company allocated the net proceeds to the $ 2.9 million warrant liability with the residual proceeds then being allocated to the debt associated with the Libertas Agreements, which resulted in the recording of a debt discount of $ 2.9 million. Upon the closing of the IPO, the number of shares issuable became fixed such that the Libertas Warrants became indexed to the Company’s stock and were eligible to be classified in stockholders’ equity on the Company’s condensed consolidated balance sheets at that time. As such, the Company reclassified the fair value of the warrant liability of $ 1.0 million as of June 12, 2025 to stockholders’ equity and recognized $ 1.8 million of income due to the change in fair value of the Libertas Warrants within other income, net on the consolidated statements of operations. To determine the fair value of the Libertas Warrants, the Company utilized the Black-Scholes model to determine the common stock price on a non-controlling, non-marketable value basis. Key assumptions included equity volatility rate of 70 %. F- 13 Debt The Company modified certain debt arrangements as of March 31, 2022. The debt was recorded at present value to estimate the fair value of the debt obligation as of March 31, 2024 and December 31, 2023. Since the debt was fully accreted to its expected value during the year ended December 31, 2024, the debt is no longer measured at fair value on a recurring basis and was transferred out of Level 3 fair value measurements. The changes in fair value of the Level 3 financial liabilities for the years ended December 31, 2025 and 2024 were as follows: Schedule of Changes in Fair Value of the Level 3 Financial Liabilities (In Thousands) Debt Investor Notes at Fair Value Warrant Liability Contingent Consideration Balance as of January 1, 2024 $ 19,427 $ - $ - $ 45,182 Addition - 13,466 - - Change in fair value 14 353 - ( 2,400 ) Transfers out ( 19,441 ) - - - Balance as of December 31, 2024 - 13,819 - 42,782 Balance $ - $ 13,819 $ - $ 42,782 Addition - - 2,885 - Change in fair value - ( 5,494 ) ( 1,843 ) ( 20,272 ) Settlement - ( 8,325 ) - ( 17,242 ) Transfers out - - ( 1,042 ) ( 5,268 ) Balance as of December 31, 2025 $ - $ - $ - $ - Balance $ - $ - $ - $ - The change in the fair value of the debt is included in interest expense, net on the consolidated statements of operations and represents the amortization of the debt discount. The change in the fair value of the Investor Notes at fair value is included in interest expense, net on the consolidated statements of operations. The change in the fair value of the contingent consideration and warrant liability is included in other income, net on the consolidated statements of operations. Fair Value of Financial Instruments The carrying value of accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate fair value due to the short time to maturity. The carrying value of the Company’s borrowings approximates fair value based on current rates available to the Company. Income Taxes The Company accounts 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 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. F- 14 The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s 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. No interest or penalties have been accrued for as of December 31, 2025 and 2024. Property and equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation of property and equipment is provided primarily utilizing the straight-line method for consolidated financial statement purposes at rates based on the following useful lives: Schedule of Property and Equipment Estimated Useful Lives Aircraft equipment 5 - 20 years Machinery and equipment 2 - 15 years Furniture and fixtures 3 - 10 years Leasehold improvements The shorter of the useful life or term of the lease Software 3 - 7 years Additions, improvements, and expenditures that significantly add to the productivity or extend the economic life of assets are capitalized. Any amounts incurred as recurring expenditures or that do not extend or improve the economic life of the asset are expensed as incurred. Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill 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. The Company has selected October 1st as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company 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. 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. During the years ended December 31, 2025 and 2024, the Company recorded a goodwill impairment charge of zero and $ 38.0 million, respectively. Definite-lived Intangible Assets The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of the acquired business to the respective net tangible and intangible assets. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed. The Company capitalizes third-party legal costs and filing fees, if any, associated with obtaining patents. Once the patent asset has been placed in service, the Company amortizes these costs over the shorter of the asset’s legal life, generally 20 years from the initial filing date, or its estimated economic life using the straight-line method. The estimated useful lives for the Company’s intangible assets are as follows: Schedule of Estimated Useful Lives for Company’s Intangible Assets Estimated useful life Developed technology 8 to 13 years Tradenames - definite-lived 4 to 8 years Customer relationships 3 to 7 years Patents up to 20 years F- 15 Impairment of Long-Lived Assets The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment 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. Revenue Recognition The Company recognizes revenue when, or as, it satisfies performance obligations by transferring promised products or services to its customers in an amount that reflects the consideration the Company expects to receive. The Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company accounts for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable. For certain sales, the Company has contracts with customers that include multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, by allocating the contract’s total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”) of each distinct good or service in the contract. The Company determines the SSP based on its overall pricing objectives, taking into consideration market conditions. Determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is recognized when control of the promised services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. The Company’s contracts do not include highly variable components. The timing of revenue recognition, billings, and cash collections can result in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities). The costs to obtain contracts, primarily commission expenses, are expensed when incurred. Amounts that are invoiced are recorded in accounts receivable and revenues or deferred revenue, depending on whether the revenue recognition criteria have been met. A large portion of the Company’s sales result in partial prepayments prior to shipment from customers. Otherwise customer invoices generally have payment terms of net 30 days and do not have a significant financing component. The Company’s revenues are derived from various sources: (i) avionics products consisting primarily of hardware with embedded firmware sold to an authorized dealer network and avionics and global navigation satellite system technologies (“GNSS”) products sold to original equipment manufacturers (“OEMs”), (ii) research and development (“R&D”) projects, (iii) sales-based royalties related to GNSS technology licensed to OEMs, (iv) consultation and training services related to aerial integration and close air support providing the latest tactics, technique, and procedures (“TTP”) to incorporate contract close air support/intelligence surveillance reconnaissance (“CCAS/ISR”) with video downlink systems into tactical operations, (v) technology and equipment sales, (vi) mini unmanned aerial systems (“MUAS” or “commercial drones”) sales, including hardware, software, training, support and product service, and (vii) drone services, including surveys, imaging, security, and other drone applications. The Company expenses costs to obtain a contract as incurred when the amortization period is one year or less. In general, revenue is disaggregated by segment and geography. See Note 13. Segment Information . Product Revenue Product revenue, which includes avionics, MUAS/commercial drones and other equipment sales, is recognized upon the transfer of control of promised products to the customer in an amount that depicts the consideration the Company is entitled to for the related products. Product revenue is recognized upon shipment or delivery and title and risk of loss have transferred to the customer. F- 16 Service and Extended Warranty Revenue Service revenue includes drone services, support, training, consultations, and out-of-warranty repairs. Revenue from services rendered is recognized over time in amounts that correspond directly with the value to the customer when performance is completed. Support revenue is recognized on a straight-line basis over the support period, which is generally one year. Extended warranties are service-type warranties and are typically sold under separate contracts. Revenue for those extended warranties is recognized over the contractual service period, which is typically two or three years. Research and Development Contracts Revenue from engineering development projects is recognized over a period of time based on the input method and is measured by the percentage of total labor and materials cost incurred to date to estimated total labor and materials cost at completion for each contract. The input method of accounting involves considerable use of estimates in determining revenues, costs, and profits and in assigning the amounts to accounting periods; as a result, there can be a significant disparity between earnings as reported and actual cash received by the Company during any reporting period. Sales-based Royalties Revenue for sales-based royalties is recognized at a point in time as subsequent sales occur. The following table summarizes the revenue recognition based on time periods: Schedule of Revenue Recognition based on Time Period 2025 2024 Year ended December 31, (In Thousands) 2025 2024 Point in time $ 84,850 $ 84,053 Over time 6,057 2,882 Revenue $ 90,907 $ 86,935 The contract liabilities as of December 31, 2025 and 2024 were $ 4.5 million and $ 10.4 million, respectively. The majority of contract liabilities are expected to be recognized as revenue through 2026. The Company had no significant contract assets as of December 31, 2025 and 2024. During the year ended December 31, 2025, the Company recognized $ 10.3 million in revenue previously included in contract liabilities as of December 31, 2024. During the year ended December 31, 2024, the Company recognized $ 10.9 million in revenue previously included in contract liabilities as of December 31, 2023. Cost of Revenue Cost of revenue includes labor cost and direct material cost, including freight and duties. Indirect production costs comprising of consumables, cost of sales freight, quality related costs and production maintenance costs are also included in cost of revenue. Shipping and Handling Shipping charges billed to customers are included in revenue and related costs are included in cost of revenue. Research and Development Research and development costs are expensed when incurred. F- 17 Product Warranty Drone Product Warranty The Company provides a one-year warranty on drone sales. Estimated future warranty obligations related to those products are recorded as a component of cost of revenue in the consolidated statements of operations at the time of sale. Avionics Product Warranty The Company establishes warranty reserves based on estimates of avionics product warranty return rates over two or three years depending on the product and the related warranty period and the expected costs to repair or to replace the avionics products under warranty. The warranty provision is recorded as a component of cost of revenue in the consolidated statements of operations. The Company does not offer returns unless special circumstances exist and the return is approved by the Company. Stock-Based Compensation The Company recognizes 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. The Company expenses the fair value of its 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 the Company determines that the achievement of the performance thresholds is probable. The Company accounts 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. Comprehensive Income (Loss) Comprehensive income (loss) generally represents all changes in the equity of a business except those resulting from investments or contributions by stockholders. Unrealized gains and losses on foreign currency translation adjustments, net of tax are included in the Company’s components of comprehensive income (loss), which are excluded from net loss. Lease Accounting At contract inception, the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease and reassesses that conclusion if the contract is modified. Operating leases are recorded in operating lease right-of-use (“ROU”) assets, lease liability, current and lease liability, noncurrent on the consolidated balance sheets. The Company did not have any finance leases during the periods presented. The Company recognizes operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The lease ROU asset is reduced for tenant incentives, if any, and excludes any initial direct costs incurred, if any. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. The Company defines the initial lease term to include renewal options determined to be reasonably certain. If the Company determines the option to extend or terminate is reasonably certain, it is included in the determination of lease assets and liabilities. The Company reassesses the lease term if and when a significant event or change in circumstances occurs within the control of the Company, such as construction of significant leasehold improvements that are expected to have economic value when the option becomes exercisable. The Company recognizes a single lease cost on a straight-line basis over the term of the lease, and the Company classifies all cash payments within operating activities in the consolidated statements of cash flows. F- 18 The Company has lease agreements with lease and non-lease components, which it has elected to not combine for all asset classes. In addition, the Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less of all asset classes. Net Loss Per Share Basic net loss per share is determined using the weighted average number of common shares outstanding during the period. Diluted net loss per share is based on the treasury stock method and computed by dividing net loss available to common stockholders by the diluted weighted-average shares of common stock outstanding during each period. The potentially dilutive shares are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when the effect is dilutive. The potentially dilutive shares of common stock that have been excluded from the calculation of net loss per share because of the anti-dilutive effect are as follows as of December 31, 2025: 0.4 million warrants, 0.2 million stock options, and 0.2 million unsettled stock units. The potentially dilutive shares of common stock that have been excluded from the calculation of net loss per share because of the anti-dilutive effect are as follows as of December 31, 2024: 0.1 million warrants, 0.3 million stock options, and 0.3 million contingent restricted stock awards, 2.2 million potential shares issuable under debt conversion agreements and 0.7 million potential shares issuable for contingent interest payments. The number of potentially dilutive shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of the period end. Such amounts have not been adjusted for the treasury stock method or weighted-average outstanding calculations as required if the securities were dilutive. Debt Discounts Debt issuance costs are presented as a discount to the related debt and are amortized over the term of the related loan for which the fees were incurred using the straight-line method, which approximates the effective interest method. As of December 31, 2025 and 2024, the unamortized debt discount totaled zero and $ 0.3 million, respectively. Foreign Currency The functional currency of the Company’s foreign subsidiary is its local currency. As such, assets and liabilities are translated to U.S. dollars at the exchange rates on the date of consolidation and related revenues and expenses are generally translated at average exchange rates prevailing during the period included in results of operations. Adjustments resulting from foreign currency translation are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheets. Foreign currency transaction gains and losses are included in other income, net on the consolidated statements of operations. Losses from foreign currency transactions were not significant for the years ended December 31, 2025 and 2024, respectively. F- 19 Recently Adopted Accounting Pronouncements In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The Company adopted this new standard on January 1, 2025 on a prospective basis and determined this guidance did not have a material impact on the consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted In November 2024, the FASB issued ASU 2024-03, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses , which requires disclosure of certain costs and expenses on an interim and annual basis in the notes to the consolidated financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2026 and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The guidance is to be applied either (1) prospectively to financial statements issued for reporting periods after the effective date or (2) retrospectively to any or all prior periods presented in the financial statements. The Company is currently evaluating the potential impact of adopting this new guidance on its consolidated financial statements and related disclosures. In July 2025, the FASB issued ASU 2025-05, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides a practical expedient to simplify the estimation of expected credit losses on current accounts receivable and current contract assets arising from revenue transactions under ASC 606. The guidance is effective for annual reporting periods beginning after December 15, 2025 and interim periods within those annual reporting periods, with early adoption permitted. The guidance is to be applied prospectively to estimate expected credit losses. The Company is currently evaluating the potential impact of adopting this new guidance on its consolidated financial statements and related disclosures. In December 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities , which establishes authoritative guidance on the recognition, measurement, presentation, and disclosure of government grants received by business entities. The ASU requires entities to recognize a government grant when it is probable that both (1) the entity will comply with the conditions attached to the grant and (2) the grant will be received. For grants related to assets, an entity may apply either a deferred income approach or a cost accumulation approach, and for grants related to income, an entity should recognize income on a systematic basis as related expenses are incurred. The ASU also includes expanded disclosure requirements regarding the nature of government grants received, the accounting policies adopted, and significant terms and conditions of the grants. The guidance is effective for annual reporting periods beginning after December 15, 2029. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its consolidated financial statements and related disclosures. In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements , which amends the guidance in ASC 270, Interim Reporting . The objective of this new guidance is to improve the clarity and navigability of the interim reporting guidance without changing the fundamental nature of interim reporting or expanding or reducing the interim disclosure requirements currently in U.S. GAAP. The amendments clarify the scope and applicability of ASC 270, specify the form and content of interim financial statements and accompanying notes, and consolidate the interim disclosures required under U.S. GAAP into a single comprehensive list. The ASU also introduces a disclosure principle that an entity must disclose events and changes occurring after the end of the last annual reporting period that have a material impact on the entity, consistent with the principle that previously existed under certain SEC interim reporting rules. The amendments are effective for interim reporting periods within annual reporting periods beginning after December 15, 2028. Early adoption is permitted, and the amendments may be applied either prospectively or retrospectively to prior interim periods presented. The Company is currently evaluating the potential impact of adopting this new guidance on its consolidated financial statements and related disclosures. In December 2025, the FASB issued ASU 2025-12, Codification Improvements, which provides technical corrections, clarifications, and improvements to the FASB Accounting Standards Codification across multiple Topics. The amendments are generally not expected to change current accounting practices materially but may affect application of certain guidance such as diluted earnings per share in loss periods and other technical areas. The amendments are effective for annual reporting periods beginning after December 15, 2026, including interim periods within those annual periods, with early adoption permitted. An entity may elect the transition method on an issue-by-issue basis. The Company is evaluating the impact of ASU 2025-12 on its consolidated financial statements and related disclosures. 2. Revolving Lines of Credit and Long-Term Debt Revolving Lines of Credit In February 2020, Aspen Avionics entered into a Loan and Security Agreement for an asset-based loan facility (the “Facility”) with Crestmark, a Division of Pathward (formerly known as Metabank), with a maximum advance limit of $ 2.5 million. The Facility was due on demand, carried variable interest at the greater of 9 % or prime plus 4.25 % and was collateralized by substantially all assets of Aspen Avionics. In October 2024, Aspen Avionics terminated the Facility and repaid the Facility in full. F- 20 In November 2018, Coastal Defense obtained two variable rate non-disclosable revolving lines of credit of up to $ 0.5 million and $ 0.2 million, due on demand, from First Citizens Community Bank (“FCCB”). These arrangements were collateralized by aircraft security agreements, assignments of life insurance, an assignment of a deposit account, and commercial security agreements dated November 15, 2018, and all associated financing statements. Interest was initially set at the prime rate as published in the Wall Street Journal plus 0.50 percentage points. Commencing in 2022, the Company was in default on these facilities, resulting in an additional 4% in interest per annum. The annual interest rate was 12% as of December 31, 2024. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2069 . No withdrawals were made during 2025 or 2024. During 2025, the lines of credit with FCCB were fully repaid and closed. The total amount outstanding on the lines of credit as of December 31, 2024 was $ 0.1 million. The two lines of credit with FCCB contained certain financial covenants. As of December 31, 2024, the Company was not in compliance with these financial covenants. However, the Company entered into a series of forbearance agreements with FCCB, under which FCCB agreed not to exercise its rights and remedies arising from such noncompliance through March 31, 2025, subject to the Company’s adherence to the terms of said forbearance agreements, which were satisfied at the time of repayment during the year ended December 31, 2025. Current Maturities of Debt and Long-Term Debt Current maturities of debt and long-term debt consist of the following as of December 31: Schedule of Current Maturities of Debt and Long Term Debt (In Thousands) 2025 2024 Bridge Loans $ 43 $ 2,960 Libertas - 2,792 WebBank - 1,510 Muncy Bank & Trust Company 2021-1 - 651 Muncy Bank & Trust Company 2021-2 - 450 SBA COVID-19 Economic Injury Disaster Loan (“EIDL”) 500 500 Code 1 188 332 Perrin Legal Settlement 500 - Financed Insurance Premiums 459 173 First Citizens Community Bank 2018 - 121 First Citizens Community Bank 2019-1 - 16 First Citizens Community Bank 2019-2 - 15 2022 Notes - 2,066 2019 Notes - 5,022 2018 Notes - 12,352 Total 1,690 28,960 Less: unamortized debt discount - ( 280 ) Less: current maturities of long-term debt ( 1,190 ) ( 27,992 ) Long-term debt, net of current maturities $ 500 $ 688 Aggregate maturities required on long-term debt as of December 31, 2025 are due in future years as follows: Schedule of Maturities of Long Term Debt (In Thousands) Amount 2026 $ 1,190 2027 7 2028 11 2029 11 2030 12 Thereafter 459 Total $ 1,690 F- 21 Bridge Loans From May 2022 through November 2024, the Company issued unsecured promissory notes, with no collateral or guarantees, to third parties for purposes of funding its operations. During the year ended December 31, 2025, the Company issued 0.3 million shares related to these Investor Notes, funded $ 2.9 million and recorded interest expense of $ 2.9 million. During the first quarter of fiscal 2025, the notes below except for $ 0.1 million, were amended such that interest would be payable in shares of common stock at the closing date of the IPO (the “Closing Date”) whereby the number of shares would be based on the IPO price and the principal amounts due would be payable within the same number days subsequent to the closing of the IPO as stated in the prior amended note agreements. Bridge Loans were primarily made up of the following as of December 31, 2024: ● Notes totaling $ 0.8 million accrue an interest charge equal to 100% of the principal amount, payable in shares of common stock based on the IPO price, with 110% of the principal paid 190 days following the Closing Date plus 12 % interest per annum accruing from the Closing Date. ● Notes totaling $ 0.2 million carry the same terms as above except only 100% of the principal is paid 190 days following the Closing Date . ● Notes totaling $ 1.0 million, as amended, accrue an interest charge equal to 110% of the principal amount, payable in shares of common stock based on the IPO price, with 110% of the principal paid 190 days following the Closing Date plus 12% interest per annum accruing from the Closing Date . ● Notes totaling $ 0.1 million which include a one-time interest charge equal to 100% of the aggregate principal amount, contingently payable in shares of common stock immediately prior to the Closing Date, with 110% of the principal to be paid on the maturity date, which is 30 days following the closing of the IPO and accruing interest at a rate of 12 % per annum from the Closing Date. ● Notes totaling $ 0.5 million accrue an interest charge equal to 50% of the principal amount, payable in shares of common stock based on the IPO price with 100% of the principal paid 190 days following the Closing Date plus 12 % interest per annum accruing from the Closing Date. ● Notes totaling $ 0.1 million accrue an interest charge equal to 150% of the principal amount, payable in shares of the Company’s common stock based on the IPO price, with the principal to be paid 190 days following the Closing Date and accruing interest at a rate of 12 % interest per annum from the Closing Date. ● Notes totaling $ 0.1 million accrue an interest charge equal to 125% of the principal amount, payable in shares of common stock on the Closing Date, with 100% of the principal paid 190 days following the Closing Date plus 12 % interest per annum accruing from the Closing Date. ● Notes totaling $ 0.1 million accrue an interest charge equal to 100% of the principal amount, payable in shares of the Company’s common stock based on the IPO price, with 120% of the principal to be paid 190 days following the Closing Date and accruing interest at a rate of 15 % interest per annum from the Closing Date. ● Notes totaling $ 0.1 million, as amended, due at the earlier of April 30, 2025 or 30 days subsequent to the IPO, with 120% contingent stock premium, contingently payable in shares of the Company’s common stock immediately prior to the Closing Date with an interest rate of 15 % per annum from either the date of the Note through April 30, 2025 or from the Closing Date to 30 days subsequent to the Closing Date. This Note was amended in April to include 130% principal with a revised maturity date of June 30, 2025. First Citizens Community Bank Between November 15, 2018 and May 15, 2019, Coastal Defense entered into three agreements which totaled $ 3.0 million with FCCB which had an outstanding of $ 0.2 million as of December 31, 2024. These arrangements were collateralized by aircraft security agreements, assignments of life insurance, an assignment of a deposit account, a commercial security agreement, and all associated financing statements. As of December 31, 2024, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note was due on demand and is shown as a component of “Current maturities of debt” on the consolidated balance sheets. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleged that payment under certain promissory notes is due, and FCCB sought recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company negotiated forbearance agreements to prevent FCCB from enforcing the judgments through March 31, 2025. On March 27, 2025, the Company and FCCB agreed to payment terms and a release whereby $ 0.2 million in amounts due, including interest and fees, would be paid by April 30, 2025. During the year ended December 31, 2025, all amounts due to FCCB which totaled $ 0.2 million were paid. F- 22 2018, 2019 and 2022 Notes The maturity date of the $ 19.4 million of debt related to that certain (i) Note and Warrant Purchase Agreement dated as of March 9, 2018, as amended (the “2018 Notes”), (ii) Note Purchase Agreement dated as of October 18, 2019, as amended (the “2019 Notes”), and (iii) Note Purchase Agreement dated as of January 31, 2022, as amended (the “2022 Notes” and, together with the 2018 Notes and the 2019 Notes, the “Bridge Notes”) was extended to June 30, 2025. On October 6, 2023, the Company signed a Satisfaction of Indebtedness and Satisfaction of Covenant Agreement, whereby all of the holders agreed to convert $ 17.5 million of the principal owed to them under the Bridge Notes into 440,584 shares of common stock immediately prior to the closing of the BCA Transactions, with the remaining principal of $ 1.9 million owed to such holders to be paid at the closing of the BCA Transactions. On June 30, 2025, the Company amended the Satisfaction of Indebtedness and Satisfaction of Covenant Agreement to stipulate that the terms in the original agreement that were contingent upon the BCA Transactions would be completed within 15 business days of the IPO and identified the underlying recipients of the 440,584 shares described above. The Company issued 440,584 shares of the Company’s common stock, funded $ 1.9 million and recognized a gain on debt extinguishment of $ 13.1 million during the year ended December 31, 2025 to satisfy the obligations attributable to the Bridge Notes. Muncy Bank & Trust Company 2021-1 On September 15, 2021, Coastal Defense entered into a $ 0.7 million commercial promissory note agreement with Muncy Bank & Trust Company (“Muncy”) for continuing operations. The loan originally carried an annual interest rate of 4.5 % per year and matured in March 2022. The maturity date of this promissory note was extended such that the principal amount of $ 0.7 million was due and payable on September 15, 2025 with interest payments at a rate of 8.5 % per year due monthly. The Company repaid the Muncy note during the year ended December 31, 2025. Muncy Bank & Trust Company 2021-2 On January 21, 2021, Coastal Defense entered into a $ 0.4 million commercial promissory note agreement with the Muncy for continuing operations and for the execution of the Naval Special Warfare task orders. The loan originally carried an annual interest rate of 4.5 % per year and matured in October 2021. The maturity date of this promissory note was extended such that the principal amount of $ 0.4 million was due and payable on September 20, 2025 with interest payments at a rate of 8.5 % per year due monthly. The Company repaid the Muncy note during the year ended December 31, 2025. This arrangement was collateralized by a contract with the Naval Special Warfare Command. Jeffrey F. Parker, Coastal Defense’s former Vice President and Treasurer, and stockholder of Holdings has guaranteed this note. U.S. Small Business Administration (“SBA”) COVID-19 Economic Injury Disaster Loan (“EIDL”) On May 28, 2020, Coastal Defense entered into a $ 0.5 million EIDL agreement with the SBA. The loan matures on May 28, 2050 and has an interest rate of 3.75 % per year. The SBA granted a payment deferral and amended the first payment due date to November 2022. These payments first reduce the interest accrued prior to reducing the principal owed. As such, the outstanding loan balance was included as a component of “Long-term debt, net of current maturities” on the consolidated balance sheets. The EIDL is collateralized by all assets of Coastal Defense. Jeffrey F. Parker, Coastal Defense’s former Vice President and stockholder of Holdings; Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, Coastal Defense’s President and Treasurer, and stockholder of Holdings have guaranteed this note. F- 23 Financed Insurance Premiums During 2023, Coastal Defense entered into financing agreements which totaled $ 0.4 million in relation to financing its insurance premiums. The financings have various maturity dates during 2023 and 2024 and have interest rates ranging from 8.0 % to 13.3 % per year. These agreements were collateralized by a security interest in the premium refund due under the policies being purchased. During 2024, Coastal Defense entered into financing agreements which totaled $ 0.3 million in relation to financing its insurance premiums. The financings have various maturity dates during 2025 and have interest rates ranging from 8.27 % to 13.75 % per year. These agreements were collateralized by a security interest in the premium refund due under the policies being purchased. During 2025, the Company entered into financing agreements which totaled $ 1.2 million in relation to financing its insurance premiums. The financings have maturity dates during 2026 and have interest rates ranging from 7.98 % to 8.4 % per year. Libertas On October 2, 2024, January 31, 2025 and February 28, 2025, the Company entered into separate Agreements of Sale of Future Receipts (collectively, the “Libertas Agreements”) with Libertas. Under the terms of the agreement dated October 2, 2024, the Company sold $ 4.1 million of its future receivables with a factor rate of 1.25 in exchange for immediate cash proceeds net of origination fees of $ 3.2 million. On April 17, 2025, the Company made a $ 1.9 million payment and recognized a $ 0.2 million loss on debt extinguishment to fully resolve the Company’s obligations under this agreement. Under the terms of the agreement dated January 31, 2025, the Company sold $ 2.5 million of its future receivables in exchange for immediate cash proceeds of $ 2.0 million. Under the terms of the agreement dated February 28, 2025, the Company sold $ 1.9 million of its future receivable in exchange for immediate cash proceeds of $ 1.5 million. While there were no repayment terms on the Libertas Agreements, based on historical revenues, the Company estimated the associated receivables to be remitted in 1 year. The receivables were remitted to Libertas as they were collected, subject to a specific percentage deduction from weekly receipts. The Libertas Agreements were collateralized by all Accounts, as defined by UCC Article 9. In conjunction with each of the Agreements dated January 31, 2025 and February 28, 2025, the Company entered into a warrant agreement whereby Libertas agreed to purchase an aggregate of 0.25 % of the fully diluted number of shares of common stock of the Company immediately before the closing of the Company’s IPO at an exercise price of $ 0.02 per share. See additional considerations related to the Libertas Warrants in Note 1. The Company and Summary of Significant Accounting Policies . Under the terms of the agreement dated April 16, 2025, the Company sold $ 2.2 million of its future receivables in exchange for immediate cash proceeds net of origination fees of $ 1.7 million. On June 30, 2025, the Company made a $ 4.5 million payment and recognized a $ 2.6 million loss on debt extinguishment to fully resolve the Company’s obligations under the remaining Libertas agreements described above. F- 24 WebBank On October 2, 2024, the Company entered into a Business Loan and Security Agreement (the “October WebBank Agreement”) with WebBank, with Libertas acting as its servicer. Under the October WebBank Agreement, the Company received a loan of $ 1.8 million collateralized by an interest in the Company’s Accounts, Payment Intangibles and Letter of Credit Rights, as defined under UCC Article 9. The repayment terms are structured to deduct a fixed amount from collected receivables on a weekly basis with maximum term of one year and a factor rate of 1.25 . The Company has the right to pay to end this financing transaction early by repurchasing the future receipts sold to WebBank but not yet delivered. On April 17, 2025, the Company entered into a Business Loan and Security Agreement with WebBank whereby the Company received a loan of $ 3.3 million which was structured with similar terms to those in the October WebBank Agreement. With the proceeds from the April WebBank Agreement, the Company repaid the $ 1.1 million outstanding balance on the loan affiliated with the October WebBank Agreement and the $ 1.9 million outstanding balance on the loan affiliated with the October 2, 2024 Libertas Agreement as described above. In conjunction with the modification of the October WebBank Agreement, the Company recognized a $ 0.2 million loss on extinguishment. On June 30, 2025, the Company made a $ 3.0 million payment and recognized a $ 0.2 million loss on debt extinguishment to fully resolve the Company’s obligations to WebBank. Code 1 On November 18, 2024, the Company entered into a Receivables Financing Agreement with Code 1 Aviation, LLC (“Code 1”) whereby the Company financed aircraft maintenance services provided by Code 1 between January 2018 and August 2024 which totaled $ 0.4 million. The Receivables Financing Agreement has a payment term of two years , an interest rate of 15 %, requires monthly payments and can be prepaid without penalty. Code 1 obtained mechanic’s liens and other similar encumbrances on certain Coastal Defense aircraft. Husch Blackwell On June 24, 2025, the Company entered into a promissory note with Husch Blackwell LLP (“Husch Blackwell”) whereby the Company agreed to fund aged invoices which totaled $ 0.6 million with no interest. During the year ended December 31, 2025, the note was fully repaid. Investor Notes at Fair Value In October 2024, certain Investor Notes were amended, and the Company performed a significance test as of the modification date in accordance with ASC 470-50. The Company determined that the modified terms of these Investor Notes were substantially different than the previous terms such that the Company recorded a loss on debt extinguishment of $ 10.5 million during the fourth quarter of 2024. As described in Note 1. The Company and Summary of Significant Accounting Policies , the Company determined it appropriate to elect the fair value option for ten individual Investor Notes which had significantly different terms established during the fourth quarter of 2024. Investor Notes at fair value are issued unsecured promissory notes, with no collateral or guarantees, to third parties for purposes of funding the Company’s operations. During the year ended December 31, 2025, the Company repaid $ 3.9 million of the Investor Notes at fair value, inclusive of a $ 0.1 million extension fee. During the year ended December 31, 2025, the Company issued 0.4 million shares related to the Investor Notes at fair value, which is inclusive of 0.1 million of default shares for the IPO being completed after May 31, 2025, and recognized a $ 5.7 million gain on debt extinguishment. Investor Notes at fair value were made up of the following as of December 31, 2024: ● Note A which had a fair value of $ 3.7 million as of December 31, 2024. The December 31, 2024 balance includes a one-time interest charge equal to the issuance of 0.1 million shares of the Company’s common stock immediately prior to the Closing Date, with the $0.8 million principal paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge was calculated using an enterprise value of $ 770 million, which was to be increased by a factor of 1.25x if the Company’s valuation was less than $770 million at the Closing Date. On March 27, 2025, Note A was amended such that the number of shares became fixed at 0.1 million shares with an additional 22,058 shares of common stock if the IPO was not completed prior to May 31, 2025. F- 25 ● Note B which had a fair value of $ 2.5 million as of December 31, 2024 which includes a one-time interest charge equal to 0.1 million shares of the Company’s common stock immediately prior to the Closing Date, with the $0.1 million principal to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge was calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation is less than $770 million at the Closing Date. On March 27, 2025, Note B was amended such that the number of shares became fixed at 0.1 million shares. An additional 12,867 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. ● Note C which had a fair value of $ 1.5 million as of December 31, 2024 which includes a one-time interest charge equal to 0.04 million shares of the Company’s common stock immediately prior to the Closing Date, with the $0.2 million principal and a $0.2 million additional cash payment to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge was calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation was less than $770 million at the Closing Date. On March 27, 2025, Note C was amended such that the number of shares became fixed at 0.04 million shares. An additional 5,514 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. ● Note D which had a fair value of $ 1.0 million as of December 31, 2024 which includes a one-time interest charge equal to 0.02 million shares of the Company’s common stock immediately prior to the Closing Date, with the $0.2 million principal to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge was calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation was less than $770 million at the Closing Date. On March 27, 2025, Note D was amended such that the number of shares became fixed at 0.02 million shares. An additional 5,882 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. ● Note E which had a fair value of $ 0.7 million as of December 31, 2024 which includes a one-time interest charge equal to 0.02 million shares of the Company’s common stock immediately prior to the Closing Date, with the $0.2 million principal to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge is calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation is less than $770 million at the Closing Date. On March 27, 2025, Note E was amended such that the number of shares became fixed at 0.02 million shares. An additional 4,411 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. ● Note F which had a fair value of $ 0.8 million as of December 31, 2024 which includes a one-time interest charge equal to 0.02 million in shares of the Company’s common stock immediately prior to the Closing Date, with the $0.1 million principal to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge is calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation is less than $770 million at the Closing Date. On March 27, 2025, Note F was amended such that the number of shares became fixed at 0.02 million shares. On March 27, 2025, Note F was amended such that the number of shares became fixed at 0.02 million shares. An additional 3,676 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. F- 26 ● Note G which had a fair value of $ 0.5 million as of December 31, 2024 which includes a one-time interest charge equal to 0.01 million in shares of the Company’s common stock immediately prior to the Closing Date, with the $0.1 million principal to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge is calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation is less than $770 million at the Closing Date. On March 27, 2025, Note G was amended such that the number of shares became fixed at 0.01 million shares. An additional 2,941 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. ● Note H which had a fair value of $ 0.2 million as of December 31, 2024 which includes a one-time interest charge equal to 0.01 million in shares of the Company’s common stock immediately prior to the Closing Date, with the $0.05 million principal to be paid on the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 and with interest accruing from the date of the note through the earlier of 5 days subsequent to the Closing Date or a capital raise of at least $10 million or May 31, 2025 at a rate of 12 % per annum. As of December 31, 2024, this note had a term whereby the number of shares issued as an interest charge is calculated using an enterprise value of $ 770 million, which shall be increased by a factor of 1.25x if the Company’s valuation is less than $770 million at the Closing Date. On March 27, 2025, Note H was amended such that the number of shares became fixed at 0.01 million shares. An additional 1,470 shares of common stock will be issued if the IPO is not completed prior to May 31, 2025. ● Notes I and J with a combined fair value of $ 2.9 million as of December 31, 2024 which each includes a one-time interest charge equal to 0.1 million in shares of the Company’s common stock immediately prior to the Closing Date, with the 120% of the combined $1.0 million principal to be paid on the earlier of 30 days subsequent to the Closing Date or April 30, 2025 and with interest accruing from the date of the note or from October 31, 2022 through the earlier of 30 days subsequent to the Closing Date or April 30, 2025 at a rate of 15 % per annum. During the second quarter of 2025, Notes I and J were amended such that 130% of the combined principal was to be paid on the earlier of 30 days subsequent to the Closing Date or June 30, 2025. 3. Stock and Warrants Authorized capital stock consists of 1.0 billion shares of common stock, par value $ 0.000001 per share, and 10.0 million shares of preferred stock, par value $ 0.000001 per share. All of the authorized preferred stock is undesignated. Common Stock The Company has reserved the following shares of authorized but unissued common stock as of December 31, 2025: 0.2 million stock options, 0.4 million warrants, and 0.2 million of contingent restricted stock units. Warrants The Company assumed warrants to purchase 0.1 million shares of the Company’s common stock as part of the merger with Jaunt. These warrants expire ten years from the date of issuance, March 10, 2022, have an exercise price of $ 16.83 per share and were outstanding as of December 31, 2025 and 2024. The Company determined that these warrants are equity classified. During the quarter ended March 31, 2025, the Company entered into two warrant agreements with Libertas to purchase an aggregate of 0.5 % of the fully diluted number of shares of common stock immediately before the closing of the IPO at an exercise price of $ 0.02 per share as described in Note 1. The Company and Summary of Significant Accounting Policies . On June 12, 2025, in conjunction with the IPO, the number of Libertas Warrants became fixed, and on June 13, 2025, Libertas exercised its warrants in exchange for 104,415 shares of common stock. In July 2025, the Company entered into a warrant agreement with Libertas whereby Libertas had the option to purchase 0.1 million shares with an exercise price of $ 0.02 per share between July 28, 2025 and July 28, 2030 which resulted in the Company recording a charge of $ 1.2 million during the year ended December 31, 2025. Libertas exercised the warrants on July 31, 2025. In September 2024, the Company executed a financing advisor agreement with Cantor Fitzgerald & Co. as compensation for assistance with the IPO, pursuant to which the Company agreed to issue to certain of the underwriters upon the closing of the IPO (the “Underwriter Warrants”) which are warrants exercisable for the number of shares of common stock equal to 5 % of the total number of shares of common stock sold in such IPO. In conjunction with the IPO, the Company issued the Underwriter Warrants, which are exercisable into 345,000 shares of common stock. The Company determined the fair value of the Underwriter Warrants at the grant date on June 12, 2025 to be $ 2.0 million which was recorded as an issuance cost against IPO proceeds during the year ended December 31, 2025. The Underwriter Warrants have an exercise price of $ 11.00 and can be exercised between December 12, 2025 and June 12, 2030. As of December 31, 2025, the Underwriter Warrants remain outstanding. F- 27 4. Management Carveout Plan In December 2021, the Company adopted the 2021 Management Carveout Plan (the “Aspen Carveout Plan”), which establishes a benefit pool for designated employees and consultants payable upon the occurrence of a change in control, which is defined as two steps consisting of (1) the closing of the merger with Holdings and (2) the IPO of Holdings or merger with a special purpose acquisition company (“SPAC”) by a specified expiration date, which was extended through June 30, 2025. The amounts to be paid as benefits under the Aspen Carveout Plan are determined based upon percentages of the total net proceeds calculated at the closing of the IPO or a SPAC merger, ranging from 0 % to 5 %. The net proceeds are calculated as the net sum of cash and the fair value of equity securities available for distribution to the stockholders of the Company after all liabilities, exclusive of the subordinated convertible notes or other loans from the stockholders and transaction costs, are paid, capped at $ 2.3 billion. The benefit payments to the participants in the Aspen Carveout Plan are to be made in the form or forms of payment and in the same proportions as the consideration paid by the purchaser which were estimated to be $ 2.0 million in stock and $ 0.9 million in cash. On October 6, 2023, the Company signed a Satisfaction of Indebtedness and Satisfaction of Covenant Agreement, whereby all of the holders agreed to convert $ 0.8 million of the cash amount owed to them under the Aspen Carveout Plan into 20,010 shares of common stock immediately prior to the closing of the BCA Transactions, with the remaining amount of $ 0.1 million owed to such holders to be paid at the closing of the BCA Transactions. In addition, the Satisfaction of Indebtedness and Satisfaction of Covenant Agreement stipulated that the $ 2.0 million in stock would be settled through the issuance of 51,309 shares. On June 30, 2025, the Company amended the Aspen Satisfaction of Indebtedness and Satisfaction of Covenant Agreement to stipulate that the terms in the original agreement that were contingent upon the BCA Transactions would be completed within 15 business days of the IPO and identified the underlying recipients of the 71,319 shares related to the Aspen Carveout Plan. During the year ended December 31, 2025, the Company issued 63,447 shares of common stock, net of 7,872 shares withheld for taxes, funded $ 0.1 million, and recognized $ 1.7 million of stock compensation expense based on the June 30, 2025 modification date. 5. Goodwill The changes in the carrying value of goodwill were as follows: Schedule of Goodwill ( In Thousands) Avionics Drones Electric Air Mobility Training Total Balance as of January 1, 2024 $ - $ 114,721 $ 451,371 $ 36,511 $ 602,603 Impairment - - ( 17,024 ) ( 20,970 ) ( 37,994 ) Effect of exchange rate - ( 7,101 ) - - ( 7,101 ) Balance as of December 31, 2024 $ - $ 107,620 $ 434,347 $ 15,541 $ 557,508 Balance $ - $ 107,620 $ 434,347 $ 15,541 $ 557,508 Effect of exchange rate - 14,145 - - 14,145 Balance as of December 31, 2025 $ - $ 121,765 $ 434,347 $ 15,541 $ 571,653 Balance $ - $ 121,765 $ 434,347 $ 15,541 $ 571,653 2025 Goodwill Impairment Test On October 1, 2025, the annual goodwill impairment testing date, the Company determined it appropriate to test the fair value of each reporting unit for goodwill impairment for all of its reporting units except Avionics as no goodwill had been allocated to this reporting unit. Management determined that the fair value of the reporting units exceeded their respective carrying values as detailed below. Schedule of Goodwill Impairment Drones Electric Air Mobility Training Goodwill carrying value as of October 1, 2025 $ 121.7 million $ 434.3 million $ 15.5 million Fair value of reporting unit as of October 1, 2025 $ 190.0 million $ 529.6 million $ 21.2 million Carrying value of reporting unit as of October 1, 2025 $ 144.3 million $ 499.1 million $ 20.4 million Impairment as of October 1, 2025 $ - $ - $ - F- 28 Estimates and assumptions varied between each reporting unit depending on the facts and circumstances specific to that reporting unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. The fair value of the reporting units for which we performed quantitative impairment tests was estimated using an income approach, which incorporates the use of the discounted cash flow method. The projections used required the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue growth, profit margins, terminal value growth rates, capital expenditure projections, assumed tax rates, discount rates, and other assumptions deemed reasonable by management. For the 2025 impairment test, the weighted average cost of capital (“WACC”) discount rates we used for its reporting units was 31 %- 40 % and the terminal value growth rate was 4 %. The terminal value growth rate represents the expected long-term growth rate for the Company’s industry, which incorporates the type of services each reporting unit provides as well as the global economy. Other factors influencing the revenue growth rates include the nature of the services the reporting unit provides to its clients, the geographic locations in which the reporting unit conducts business and the maturity of the reporting unit. Specific to the Electric Air Mobility segment’s projections as of October 1, 2025, projected revenue reflects management’s continued prioritization of its cargo unmanned aerial vehicle (“UAV”) program due to improved market visibility and lower regulatory complexity relative to passenger aircraft. Management continues to expect commercialization of the cargo UAV to begin in the fourth quarter of 2027, followed by the Jaunt Journey passenger aircraft in late 2031. Revenue projections assume increasing production volumes over time, reaching long-term capacity of approximately 400 units per year for the cargo UAV and 3,000 units per year for the Jaunt Journey at a single production facility. Projected selling prices include a 1.5% annual escalation rate and remain generally consistent with prior year assumptions. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) projections as of October 1, 2025 were developed using estimates of manufacturing costs, production hours per unit, learning curves and subsequent efficiencies with operating losses expected to continue through the end of fiscal year 2031. The forecast assumes cost of revenue improves as volumes scale, stabilizing at approximately 74% of revenues over the longer term, and operating expenses as a percentage of revenue peak in 2027 at approximately 62% before trending down and stabilizing near 3% of revenue after 2033. Long-term EBITDA margins are estimated at approximately 22%. Projected EBITDA as of October 1, 2025 gave effect to net research and development costs expected to be incurred (i) between 2026 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. Manufacturing cost estimates and estimated efficiencies as well as mid-term and long-term EBITDA projections at maximum capacity have not significantly changed compared to the Company’s prior year testing. The Company continues to anticipate profitability in the Electric Air Mobility segment commencing in year two following commercialization of the cargo UAV. As to the degree of uncertainty associated with the Company’s assumptions, the Company believes its long-term projected revenue is reasonable given a sales price supported by non-binding letters of intent and a relatively small number of units. There is a higher degree of uncertainty in projected EBITDA as compared to projected revenue as projected EBITDA includes estimates as to future labor and material costs, efficiency rates as to the number of production hours required over time, and synergies. The discounted cash flow analysis as of October 1, 2025 indicated no impairment of the Electric Air Mobility reporting unit’s goodwill. The most sensitive factor in the Company’s analysis was the discount rate. As of October 1, 2025, a 34.0 % WACC rate was applied. This represents a 100-basis points increase compared to the prior valuation, which was considered appropriate in light of the Company’s IPO-related developments and management’s outlook as well as the current stage of the development process. As to the sensitivity of the WACC rate, another hypothetical 100-basis-point increase in the WACC discount rate would have yielded $ 13.0 million in goodwill impairment. The Company believes the factors considered in the impairment analysis are reasonable; however, significant changes in any one of our assumptions could produce a different result and result in future impairment charges that could be material to our consolidated financial statements. Specific to the Training segment’s projections as of October 1, 2025, projected revenue, margins and EBITDA have not significantly changed compared to prior year testing. As to the degree of uncertainty associated with the Company’s assumptions, the Company believes its short-term projected revenue is reasonable given its history with military contract practices and the historical results of flight schools, while long-term projected revenue is subject to a higher degree of uncertainty. To mitigate this risk, a 31 % WACC discount rate was applied to these projections which reflected a 100-basis points increase compared with the prior year testing date of October 1, 2024. As to the sensitivity of the WACC rate, another hypothetical 100-basis-point increase in the WACC discount rate would have yielded $ 2.4 million in goodwill impairment. In addition to the income approach described above, the Company considered its observable market capitalization when assessing the reasonableness of the estimated fair values of its reporting units as of the valuation date. The Company reconciled the aggregate estimated fair value of its reporting units, inclusive of corporate assets and liabilities and after consideration of outstanding debt, to the Company’s market capitalization as of the testing date. The aggregate estimated fair value exceeded the Company’s observable market capitalization. This difference reflects that the estimated fair values of the reporting units represent values on a controlling interest basis, whereas the Company’s market capitalization reflects the trading value of minority shares. Accordingly, the difference represents an implied control premium. The reasonableness of the implied control premium was evaluated with reference to observable market data, including published control premium studies and other evidence of premiums paid in transactions in relevant sectors, and was determined to be consistent with assumptions that market participants would use in estimating fair value. The Company believes the factors considered in the impairment analysis are reasonable; however, significant changes in any one of the assumptions discussed above could produce a different result and result in additional impairment charges that could be material to the 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. F- 29 2024 Goodwill Impairment Test As a result of the BCA Transactions being terminated in August 2024 and the continued delays in securing financing, the Company determined it appropriate to test the fair value of each reporting unit for goodwill impairment as of September 30, 2024 for all of its reporting units except Avionics as no goodwill had been allocated to this reporting unit. Management 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. Schedule of Goodwill Impairment Drones Electric Air Mobility Training Goodwill carrying value as of September 30, 2024 $ 115.8 million $ 451.4 million $ 36.5 million Fair value of reporting unit as of September 30, 2024 $ 185.1 million $ 510.2 million $ 25.1 million Carrying value of reporting unit as of September 30, 2024 $ 133.5 million $ 527.2 million $ 46.1 million Impairment as of September 30, 2024 $ - $ 17.0 million $ 21.0 million Estimates and assumptions varied between each reporting unit depending on the facts and circumstances specific to that reporting unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. The fair value of the reporting units for which the Company performed quantitative impairment tests was estimated using an income approach, which incorporates the use of the discounted cash flow method. The projections used required the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates, and other assumptions deemed reasonable by management. For the 2024 impairment test, the WACC discount rates the Company used for its reporting units was 30 %- 35 % and the terminal value growth rate was 4 %. The terminal value growth rate represents the expected long-term growth rate for the Company’s industry, which incorporates the type of services each reporting unit provides as well as global economic conditions. Other factors influencing the revenue growth rates include the nature of the services the reporting unit provides for its customers, the geographic locations in which the reporting unit conducts business and the maturity of the reporting unit. Specific to the Electric Air Mobility segment’s projections as of September 30, 2024, projected revenue was revised to include projected aircraft production timing for the Jaunt Journey in 2031 and a downscaled cargo version of the Jaunt Journey in 2028. Projected revenue in years 1 and 2 of commercialization of the downscaled cargo version of the Jaunt Journey as of September 30, 2024 were increased as compared to prior revenue estimates from the Company’s prior year testing date of October 1, 2023 for the same two-year period. Projected revenue in years 1 and 2 of commercialization of the Jaunt Journey as of September 30, 2024 also increased as compared to prior revenue estimates from the Company’s prior year testing date of October 1, 2023 for the same two-year period. EBITDA projections as of September 30, 2024 were developed using revised estimates of manufacturing costs, production hours per unit, learning curves and subsequent efficiencies, and operating costs. Mid-term and long-term EBITDA projections at maximum capacity have not significantly changed compared to the Company’s prior year testing date of October 1, 2023, but the shifting and corresponding discounting of these projections resulted in a significant decrease in the fair value of the Electric Air Mobility segment, which indicated impairment. As to the degree of uncertainty associated with the Company’s assumptions, the Company believes its long-term projected revenue is reasonable given a sales price supported by non-binding letters of intent and a relatively small number of units. There is a higher degree of uncertainty in projected EBITDA, as compared to projected revenue as projected EBITDA includes estimates as to future labor and material costs, efficiency rates as to the number of production hours required over time, and synergies. The most sensitive factor in the Company’s analysis was the WACC discount rate. As of September 30, 2024, a 33 % WACC discount rate was applied to the Electric Air Mobility segment, which is fairly consistent with the 35 % WACC discount rate used as of the Company’s prior year testing date of October 1, 2023. The 200 basis-point decrease from prior year was deemed appropriate due to more conservative projected long term EBITDA margins as compared to sales in the prior year, regulatory harmonization that has occurred for the industry between the Federal Aviation Association, Transport Canada Civil Aviation, and European Union Aviation Safety Agency, advances in electric propulsion, battery density, and autonomous systems which lower remaining technical development risk. While these factors reduce risk to the Electric Air Mobility segment, a larger decrease in the WACC was not deemed appropriate due to delays in funding for development efforts and overall implementation risk that remains similar to October 1, 2023. As to the sensitivity of the WACC rate, another hypothetical 100-basis-point increase in the WACC discount rate would have yielded an additional $ 46.0 million in goodwill impairment. The Company believes the factors considered in the impairment analysis are reasonable; however, significant changes in any one of its assumptions could produce a different result and result in additional impairment charges that could be material to its 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 its aircraft and other products, obtain regulatory approvals, and launch and commercialize its products at scale, if the estimated production costs are significantly higher than estimated or if the WACC discount rate is increased. Specific to the Training segment’s projections as of September 30, 2024, the Company noted a significant decrease in sales and gross margins as a result of not being able to meet contractual demands due to delays in the funding of aircraft. In prior years, government ISR aircraft contracts did not require that the aircraft be able to employ weapons. As those contracts have aged-out, the new requirements for the re-competitions require assets that have the ability to employ training munitions and have been approved by the government to do so. Coastal Defense does not possess aircraft that can achieve this requirement; thus, the Company has either not been awarded or chose not to bid on certain contracts. The projected revenue and margins were revised to include the timing of projected aircraft and investments to be made in flight schools in the short-term (between 2025 and 2028) and then the acquisition of additional aircraft beginning in years after 2029. F- 30 EBITDA projections as of September 30, 2024 did not significantly change compared to the Company’s prior year testing date of October 1, 2023, and the Company does not anticipate any changes until the Company is able to make more significant investments in aircraft, and at which time the Company can better leverage its operating expenses. At that point, the Company anticipates that mid-term and long-term EBITDA margins would increase. The shifting and corresponding discounting of these projections resulted in a significant decrease in the fair value of the Training segment, which indicated impairment. As to the degree of uncertainty associated with the Company’s assumptions, the Company believes its short-term projected revenue is reasonable given its history with military contract practices and the historical results of flight schools, while the Company’s long-term projected revenue is subject to a higher degree of uncertainty. To mitigate this risk, a 30 % WACC discount rate was applied to these projections which was consistent with the Company’s prior year testing date of October 1, 2023. As to the sensitivity of the WACC rate, another hypothetical 100-basis-point increase in the WACC discount rate would have yielded an additional $ 3.4 million in goodwill impairment. 6. Intangible Assets, Net Intangible assets acquired through business combinations were as follows: Schedule of Intangible Assets, Net Weighted Average Remaining Life (Years) Gross Accumulated Amortization Carrying Value As of December 31, 2025 (In Thousands) Weighted Average Remaining Life (Years) Gross Accumulated Amortization Carrying Value Developed technology – definite lived 8.9 $ 100,179 $ 33,136 $ 67,043 Developed technology – indefinite lived N/A 66 - 66 Tradenames - definite lived 3.3 1,933 1,153 780 Tradenames - indefinite lived N/A 8,738 - 8,738 Customer relationships 3.3 20,339 13,717 6,622 Patents 6.3 585 347 238 Intangible assets net $ 131,840 $ 48,353 $ 83,487 Weighted Average Remaining Life (Years) Gross Accumulated Amortization Carrying Value As of December 31, 2024 (In Thousands) Weighted Average Remaining Life (Years) Gross Accumulated Amortization Carrying Value Developed technology – definite lived 9.9 $ 99,377 $ 24,819 $ 74,558 Developed technology – indefinite lived N/A 66 - 66 Tradenames - definite lived 4.1 1,893 824 1,069 Tradenames - indefinite lived N/A 8,738 - 8,738 Customer relationships 4.2 20,014 11,208 8,806 Patents 7.5 569 304 265 Intangible assets net $ 130,657 $ 37,155 $ 93,502 F- 31 Amortization expense is reported on the consolidated statements of operations line items as shown in the table below for the years ended December 31: Schedule of Amortization Expense (In Thousands) 2025 2024 Cost of revenue $ 386 $ 427 Research and development 7,613 7,586 Sales and marketing 2,198 2,827 General and administrative 354 352 Amortization expense $ 10,551 $ 11,192 Total estimated future amortization expense as of December 31, 2025 is as follows: Schedule of Estimated Future Amortization Expense (In Thousands) 2026 $ 10,286 2027 10,041 2028 9,880 2029 8,398 2030 7,033 Thereafter 29,045 Amortization expense $ 74,683 7. Inventory Inventory consisted of the following as of December 31: Schedule of Inventory (In Thousands) 2025 2024 Raw materials $ 7,052 $ 8,150 Work in process 1,503 33 Finished goods 3,084 640 Total $ 11,639 $ 8,823 8. Property and Equipment, Net Property and equipment, net consisted of the following as of December 31: Schedule of Property and Equipment (In Thousands) 2025 2024 Aircraft equipment $ 5,744 $ 5,221 Equipment 8,352 6,408 Furniture and fixtures 357 244 Leasehold improvements 1,765 399 Property and equipment gross 16,218 12,272 Less: accumulated depreciation ( 7,232 ) ( 5,438 ) Property and equipment, net $ 8,986 $ 6,834 Depreciation expense for the years ended December 31, 2025 and 2024 was $ 1.5 million and $ 1.4 million, respectively. F- 32 9. Balance Sheet Details Prepaid expenses and other current assets consisted of the following as of December 31: Schedule of Prepaid expenses and other assets (In Thousands) 2025 2024 Prepaid insurance $ 835 $ 296 Prepaid taxes 464 - Value added tax 616 651 Vendor prepayments 4,984 1,009 Other 609 354 Prepaid expenses and other current assets $ 7,508 $ 2,310 Accrued expenses consisted of the following as of December 31: Schedule of Accrued expenses (In Thousands) 2025 2024 Accrued legal and professional fees $ 945 $ 1,573 Payroll related expenses 5,026 3,380 Accrued warranty 299 287 Accrued taxes 385 9,670 Other accrued expenses 969 1,464 Accrued expenses $ 7,624 $ 16,374 10. Deferred Compensation As part of the Agreement and Plan of Merger by and among Jaunt, Legacy AIRO, the Company, Jaunt Merger Sub, LLC and Martin Peryea as member representative, dated as of October 6, 2021, as amended, and subsequent to that acquisition, the Company had deferred salary arrangements with various employees that allowed for a portion of their compensation to be deferred and paid upon a single outside investment of no less than $ 25 million, or such earlier time as the Company determined in its sole discretion that sufficient funds were available to commence payment of the deferred amounts. As of December 31, 2024, the accrued deferred compensation was $ 11.2 million. For the year ended December 31, 2025, the Company issued approximately 0.2 million shares, net of shares withheld for taxes, made total cash payments of $ 1.1 million, and recorded a $ 5.9 million gain within other income related to the settlement of these obligations. 11. Warranty The following table summarizes the Company’s accrued warranty during the years ended December 31: Schedule of Accrued Warranty (In Thousands) 2025 2024 Accrued warranty - beginning of period $ 287 $ 160 Warranty cost incurred ( 187 ) ( 88 ) Provision for warranty 199 215 Accrued warranty - end of period $ 299 $ 287 12. Commitments and Contingencies Consulting Agreement In October 2020, the Company entered into an agreement for market analysis and business strategy consulting. The services were performed in prior periods. The agreement states a fee of $ 0.5 million for the services, due upon the completion of the IPO, SPAC merger, financing raise of at least $ 100 million or an acquisition of at least 50 % of the equity of the Company. During the year ended December 31, 2025, the Company funded the payment related to this consulting agreement. F- 33 Contingent Fee Arrangement In June 2022, the Company executed a previously arranged contingent fee agreement with New Generation Aerospace, Inc. (“NGA”) to compensate NGA for past services rendered and future services rendered through December 31, 2022 related to the acquisitions and financing of the Merger Entities in the amount of $ 1.5 million (the “Contingent Fee”). The Contingent Fee is payable upon the closing of the IPO. On October 2, 2023, the Company signed an Amended and Restated Success Fee Agreement, whereby NGA agreed to convert $ 1.4 million of the amounts owed to it into 33,995 shares of the Company’s common stock immediately prior to the closing of the BCA Transactions, with the remaining amount of $ 0.1 million owed to such holders to be paid at the closing of the BCA Transactions. During the year ended December 31, 2025, the Company issued 33,995 shares of common stock, recorded $ 0.3 million of stock compensation and funded $ 0.1 million to fully satisfy obligations under this agreement. Contingent Financing Fee Arrangement In September 2024, the Company executed a financing advisor agreement with Cantor Fitzgerald & Co. as compensation for assistance with the IPO which totals the greater of $ 2 million and 7 % of the gross proceeds in conjunction with the IPO (the “Cantor Contingent Financing Fee”). In conjunction with the IPO, the Company recorded $ 4.8 million related to the Cantor Contingent Financing Fee as an offset to gross proceeds. KDC IPO Payment Agreement In April 2022, Aspen Avionics and KippsDeSanto & Co. (“KDC”) entered into an amendment (the “KDC IPO Payment Agreement”) to the parties’ prior engagement letter dated August 7, 2018 (the “KDC Agreement”), pursuant to which Aspen Avionics engaged KDC to provide financial advisory services in connection with AIRO’s potential acquisition of Aspen Avionics. Pursuant to the terms of the KDC IPO Payment Agreement upon the closing of the IPO, Aspen Avionics was obligated to fund a one-time, final payment of $ 1.0 million to be made to KDC in satisfaction of Aspen Avionics obligations under the KDC Agreement. During the year ended December 31, 2025, the Company recorded $ 1.0 million of expense and funded the payment related to the KDC Agreement. Non-binding Letters of Intent In November 2023, the Company signed non-binding letters of intent to acquire two businesses for the Training segment including flight training schools. The parties have undertaken due diligence to determine whether a binding purchase agreement will be negotiated. The total anticipated purchase price for the acquisitions is expected to range from $ 5.1 million to $ 7.7 million, which would be paid in a combination of cash and the issuance of common stock. In October 2025, the Company entered into a non-binding letter of intent with Degree-Trans LLC dba Bullet (“Bullet”), a Ukrainian developer of turbojet unmanned interceptor systems, to establish a 50/50 joint venture to produce and deploy Bullet’s combat-proven fixed-wing UAV technology across the United States, North Atlantic Treaty Organization (“NATO”) defense markets and Ukraine. Joint Venture Agreement On November 13, 2025, AIRO Drone, entered into a Joint Venture and Operating Agreement (the “JV Agreement”) with Nord Drone Group, LLC (“NDG”), a Ukrainian limited liability company, pursuant to which AIRO Drone and NDG will form AIRO Nord-Drone, LLC, a Delaware limited liability company (the “JV”). Pursuant to the terms of the JV Agreement, the JV will develop, manufacture, and commercialize unmanned aerial systems primarily designed for delivering munitions, targeting U.S., NATO, and Ukrainian defense markets. Each of the parties will contribute operational resources and capabilities to the JV. The Company will contribute business development, sales, manufacturing, engineering, and government certification resources, as well as manufacturing facilities in the United States, while NDG will contribute intellectual property, engineering data, operational resources, and manufacturing facilities in Ukraine. In addition, the Company will reimburse NDG for reasonable out-of-pocket costs incurred by NDG in obtaining NATO certification required by the JV Agreement, up to a maximum amount of $ 50,000 within 30 days of the closing of the JV. Each party to the JV will receive 50% of the limited liability company interests of the JV. The JV will be governed by a five-member board of managers, with each party appointing two directors and the acting chairman of the Company’s board of directors serving as the fifth director and chairman of the JV. The consummation of the JV is subject to various closing conditions, including executing certain ancillary agreements between the parties and the JV, including intellectual property license, manufacturing, and services agreements, and obtaining any regulatory required under applicable law or by any governmental authority. Unless revised, the JV Agreement (as amended) will terminate and the JV will not be consummated if closing does not occur on June 30, 2026. There can be no assurance that closing conditions under the JV Agreement will be satisfied or when or that the JV will be consummated on the terms described herein or at all. The JV involves material risks including operational challenges related to NDG’s location in Ukraine during ongoing military conflict, complex export control and sanctions compliance requirements, and potential regulatory scrutiny regarding foreign defense partnerships. Litigation A civil action was filed against Old AGI, Inc. in the Circuit Court of Cook County, State of Illinois in February 2022 (the “2022 Lawsuit”). The claimant alleged that an agreement for certain services entered into in March 2020 was breached and resulted in damages to claimant. This case was dismissed on July 5, 2022. However, the court allowed the claimant to amend its complaint. On August 5, 2022, the claimant filed its amended complaint, and the Company filed its response on October 12, 2022. The parties have engaged in discovery and mandatory arbitration. The arbitration resulted in an award in favor of the Company, which was contested by the claimant. On December 19, 2024, the Circuit Court denied the Company’s motion for summary judgment. In February 2026, the Company and the claimant filed documents to request that the 2022 Lawsuit be dismissed in its entirety. F- 34 Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleged that payment under certain promissory notes is due, and the claimant is seeking recovery of the outstanding amounts. The claimant obtained judgments against all named defendants. On March 27, 2025, the Company entered into a settlement agreement with FCCB providing for a full and unconditional release of all claims related to the underlying debt upon completion of payments totaling approximately $ 0.2 million. As of April 30, 2025, the Company had fulfilled its payment obligations under the agreement, and the parties had fully and unconditionally released each other from and all claims/liabilities, or obligations related to the underlying debt. A civil action was filed against Holdings, AIRO Group, AIRO Group (Illinois), AIRO Drone, Agile Defense, Joseph Burns, Chirinjeev Kathuria and John Uczekaj in Chancery Court in Delaware in September 2023. The claimant, Robert Perrin, one of the Company’s stockholders, alleged that these entities failed to pay him for services allegedly rendered under an Employment Agreement with AIRO Group (Illinois), that the individual defendants have breached their fiduciary duties as members of the Company’s board of directors, and that defendants violated the Computer Fraud and Abuse Act. On November 17, 2023, the Company filed a motion to dismiss. In response, the claimant filed an Amended Complaint on February 22, 2024 in which he dropped AIRO Group (Illinois) as a defendant, dropped the breach of contract claim and added a wage claim under Delaware statute. On April 5, 2024, the Company filed a Partial Answer and Affirmative Defenses as well as a Partial Motion to Dismiss. In response, the claimant filed a Second Amended Complaint on May 16, 2024 in which he dropped the wage claim under Delaware statute and added a civil conspiracy claim against all defendants. The Company filed an Amended Answer on November 15, 2024. During the year ended December 31, 2025, the Company agreed to settle Mr. Perrin’s individual claims in the lawsuit for $ 0.8 million, which will be paid over six quarters beginning the quarter ended September 30, 2025. As of December 31, 2025, the Company had paid $ 0.3 million and recorded the remaining $ 0.5 million related to this settlement within current maturities of debt. Aside from the above matters, the Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss or the measurement of a loss can be complex. The Company will accrue losses that are both probable and reasonably estimable. 13. Segment Information The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s chief operating decision maker (“CODM”) has been identified as the chief executive officer. The Company will continue to reevaluate its reportable and operating segments. The Company manages its business primarily based upon four operating segments: Avionics, Drones, Electric Air Mobility and Training. In accordance with the segment reporting accounting standard, the Company evaluated the economic similarity of its operating segments and determined that each of these operating segments represents a reportable segment. ● Avionics: This segment develops, manufactures, and sells avionics and GPS sensors for the general aviation (“GA”), unmanned aircraft systems (“UAS”) and eVTOL market segments. The Company’s avionics products are focused on GA aftermarket, OEM display, integration and connected panel solutions. ● Drones: This segment offers direct operation of drones and drone systems, provision of drone-derived information, and the development of drone-optimized communication services. Additionally, it consists of development and commercialization of market leading MUAS for professional users, primarily in the defense and security markets. The MUAS includes internally developed software, hardware, and mechanical system components. Operations cover sourcing, manufacturing, assembly, quality assurance testing activities and logistics. ● Electric Air Mobility: This segment includes designing, licensing and ultimately the manufacturing of air vehicles incorporating slowed rotor compound technology that is capable of transporting people and packages operated by pilots or autonomous flight systems. F- 35 ● Training: This segment provides and operates military aircraft for U.S. military services and Department of Defense (“DOD”) contractors. Segment revenues are earned from (1) flying training missions as part of armed forces training groups, and (2) providing aircraft and support services to DOD contractors. The Company evaluates the performance of its reportable segments based on the net income (loss) for each reporting segment. Presented below are reconciliations of the reportable segment total revenues to the consolidated revenues and the reportable segment total net income (loss) to the consolidated net loss for the years ended December 31, 2025 and 2024: Schedule of Segment Information Avionics Drones Electric Air Mobility Training Total December 31, 2025 (In Thousands) Avionics Drones Electric Air Mobility Training Total Revenue $ 6,921 $ 79,080 $ - $ 4,906 $ 90,907 Cost of revenue 4,461 28,102 - 3,929 36,492 Gross profit 2,460 50,978 - 977 54,415 Research and development 1,824 8,328 7,566 - 17,718 Sales and marketing 1,181 3,448 - 1,986 6,615 General and administrative 3,604 11,348 1,200 13,716 29,868 Interest expense 23 427 - 243 693 Interest income ( 2 ) ( 333 ) - - ( 335 ) Gain on extinguishment of debt ( 13,091 ) - - - ( 13,091 ) Other expense (income), net 670 ( 160 ) ( 23,098 ) ( 2,677 ) ( 25,265 ) Income tax expense - ( 6,106 ) - - ( 6,106 ) Segment profit (loss) $ 8,251 $ 21,814 $ 14,332 $ ( 12,291 ) 32,106 Unallocated amounts: Corporate expenses 28,979 Interest expense, net 9,442 Gain on extinguishment of debt ( 2,468 ) Other income, net ( 680 ) Income tax expense 937 Net loss $ ( 4,104 ) Avionics Drones Electric Air Mobility Training Total December 31, 2024 (In Thousands) Avionics Drones Electric Air Mobility Training Total Revenue $ 8,665 $ 74,691 $ - $ 3,579 $ 86,935 Cost of revenue 5,764 19,854 - 3,000 28,618 Gross profit 2,901 54,837 - 579 58,317 Research and development 1,028 4,512 7,593 - 13,133 Sales and marketing 1,286 3,146 - 1,990 6,422 General and administrative 1,868 8,190 2,115 2,600 14,773 Goodwill impairment - - 17,024 20,970 37,994 Interest expense 129 2,150 - 278 2,557 Interest income - ( 271 ) - - ( 271 ) Other expense (income), net 77 205 ( 2,401 ) ( 74 ) ( 2,193 ) Income tax benefit (expense) ( 7,528 ) ( 9,051 ) 4,035 4,244 ( 8,300 ) Segment (loss) profit $ ( 9,015 ) $ 27,854 $ ( 20,296 ) $ ( 20,941 ) ( 22,398 ) Unallocated amounts: Corporate expenses 3,428 Interest expense, net 1,478 Loss on extinguishment of debt 10,461 Other expense, net 20 Other (income) expense, net 20 Income tax expense 909 Net loss $ ( 38,694 ) F- 36 The following table presents revenues by geographic area for the years ended December 31: Schedule of Revenue by Geographic Area Avionics Drones Electric Air Mobility Training Total 2025 (In Thousands) Avionics Drones Electric Air Mobility Training Total United States $ 4,307 $ 98 $ - $ 4,906 $ 9,311 Europe 1,586 76,398 - - 77,984 Other 1,028 2,584 - - 3,612 Revenue $ 6,921 $ 79,080 $ - $ 4,906 $ 90,907 Avionics Drones Electric Air Mobility Training Total 2024 (In Thousands) Avionics Drones Electric Air Mobility Training Total United States $ 5,318 $ 1,169 $ - $ 3,579 $ 10,066 Europe 1,793 73,522 - - 75,315 Other 1,554 - - - 1,554 Revenue $ 8,665 $ 74,691 $ - $ 3,579 $ 86,935 The following table presents revenues by products and services for the years ended December 31: Schedule of Revenue by Products and Services Avionics Drones Electric Air Mobility Training Total 2025 (In Thousands) Avionics Drones Electric Air Mobility Training Total Products $ 6,907 $ 73,012 $ - $ 902 $ 80,821 Services 14 6,068 - 4,004 10,086 Revenue $ 6,921 $ 79,080 $ - $ 4,906 $ 90,907 Avionics Drones Electric Air Mobility Training Total 2024 (In Thousands) Avionics Drones Electric Air Mobility Training Total Products $ 8,618 $ 71,856 $ - $ 202 $ 80,676 Services 47 2,835 - 3,377 6,259 Revenue $ 8,665 $ 74,691 $ - $ 3,579 $ 86,935 F- 37 The following table presents capital expenditures, depreciation and amortization, stock-based compensation and contingent consideration fair value adjustments for the years ended December 31: Schedule of Capital Expenditures, Depreciation and Amortization Avionics Drones Electric Air Mobility Training Total 2025 (In Thousands) Avionics Drones Electric Air Mobility Training Total Depreciation and amortization $ 458 $ 1,679 $ 6,801 $ 3,071 $ 12,009 Stock-based compensation 1 1,717 151 166 10,087 12,121 Contingent consideration fair value adjustments - ( 365 ) ( 17,223 ) ( 2,684 ) ( 20,272 ) Capital expenditures 361 2,014 - 1,004 3,379 1 During the year ended December 31, 2025, the Company also recognized $ 7.8 million as part of corporate expense. Avionics Drones Electric Air Mobility Training Total 2024 (In Thousands) Avionics Drones Electric Air Mobility Training Total Depreciation and amortization $ 496 $ 1,943 $ 6,802 $ 3,399 $ 12,640 Stock-based compensation - - 716 - 716 Contingent consideration fair value adjustments - - ( 2,400 ) - ( 2,400 ) Capital expenditures 6 783 - - 789 The following table presents tangible long-lived assets by geographic area as of December 31: Schedule of Tangible Long Lived Assets by Geographic Area Avionics Drones Electric Air Mobility Training Total 2025 (In Thousands) Avionics Drones Electric Air Mobility Training Total United States $ 544 $ - $ 3 $ 5,484 $ 6,031 Europe - 2,955 - - 2,955 Total $ 544 $ 2,955 $ 3 $ 5,484 $ 8,986 Avionics Drones Electric Air Mobility Training Total 2024 (In Thousands) Avionics Drones Electric Air Mobility Training Total United States $ 201 $ - $ 2 $ 5,339 $ 5,542 Europe - 1,292 - - 1,292 Total $ 201 $ 1,292 $ 2 $ 5,339 $ 6,834 Total segment assets reconciled to consolidated amounts are as follows as of December 31: Schedule of Segment Assets Total Segment assets (In Thousands) Avionics Drones Electric Air Mobility Training Corporate Total 2025 $ 3,795 $ 178,064 $ 506,214 $ 30,387 $ 55,679 $ 774,139 2024 $ 1,208 $ 150,722 $ 514,152 $ 32,378 $ 2,539 $ 700,999 Government Regulation The Company is subject to various local, state, federal and international laws and regulations relating to the development, manufacturing, sale and distribution of its products, systems and services, and it is the Company’s policy to comply with the applicable laws in each jurisdiction in which it conducts business. Regulations include but are not limited to those related to import and export controls, corruption, bribery, environment, government procurement, wireless communications, competition, product safety, workplace health and safety, employment, labor and data privacy. F- 38 Drones Because it contracts with the DoD and other agencies of the U.S. government—and, for certain of those contracts, requires access to classified information—the Company’s Drones segment is subject to extensive federal statutes and regulations, including the Federal Acquisition Regulation, the Defense Federal Acquisition Regulation Supplement, the Truthful Cost and Pricing statute, the Foreign Corrupt Practices Act, the False Claims Act, and the regulations implementing the National Industrial Security Program Operating Manual (“NISPOM”). The NISPOM regulations establish the security requirements applicable to classified contracts and programs, facility security clearances, and personnel security clearances. The federal government audits and reviews contractors’ performance on contracts, pricing practices, cost accounting systems and practices, and compliance with applicable laws, regulations and standards. Like most government contractors, the Drones segment’s contracts are audited and reviewed regularly by federal agencies, including the Defense Counterintelligence and Security Agency, the Defense Contract Management Agency and the Defense Contract Audit Agency. In addition, the Drones segment is subject to industry-specific regulations due to the nature of the products and services it provides. For example, certain aspects of its business are subject to further regulation by additional U.S. government authorities, including: (i) the Federal Aviation Administration (“FAA”), which regulates airspace for all air vehicles in the U.S. National Airspace System (“NAS”); (ii) the National Telecommunications and Information Administration and the Federal Communications Commission, which regulate the wireless communications upon which its UAS depend in the U.S. and also regulate any device that emits radiofrequency emissions as a result of its operations; (iii) the Directorate of Defense Trade Controls of the U.S. Department of State, which administers the International Traffic in Arms Regulations that regulate the export of controlled technical data, defense articles and defense services and (iv) the Bureau of Industry and Security of the U.S. Department of Commerce, which regulates matters relating to U.S. national security and technology. Electric Air Mobility A transport category type certification is the highest level in safety provided by the Civil Aviation Authorities. Jaunt intends to certify under CAR 529, single pilot (instrument flight rules and comply with Category Enhanced of European Union Aviation Safety Agency (“EASA”) SC-VTOL-01 by: ● using System Safety Assessment processes (Aerospace Recommended Practice (“ARP”) 4761 with ARP 4754A) that are industry standard for commercial transport aircraft (Exposure Draft 79A); ● designing flight critical systems to meet the requirements of a probability of catastrophic failure of less than 10-9 per flight hour (less than once every billion flight hours); ● developing robust software design processes to meet Development Assurance Level A for functions that could exhibit catastrophic failures; and ● meeting requirements for bird strike, fatigue and damage tolerance, lightning strike, fire protection, and designing and incorporating elements for crashworthiness right from conceptual stage. In the near-term, the efforts of the Electric Air Mobility segment will focus on obtaining FAA certification of its aircraft and engaging with key decision makers in cities in the United States in which it anticipates its aircraft and urban air mobility (“UAM”) service will initially operate. Its aircraft will be required to comply with regulations governing aircraft design, production and airworthiness. In the United States, this primarily includes regulations put forth by the FAA and the Department of Transportation (“DOT”). Outside the United States, similar requirements are generally administered by the national civil aviation and transportation authorities of each country. Avionics Aspen Avionics designs and manufactures equipment under worldwide aviation regulatory agency approvals. These include but are not limited to FAA, EASA, Transport Canada Civil Aviation, and National Civil Aviation Agency of Brazil regulations. These govern the design, test, certification, installation, and manufacturing of Aspen’s equipment. F- 39 The FAA regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the United States. Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of aircraft and equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance are required prior to installation of a part on an aircraft. Aircraft operators must maintain logs concerning the utilization and condition of aircraft engines, life-limited engine parts and airframes. In addition, the FAA requires that various maintenance routines be performed on aircraft engines, some engine parts, and airframes at regular intervals based on cycles or flight time. Engine maintenance must also be performed upon the occurrence of certain events, such as foreign object damage in an aircraft engine or the replacement of life-limited engine parts. Such maintenance usually requires that an aircraft engine be taken out of service. Aspen Avionics’ operations may in the future be subject to new and more stringent regulatory requirements. In that regard, Aspen Avionics closely monitors the FAA and industry trade groups in an attempt to understand how possible future regulations might impact it. The Company’s businesses that sell defense products directly to the U.S. government or for use in systems delivered to the U.S. government can be subject to various laws and regulations that govern pricing and other factors. 14. Employee Benefit Plan The employees of Aspen Avionics and Coastal Defense in the U.S. are eligible to participate in a profit-sharing plan under Internal Revenue Code Section 401(k). Participants in the profit-sharing plan may elect to have Aspen Avionics and Coastal Defense contribute a portion of their compensation to the profit-sharing plan. Contributions to be made by Aspen Avionics and Coastal Defense will be at their discretion. No significant contributions were made for the years ended December 31, 2025 and 2024. 15. Stock-Based Compensation Equity Incentive Plan In March 2025, the Board of Directors adopted, and the stockholders approved, the AIRO Group Holdings, Inc. 2025 Equity Incentive Plan (the “2025 Plan”). The 2025 Plan provides for the grant of incentive stock options (“ISOs”) to employees, including employees of any parent or subsidiary, and for the grant of non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of the Company’s affiliates. The 2025 Plan is a successor to and continuation of the Legacy Plan (referred to in the 2025 Plan as the Prior Plan) and will become effective on the execution of the underwriting agreement related to the IPO. Initially, the maximum number of shares of the Company’s common stock that may be issued under the 2025 Plan after it becomes effective will not exceed 1.9 million shares of the Company’s common stock (the “Share Reserve”). In addition, the number of shares of the Company’s common stock reserved for issuance under the 2025 Plan will automatically increase on January 1 of each year, starting on January 1, 2026, through and including January 1, 2035, in an amount equal to (1) 3% of the total number of shares of the Company’s common stock outstanding on the last day of the preceding calendar year, or (2) a lesser number of shares of the Company’s common stock determined by the Board of Directors prior to the date of the increase. The maximum number of shares of the Company’s common stock that may be issued upon the exercise of ISOs under the 2025 Plan will be three times the Share Reserve. During the year ended December 31, 2025, there were 0.1 million of stock awards, 0.2 million stock units, and zero options, respectively, granted under the 2025 Plan. During the year ended December 31, 2025, the Company incurred $ 19.9 million in stock-based compensation expense, which comprised $ 14.1 million from restricted stock awards and units, $ 0.3 million in shares issued to NGA, and $ 5.5 million in shares issued to Dangroup. Restricted Stock Awards In May 2022, the Company granted restricted stock awards for 0.3 million shares of common stock with performance-based vesting criteria with a grant date fair value of $ 41.95 per share. The recognition of vesting on the restricted stock awards can vary by reporting period as the recognition of vesting expense is based on the probable outcome of the performance threshold condition and the cumulative progress to those performance conditions. The Company reassesses at each reporting date whether the achievement of the performance threshold condition is probable and accrues compensation expense if and when achievement of the performance threshold condition is probable and the expected achievement and vesting date for the performance tranche. The restricted stock awards granted in May 2022 were granted with three separate performance thresholds with specific amounts of restricted shares attached that vest based on the probable achievement of those performance thresholds. The performance thresholds are attached to contract dollar volumes on Adversary Air task orders from the United States Department of Defense. The restricted stock awards vest ratably at each performance tranche level of aggregate amounts of (1) $ 25.0 million, (2) $ 50.0 million, and (3) $ 75.0 million. As of December 31, 2022, the Company had concluded that the achievement of the performance thresholds within the measurement period was not probable. Accordingly, during the period from the grant date to December 31, 2022, no compensation expense was recognized. On August 2, 2023, the terms of the restricted stock awards were modified whereby the vesting of the 0.3 million shares of common stock became contingent upon the Company’s common stock being publicly traded. As this contingency was not probable as of the modification date, no charge was recorded as a result of the modification. This contingency was resolved upon the completion of the Company’s initial public offering, at which time the modified vesting condition was satisfied. The Company recorded stock-based compensation expense of $ 10.1 million associated with the vesting of these contingent restricted stock awards. As of December 31, 2024, there was no compensation expense recognized as the contingency was not probable. During the year ended December 31, 2025, the Company granted and delivered 0.1 million restricted stock awards with a weighted-average grant date fair value of $ 16.55 and recorded $ 1.3 million of stock-based compensation expense for these awards. F- 40 Restricted Stock Units During the year ended December 31, 2025, the Company granted 0.2 million restricted stock units and recorded $ 0.9 million of stock-based compensation expense for these units. The majority of these restricted stock units will be delivered in 2026. A summary of restricted stock unit activity under the Plan for the year ended December 31, 2025: Schedule of Restricted Stock Unit Activity (Shares In Thousands) Number of Shares Weighted- Average Grant Date Fair Value (Per Unit) Unvested restricted stock units outstanding, January 1, 2025 - - Granted 233 $ 8.91 Vested 1 ( 61 ) $ 12.67 Forfeited - - Unvested restricted stock units outstanding, December 31, 2025 172 $ 7.57 1 Total vested shares include 51,832 shares that vested during the year ended December 31, 2025 and for which, delivery was deferred until March 11, 2026, as permitted under the terms of the Equity Incentive Plan. Option Plan On April 1, 2022, as part of the reverse acquisition with Holdings, the Company adopted the AIRO Group Holdings, Inc. Option Plan (the “Plan”) and assumed the outstanding options previously granted prior to the acquisition. The option agreements provide for the purchase of a total of 0.4 million shares of the Company’s common stock with an exercise price of $ 8.59 per share. There were no additional common shares available for future grants under the Plan. The options’ vesting periods range from immediate to four years and expire as determined by the Board of Directors, but not more than 10 years from the date of grant. The exercise price and grant amounts are determined in accordance with the provisions of the Plan and by the Board of Directors. The total stock-based compensation expense for the Plan during the years ended December 31, 2025 and 2024 was $ 0.2 million and $ 0.7 million, respectively. As of December 31, 2025, there was no unrecognized stock-based compensation cost related to options under the Plan. A summary of option activity under the Plan for the years ended December 31, 2025 and 2024: Summary of Option Activity (Shares In Thousands) Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Options outstanding, January 1, 2024 356 $ 8.59 6.4 Options forfeited ( 51 ) $ 8.59 Options outstanding, December 31, 2024 305 $ 8.59 6.6 Options exercised ( 68 ) $ 8.59 Options outstanding, December 31, 2025 237 $ 8.59 5.6 Vested and exercisable, December 31, 2025 237 $ 8.59 5.6 Vested and exercisable and expected to vest, December 31, 2025 237 $ 8.59 5.6 The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the use of a number of complex assumptions including expected volatility, expected term, risk-free interest rate, and expected dividends of the option. The expected volatility assumption used in the Black-Scholes option pricing model are based on estimates derived from both historical and implied volatility from a group of comparable public companies operating in the same or similar lines of business as the Company. The expected term of employee options represents the weighted-average period the options are expected to remain outstanding and was derived using the simplified method for awards that qualify as “plain-vanilla” options. All awards that are outstanding are qualified as “plain-vanilla” options. The risk-free rate is based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option. The dividend yield is set to zero as the Company has never paid cash dividends and has no present intention to pay cash dividends. 16. Leases Commercial real estate During the year ended December 31, 2025, the Company entered into a lease agreement for a facility in Phoenix, Arizona, with a lease term extending through October 31, 2030. At lease commencement, the Company recognized a ROU operating lease asset of $ 1.9 million, a current operating lease liability of $ 0.3 million, and a noncurrent operating lease liability of $ 1.6 million. The Company also leases office space in McLean, Virginia, which serves as its principal executive offices, with a lease term extending through March 31, 2031. At lease commencement, the Company recognized a ROU operating lease asset of $ 0.5 million, a current operating lease liability of $ 0.1 million, and a noncurrent operating lease liability of $ 0.4 million. Sky-Watch leases three commercial real estate locations used primarily as office space and for production. One location does not have a fixed contractual term, however, the Company has assumed a two-year lease term based on its assessment that it is reasonably certain to continue using the space for that period. The other two leases have contractual terms ending on May 1, 2027 and March 1, 2028. Aspen Avionics has a lease for its office and assembly facility in Albuquerque, New Mexico, with terms extending through March 31, 2026. Coastal Defense has one hangar lease with a lease term extending through February 29, 2028. Other hangar leases are leased on a month-to-month basis. F- 41 Additional office leases are leased on a month-to-month basis. All of the commercial real estate leases with terms greater than one year described above are classified as operating leases and are included within ROU assets and lease liabilities on the Company’s consolidated balance sheets. Automobiles and Aircraft Sky-Watch leases one automobile with a lease term ending in 2026, which is classified as an operating lease and is included within ROU assets and lease liabilities on the Company’s consolidated balance sheets. All other automobile and aircraft leases are leased on a month-to-month basis or have lease terms of less than one year. The following table presents supplemental cash flow information related to the Company’s operating leases: Schedule of Supplemental Cash Flow Information Related to Operating Leases Year ended Year ended (In Thousands) December 31, 2025 December 31, 2024 Cash paid for amounts included in the measurement of operating lease liabilities Operating cash flows from operating leases $ 472 $ 381 Maturities of operating lease liabilities as of December 31, 2025 were as follows: Schedule of Maturities of Operating Lease Liabilities 2026 $ 1,179 2027 966 2028 610 2029 608 2030 545 Thereafter 36 Total 3,944 Less: interest ( 564 ) Present value of lease liabilities $ 3,380 Total lease expense was $ 0.6 million and $ 0.4 million for the years ended December 31, 2025 and 2024, respectively. As of December 31, 2025, the weighted-average remaining lease term for the operating leases was 4.1 years and the weighted-average discount rate was 7.81 %. As of December 31, 2024, the weighted-average remaining lease term for the operating leases was 2.1 years and the weighted-average discount rate was 6.22 %. Short-term lease expense for 2025 and 2024 were $ 1.0 million and $ 0.3 million. 17. Income Taxes For the year ended December 31, 2025, the Company’s income tax expense was $ 7.0 million, and the effective tax rate was 239.6 %. For the year ended December 31, 2024, the Company’s income tax expense was $ 9.2 million, and the effective tax rate was 31.2 %. The sources of income (loss) before income tax expense are as follows for the years ended December 31: Schedule of Loss Before Income Tax Expense (In Thousands) 2025 2024 United States (“U.S.”) $ ( 23,874 ) $ ( 65,863 ) International 26,813 36,378 Income (loss) before income tax expense $ 2,939 $ ( 29,485 ) F- 42 Income tax expense is comprised of the following for the years ended December 31: Schedule of Income Tax Expense (In Thousands) 2025 2024 Current: Federal $ 380 $ ( 1 ) State 6 1 International 6,397 9,881 Total current 6,783 9,881 Deferred: Federal 476 139 State 61 18 International ( 277 ) ( 829 ) Total deferred 260 ( 672 ) Total income tax expense $ 7,043 $ 9,209 A reconciliation of the federal statutory income tax rate to the effective income tax rate subsequent to the adoption of ASU 2023-09 is as follows for the year ended December 31: Schedule of Effective Income Tax Rate Reconciliation 2025 Percent Federal tax at statutory rate $ 617 21.0 % State and local income taxes, net of U.S. federal income tax effect 66 2.2 % Foreign tax effects Denmark: Statutory tax rate difference between Denmark and U.S. 285 9.7 % Denmark permanent differences 151 5.1 % Return to provision ( 155 ) ( 5.3 )% Other 1 0.0 % Canada: Statutory tax rate difference between Denmark and U.S. 58 2.0 % Change in valuation allowance 147 5.0 % Other ( 2 ) ( 0.1 )% Effect of cross-border tax laws Global intangible low-taxed income 5,793 197.1 % Changes in valuation allowance ( 5,632 ) ( 191.6 )% Nontaxable or nondeductible items Stock compensation 932 31.7 % Fair value change in contingent liability 4,660 158.6 % Section 162(m) limitation 64 2.2 % Other nondeductible item 2 0.1 % Other adjustments 56 1.9 % Income tax expense and effective tax rate $ 7,043 239.6 % Supplemental cash flow information related to cash paid for income taxes is as follows for the year ended December 31: Schedule of Supplemental Cash Flow Related to Cash Paid For Income Taxes (In Thousands) 2025 Federal: Federal $ - State and local - International: Denmark 17,720 Canada - International - Total cash paid for income taxes, net of refund $ 17,720 A reconciliation of the federal statutory income tax rate to the effective income tax rate prepared under the disclosure requirements prior to the adoption of ASU 2023-09 is as follows for the year ended December 31: 2024 Federal tax at statutory rate $ ( 6,192 ) State income taxes 19 Stock compensation 150 Foreign rate differential 372 Fair value change in contingent liability ( 504 ) Global intangible low-taxed income inclusion - Transaction costs 301 Goodwill impairment 7,979 Other permanent differences 48 Return to provision 211 Valuation allowance 6,786 Other 39 Income tax expense $ 9,209 The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered the nature of its deferred tax assets and the timing, likelihood, and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F- 43 Deferred tax assets and liabilities are as follows as of December 31: Schedule of Deferred Tax Assets and Liabilities 2025 2024 Deferred tax assets: Net operating loss carryforwards $ 6,499 $ 12,342 Accruals and reserves 2,096 3,221 Excess interest expense 163(j) 4,897 4,033 Capitalized research and experimental expenses 333 865 Other 1,573 1,019 Gross deferred tax assets 15,398 21,480 Valuation allowance ( 4,800 ) ( 9,836 ) Net deferred tax assets 10,598 11,644 Deferred tax liabilities: Intangible assets ( 9,565 ) ( 10,908 ) Property and equipment ( 1,524 ) ( 1,305 ) ROU assets ( 555 ) ( 198 ) Total deferred tax liabilities ( 11,644 ) ( 12,411 ) Net deferred tax liabilities $ ( 1,046 ) $ ( 767 ) As of December 31, 2025, the Company has federal, state, and foreign net operating loss carryforwards (“NOL”) totaling $ 21.5 million, $ 29.1 million, and $ 2.3 million, respectively. If not utilized, federal NOLs of $ 5.9 million will expire at various dates from 2028 through 2035, and $ 15.6 million of federal NOLs have indefinite lives. A portion of State NOLs will expire at various dates between 2026 through 2046 and the remainder will have indefinite lives. Canadian NOLs of $ 2.3 million begin to expire in 2043. Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of all available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction-by-jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. The Company’s management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended December 31, 2025, the Company has provided a valuation allowance for certain deferred tax assets that are expected to be unrealized against the Company’s U.S. and Canada net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2025 and 2024 was a decrease of $ 5.0 million and an increase of $ 5.3 million, respectively. The decrease in the valuation allowance year-over-year was mainly driven by the utilization of net operating losses in the United States, which led to a corresponding decrease in the valuation allowance. The taxable income in the United States was mainly driven by Sky Watch’s tested income and its inability to claim high-tax exception for the 2025 tax year. Domestic NOLs are subject to an annual limitation as a result of multiple changes of ownership as defined under Internal Revenue Code (“IRC”) Section 382. Federal NOLs of $ 15.1 million and state NOLs of $ 20.5 million originating after the most recent change are not subject to limitation. IRC §163(j) interest expense carryforwards have indefinite lives and are generally limited to an annual utilization limitation of thirty percent of adjusted taxable income plus business interest income. California NOLs are limited to a member’s contribution to combined California taxable income. The Company has reduced its federal and New Mexico NOLs by the amount expected to be unavailable and expire unutilized as a result of any IRC §382 limitation. The Company had no unrecognized tax benefits for the years ended December 31, 2025 and 2024. The Company recognizes interest and penalties related to unrecognized tax benefits in operating expenses. No such interest and penalties were recognized during the years ended December 31, 2025 and 2024. The Company expects to file income tax returns in the United States, Canada, and Denmark. As of December 31, 2025, Holdings’ tax years 2022 through 2024 remain open to examination. Prior to the closing of the acquisitions, AIRO Drone, Agile Defense, and Jaunt were taxed as partnerships and, as a result, the Company is not responsible for pre-acquisition tax authority examinations. All of Aspen Avionics’ tax years remain open to examination. Coastal Defense’s tax years 2022 through 2024 remain open to examination. Denmark’s statute of limitations expires May 1st in the fourth calendar year following the end of the relevant accounting period, and therefore the 2022 through 2024 tax years remain open to examination. H.R.1, enacted on July 4, 2025, introduced provisions that modified the IRC, including the immediate expensing of domestic research and development expenditures. As previously required under the Tax Cuts and Jobs Act, the Company capitalized and amortized research and experimental expenditures under IRC Section 174 for tax years beginning after December 31, 2021. With the enactment of H.R.1 in 2025, the Company began deducting domestic Section 174 costs in the year they were incurred. The Company will continue to capitalize and amortize research and experimental costs over 15 years for research and development performed outside of the United States. Other notable changes made with the passage of H.R. 1 include favorable changes to the interest expense limitation under IRC Section 163(j) and the reinstatement of 100 percent bonus depreciation for qualified property acquired and placed in service on or after January 20, 2025. 18. Related Party Transactions Related party transactions include the following: ● Aspen Avionics has a Commercialization Agreement with Centro Italiano Richerche Aerospaziali S.c.p.A (“CIRA”), a stockholder of Aspen Avionics, whereby CIRA licensed certain technology to Aspen Avionics. As consideration for the license, CIRA will receive a royalty based on each unit sold by Aspen Avionics. In March 2020, Aspen Avionics entered into an agreement with CIRA to settle unpaid royalty amounts due under a development agreement. The Company owed $ 0.6 million to CIRA as of December 31, 2025 and 2024. ● Aspen Avionics owed $ 0.4 million to Accord Global, a stockholder, as of December 31, 2024, which was funded during 2025. Sales to Accord Global were zero and $ 0.3 million during the years ended December 31, 2025 and 2024, respectively. Amounts due from Accord Global were zero and $ 0.4 million as of December 31, 2025 and 2024, respectively. F- 44 ● As of December 31, 2025 and 2024, Coastal Defense had net receivables due from Failor Services, Inc. (“Failor”), which is owned by a stockholder of the Company, of $ 0.4 million which are included in “Related party receivables” on the consolidated balance sheets. No purchases were made from Failor during the year ended December 31, 2025 or 2024. Coastal Defense also pays for certain expenses on Failor’s behalf, which are reimbursable to Coastal Defense. ● Coastal Defense entered into unsecured due on demand notes with two stockholders (the “Stockholder Notes”). Interest is charged at 7.00 % per year. As of December 31, 2025 and 2024, the total outstanding balance of the Stockholder Notes was $ 1.1 million. During 2025, the Company engaged in settlement discussions with one counterparty, Jeffrey F. Parker as executor of the estate of Kenneth Parker, and received a proposed settlement pursuant to which the Company is expected to pay the counterparty $ 1.0 million in full satisfaction of the obligations. The proposed settlement reflects a comprehensive resolution that includes offsets for amounts owed by Failor and Coastal Restaurant Group (“CRG”) to Coastal Defense. As of December 31, 2025, Coastal Defense’s recorded balances relating to these items were as follows: (i) amount due to Jeffrey F. Parker related to the Stockholder Notes of $ 1.0 million, (ii) amount due from Failor of $ 0.4 million, and (iii) an immaterial amount due from CRG, resulting in a net amount due of $ 0.6 million. The proposed settlement payment of $ 1.0 million exceeds the net recorded balance by $ 0.4 million, which was accrued at December 31, 2025 and included in related party payables on the consolidated balance sheets. The Company finalized the settlement in March 2026 as described in Note 19. ● Coastal Defense uses West Run LLC (“West Run”) as a subcontractor for its military exercises. West Run is owned by both a Coastal Defense employee and a shareholder of the Company and the wife of Coastal Defense’s former President. The Company owed $ 0.2 million and $ 0.3 million to West Run as of December 31, 2025 and 2024, respectively. ● During 2024, the Company issued a series of promissory notes to Martin Peryea, the Senior Vice President and General Manager, Electric Air Mobility Division, which totaled $ 0.2 million as of December 31, 2024 which were payable within two weeks of closing of the IPO and had an interest charge of $ 1 . During the year ended December 31, 2025, these promissory notes were repaid. ● From May 2022 through January 2025, the Company issued unsecured promissory notes, with no collateral or guarantees, to employees and stockholders for purposes of funding its operations. During the year ended December 31, 2025, the Company repaid $ 4.8 million, issued 0.4 million shares related to these Investor Notes and recognized $ 3.9 million of interest expense. During the first quarter of 2025, $ 3.4 million of the notes below were amended such that interest would be payable in shares at the Closing whereby the number of shares would be based on the trading price and the principal amounts due would be payable within the same number days subsequent to the Closing. As of December 31, 2024, notes totaling $2.3 million, as amended, accrue an interest charge equal to 100% of the principal amount, payable in shares of common stock on the Closing Date, with 110% of the principal paid 190 days following the Closing Date plus 12% interest per annum accruing from the Closing Date. Notes totaling $0.6 million carry the same terms except only 100% of the principal is paid 190 days following the Closing Date. Notes totaling $0.2 million accrue an interest charge equal to 50% of the principal amount, payable in shares of common stock on the Closing Date with 100% of the principal paid 190 days following the Closing Date plus 12% interest per annum accruing from the Closing Date. Notes totaling $0.2 million accrue an interest charge equal to 115% of the principal amount, payable in shares of common stock on the Closing Date, with 100% of the principal paid 190 days following the Closing Date plus 15% interest per annum accruing from the Closing Date. Notes totaling $0.4 million accrue an interest charge equal to 125% of the principal amount, payable in shares of common stock on the Closing Date, with 100% of the principal paid 190 days following the Closing Date plus 12% interest per annum accruing from the Closing Date. Notes totaling $0.1 million accrue an interest charge equal to 150% of the principal amount, payable in shares of common stock on the Closing Date, with 100% of the principal paid 190 days following the Closing Date plus 12% interest per annum accruing from the Closing Date. Notes totaling $ 0.1 million, as amended, accrued an interest charge equal to $ 50,000 payable in shares of common stock immediately prior to Closing, with the principal due by June 30, 2025. Notes totaling $ 0.5 million with Dangroup which accrued interest at a rate of 10.5 % per annum became payable five days after the Closing or the closing of one or more financing transactions with an aggregate value of at least $ 35.0 million. F- 45 ● The Company entered into promissory notes with the Merger Entities during 2022. The fair value of the contingent consideration promissory notes issued to the former equity holders of Agile Defense, AIRO Drone and Coastal Defense totaled $ 9.4 million as of December 31, 2024 and were included in contingent consideration on the consolidated balance sheets. In October 2023, the Company signed various agreements pursuant to which approximately 90 % of the principal owed would be converted to equity in the Company at a rate of $ 39.7112 per share no later than two days prior to closing of the BCA Transactions. In March 2025, the Company signed an amendment with Coastal Defense pursuant to which immediately prior to the closing of the IPO, the Company would issue 203,707 shares for 80 % of the principal owed under the contingent consideration promissory note. Given that the BCA Transactions were not consummated, at the closing of the IPO, the Company issued the following shares and used the following proceeds to satisfy the following contingent consideration obligations ● Promissory Note issued in connection with the Agile Defense Acquisition (the “Agile Defense Promissory Note”) - issued 34,360 shares of common stock and used proceeds of $ 1.0 million during the year ended December 31, 2025 to satisfy the Company’s obligations to the under the Agile Defense Promissory Note and Note Termination Agreement. ● Promissory Note issued in connection with the Airo Drone acquisition (the “Airo Drone Promissory Note”) - issued 37,080 shares of common stock and used proceeds of $ 0.6 million during the year ended December 31, 2025 to satisfy the Company’s obligations under the Airo Drone Promissory Note and Note Termination Agreement. ● Promissory Note issued in connection with the acquisition of Coastal Defense (the “CDI Promissory Note”), as amended on March 7, 2025 - issued 203,707 shares of common stock and used proceeds of $ 2.0 million during the year ended December 31, 2025 to satisfy the Company’s obligations to the holders under the CDI Promissory Note pursuant to a Promissory Note Termination Agreement. ● As part of the Jaunt acquisition, the Company 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 of the acquisition date, $ 49.6 million in future payments remained on this obligation. 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, the Company 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 the Company’s 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, at the Closing, the Company issued 1,122,437 shares of the Company’s common stock and funded $ 5.0 million during the year ended December 31, 2025 to satisfy the Company’s obligations to the holders under the Jaunt Satisfaction of Indebtedness and Satisfaction of Covenant Agreement. F- 46 ● In conjunction with the Aspen Avionics acquisition, the Company agreed to assume $ 25.3 million of obligations as defined within the merger agreement of which $ 19.4 million was attributable to the Aspen Notes, $ 1.9 million was attributable to future allowable services or to be payable to the former Aspen Avionics shareholders at the Closing, and $ 0.9 million was attributable to the Aspen Carveout Plan. The Aspen Carveout Plan also includes a one-time stock payment of $ 2.0 million for designated employees and consultants payable upon the occurrence of certain change in control events. On October 6, 2023, the Company signed a satisfaction of indebtedness and satisfaction of covenant agreement (the “Aspen Satisfaction of Indebtedness and Satisfaction of Covenant Agreement”), whereby all of the holders agreed to convert various amounts due, which included $ 17.5 million under the Bridge Notes, $ 0.8 million related to the cash portion of Aspen Carveout Plan, and $ 1.7 million attributable to the a contingency to Aspen shareholders (“Aspen Contingent Debt”) into 440,584 shares, 20,010 shares and 43,512 shares, respectively, of the Company’s common stock immediately prior to the closing of the BCA Transactions, with the remaining amount of $ 2.2 million owed to such holders to be paid at the closing of the BCA Transactions. The $ 2.0 million payment in stock, which equates to 51,309 shares, was also due at the closing of a business combination. The Company issued 440,584 shares of the Company’s common stock, funded $ 1.9 million and recognized a gain on debt extinguishment of $ 13.1 million during the year ended December 31, 2025 as described in Note 2 to satisfy the obligations attributable to the Bridge Notes. Prior to the IPO, the Company had not recorded the Aspen Contingent Debt as it was not probable or estimable in accordance with ASC 450. On June 12, 2025, the Company issued 43,512 shares to the target representative and recorded an accrual for $ 0.2 million related to the Aspen Contingent Debt which resulted in $ 0.6 million of other expense during the year ended December 31, 2025. On June 30, 2025, the Company amended the Aspen Satisfaction of Indebtedness and Satisfaction of Covenant Agreement to stipulate that the terms in the original agreement that were contingent upon the BCA Transactions would be completed within 15 business days of the IPO and identified the underlying recipients of 43,512 of the shares described above. In conjunction with the amended Satisfaction of Indebtedness and Satisfaction of Covenant Agreement, the target representative transferred the shares to the underlying shareholders. The Company agreed to fund the remaining $ 0.2 million owed under the Aspen Contingent Debt by March 1, 2026. During the year ended December 31, 2025, the Company issued 71,319 shares of the Company’s common stock, funded $ 0.1 million and recognized $ 1.7 million of stock compensation, as described in Note 4, to fully settle all obligations with the participants of the Aspen Carveout Plan. ● The Company entered into a $ 12.9 million promissory note in conjunction with the acquisition of Sky-Watch in 2022. The $ 12.9 million promissory note was fully repaid during the year ended December 31, 2024. As detailed in Note 1. The Company and Summary of Significant Accounting Policies , the Sky-Watch earnout liability was originally payable up to $ 6.5 million, of which up to a maximum of $ 3.0 million was payable on a dollar-for-dollar basis on revenue earned within the first two-year anniversary of the acquisition and $ 3.5 million would become due and payable if and only if Sky-Watch earns a minimum of $ 13.8 million in revenue during the period from the acquisition date through June 2024. In December 2022, the Equity Purchase Agreement was amended to increase the second earnout amount to $ 7.5 million and to extend the earnout period to include the full fiscal year periods of 2022 through 2024. In March 2023, the Equity Purchase Agreement was further amended to add a third earnout of $ 4.0 million if revenue during the full fiscal year periods of 2022 through 2024 reaches $ 17.0 million with the earnouts payable by May 31, 2024. As of December 31, 2023, the earnout liability was recorded to the full amount owed net of $ 3.0 million in payments made to date, or $ 11.5 million and was classified as due to seller as all contingencies had been resolved. In March 2024, the parties further amended the Equity Purchase Agreement, to extend the due dates of the earnout liability and the promissory note to June 30, 2024 in exchange for the former shareholders of Sky-Watch becoming eligible for an additional earnout of $ 1.0 million if Sky-Watch achieved EBITDA of DKK 127,107,500 or above for fiscal year 2024. As both the promissory note and the second and third earnouts were due within three months of the amendment date and as the Company would not have been able to refinance the then current balance of $ 18.3 million with another lender, the Company determined this modification to be an extinguishment in accordance with ASC 470-50. The loss on debt extinguishment was not significant. F- 47 In June 2024, the Company amended the Equity Purchase Agreement to extend the payment dates for the remaining balance on the seller promissory note to five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $ 35 million, and for the remaining earnout liability to five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $ 45 million. Interest shall continue to accrue on the earned but unpaid earnout amounts at the federal discount rate plus five percent, compounded quarterly. The former shareholders agreed to waive enforcement of payment until June 30, 2025. The Company recorded $ 0.2 million and $ 1.0 million of interest during the years ended December 31, 2025 and 2024, respectively. During the year ended December 31, 2025, the Company repaid the remaining $ 3.2 million of its Due to seller obligations. As of December 31, 2024, the total amount included in due to seller and owed under the earnouts was $ 3.1 million ● On June 28, 2024, the Company signed an Incentive Agreement whereby the Company will 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. The Incentive Agreement also included a contingent 5 % payout on any aggregate earnout awards that the Company’s stockholders were entitled to in conjunction with the BCA Transactions. In December 2024, the Incentive Agreement was amended such that Dangroup will contingently receive shares in conjunction with the Closing such that their ownership will be 5 % on a fully diluted basis. In conjunction with the IPO, the Company recorded $ 5.5 million of stock compensation expense related to the 0.5 million shares that were issued to Dangroup during the year ended December 31, 2025. On June 28, 2024, the Company signed a consulting agreement whereby the Company will pay a shareholder and former board member of Sky-Watch 2.5 % of Sky-Watch’s EBITDA as a consulting fee for his assistance with branding and rolling out products and services into new and additional markets commencing on January 1, 2024. This agreement may be terminated by either party with 30 days notice. In February 2026, the Company hired the consultant as an employee and terminated the consulting agreement as described in Note 19. During the years ended December 31, 2025 and 2024, the Company recorded $ 6.5 million and $ 1.1 million of expense within general and administrative expense, respectively, and $ 0.3 million of interest in 2025 related to the Incentive and Consulting Agreement. As of December 31, 2025 and 2024, the Company had an accrual of $ 7.8 million and $ 1.1 million, respectively related to these agreements. 19. Subsequent Events In February 2026, the Company entered into a manufacturing license agreement whereby the Company agreed to pay $ 1.3 million over five years. The Company had previously been a party to the 2022 Lawsuit with the licensor as described in Note 12. In February 2026, the Company hired a shareholder and former board member of Sky-Watch and terminated a consulting agreement as described in Note 18. In March 2026, the Company entered into a settlement agreement with one counterparty, Jeffrey F. Parker as executor of the estate of Kenneth Parker as described in Note 18. In March 2026, the Company entered into an amendment to the JV Agreement with NDG and extended the closing date for the joint venture from March 26, 2026 to June 30, 2026 as described in Note 12. F- 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.