What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-14 compared with 2025-11-14 · 245 added, 757 removed, 140 unchanged (88% of the section changed)

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

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

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

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

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

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

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

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

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

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

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

following is management’s discussion and analysis of the major factors that influenced our financial condition and results of operations

as of and for the three months ended March 31, 2026.

This analysis should be read in conjunction with the audited consolidated financial statements as of December 31, 2025 and 2024 and for each of the two years

then ended, together with the related notes thereto, included in our Annual Report on Form 10-K

for the year ended December 31, 2025 (the “Form 10-K”) and with the unaudited condensed consolidated financial statements

and notes thereto set forth in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles

generally accepted in the United States of America (“GAAP”).

Some of the information contained in this discussion and analysis

includes forward-looking statements that involve risks and uncertainties.

You should review the sections titled “Note Regarding

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

statements and important factors that could cause actual results to differ materially from the results described in or implied by the

forward-looking statements contained in the following discussion and analysis.

All references to “we”, “us”,

“our”, and the “Company” refer to AIRO Group Holdings, Inc.

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

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for both military and commercial end markets.

The segment’s portfolio includes the RQ-35 platform and the recently introduced next-generation RQ-70 ISR platform,

which is designed to support expanded operational capabilities, including longer flight range, higher payload capacity, upgraded sensor

options, and enhanced autonomous mission operations.

The Avionics segment develops, manufactures, and sells avionics for military and general aviation aircraft, drones, and eVTOLs.

avionics products include flight displays, Connected Panels, and GPS/GNSS sensors, all of which have been installed on legacy military

aircraft and general aviation platforms.

We sell our advanced avionics through our Aspen Avionics brand, which is well-recognized in

the general aviation aftermarket sector with over 20 years of operating history and long-term customer loyalty for our value proposition.

We also serve as an avionics supplier for OEMs, including Robinson Helicopters, Pilatus, and Honeywell.

We believe our avionics solutions

have a considerable market opportunity as general aviation fleets continue to age, with owners and operators seeking to upgrade the avionics

technology on their aircraft.

The Training segment currently provides military pilot training and will provide commercial pilot training in the future.

We offer professional

training and consulting services to the U.S.

products include flight displays, Connected Panels, and GPS/GNSS sensors, all of which have been installed on legacy military aircraft

and general aviation platforms.

We sell our avionics products through our Aspen Avionics brand, which is well-recognized in the general

aviation aftermarket sector with over 20 years of operating history and long-term customer loyalty for our value proposition.

serve as an avionics supplier for OEMs, including Robinson Helicopters, Pilatus, Honeywell, and Joby Aviation.

We believe our avionics

solutions have a considerable market opportunity as general aviation fleets continue to age, with owners and operators seeking to upgrade

the avionics technology on their aircraft.

Training segment currently provides military pilot training.

We offer professional training and consulting services to the U.S.

military, select NATO countries, and other U.S.

allies under our CDI brand.

These offerings

include adversary air, close air support, ISR, aircraft leasing, pilot training, ground liaison services, and JTAC, as well as full joint

theatre ISR and simulated ground strike training.

We work closely with special military forces such as SEAL teams, the U.S.

Warfare Center, and USAF Air Combat Command, and are a mandated recipient on a $5.7 billion IDIQ contract.

Our personnel’s top

security clearances and established relationships at the Pentagon provide us with a differentiated ability to bid on mandates.

plan to offer commercial pilot training and plan to expand our non-military capabilities in response to the global pilot shortage.

allies under our Coastal Defense brand.

These offerings include adversary air, close

air support, ISR, aircraft leasing, pilot training, ground liaison

services, and Joint Terminal Attack Controller training, as well as full joint theatre ISR and simulated ground strike training.

work closely with special military forces such as SEAL teams, the U.S.

Naval Air Warfare Center, and United States Air Force Air

Combat Command, and are a mandated recipient on a $5.7 billion DoW Indefinite Delivery Indefinite Quantity (“IDIQ”)

Contract and a $1.9 million IDIQ Contract.

Our personnel’s top security clearances and established relationships at the

Pentagon provide us with a differentiated ability to bid on mandates.

The Company is evaluating the strategic fit and long-term role of its Training segment.

The Training segment remains a valuable asset with significant long-term opportunity, but the segment is capital-intensive and often requires

meaningful ongoing investment.

Air Mobility .

The Electric Air Mobility segment is developing a rotorcraft eVTOL for cargo and passenger use through our Jaunt brand

for fixed route flights, on-demand trips, and cargo operations.

Our R&D efforts are focused on developing a cargo eVTOL platform,

which will be a scaled-down version of our passenger eVTOL platform, and will target the attractive middle mile delivery cargo market.

Meanwhile, our long-term R&D efforts are focused on developing a full-scale multi-role eVTOL platform, which will be able to serve

both the cargo and passenger markets.

We plan to certify our eVTOLs through existing CAR 529 Rotorcraft standards, with our platform

including the best attributes of both rotary and fixed wing aircraft.

Our patented compound rotorcraft technology, a core point of technological

differentiation that will underpin our cargo eVTOL’s commercial capability, has over 300 piloted flight hours on multiple Jaunt

demonstrator aircraft.

We believe the range and payload capabilities driven by this technology uniquely position us to provide a compelling

commercial solution for the eVTOL cargo market.

Once developed and certified, we expect our cargo eVTOL program will serve as the foundation

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

Public Offering, Follow-on Offering and Repurchase

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

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

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

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

ticker symbol “AIRO” on June 13, 2025.

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

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

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

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

an offering price of $18.50 per share.

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

discounts and commissions were $82.6 million.

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

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

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

The proceeds to shareholders paid were $19.4 million.

Combination Agreement

March 3, 2023, we entered into the Business Combination Agreement.

On August 5, 2024, the Business Combination Agreement was terminated.

were formed in August 2021 for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry.

During the year ended December 31, 2022, we completed our Put-Together Transaction to acquire six companies which are now organized into

our four reportable segments, each with a diverse set of partners and customers:

(i) Drones, through our subsidiaries, AIRO Drone and

(ii) Avionics, through our subsidiary, Aspen Avionics;

(iii) Training, through our subsidiaries, Agile Defense and CDI;

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

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

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

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

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

The Agile Defense Promissory Note bears no interest

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

On October 2,

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

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

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

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

Given that the BCA Transactions were not consummated,

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

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

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

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

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

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

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

trading of our common stock.

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

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

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

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

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

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

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

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

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

AIRO, us, Jaunt Merger Sub, LLC and Martin Peryea as member representative, dated as of October 6, 2021, as amended, in exchange for

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

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

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

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

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

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

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, we signed a satisfaction of indebtedness and satisfaction of covenant agreement (the “Jaunt Satisfaction of

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

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

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

Transactions.

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

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

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

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

AIRO, us, Dangroup ApS and Mekan I/S v/Per Pedersen & Claus Bo Jensen, dated as of October 6, 2021, as amended, in exchange for consideration

in the form of a promissory note in the amount of $12.9 million (the “Sky-Watch Promissory Note”), 524,064 shares of our

common stock and an earnout of up to $6.5 million based on performance commencing on the closing date of the acquisition through June

The $6.5 million earnout was made up of $3 million that 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 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 from $3.5 million 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.

In March 2024, the parties further amended

the Equity Purchase Agreement, pursuant to which the former shareholders of Sky-Watch became eligible for an additional earnout of $1.0

million if Sky-Watch achieves earnings before interest, taxes, depreciation and amortization (“EBITDA”) of DKK 127,107,500

or above for fiscal year 2024.

On June 28, 2024, the parties signed an amendment to the promissory notes (the “Sky-Watch Promissory

Note Amendment”) whereby (i) the remaining principal of $5.7 million payable within five business days of the date that we or our

successor closes one or more financing transactions with an aggregate value of at least $35.0 million and (ii) the remaining earnout

liability is payable within five business days following the date that the we, or our successor, closes one or more financing transactions

with an aggregate value of at least $45.0 million with interest continuing to accrue on the earned but unpaid earnout amounts at the

federal discount rate plus 5.0%, compounded quarterly.

In December 2024, we made a $13.9 million payment which resulted in a remaining

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

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

obligations under these agreements.

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

Agreement”) by and among Aspen, Legacy AIRO, us, Aspen Merger Sub, Inc.

and John Uczekaj as target representative, dated as of

October 6, 2021, as amended, in exchange for consideration in the form of 1,515,151 shares of our common stock.

As part of this transaction,

we agreed to assume $25.3 million of obligations, which primarily included $19.4 million related to the Aspen Notes, $2.9 million related

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

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

October 6, 2023, we 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 Aspen Notes, $0.8 million related to the cash portion of Aspen Carveout Contingency, and $1.7 million attributable

to the Aspen Contingent Debt into 440,584 shares, 43,512 shares and 20,010 shares, respectively, of our 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 2021 Management Carveout Plan also provides for a $2.0 million Aspen Carveout Stock Obligation which equates to

51,309 shares that is also due at the closing of a business combination.

Given that the BCA Transactions were not consummated, in connection

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

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

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

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

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

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

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

us, Coastal Merger Sub, Inc.

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

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

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

trading of our common stock.

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

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

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

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

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

the holders of the CDI Promissory Note Termination Agreement.

The Electric Air Mobility segment, operated through our Jaunt brand, is developing dual-use electric and

hybrid-electric compound rotorcraft aircraft.

Our near-term focus is on

cargo-configured and multi-role autonomous aircraft platforms, including the JC250 and JX250 variants, designed to support

middle-mile logistics, tactical resupply, emergency medical delivery, law enforcement, ISR, and other commercial and government

The JC250 is designed as an autonomous cargo drone platform for logistics missions, while the JX250 is designed as a

variant platform for ISR and logistics applications.

These platforms are being designed to support extended operational range,

payload flexibility, and autonomous mission capabilities for commercial and government use cases.

We plan to pursue certification of our aircraft under

existing CAR 529 Transport Category Rotorcraft standards.

Our aircraft integrate characteristics of both rotary- and fixed-wing

platforms through our patented compound rotorcraft configuration, which has accumulated over 300 piloted flight hours across

multiple Jaunt demonstrator aircraft.

We are evaluating both fully electric and hybrid-electric propulsion architectures to support

varying mission requirements, including extended range and increased operational flexibility.

We believe this compound rotorcraft

architecture, combined with electric and hybrid-electric propulsion strategies, provides favorable range, payload capacity, and

mission adaptability relative to conventional rotorcraft and certain eVTOL configurations.

Upon certification, we expect our

cargo-configured aircraft to serve as the initial foundation of our commercialization efforts.

Factors Affecting Our Performance

financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following.

Concentration and Drone Segment Revenue Concentration

believe that our operating results for the foreseeable future will continue to depend to a significant extent on sales attributable to

certain end customers with such concentration primarily attributable to our Drones segment.

of Long-Term Customer Commitments

sales are generally made on a purchase order basis, and we typically do not have long-term purchase commitments from our customers.

a result, customers may cancel, reduce, reschedule, or otherwise modify their purchase orders, which may affect anticipated sales.

addition, the timing and size of purchase orders, as well as modifications to existing orders, may vary from period to period and could

cause fluctuations in our operating results.

are dependent on a global supply chain and, in recent years, have experienced supply chain disruptions that resulted in delays and increased

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

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

conditions, including inflation and labor market shortages.

Current geopolitical conditions, including conflicts and other causes of

strained intercountry relations, as well as sanctions and other trade restrictive activities, continue to contribute to these issues.

Furthermore, our suppliers and subcontractors have been impacted by these same issues.

We also experience periodic shortages of electronic

and mechanical parts.

Management continues to proactively manage the supply and transportation of parts during regular sales inventory

and operations meetings.

This proactive planning is an integral part of our normal operations and has allowed us to anticipate potential

shortages and introduce redundancy along our supply chain.

These mitigation efforts have not introduced new material risks related to

product quality, reliability or regulatory approval of products.

We continue to monitor the condition of our supply chain and evaluate

our procurement strategy to reduce any negative impact on our business, financial condition, and results of operations.

We have implemented

actions and programs designed to mitigate the impacts of supply chain disruptions, but anticipate that we and others in our industry

will continue to face such challenges for the foreseeable future.

The supply chain disruptions discussed above did not materially impact

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

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

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

We are qualifying

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

The antenna update also requires incremental

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

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

including inflation and labor market shortages.

Current geopolitical conditions, including conflicts and other causes of strained intercountry

relations, as well as sanctions and other trade restrictions, continue to contribute to these issues.

Furthermore, our suppliers and

subcontractors have been affected by these same factors.

We also experience periodic shortages of electronic and mechanical parts.

continues to proactively manage the supply and transportation of parts during regular sales inventory and operations meetings.

This proactive

planning is an integral part of our normal operations and has allowed us to anticipate potential shortages and introduce redundancy along

our supply chain.

These mitigation efforts have not introduced new material risks related to product quality, reliability or regulatory

approval of products.

We continue to monitor the condition of our supply chain and evaluate our procurement strategy to reduce any negative

impact on our business, financial condition, and results of operations.

We have implemented actions and programs designed to mitigate

the impacts of supply chain disruptions, but anticipate that we and others in our industry will continue to face such challenges for

the foreseeable future.

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

operations or capital resources during 2025 or the first three months of 2026.

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

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of the Electric Air Mobility Market

revenue will be tied to the continued development of short distance aerial transportation.

While we believe the global market for electric

air mobility will be large, it remains undeveloped and there is no guarantee of future demand.

We anticipate receiving certification

of our 33% downscaled cargo eVTOL under drone rules as early as 2027 and expect our first passenger production aircraft to be certified

by the TCCA under existing CAR 529 Transport Category Rotorcraft airworthiness rules as early as 2031.

Our business will require significant

investment leading up to launching these services, including, but not limited to, final engineering designs, prototyping and testing,

manufacturing, software development, certification, pilot training, infrastructure and commercialization.

We benefit from supplier cost

sharing, whereby our suppliers have agreed to defer their non-recurring engineering costs until commercialization, which has reduced

our initial funding requirements prior to commercialization.

future revenue for our Electric Air Mobility segment will be tied to the continued development of autonomous cargo and logistics

operations and short distance aerial transportation.

While we believe the global market for electric air mobility will be large, it

remains undeveloped and there is no guarantee of future demand.

Our current focus is on the development and commercialization of

autonomous cargo and multi-role eVTOL platforms for logistics, ISR, defense, government, and related commercial applications.

anticipate receiving certification of our 33% downscaled cargo eVTOL under drone rules as early as 2027.

Our business will require

significant investment leading up to launching these services, including, but not limited to, final engineering designs, prototyping

and testing, manufacturing, software development, certification, operator training, infrastructure, and commercialization.

from supplier cost sharing, whereby our suppliers have agreed to defer their non-recurring engineering costs until

commercialization, which has reduced our initial funding requirements prior to commercialization.

Components of Results of Operations

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become effective.

represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination.

We manage our business primarily based upon four operating segments:

(i) Drones, (ii) Avionics, (iii) Training and (iv) Electric Air

Mobility, each of which represents a reportable segment.

See “—Critical Accounting Policies and Estimates—Goodwill”

for additional information.

Income (Expense)

expense, net consists primarily of the interest expense from borrowings relating to revolving lines of credit with external banks and

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

on Debt Extinguishment, Net

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

expense, net consists primarily of the interest expense from borrowings relating to third-party and related party notes, net of interest

income earned on cash deposits.

Income (Expense), Net

income (expense), net includes changes in fair value on contingent consideration obligations and foreign currency exchange adjustments

based on the terms of payments related an earnout obligation.

Tax (Expense) Benefit

tax (expense) benefit primarily consists of income taxes in certain foreign jurisdictions in which we conduct business.

income (expense), net includes changes in fair value on contingent consideration obligations and other liabilities, the impact from

debt and other liability settlements, and foreign currency exchange adjustments based on the terms of payments related to an earnout

Tax Benefit (Expense)

tax benefit (expense) primarily consists of income taxes in certain foreign jurisdictions in which we conduct business.

Financial Measures

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and forecasting purposes.

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

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

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

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

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

with prior periods and competitors less meaningful.

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

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

business performance.

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

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

and performing strategic planning and annual budgeting.

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

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

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

divided by revenue.

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

or because the amount and timing of these items is unpredictable, or because they are not driven by core results of operations,

thereby rendering comparisons with prior periods and competitors less meaningful.

We believe Adjusted EBITDA provides useful

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

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

Moreover, we have included Adjusted EBITDA in this Quarterly Report on

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

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

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

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to their most directly comparable GAAP financial measure.

Three Months Ended

September 30,

Ended September 30,

Three Months Ended March 31,

(in thousands, except percentages)

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Interest (income) expense, net

Gain on extinguishment

Stock-based compensation

Contingent consideration fair value adjustments

Warrant fair value adjustment

Goodwill impairment

IPO contingencies 1

Adjusted EBITDA

1 unchanged sentence

Adjusted EBITDA Margin

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

net of a $4.5 million gain on deferred compensation.

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

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

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

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

– Not meaningful

of Operations

and Nine Months Ended September 30, 2025 and 2024

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

Three months ended

September 30,

Months Ended March 31, 2026 and 2025

following table shows our consolidated financial results for the three months ended March 31, 2026 and 2025:

months ended March 31,

Period over period change

5 unchanged sentences

General and administrative

Goodwill impairment

Total operating expenses

2 unchanged sentences

Interest income (expense)

Other income (expense), net

Other (expense) income, net

Total other income

Net loss before income tax benefit

Income tax benefit (expense)

Nine months ended

September 30,

Period over period change

(in thousands, except percentages)

Cost of revenue

Operating expenses

Research and development

Sales and marketing

General and administrative

Goodwill impairment

Total operating expenses

Loss from operations

Other income (expense):

Interest income (expense)

Gain on debt extinguishment

Total other income (expense)

Net loss before income tax benefit

Net loss before income tax benefit (expense)

Income tax benefit (expense)

– Not meaningful

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

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

the Training segment.

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

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

increase in the Training segment.

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

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

Our incumbent supplier was unable to

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

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

Training revenue continues to reflect deferred aircraft acquisitions;

the segment benefited from a biennial government

contract with higher margins associated with ground target vehicle programs.

Following the Company’s completed equity

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

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

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

in cost of revenue within the Training segment.

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

the three months ended March 31, 2026 compared to the same period in 2025, revenue decreased by $2.9 million, driven by a $2.0

million decrease in the Drones segment, a $0.5 million decrease in the Avionics segment, and a $0.4 million decrease in the Training

The decrease in the Drones segment was primarily attributable to lower order volume during the period.

The decrease in the

Avionics segment reflects the impact of a facility relocation, with sales activity improving toward the end of the quarter.

decrease in the Training segment reflects lower sales during the period.

the three months ended March 31, 2026 compared to the same period in 2025, cost of revenue increased by $1.7 million, primarily due

to an increase of $1.9 million and $0.1 million within the Drones and Avionics segments, respectively, partially offset by a $0.4

million decrease in the Training segment.

Gross margin was 26.6% during the three months ended March 31, 2026 compared to 58.8%

during the same period in 2025.

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

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

The Training segment margin

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

margin due to favorable operating variances.

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

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

within the Avionics segment.

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

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

discussed above.

The decline in gross margin was primarily driven by a 39.2% decrease in the Drones segment,

reflecting lower order volume, production timing, and an atypical sales mix during the quarter, with fewer new drone system sales

and a higher concentration of lower-margin upgrades, modifications, and support-related orders.

Gross margin in the Avionics segment

decreased by 21.5% due to a temporary disruption from a facility relocation and lower sales volume.

The Training segment margin also

decreased by 4.2% due to lower sales.

and Development

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

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

For the nine months ended September 30, 2025

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

Increases within the Drones

segment were primarily due to increased personnel and other costs.

the three months ended March 31, 2026 compared to the same period in 2025, R&D expense increased by $3.0 million primarily due

to a $2.3 million increase in the Drones segment, a $0.5 million increase in the Avionics segment, and a $0.3 million increase in

the Electric Air Mobility segment.

The increase in the Drones segment was primarily driven by higher personnel and consulting costs

related to ongoing strategic and development initiatives.

The increase in the Avionics segment reflects targeted investments within

the platform, while the increase in the Electric Air Mobility segment was primarily due to higher personnel costs supporting

development programs.

and Marketing

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

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

million increase within the Drones segment.

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

the three months ended March 31, 2026 compared to the same period in 2025, sales and marketing expense increased by $0.5 million,

primarily due to higher personnel costs within the Drones segment.

and Administrative

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

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

million of equity compensation.

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

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

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

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

and $3.5 million of other corporate costs.

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

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

the Electric Air Mobility segment.

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

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

The $0.8 million decrease

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

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

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

Note 12 to our unaudited condensed consolidated financial statements.

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

respectively.

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

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

interest was primarily attributable to interest accrued on investor notes.

on extinguishment of debt, net

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

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

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

the three months ended March 31, 2026 compared to the same period in 2025, general and administrative expense increased by $5.9

million, primarily driven by a $3.4 million increase in corporate expenses, including a $2.3 million increase in compensation

expense, a $0.3 million increase in insurance, a $0.4 million increase in professional fees, a $0.2 million increase in lease

expense, and a $0.2 million increase in other corporate overhead.

The remaining increase reflects higher expenses across our

operating segments, including a $1.8 million increase in the Drones segment, a $0.3 million increase in the Avionics segment, a $0.2

million increase in the Training segment, and a $0.1 million increase in the Electric Air Mobility segment.

The increase in the

Drones segment was primarily due to higher equity-based compensation, personnel, and operating costs, while the increases in the

Avionics, Training, and Electric Air Mobility segments were primarily attributable to higher personnel and operating

the three months ended March 31, 2026, net interest income was $0.4 million, compared to net interest expense of $1.3 million for the

three months ended March 31, 2025.

The 2025 amount included both cash and non-cash interest expense related to loan agreements with Libertas

Funding, LLC (“Libertas”) and WebBank.

Income (Expense), Net

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

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

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

Contingent Arrangement.

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

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

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

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

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

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

for the three months ended September 30, 2024.

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

million and $3.8 million, respectively.

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

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

The tax benefit for

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

the three months ended March 31, 2026, other expense was $0.3 million, compared to other income of $2.7 million for the three months

ended March 31, 2025.

The 2025 amount included a $1.8 million decrease in the fair value of the Company’s contingent

obligation originating from the Jaunt acquisition, and a $0.9 million decrease in the fair value of contingent promissory

notes with certain acquired companies, including Agile Defense, Coastal Defense, and AIRO Drone.

the three months ended March 31, 2026, our income tax benefit was $1.6 million as compared to $0.3 million of income tax expense for

the three months ended March 31, 2025.

The income tax benefit for 2026 was primarily attributable to a pre-tax loss at Sky-Watch, whereas

the 2025 tax expense was primarily attributable to pre-tax income.

and Capital Resources

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

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

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

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

Company is evaluating opportunistic debt financing to support growth initiatives;

any proceeds, if obtained, would be used to expand

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

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

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

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

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

and $1.7 million of Investor Notes which we have elected

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

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

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

out of IPO proceeds.

of March 31, 2026, we had cash and restricted cash of $54.4 million, of which $0.2 million was either restricted or was designated exclusively

for Sky-Watch operations, and working capital of $62.5 million.

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

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

statements included in this Quarterly Report on Form 10-Q.

Incentive Agreement

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

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

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

In December 2024, we amended

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

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

During the nine

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

Per Erik Svehag, a member of our Board of Directors, is a director of Dangroup ApS (“Dangroup”) and indirectly

beneficially owns approximately 60% of Dangroup.

In June 2024, we entered into an Incentive Agreement with Dangroup (the

“Dangroup Incentive Agreement”), whereby we agreed to pay Dangroup 20% of Sky-Watch’s EBITDA as an incentive bonus

for its continued involvement in Sky-Watch’s governance, management and/or other operations, commencing on January 1, 2025 for

an initial term of five years, which shall renew upon mutual agreement of the parties.

In December 2024, we amended the Dangroup

Incentive Agreement, in addition to the incentive bonus described above, whereby we agreed to transfer to Dangroup shares of our

common stock immediately prior to the completion of the IPO such that Dangroup’s ownership was increased to 5% of our capital

stock on a fully diluted basis.

During the year ended December 31, 2025, we issued 0.5 million shares of our common stock to

Dangroup in satisfaction of this agreement.

During the three months ended March 31, 2026 and 2025, the Company recorded $0.5 million

of expense within general and administrative expense related to the agreement.

following summarizes our cash flows for the periods indicated:

Nine Months Ended

September 30,

Months Ended March 31,

(In Thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities

Cash Used in Operating Activities

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

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

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

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

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

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

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

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

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

adjustment for change in fair value of the contingent consideration.

cash used in operating activities for the three months ended March 31, 2026 was $17.4 million, primarily due to a $15.5 million net loss

and a $11.1 million increase in inventory.

These uses were partially offset by non-cash expenses, including $3.1 million of depreciation

and amortization and $1.5 million of stock-based compensation, as well as working capital changes, including a $4.1 million decrease

in accounts receivable and a $5.1 million increase in accounts payable, accrued expenses and other long-term liabilities, partially offset

by a $2.1 million increase in prepaid expenses and other assets and a $2.1 million decrease in related party payables.

cash used in operations for the three months ended March 31, 2025 totaled $9.8 million, and was primarily due to a net loss of $2.0 million

and working capital adjustments, including an increase in prepaid expenses and other assets of $5.8 million and an increase in inventory

of $3.7 million, as well as a decrease in deferred revenue of $6.3 million and a decrease in accounts payable, accrued expenses and other

long-term liabilities of $1.7 million, partially offset by a decrease in accounts receivable of $8.2 million.

These were partially offset

by non-cash adjustments totaling $1.2 million, including depreciation and amortization of $3.1 million, change in fair value of contingent

consideration of $2.7 million, non-cash interest of $0.6 million, and stock-based compensation of $0.1 million.

Cash Used in Investing Activities

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

of $2.1 million and $0.3 million was used in investing activities during the three months ended March 31, 2026 and 2025, respectively,

to purchase property and equipment and intangible assets.

Cash Provided by (Used in) Financing Activities

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

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

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

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

due to seller.

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

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

net of repayments.

Cash (Used in) Provided by Financing Activities

cash used in financing activities during the three months ended March 31, 2026 was $0.6 million due to repayments on third party borrowings

and related party borrowings.

Net cash provided by financing activities during the three months ended March 31, 2025 was $1.8 million

primarily due to $3.5 million of proceeds from the Libertas loans and $0.2 million of related party borrowings proceeds that were partially

offset by $1.7 million of debt repayments including $1.1 million to Libertas, $0.4 million to WebBank and $0.2 million to First Citizens

Community Bank.

Accounting Policies and Estimates

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

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

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

On an ongoing basis, we evaluate our estimates

and assumptions.

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

We believe that of our

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

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

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

Accordingly, these are the policies and estimates

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

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

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

of indefinite lived and long-lived assets;

compensation;

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

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

We base our estimates

and judgments on historical experience, industry benchmarking information, and on various other factors that we believe to be reasonable

under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities

that are not readily apparent from other sources.

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

consolidated financial statements as soon as they become known.

Actual results could differ from these estimates and any such differences

may be material to our condensed consolidated financial statements.

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

amount that reflects the consideration we expect to receive.

We apply the following five steps:

(i) identify the contract with a customer,

(ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price

to the performance obligations in the contract, and (v) recognize revenue when a performance obligation is satisfied.

We account 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 collectability of the contract consideration is probable.

certain sales, we have contracts with customers that include multiple performance obligations.

For these contracts, we account for individual

performance obligations separately, by allocating the contract’s total transaction price to each performance obligation in an amount

based on the relative SSP of each distinct good or service in the contract.

We determine the SSP based on our 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 we expect to be entitled

to receive in exchange for those services.

Our 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.

that are invoiced are recorded in accounts receivable and revenue or deferred revenue, depending on whether the revenue recognition criteria

have been met.

A large portion of our 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.

revenue is derived from various sources:

(i) avionics products consisting primarily of hardware with embedded firmware sold to an authorized

dealer network and avionics and GNSS products sold to OEMs, (ii) 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 to incorporate contract close air support/intelligence surveillance reconnaissance with video downlink systems

into tactical operations, (v) technology and equipment sales (vi) mUAS, commonly referred to as “commercial drones,” sales,

including hardware, software, training, support and product service, and (vii) drone services, including surveys, imaging, security,

and other drone applications.

account for acquired businesses using the purchase method of accounting.

Under the purchase method, our condensed consolidated financial

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

In addition, the

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

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

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

respective useful lives.

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

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

management but are inherently uncertain.

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

on the date of acquisition.

Significant changes in the discount rate used could affect the accuracy of the fair value calculation.

consideration is adjusted based on experience in subsequent periods and the impact of changes related to assumptions are recorded in

operating expenses as incurred.

typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash

flows attributable to the respective assets.

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 (including expected growth rates and profitability),

the underlying product or technology life cycles, the economic barriers to entry, and the discount rate applied to the cash flows.

Unanticipated

market or macroeconomic events and circumstances may result in a triggering event for which we would test for impairment.

represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination.

We manage our business primarily based upon four operating segments:

(i) Drones, (ii) Avionics, (iii) Training and (iv) Electric Air

Mobility, each of which represents a reportable segment.

We have determined that each reportable segment represents a reporting unit

and, in accordance with ASC 350, each reporting unit requires an allocation of goodwill.

We will continue to reevaluate reportable and

operating segments.

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

indicate that the carrying value may not be recoverable.

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

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

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

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

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

Management may choose to proceed directly to the evaluation, bypassing

the initial qualitative assessment.

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

allocated to its net book value, including goodwill.

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

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

reporting unit.

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

We recorded goodwill

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

Impairment Test

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

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

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

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

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

carrying value as of September 30, 2024

value of reporting unit as of September 30, 2024

as of September 30, 2024

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

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.

Projections used require 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 we used for our 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 our 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 for its clients, the geographic locations in which the reporting

unit conducts business and the maturity of the reporting unit.

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 as compared to a previous estimate of 2028 and further incorporated production

of a cargo UAV (a smaller cargo derivative of the Jaunt Journey) in 2027.

Projected revenue in years 1 and 2 of commercialization of

the cargo UAV as of September 30, 2024 were added to our September 30, 2024 projections based on an estimated assumed selling price and

expected production levels of approximately 240 units over the two-year period.

Projected revenue in years 1 and 2 of commercialization

( i.e., 2028 and 2029 ) of the Jaunt Journey as of October 1, 2023 was based on a sales price that was in line with the negotiated

pricing contained in our non-binding letters of intent and projected volume of 630 units over the same two-year period.

Following the

revision of the estimated commercialization date to 2031, the escalation rate utilized in our original projections continued to be consistently

Accordingly, such escalation rate was applied to the original estimated selling price in 2028 for a period of three additional

years (i.e., 2028 to 2031).

As a result, the sales price in the revised estimated first year of commercialization (2031) increased compared

to prior projections.

Revenue projections for both programs were based on increasing production quantities year-over-year that max out

at approximately 400 units per year for the cargo UAV and 3,000 units per year for the Jaunt Journey at a single production facility,

and a per-unit sales price that increases over time assuming a 1.5% escalation rate.

The foregoing escalation rate and production volume

of the Jaunt Journey remained consistent with prior year projections.

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

and subsequent efficiencies, and operating costs.

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

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

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

which indicated impairment.

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

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

following commercialization.

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

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

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

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

of October 1, 2023.

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

mid-term and long-term gross margins by approximately 2% at full rate production, as well as estimated efficiencies, which resulted in

reduced operating expenses slightly (0.5%-1%) as a percentage of revenue as compared to the October 1, 2023 projections.

the timing of projected cash flows from the Jaunt Journey has been delayed and as operations now include a plan to produce a cargo UAV,

profitability of the Electric Air Mobility segment post-commercialization of the Jaunt Journey has always been part of our projections.

We 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 our assumptions, we believe our long-term projected revenue is reasonable given a sales

price supported by non-binding letters of intent and a relatively small number of units in comparison to, according to the Morgan Stanley

Report, an anticipated global market ranging between an expected $1 trillion and with an upside $4.4 trillion by 2040.

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.

most sensitive factor in our 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 our prior year testing date of October

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 FAA, TCCA, and EASA,

advances in electric propulsion, battery density, and autonomous systems which lower remaining technical development risk.

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.

believe 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 additional impairment charges that could be material to our condensed consolidated financial

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

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

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

or if the WACC discount rate is increased.

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

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.

CDI does not possess aircraft that can achieve this requirement;

thus, we have either not been awarded or chose not to bid on certain

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.

projections as of September 30, 2024 have not significantly changed compared to our prior year testing date of October 1, 2023, and we

do not anticipate any changes until we are able to make more significant investments in aircraft, and at which time we can better leverage

our operating expenses.

At that point, we anticipate 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.

to the degree of uncertainty associated with our assumptions, we believe our short-term projected revenue is reasonable given our history

with military contract practices and the historical results of flight schools, while our 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

our 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.

believe 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 additional impairment charges that could be material to our condensed consolidated financial

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

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

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

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

the purchase price of the acquired business to the respective net tangible and intangible assets.

We determine 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.

We capitalize third-party legal costs and filing fees, if any, associated with obtaining patents.

Once the patent asset

has been placed in service, we amortize 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.

estimated useful lives for our intangible assets are as follows:

– definite-lived

relationships

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

million tradename obtained in conjunction with the Jaunt acquisition.

of Indefinite Lived Assets

ASC 350-30-35-18, an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently

if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

In testing for impairment,

we define our Asset Groups at the reporting unit level.

Under ASC 360-10-35-26 when an asset group is a reporting unit, the asset group

includes goodwill.

When goodwill and indefinite lived intangibles are included in the long-lived asset group being tested for impairment,

the indefinite-lived intangible assets are tested for impairment in accordance with ASC 350-30 first, then the long-lived assets (groups)

are tested for impairment in accordance with ASC 360-10, and goodwill is tested for impairment at the reporting unit level in accordance

with ASC 350-20 last.

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

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

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

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

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

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

of impairment for the Avionics or Drones segments.

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

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

The fair value of the undiscounted cashflows of both the

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

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

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

of Long-Lived Assets

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

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

Recoverability of assets held

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

expected to be generated by the asset or asset group.

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

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

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

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

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

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

However, we determined

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

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

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

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

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

In accordance with ASC 470-50, as this

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

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

date in October 2024.

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

closing of an initial public offering or qualified financing.

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

the Investor Notes at fair value.

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

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

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

Reductions to the carrying value

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

Subsequent changes to facts

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

If actual market conditions are less favorable

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

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

Options and restricted

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

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

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

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

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

We account for forfeitures as they occur and does not

estimate forfeitures at the time of grant.

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

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

Deferred tax assets and liabilities are recognized

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

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

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

to be recovered or settled.

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

period that includes the enactment date.

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

to be realized.

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

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

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

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

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

as income tax expense.

Sheet Arrangements

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

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

We do not participate

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

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

condensed consolidated financial statements have been prepared in accordance with GAAP.

The preparation of these condensed consolidated

financial statements requires management to establish accounting policies that contain estimates and assumptions that affect the amounts

reported in the condensed consolidated financial statements and accompanying notes.

These policies relate to revenue recognition, goodwill

impairment, inventory, income taxes, impairment of indefinite-lived and long-lived assets, and stock-based compensation.

We have other

important accounting policies and practices;

however, once adopted, these other policies either generally do not require us to make significant

estimates or assumptions or otherwise only require implementation of the adopted policy and not a judgment as to the policy itself.

bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances,

the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent

from other sources.

Despite our intention to establish accurate estimates and assumptions, actual results may differ from these estimates

under different assumptions or conditions.

During the three months ended March 31, 2026, management believes there have been no significant

changes to the items that we disclosed within our critical accounting policies and estimates in “Management’s Discussion

and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31,

Recent Accounting Pronouncements

A summary of recent accounting pronouncements

that may have an impact on our consolidated financial statements is included in Note 1 to condensed consolidated financial statements

accompanying this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk

a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information

required by this item.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis