Airship AI Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Recent Developments Backlog and Pipeline Backlog as of May 6, 2026 was approximately $4.6 million, representing firm fixed price contracts awarded in the first quarter of 2026 that will be shipped and invoiced through the remainder of 2026. Our total validated pipeline as of March 31, 2026 was $165.3 million, consisting of single and multi-year opportunities for AI-driven edge, video, and sensor and data management platform across our customer verticals. Our pipeline includes opportunities at varying stages of progression with expected award timeframes over the next 18-24 months. Overview We are a robust AI-driven data management platform that solves complex data challenges for large institutions operating in dynamic and mission-critical environments with rapidly increasing volumes of data being ingested from a similarly rapidly growing number of data sources. We solve these challenges by structuring “dark” or unstructured data at the edge, the location at which the data is generated and collected, and leveraging purpose-built AI models. Unstructured, or “dark” data, which is typically categorized as qualitative data, cannot be processed and analyzed via conventional data tools and methods. Conversely, structured data, typically categorized as quantitative data, is highly organized and easily decipherable by machine learning algorithms. Structuring and then analyzing data using AI models at the edge, versus transmitting the data from the edge back to a central processing location for structuring and analysis, enables real-time decision making and data-driven operational efficiency. We specialize in ingesting all available metadata from edge-based sensors used by government and law enforcement agencies around the world, including surveillance cameras (video), audio, telemetry, acoustic, seismic, and autonomous devices, along with large commercial corporations with fundamentally similar capabilities and requirements. Data generated by these edge-based sensors, including video, can then be run through our trained AI models to detect objects present within the video frame. Once an object is detected, for example an automobile, additional identifying characteristics of the object can be extracted from the image including the license plate characters and the make, model, and color of the automobile. This process of analyzing, logging and categorizing ingested data is referred to as “structuring” the data. 24 Table of Contents Airship AI’s software allows customers to view structured data both in real-time as well as to conduct searches on the structured data at a later point in time. Real-time structured data use includes, for example, alarms on a specific license plate or a specific make, model or color of automobile. Non-real-time structured data use includes, for example, searching a database of video data that has been previously ingested and stored to find instances of a particular license plate being visible, along with other logged vehicle characteristics such as make, model and color of an automobile. Additional edge deployed AI models enable similar object detection and recognition of common and custom trained objects, such as an aircraft, boat, person, animal, bag, or weapon. Airship AI’s models provide similar data points for these object types allowing analysts the ability to be notified in real-time of the detection of a specified object and similarly search for historically detected objects. Examples include detecting aircrafts and boats along with their respective tail numbers and hull registration numbers. Our AI modelling process starts with pre-trained AI models from our technology ecosystem partners which we then customize using proprietary datasets tailored towards our customers unique workflow requirements. Where customers have pre-existing AI models or engines, we integrate those models or engines into our edge platform allowing customers to leverage proprietary models within the Airship AI software ecosystem. Our primary offerings include Outpost AI, Acropolis, and Airship Command. Our offerings allow customers to manage their data across the full data lifecycle, when and where they need it, using a highly secure permissioned based architecture. Outpost AI is our edge hardware and software offering that is purpose built to structure and analyze data efficiently and effectively at the source using Airship AI trained models. Once structured, Outpost AI securely encodes the data and streams it to Acropolis for further processing. In the automobile example, Outpost AI will process the unstructured and unlabeled video data into structured data including images of vehicles, images of plates, make, model, color, locations and plate numbers, as well as confidence levels on the structured results. Acropolis is our enterprise management software suite which serves as the backbone of our software ecosystem. Acropolis allows customers with a handful of devices or hundreds of thousands of devices to manage their user and install base efficiently and securely from a single graphical user interface. Acropolis can be installed and managed locally (on-premises) as well as in cloud/multi-cloud-based system architectures. Acropolis can work with structured and unstructured data. In the scenario where Outpost AI processes the unstructured video of vehicles into images, plate numbers and other structured data, Acropolis will compare the structured data against customer repositories of structured data in order to add labels to results for user attention. Here, Acropolis leaves the initial processing of unstructured data to the edge device (Outpost AI) and handles additional labeling which requires bigger centralized datasets. Where Acropolis is receiving unstructured data as input from devices, it will do the initial processing of unstructured to structured data similar to what Outpost AI does at the edge before any additional labelling. This holistic approach allows customers to leverage the benefits of both edge and back-end data structuring and analysis in a “single-pane-of-glass” approach. Airship Command then allows the customer to view the final labelled data which can be presented in real-time or as search results, as alerts, in automatically updating lists or on maps. In the vehicle example, Airship Command can present alarms on specific filters such as specific plates, intelligent partial matches, make, model, color and any combination thereof, as well as searches using the same filters against character recognition and vehicle characteristics results. Airship Command is our suite of visualization tools that allow customers to interact with their data and devices securely and efficiently. Customer data interaction may include receiving and viewing an alarm triggered by an AI detected event at the edge on a mobile phone, or receiving and viewing events from thousands of edge devices spread across multiple different locations on a large video wall in a Security Operations Center (“SOC”). Our visualization tools span applications for workstations, web-based browsers, and applications for mobile handheld devices ensuring our customers data is never out of their immediate reach. 25 Table of Contents We apply AI across the entire offering suite, ensuring that we are extracting as much value from our customers’ existing and emerging data as possible. Whether it is using machine learning to train new models for deployment at the edge, or using a rules-based approach to detect anomalies based on data generated by machine learning models, we are constantly expanding and evolving our AI capabilities. Our offerings are used by some of the largest government agencies and commercial organizations in the world. While we are heavily focused on continuing to grow market share in the United States, our offerings are currently deployed around the world, with significant room to grow in both the governmental and commercial markets. Our typical customer engagement is a multi-year contractual agreement, an agreement which includes our core offerings as well as professional services, technical support, and software maintenance, which we expect will result in predictable, long-term recurring revenue. Our history shows that organizations that have chosen to partner with Airship AI stick with Airship AI. Since our inception and until the Merger in December 2023, we have operated as a 100% employee-owned bootstrapped company with no outside investment, operating in a fiscally conservative model. As a U.S. based company, we operate in high growth areas, namely the intersection of public safety and AI, with a combined $7 billion edge AI hardware and software addressable market. Our customers trust us to collect and analyze vast amounts of data in real-time as well as make it available to their users when they need it, where they need it, as securely as possible. We believe our offerings are purpose-built from the ground up to help ensure we continue to meet or exceed these expectations. Fair Value Transactions in Connection with Merger As a result of the merger, we entered into the following transactions that were measured at fair value and vary quarterly with the share price and other items. Any change is non-cash and is recorded as a gain or loss in other income (expense). See Note 11– Fair Value Measurements for more information. Liability as of Liability as of March 31, 2026 December 31, 2025 Earnout liability $ 3,347,120 $ 2,620,933 Warrant liability (Public Warrants) 11,462,954 12,916,006 Warrant liability (Private Warrants) 365,650 412,000 Total liabilities measured at fair value $ 15,175,724 $ 15,948,939 Other income related to instruments recorded at fair value during the three months ended March 31, 2026 and 2025 $ 773,215 $ 25,344,788 Private Placement and Public Warrants in Connection with Merger At the Merger closing, we assumed 515,000 private placement warrants and 16,184,612 public warrants. On June 3, 2024, we reduced the exercise price of such warrants from $11.50 per share to an exercise price of $7.80 per share. On November 20, 2024, we further reduced the exercise price of the outstanding public warrants and private warrants to an exercise price of $4.50 per share. The purpose of this reduced exercise price was to potentially raise proceeds received from the exercise of such warrants, if any, for working capital and general corporate purposes. As of March 31, 2026, there were 515,000 private placement warrants and 16,145,006 public warrants outstanding. Segment Reporting The Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Chief Executive Officer, Chief Financial Officer and President are the Company’s CODM. The CODM monitors the revenue and expense components of the various products and services we offer, but operations are managed and financial performance is evaluated on a corporation-wide basis in comparison to a business plan which is developed each year. Accordingly, all operations are considered by the CODM to be one operating segment and one reportable segment as contained in the Consolidated Statements of Operations and Comprehensive Loss to the consolidated financial statements. The CODM uses consolidated net income (loss) as its required measure of segment profit/loss, as such measure is determined in accordance with the measurement principles most consistent with the consolidated financial statements. 26 Table of Contents Results of Operations The following table sets forth key components of our results of operations during the three months ended March 31, 2026 and 2025. (dollars in thousands) Three Months Ended, 2026 2025 $ Variance % Variance Net revenues $ 6,353 $ 5,503 $ 850 15.4 % Cost of net revenues 3,187 3,268 81 2.5 % Gross profit 3,166 2,235 931 41.7 % Research and development expenses 844 719 (125 ) -17.4 % Selling, general and administrative expenses 3,904 3,230 (674 ) -20.9 % Total operating expenses 4,748 3,949 (799 ) -20.2 % Operating loss (1,582 ) (1,714 ) 132 7.7 % Other income (expense): (Loss) gain from change in fair value of earnout liability (726 ) 9,824 (10,550 ) -107.4 % Gain change in fair value of warrant liability 1,499 15,521 (14,022 ) 90.3 % Interest income, net 88 77 11 14.3 % Total other income, net 861 25,422 (24,561 ) 96.6 % (Loss) income before provision for income taxes (721 ) 23,708 (24,429 ) -103.0 % Provision for income taxes - - - - Net (loss) income $ (721 ) $ 23,708 $ (24,429 ) -103.0 % Net Revenues — Net revenues for the three months ended March 31, 2026 increased $850,000 to $6,353,000 as compared to $5,503,000 for the three months ended March 31, 2025. The increase was due increased commercial orders. On January 20, 2025, President Trump signed an executive order creating an advisory commission, the Department of Government Efficiency, to reform federal government processes and reduce expenditures. Pressures on and uncertainty surrounding the U.S. federal government’s budget, and potential changes in budgetary priorities and spending levels, could adversely affect staffing levels and the funding for government projects. Disruptions in how the government agencies operate due to these policies is materially affecting our government business. Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support. For the three months ended March 31, 2026, cost of sales decreased $81,000 to $3,187,000 as compared to $3,268,000 for the three months ended March 31, 2025. The decrease was due product mix with increased higher margin commercial sales during the three months ended March 31, 2026, offset by raw material cost increases. Research and Development Expenses — Research and development expenses for the three months ended March 31, 2026 increased $125,000 to $844,000 as compared to $719,000 for the three months ended March 31, 2025. The increase was due to increased expenses for product development in the United States and Taiwan. 27 Table of Contents Selling, General and Administrative Expenses — Selling, general and administrative expenses for the three months ended March 31, 2026 increased $674,000 to $3,904,000 as compared to $3,230,000 for the three months ended March 31, 2025. The increase is primarily due to an increase in stock-based compensation expense of $238,000 and other personnel costs. Other Income (Expense) — Other income for the three months ended March 31, 2026 was $861,000 as compared to other income for the three months ended March 31, 2025 was $25,422,000. Other income for the three months ended March 31, 2026 consisted of (i) loss from change in fair value of earnout liability of $726,000; (ii) gain from change in fair value of warrant liability of $1,499,000; and (iii) interest income of $88,000. The loss from change in fair value of earnout liability resulted from the increase in the volatility factor to 78.4%, offset by a decrease in the our share price. The income from change in fair value of warrant liability was primarily the result of a decrease in our stock price. Other income for the three months ended March 31, 2025 consisted of (i) gain from change in fair value of earnout liability of $9,824,000; (ii) gain from change in fair value of warrant liability of $15,521,000; (iii) other income of $77,000. The gain from change in fair value of various financial instruments was primarily the result of a decrease in our stock price. Net (Loss) Income — Net (loss) for the three months ended March 31, 2026 was $721,000 as compared to a net income of $23,708,000 for the three months ended March 31, 2025. The net loss primarily related to increases in selling, general and administrative and research and development expenses. Net income for the three months ended March 31, 2025 primarily related to noncash items of $24,833,000. Noncash items included (i) gain from change in warrant liability of $15,521,000; and (ii) gain from change in earnout liability of $9,823,000; and offset by (iii) stock based compensation of $428,000; and (iv) net amortization of operating lease right of use assets of $83,000. Liquidity and Capital Resources as of March 31, 2026 and 2025 Liquidity is our ability to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. We have incurred losses from operations in the past few years and had an accumulated deficit of $46 million as of March 31, 2026. On October 8, 2025, we entered into warrant exercise inducement offer letter with the holder of existing common stock warrants exercisable for an aggregate of 2,162,162 shares of common stock to exercise such warrants at the existing exercise price of $4.50 per share, in exchange for our agreement to issue new common stock warrants to purchase 2,702,702 shares of common stock at an exercise price per share of $6.20. The aggregate gross proceeds received from the exercise of the existing warrants were approximately $9,729,729, before deducting financial advisory fees. We intend to use the net proceeds from the exercise of the existing warrants for working capital and general corporate purposes. Operating Activities Net cash generated by operating activities for the three months ended March 31, 2026 was $814,000. This amount was primarily related to (i) net loss of $721,000; and (ii) noncash items of $5,000; offset by (iii) operating assets and liabilities changes of $1,540,000 (including a $493,000 increase in deferred revenues). Noncash items included (iv) gain from change in warrant liability of $1,499,000; and offset by (v) loss from change in earnout liability of $726,000; (vi) stock based compensation of $666,000; and (vii) net amortization of operating lease right of use asset of $102,000. Net cash used in operating activities for the three months ended March 31, 2025 was $2,098,000. This amount was primarily related to (i) net income of $23,708,000; and offset by (ii) operating assets and liabilities reductions of $973,000 (including a $713,000 reduction in deferred revenues); and (iii) noncash items of $24,833,000. Noncash items included (iv) gain from change in warrant liability of $15,521,000; and (v) gain from change in earnout liability of $9,823,000; and offset by (vi) stock based compensation of $428,000; and (vii) net amortization of operating lease right of use assets of $83,000. 28 Table of Contents Financing Activities Net cash provided by financing activities for the three months ended March 31, 2026 was $11,000 and consisted of proceeds from stock option exercises. Net cash used in financing activities for the three months ended March 31, 2025 was $497,000 and consisted of (i) repayment of advances by founders of $600,000; and offset by (ii) net proceeds from exercise of warrants of $60,000; and (iii) proceeds from stock option exercises of $43,000. Contractual Obligations and Commitments Less Than Contractual Cash Obligations Total 1 Year 1-3 Years Operating lease cash payments $ 809,736 $ 486,075 $ 323,661 On September 7, 2023, we entered into a lease in Redmond, WA for 15,567 square feet of office and warehouse space which started August 1, 2024. The monthly payment is approximately $29,600 per month. The lease expires October 31, 2027 and the monthly payment increases 3% on August 1, 2025 and each year thereafter. There is a one three year option to extend the lease based on the fair market rate on October 31, 2027. We do not believe that is reasonably certain that the lease will be extended. On December 6, 2024, we entered into two separate office leases in Mooresville, North Carolina, the terms of which commenced on February 1, 2025. We lease an aggregate of 5,240 square feet and the net monthly payment is approximately $9,105. The leases expire January 31, 2028 and the monthly payment increases 3% on February 1, 2026 and each year thereafter. There is no option to extend the lease. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the current economic environment. To the extent that there are material differences between these estimates and our actual results, our future consolidated financial statements will be affected. We believe that the significant accounting policies described in “ Note 2, Summary of Significant Accounting Policies ” to our audited consolidated financial statements are accurate and complete. The critical accounting estimates and policies during the three months ended March 31, 2026 have not materially changed to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2025. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable to smaller reporting companies. 29 Table of Contents