AIRO Group Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2026

The 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 and six months ended June 30, 2026 and 2025. 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.

Overview

We are a technologically differentiated aerospace, autonomy, and air mobility platform targeting 21st century aerospace and defense opportunities. We leverage decades of industry expertise and connections across the drone, aviation, and avionics markets to provide leading solutions to the aerospace and defense market. We offer connected and diversified solutions providing operational synergies across our segments and are powered by an international footprint as well as supplier and public sector relationships. Supported by complementary and innovative technologies, we believe we bring a unique value proposition to the market and are well-positioned to become a differentiated leader in the industry.

Our business is organized into four operating segments, each of which represents a critical growth vector in the aerospace and defense market: Avionics, Drones, Electric Air Mobility, and Training. These four segments collectively target an estimated total addressable market of over $315 billion by 2030.

Avionics. The Avionics segment develops, manufactures, and sells avionics for military and general aviation aircraft, drones, and eVTOLs. Our 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 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. We also 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. During the second quarter of 2026, our consolidated Phoenix manufacturing facility achieved AS9100D certification, reinforcing our manufacturing quality and supporting future growth across general aviation and advanced aerospace markets.

Drones. The Drones segment develops, manufactures, and sells drones and will provide drone services, such as DaaS, for military and commercial end users. Our military drones are sold through our Sky-Watch brand, which is a key supplier to European NATO countries. A critical point of differentiation lies in our drones’ ability to perform in a GPS-denied environment, which is a technology application relevant for both military and commercial end markets. The segment’s portfolio includes the battle-proven RQ-35 platform and the recently introduced next-generation RQ-70 platform, which is designed to support expanded operational capabilities, including longer flight range, greater endurance, higher payload capacity, upgraded sensor options, and enhanced autonomous mission operations. During the second quarter of 2026, we completed significant customer deliveries of our RQ-35 platform, including the first operational deployment featuring our proprietary Zentra camera suite, and announced that the RQ-35 had been added to the U.S. Department of War (“DoW”) Blue UAS list, expanding its eligibility for U.S. government procurement.

Electric Air Mobility. 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 missions. 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.

Training. The 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 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. We 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, although the segment is capital-intensive and often requires meaningful ongoing investment.

Key Factors Affecting Our Performance

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

Customer Concentration and Drone Segment Revenue Concentration

We 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.

Training Segment Contract Opportunities

The Training segment has experienced delays in the timing of expected contract awards, resulting in lower near-term revenue visibility. During 2026, the Company invested in operational capabilities to support its ability to compete for future contract opportunities. Future operating results will depend on the timing and successful conversion of contract awards.

Lack of Long-Term Customer Commitments

Our sales are generally made on a purchase order basis, and we typically do not have long-term purchase commitments from our customers. As a result, customers may cancel, reduce, reschedule, or otherwise modify their purchase orders, which may affect anticipated sales. In 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.

Global Supply Chain

We are dependent on a global supply chain and, in recent years, have experienced disruptions that resulted in delays and increased costs which adversely affected our performance. These disruptions impacted our ability to procure raw materials, microelectronics, and certain commodities on a timely basis and/or at expected prices and have been driven by supply chain 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. 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 alongside 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 six months of 2026.

Geopolitical Matters

We operate in a complex and evolving global security environment, and our business is affected by geopolitical and security issues. Conflicts, including the conflict between Russia and Ukraine, conflicts in the Middle East and heightened tension in the Pacific region, have elevated global security concerns resulting in increased interest for our products and services as countries seek to improve their security posture. In addition, security assistance provided by NATO and its allies to Ukraine has increased demand to replenish NATO stockpiles, resulting in additional and potential future orders, including for the ramp-up in production capacity for certain products. We continue to expect additional orders over the next several years attributable to the global threat environment.

Economic Environment

Our business and financial performance is also affected by elevated levels of inflation and interest rates. Certain costs, including rising labor rates and supplier costs, have increased as a result of inflation, and have adversely affected our margins on certain programs. Due to the nature of our government and commercial aerospace businesses, and their respective customer and supplier contracts, we are not always able to offset cost increases by increasing our contract value or pricing. This can affect our ability to acquire equipment and constrain our customers’ purchasing power, decrease orders for our products and services, and impact the ability of our customers to make payments and of our suppliers to perform. Moreover, volatility in interest rates and financial markets can lead to economic uncertainty, an economic downturn or recession and create an impact on the demand for our products and services as well as our supply chain.

Development of the Electric Air Mobility Market

Our 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. We 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. 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.

Key Components of Results of Operations

Revenue

Revenue consists primarily of product sales, fees for consulting services, licensing revenue, warranty sales, and after-sales services. A majority of our revenue is derived from the Drones segment. To date, our Electric Air Mobility segment has not generated material revenue.

Cost of Revenue

Cost of revenue includes direct labor (including salary, benefits and taxes), material costs and indirect production costs. Indirect production costs include indirect labor, purchasing, quality and manufacturing leadership, consumables, freight, charges for inventory reserves and amortization of intangible assets. We expect our cost of revenue to fluctuate based on a number of factors including, among others, availability and ability to obtain suitable aircraft, availability and cost of raw materials, such as lithium, and fluctuations in the labor market, in particular with respect to individuals who are highly skilled and specialized, such as pilots, and foreign currency exchange rates.

Operating Expenses

Research and Development

Research and development (“R&D”) expenses consist primarily of personnel expenses, including salaries, benefits, costs of consulting, equipment and materials, direct allocable overhead costs, including staff development cost, travel costs and technology costs, and amortization of intangible assets. We expect our R&D expenses to increase as we continue to invest in our infrastructure and technology and seek to develop new products and services.

Sales and Marketing

Sales and marketing expenses include salary, benefits and taxes, commissions, travel, costs of leased airplanes, advertising, trade shows and amortization of intangible assets. We expect our sales and marketing expenses to increase as we seek to build out our capabilities in these areas to acquire new customers.

General and Administrative

General and administrative expenses include costs of executive leadership, corporate governance, consulting fees, accounting and finance operations, travel, and support functions, including human resources and information technology. We expect our general and administrative expenses to increase as we incur additional costs associated with being a public company and certain terms of our consulting and incentive agreements become effective.

Other Income (Expense)

Interest Income (Expense), Net

Interest income (expense), net consists primarily of the interest expense from borrowings, net of interest income earned on cash deposits.

Gain on Debt Extinguishment, Net

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

Other Income (Expense), Net

Other 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 obligation.

Income Tax Expense

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

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements prepared and presented in accordance with GAAP, we use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin, as described below, to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes.

We define (1) EBITDA as net (loss) income before interest (income) expense, income tax expense, and depreciation and amortization, (2) Adjusted EBITDA as net (loss) income before interest (income) expense, income tax expense, depreciation and amortization, gain on extinguishment of debt, stock-based compensation, strategic workforce transition costs, contingent consideration fair value adjustments, warrant fair value adjustment, and IPO contingencies, 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 providing 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.

These non-GAAP financial measures should not be considered as alternatives to performance measures derived in accordance with GAAP. Our presentation of these non-GAAP financial measures should not be construed to imply that our future results will be unaffected by items that are excluded from these metrics. In addition, our definitions of these non-GAAP financial measures may be different from similarly titled non-GAAP measures used by other companies. These non-GAAP financial measures have limitations as an analytical tool, and you should not consider any of these non-GAAP financial measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that our non-GAAP financial measures:

• do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
• exclude depreciation and amortization expense, and although these are non-cash expenses, the assets being depreciated may have to be replaced in the future, increasing our cash requirements; and
• do not reflect provision for or benefit from income taxes that reduces cash available to us.

Because of these limitations, we consider, and you should consider, the non-GAAP financial measures alongside other financial performance measures, including net (loss) income and our other GAAP results. A reconciliation of EBITDA and Adjusted EBITDA to net (loss) income, and Adjusted EBITDA Margin to net (loss) income margin, the most directly comparable financial measures stated in accordance with GAAP, is provided below. Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measure to their most directly comparable GAAP financial measure.

(in thousands, except percentages)

1 Strategic workforce transition costs consist of severance and other direct employee-related costs incurred in connection with the Company’s strategic workforce realignment and organization optimization initiatives. These costs are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

2 IPO contingencies are made up of $1.0 million related to Kipps, $0.8 million related to the legal settlement, $0.5 million legal accrual, $0.2 million for NGA, $0.3 million bonus, $0.6 million Aspen contingent debt, $0.1 million cash portion of the Aspen carve-out, net of a $1.4 million gain on deferred compensation.

Results of Operations

Three and Six Months Ended June 30, 2026 and 2025

The following table shows our consolidated financial results for the three and six months ended June 30, 2026 and 2025:

Revenue

For the three months ended June 30, 2026 compared to the same period in 2025, revenue increased by $18.6 million, driven by a $19.0 million increase in the Drones segment, partially offset by a $0.3 million decrease in the Training segment and a $0.1 million decrease in the Avionics segment.

For the six months ended June 30, 2026 compared to the same period in 2025, revenue increased by $15.7 million, driven by a $17.1 million increase in the Drones segment, partially offset by a $0.7 million decrease in the Training segment and a $0.6 million decrease in the Avionics segment.

For both comparative periods, the increase in the Drones segment was primarily attributable to higher drone sales. The decrease in the Training segment primarily reflects lower task orders. The decrease in the Avionics segment primarily reflects lower demand and temporary disruption associated with facility relocation that occurred during the first quarter of 2026.

Cost of Revenue

For the three months ended June 30, 2026 compared to the same period in 2025, cost of revenue increased by $6.0 million, primarily due to an increase of $6.0 million within the Drones segment driven by higher drone sales. Gross margin was 64.1% during the three months ended June 30, 2026 compared to 61.2% during the same period in 2025 commensurate with higher sales volume. For the six months ended June 30, 2026 compared to the same period in 2025, cost of revenue increased by $7.7 million, primarily due to an increase of $7.9 million and $0.1 million within the Drones and Avionics segments, respectively, partially offset by a $0.4 million decrease in the Training segment commensurate with higher sales volume.

Gross margin was 57.7% during the six months ended June 30, 2026 compared to 60.4% during the same period in 2025. The decrease in gross margin was primarily driven by a 4.2% decrease in the Drones segment, reflecting the impact of a less favorable sales mix during the first quarter of 2026, partially offset by improved margins in the second quarter as drone product deliveries increased. Gross margin in the Avionics segment decreased by 15.6%, primarily reflecting lower customer demand and pricing concessions to support sales. Gross margin in the Training segment decreased by 10.9%, primarily reflecting lower sales.

Operating Expenses

Research and Development

For the three months ended June 30, 2026 compared to the same period in 2025, R&D expense increased by $3.5 million primarily due to a $2.3 million increase in the Drones segment, a $0.7 million increase in the Electric Air Mobility segment, and a $0.4 million increase in the Avionics segment.

For the six months ended June 30, 2026 compared to the same period in 2025, R&D expense increased by $6.5 million primarily due to a $4.6 million increase in the Drones segment, a $1.0 million increase in the Electric Air Mobility segment, and a $0.8 million increase in the Avionics segment.

For both comparative periods, 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 Electric Air Mobility segment was primarily due to higher personnel costs supporting development programs, while the increase in the Avionics segment reflects targeted investments within the platform.

Sales and Marketing

For the three months ended June 30, 2026 compared to the same period in 2025, sales and marketing expense increased by $0.6 million, primarily due to higher personnel costs, higher facility costs driven by repair and maintenance activities, and increased marketing and tradeshow expenses. For the six months ended June 30, 2026 compared to the same period in 2025, sales and marketing expense increased by $1.1 million, primarily due to higher personnel costs, higher facility costs driven by repair and maintenance activities, and increased marketing and tradeshow expenses.

General and Administrative

For the three months ended June 30, 2026 compared to the same period in 2025, general and administrative expense decreased by $12.8 million, including a $9.5 million decrease in the Training segment and a $1.7 million decrease in the Avionics segment, partially offset by a $2.6 million increase in the Drones segment and a $0.4 million increase in the Electric Air Mobility segment. The decreases in the Training and Avionics segments were primarily attributable to lower stock-based compensation that vested with the IPO, while the increases in the Drones and Electric Air Mobility segments were primarily due to higher stock-based compensation for drones, and higher personnel and operating costs for both. The remaining change was primarily driven by a $4.5 million decrease in corporate expenses, including decreases in stock-based compensation, IPO-related expenses, and professional fees, partially offset by increases in compensation expense, insurance and lease expense.

For the six months ended June 30, 2026 compared to the same period in 2025, general and administrative expense decreased by $6.8 million, primarily reflects lower expenses across our operating segments, including a $9.2 million decrease in the Training segment and a $1.4 million decrease in the Avionics segment, partially offset by a $4.4 million increase in the Drones segment, and a $0.5 million increase in the Electric Air Mobility segment. The decreases in the Training and Avionics segments were primarily attributable to lower stock-based compensation that vested with the IPO, while the increase in the Drones and Electric Air Mobility segments were primarily due to higher stock-based compensation for drones, and higher personnel and operating costs for both. The remaining change is primarily driven by a $1.1 million decrease in corporate expenses, including decreases of $5.6 million in stock-based compensation, $2.7 million in IPO-related expenses and $1.3 million in professional fees, partially offset by increases in compensation expense of $6.5 million and $2.0 million in other expenses.

Other Income

Interest Income (Expense), Net

For the three months ended June 30, 2026, net interest income was $0.2 million, compared to net interest expense of $8.0 million for the three months ended June 30, 2025. For the six months ended June 30, 2026, net interest income was $0.6 million, compared to net interest expense of $9.3 million for the six months ended June 30, 2025. The 2025 interest was primarily attributable to the interest paid in shares on the investor notes which totaled $6.7 million and additional interest paid on borrowings with Libertas Funding, LLC (“Libertas”) and WebBank.

Gain on extinguishment of debt, net

For the three and six months ended June 30, 2025, gain on debt extinguishment, net, was $15.6 million, primarily resulting from a $13.1 million gain on the partial settlement in equity of the Aspen bridge notes and a $5.7 million gain on the settlement of certain investor notes at fair value, partially offset by losses on debt extinguishment of $3.2 million related to Libertas and WebBank loans. No gain or loss on debt extinguishment was recognized during the three and six months ended June 30, 2026.

Other Income (Expense), Net

For the three months ended June 30, 2026, other income, net was $0.2 million, compared to other income, net of $20.1 million for the three months ended June 30, 2025. Other income for the 2025 period was primarily attributable to $17.5 million of income from fair value adjustments to contingent consideration that was resolved in connection with the IPO and $1.8 million of income from a fair value adjustment to the Libertas warrants, which were remeasured prior to becoming equity-classified upon the closing of the IPO. These amounts were partially offset by $0.6 million of expense related to the Aspen contingent debt, an obligation arising from the acquisition of Aspen Avionics that became payable in connection with the IPO.

For the six months ended June 30, 2026, other expense, net was $0.1 million, compared to other income, net of $22.7 million for the six months ended June 30, 2025, primarily attributable to $20.3 million of income from fair value adjustments to contingent consideration and $1.8 million of income from a fair value adjustment to the Libertas warrants, partially offset by $0.6 million of expense related to the Aspen contingent debt, as discussed above.

Income Tax Expense

For the three months ended June 30, 2026 and 2025, income tax expense was $4.1 million and $2.1 million, respectively. For the six months ended June 30, 2026 and 2025, income tax expense was $2.4 million and $2.3 million, respectively. Income tax expense for both periods was primarily attributable to positive pre-tax income generated by Sky-Watch.

Liquidity and Capital Resources

As of June 30, 2026, we had cash and restricted cash of $26.0 million, of which $0.2 million was either restricted or was designated exclusively for Sky-Watch operations. Working capital was $61.5 million. In July 2026, we collected $43.2 million from the outstanding receivables as of June 30, 2026 strengthening our liquidity position.

Based 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.

Dangroup Incentive Agreement

Edvard 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. In June 2026, the Dangroup Incentive Agreement was further amended. In connection with the June 2026 amendment, the Company also agreed to pay Dangroup DKK 1.3 million, or $0.2 million with a foreign exchange rate as of June 30, 2026, on or before December 15, 2026. The incentive bonus related to fiscal year 2025 of $6.1 million was paid on June 10, 2026. During the three months ended June 30, 2026 and 2025, the Company recorded $2.6 million and $1.8 million, respectively, and $3.1 million and $2.3 million for the six months ended June 30, 2026 and 2025, respectively, of expenses within general and administrative expense related to the agreement.

Cash Flows

The following summarizes our cash flows for the periods indicated:

(In Thousands)

Net Cash Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 2026 was $48.7 million, primarily due to a $17.4 million net loss, a $34.9 million increase in accounts receivable, a $6.5 million decrease in related party payables, and a $3.3 million increase in inventory. These uses were partially offset by non-cash expenses, including $6.8 million of depreciation and amortization and $2.6 million of stock-based compensation, as well as working capital changes, including a $2.9 million increase in deferred revenue and a $0.7 million decrease in prepaid expenses and other assets.

Net cash used in operating activities for the six months ended June 30, 2025 was $30.8 million, primarily due to working capital changes, including a $12.6 million increase in accounts receivable and a $0.6 million increase in inventory, a $9.4 million decrease in accounts payable, accrued expenses and other long-term liabilities, and a $7.2 million decrease in deferred revenue. Operating cash flows were also impacted by non-cash gains, including a $20.3 million change in the fair value of contingent consideration, a $15.6 million gain on debt extinguishment, a $1.8 million change in the fair value of warrant liability, and a $0.9 million gain on IPO transactions. These uses were partially offset by $3.9 million of net income and non-cash expenses, including $18.8 million of stock-based compensation, $6.7 million of non-cash investor note interest, $6.2 million of depreciation and amortization, and $1.1 million of non-cash interest.

Net Cash Used in Investing Activities

Cash of $4.5 million and $1.1 million was used in investing activities during the six months ended June 30, 2026 and 2025, respectively, to purchase property and equipment and intangible assets.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2026 was $4.0 million, primarily due to a $5.5 million increase in lines of credit related to Sky-Watch’s overdraft credit facility, partially offset by $1.3 million of repayments on third-party borrowings and $0.2 million of repayments on related party borrowings. Net cash provided by financing activities during the six months ended June 30, 2025 was $49.6 million primarily due to $61.5 million of proceeds from the IPO net of issuance costs, $8.5 million of proceeds from the Libertas and WebBank loans that were partially offset by $14.8 million of debt repayments on borrowings and related borrowings, $3.3 million of contingent consideration payments, and $2.2 million in payments due to seller.

Critical Accounting Policies and Estimates

Our 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. Management 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 six months ended June 30, 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, 2025.

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.

As 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.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and Chief Financial Officer, with assistance from other members of management, have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2026, and based on their evaluation, have concluded that our disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting, described below.

Background and Remediation of Material Weaknesses

In connection with the preparation of our consolidated financial statements for the years ended December 31, 2025 and 2024, material weaknesses were identified in the design and operating effectiveness of our internal control over financial reporting. In 2024, we identified material weaknesses due to ineffective information and communication controls, resulting in lack of timely identification and accounting for certain key debt and other agreements. Since fiscal year 2023, there have been misstatements that, individually and in the aggregate, were material to the consolidated financial statements that were identified due to deficiencies related to technical accounting. More specifically, the review controls over the transactions that gave rise to these misstatements lacked sufficient precision and the Company lacked a sufficient complement of personnel with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. Due to the delays we experienced in securing funding during 2024 and 2025, we were not able to hire and train sufficient staff to remediate the previously identified material weaknesses in our internal control over financial reporting. As such, these material weaknesses were not remediated and continued to be present as of June 30, 2026.

We have initiated, and continue to implement, measures intended to remediate the material weaknesses described above and to strengthen our internal control over financial reporting. These measures include:

(i) hiring additional experienced accounting and SEC reporting personnel at the corporate and subsidiary levels and enhancing segregation of duties; (ii) engaging an independent internal auditor and establishing an internal audit plan focused on improving the overall financial reporting control environment, including revenue recognition, complex financing arrangements, and acquisition accounting, with periodic reporting to the Audit Committee; (iii) implementing formal contract-review controls including documented technical accounting reviews for new or amended agreements; (iv) standardizing and documenting our monthly and quarterly close processes, including review and approval controls, checklists, and enhanced management review controls over significant estimates and judgments; and (v) deploying certain technology solutions, including a cloud-based planning and reporting system to reduce manual processes and improve data integrity and transparency.

While we believe these actions represent important steps toward remediation, the material weaknesses will not be considered remediated until the applicable controls are designed, implemented, and operate effectively for a sufficient period of time and management has concluded, through testing, that they are operating effectively. We can provide no assurance that the measures described above will fully remediate the identified material weaknesses. We also may incur significant costs to execute various aspects of our remediation plan.

Changes in Internal Control over Financial Reporting

Except for the material weakness remediation efforts described above, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some people, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our business, financial condition and operating results are affected by a number of factors, whether currently known or unknown, including risks specific to us or the aerospace and defense industry as well as risks that affect businesses in general. In addition to the information set forth in this Quarterly Report on Form 10-Q, you should consider carefully the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, filed with the SEC on March 31, 2026. The risks and uncertainties disclosed in such Annual Report could materially adversely affect our business, financial condition, cash flows or results of operations and thus our stock price. During the second quarter of 2026, there were no material changes to our previously disclosed risk factors.

These risk factors may be important to understanding other statements in this Quarterly Report and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report. Because of such risk factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.