AIRO 10-K & 10-Q changes, risk factors and insider trading

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 firstsecond quarter of 2026, there were no material changes to our previously disclosed risk factors.

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 MarchJune 31,30, 2026.2026 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.

Our business is organized into four operating segments, each of which represents a critical growth vector in the aerospace and defense market: Drones, Avionics, Training, andDrones, Electric Air Mobility.Mobility, and Training. These four segments collectively target aan combinedestimated total addressable market estimated to beof over $315.4 $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.

We are dependent on a global supply chain and, in recent years, have experienced supply chain disruptions that resulted in delays and increased costs costs which adversely affected our performance. These disruptions impacted our ability to procure raw materials, microelectronics, and certain certain commodities on a timely basis and/or at expected prices,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 alongalongside 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,disruptions but anticipate that we and others in our industry will continue to face such challenges for the the foreseeable future. The supply chain disruptions discussed above did not materially impact our outlook, business goals, results of operations operations or capital resources during 2025 or the first threesix months of 2026.

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,pricing. inThis particular on our fixed-price contracts. Increasing material, component, and labor prices could subject us to losses in our fixed price contracts in the event of cost overruns. In addition, higher interest rates have increased the cost of borrowing and tightened the availability of capital. Among other things, these effects can affect our ability to acquire equipment and constrain our customers’ purchasing power andpower, decrease orders for our products and servicesservices, 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.

Revenue consists primarily of product sales, fees for consulting services, licensing revenue, warranty sales, and after saleafter-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.

Interest Expense,Income (Expense), Net

Interest expense,income (expense), net consists primarily of the interest expense from borrowings relating to third-party and related party notes,borrowings, net of interest income earned on cash deposits.

Income Tax Benefit (Expense)

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

We define (1) EBITDA as net (loss) income before interest (income) expense, income tax (benefit) expense, and depreciation and amortization, (2) Adjusted EBITDA as net (loss) income before interest (income) expense, income tax (benefit) expense, depreciation and amortization, gain on extinguishment of debt, stock-based compensation, andstrategic workforce transition costs, contingent consideration fair value adjustments, 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 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 providesproviding a useful measure for 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.

Because of these limitations, we consider, and you should consider, the non-GAAP financial measures alongside other financial performance measures, measures, including net income (loss) income and our other GAAP results. A reconciliation of EBITDA and Adjusted EBITDA to net income (loss), income, and Adjusted EBITDA Margin to net income (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.

Three and Six Months Ended MarchJune 31,30, 2026 and 2025

The following table shows our consolidated financial results for the three and six months ended MarchJune 31,30, 2026 and 2025:

For the three months ended MarchJune 31,30, 2026 compared to the same period in 2025, R&D expense increased by $3.0$3.5 million primarily due to to a $2.3 million increase in the Drones segment, a $0.5$0.7 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 segmentsegment, wasand primarilya due$0.4 tomillion higherincrease in personnelthe costsAvionics supporting development programs.segment.

For the three months ended MarchJune 31,30, 2026 compared to the same period in 2025, general and administrative expense increaseddecreased by $5.9$12.8 million, primarilyincluding drivena $9.5 million decrease in the Training segment and a $1.7 million decrease in the Avionics segment, partially offset 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$2.6 million increase in the Drones segment, a $0.3 million increase in the Avionics segment, a $0.2 million increase in the Training segment,segment and a $0.1$0.4 million increase in the Electric Air Mobility segment. The increase decreases in the Drones segmentTraining wasand Avionics segments were primarily dueattributable to higherlower equity-basedstock-based compensation,compensation personnel,that andvested operatingwith costs,the IPO, while the increases in the Avionics, Training,Drones and Electric Air Mobility segments were primarily attributabledue 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 costs.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.

Interest Expense,Income (Expense), Net

For the three months ended MarchJune 31,30, 2026, net interest income was $0.4$0.2 million, compared to net interest expense of $1.3$8.0 million for the three months ended MarchJune 31,30, 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 amountinterest includedwas bothprimarily cashattributable to the interest paid in shares on the investor notes which totaled $6.7 million and non-cashadditional interest expensepaid relatedon to loan agreementsborrowings with Libertas Funding, LLC (“Libertas”) and WebBank.

As of MarchJune 31,30, 2026, we had cash and restricted cash of $54.4$26.0 million, of which $0.2 million was either restricted or was designated exclusively for Sky-Watch operations,operations. and workingWorking capital was $61.5 million. In July 2026, we collected $43.2 million from the outstanding receivables as of $62.5June million.30, 2026 strengthening our liquidity position.

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 MarchJune 31,30, 2026 and 2025, the Company recorded $0.5$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 expenseexpenses within general and administrative expense related to the agreement.

Net cash used in operating activities for the threesix months ended MarchJune 31,30, 2026 was $17.4$48.7 million, primarily due to a $15.5$17.4 million net loss, loss a $34.9 million increase in accounts receivable, a $6.5 million decrease in related party payables, and a $11.1$3.3 million increase in inventory. These uses were partially offset by non-cash expenses, including $3.1$6.8 million of depreciation and and amortization and $1.5$2.6 million of stock-based compensation, as well as working capital changes, including a $4.1 million decrease in accounts receivable and a $5.1$2.9 million increase in deferred accounts payable, accrued expensesrevenue and other long-term liabilities, partially offset by a $2.1$0.7 million increasedecrease in prepaid expenses and other assets and a $2.1 million decrease in related party payables.assets.

Net cash used in operationsoperating activities for the threesix months ended MarchJune 31,30, 2025 totaledwas $9.8$30.8 million, and was primarily due to a net loss of $2.0 million and working capital adjustments, changes, including ana $12.6 million increase in prepaidaccounts expensesreceivable and othera assets of $5.8$0.6 million and an increase in inventory of $3.7 million, as well asinventory, a decrease in deferred revenue of $6.3 $9.4 million and a decrease in accounts payable, accrued expenses and other long-term liabilitiesliabilities, of $1.7 million, partially offset byand a $7.2 million decrease in accountsdeferred revenue. receivableOperating ofcash $8.2 million. Theseflows were partiallyalso offset impacted by non-cash adjustments totaling $1.2 million,gains, including depreciationa and amortization of $3.1 million,$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 considerationthe fair value of $2.7warrant million,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 interestexpenses, including $18.8 million of $0.6stock-based million,compensation, $6.7 million of non-cash investor note interest, $6.2 million of depreciation and stock-basedamortization, compensationand $1.1 million of $0.1non-cash million.interest.

Cash of $2.1$4.5 million and $0.3$1.1 million was used in investing activities during the threesix months ended MarchJune 31,30, 2026 and 2025, respectively, to to purchase property and equipment and intangible assets.

Net Cash (Used in) Provided by Financing Activities

Net cash usedprovided inby financing activities during the threesix months ended MarchJune 31,30, 2026 was $0.6$4.0 millionmillion, 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 third party borrowings and related party borrowings. Net cash provided by financing activities during the threesix months ended MarchJune 31,30, 2025 was $1.8$49.6 million primarily due to $3.5$61.5 million of proceeds from the IPO net of issuance costs, $8.5 million of proceeds from the Libertas loans and $0.2WebBank million of related party borrowings proceedsloans that were partially offset by $1.7$14.8 million of debt repayments includingon $1.1borrowings and related borrowings, $3.3 million toof Libertas,contingent $0.4consideration payments, and $2.2 million in payments due to WebBank and $0.2 million to First Citizens Community Bank.seller.

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 threesix months ended MarchJune 31,30, 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.