AIRO Group Holdings, Inc. (AIRO)

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.

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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.

26

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,

[Excerpt truncated for page length; source filing is linked above.]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this
discussion and analysis, including information with respect to our plans, objectives, goals, strategies, future events or performance,
financing needs, plans or intentions relating to markets, and business trends, 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 Annual Report on Form 10-K 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.

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:
Drones, Avionics, Training, and Electric Air Mobility. These four segments collectively target a combined total addressable market estimated
to be over $315.4 billion by 2030.

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.

62

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.

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 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. Naval Air Warfare Center, and USAF Air Combat
Command, and are a mandated recipient on a $5.7 billion 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. We also plan to
offer commercial pilot training and plan to expand our non-military capabilities in response to the global pilot shortage.

Electric Air Mobility.
The Electric Air Mobility segment, operated through our Jaunt brand, is developing dual-use electric and hybrid-electric compound rotorcraft
aircraft designed for cargo, government, and passenger applications. Our near-term focus is on a cargo-configured platform intended to
support middle-mile logistics, tactical resupply, emergency medical delivery, law enforcement, ISR, and other commercial and government
missions. Over time, we intend to develop a multi-role variant capable of supporting both cargo and passenger operations. 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.

Initial
Public Offering, Follow-on Offering and Repurchase

On
June 16, 2025, we completed our IPO of 6.9 million shares of our common stock, which
included an additional 0.9 million shares of common stock pursuant to the full exercise of the underwriters’ option to
purchase additional shares, at an initial public offering price of $10.00 per share (the “Closing”). Our common stock began trading on the Nasdaq
Global Market under the ticker symbol “AIRO” on June 13, 2025. The net proceeds from the IPO, after deducting
$10.7 million of underwriting discounts and commissions, and issuance costs paid were $58.3 million.

On
September 12, 2025, we completed our Follow-on Offering of 4.8 million shares of 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 from the Follow-on Offering, after deducting $6.8 million of underwriting
discounts and commissions were $82.6 million.

On
September 12, 2025, we 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 stockholders, including certain directors and
executive officers and their affiliates at an offering price of $17.39 per share. The proceeds to such stockholders were $19.4
million.

63

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. For the year ended December 31, 2025,
two customers accounted for 79% of our consolidated revenue, all of which related to Drone segment revenue. For the year ended December
31, 2024, two customers accounted for 72% of our revenue, all of which related to Drone segment revenue. No other customer directly or
indirectly accounted for more than 10% of our revenue for either period.

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 supply chain 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 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.

During
the quarter ended September 30, 2025, a key customer requested a configuration change to dual-band antennas on certain RQ-35
systems. During the fourth quarter of 2025, we qualified additional antenna suppliers and implemented dual-sourcing to reduce
component risk.

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.

64

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 co

[Excerpt truncated for page length; the complete text is on the linked full-MD&A page.]