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 August 6, 2026 were approximately $6.9 million, representing firm fixed price contracts awarded in the first and second quarters of 2026 that are expected to be shipped and primarily invoiced in the third quarter of 2026.

Separately, our total validated pipeline as of August 6, 2026 was $206.1 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. Backlog reflects awards already executed, whereas pipeline reflects identified and qualified opportunities that have not yet resulted in awards. We can give no assurance as to whether, when, or in what amount pipeline opportunities will convert into backlog or revenue.

Federal Funding Environment

A substantial majority of our revenue is derived from U.S. federal law enforcement and homeland security customers. During 2025, uncertainty surrounding federal budget priorities and the pace of government spending, including federal initiatives to reform government processes and reduce expenditures contributed to variability in the timing of government awards and procurement activity, which affected our government business. More recently, we have observed an improving federal funding environment for the mission areas our platform supports, including border security and public safety, which we believe is reflected in the growth and stage progression of our validated pipeline. The timing and amount of government awards remain subject to factors outside our control, including appropriations, shifting agency priorities and procurement cycles, and we can provide no assurance regarding the conversion of any particular opportunity.

Strategic Initiatives

We are pursuing a deliberate expansion of our commercial business to complement our established federal law enforcement and homeland security customer base. While a substantial majority of our revenue is currently derived from government customers, we believe our edge AI and data management platform is directly applicable to commercial organizations with large-scale sensor, security and data-management requirements, and we are investing to broaden our presence across commercial verticals. The strategic initiatives described below are central to this expansion.

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Agentic AI (Ask Airship)

We are developing Ask Airship, an agentic AI capability designed to allow users to query, analyze and act on structured data across our platform using natural language, which we intend to offer as a standalone product complementary to our Outpost AI, Acropolis, Airship Command and Fortress Server offerings. We intend to make Ask Airship available on a software-as-a-service (subscription) basis as well as on a pay-per-use, consumption-based basis. For deployments in federal and other security-sensitive environments, we expect on-premises inference to rely on Western open-weight models to satisfy applicable procurement and model-origin requirements.

Robotics

We are extending our edge AI and data management platform to ingest, structure and act on data from autonomous and robotic sensor platforms, with a particular focus on commercial customers as well as government customers, consistent with our broader commercial expansion. We are evaluating commercial models for these capabilities, including subscription and as-a-service arrangements. We can give no assurance regarding the timing, cost, market acceptance or financial contribution of this initiative, which is subject to development, integration, supply-chain and regulatory risks.

Overview

We are an AI-driven data management platform that solves complex data challenges for large institutions operating in dynamic and mission-critical environments characterized by rapidly increasing volumes of data ingested from a rapidly growing number of data sources. We address these challenges by structuring "dark" or unstructured data at the edge, the location at which the data is generated and collected using purpose-built AI models, enabling real-time decision-making rather than transmitting raw data to a central location for processing.

We specialize in ingesting metadata from edge-based sensors used by government and law enforcement agencies worldwide, including video, audio, telemetry, acoustic, seismic and autonomous devices, as well as by large commercial organizations with similar requirements. Our trained AI models detect and extract identifying characteristics of objects within a video frame (for example, a vehicle's license plate characters and its make, model and color), a process we refer to as "structuring" the data, and allow customers to act on that data both in real time and through historical search.

Our primary offerings include Outpost AI (edge structuring and analysis), Acropolis (enterprise management software backbone, deployable on-premises or in cloud/multi-cloud architectures), Airship Command (visualization across workstation, web and mobile) and Fortress Server (our on-premises data center server and storage platform). These product offerings allow customers to manage their data across the full data lifecycle through a secure, permission-based, single-pane-of-glass architecture.

Our typical customer engagement is a multi-year agreement that includes our core offerings together with professional services, technical support and software maintenance, which we expect to result in predictable, long-term recurring revenue. From inception until the Merger in December 2023, we operated as a 100% employee-owned, bootstrapped company with no outside investment. As a U.S.-based company, we operate at the intersection of public safety and AI, in which we address a combined market we estimate at more than $70 billion in 2026 and growing, spanning edge AI hardware and software (approximately $30 billion, according to Grand View Research, 2026, service and professional robotics, including robotics-as-a-service (approximately $31 billion according to Fortune Business Insights, 2026), and agentic AI (approximately $10 billion according to multiple industry analysts, 2026).

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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 12- Fair Value Measurements for more information.

		Liability as of				Liability as of
		June 30, 2026				December 31, 2025
Earnout liability		$	3,540,252			$	2,620,933
Warrant liability (Public Warrants)			12,270,205				12,916,006
Warrant liability (Private Warrants)			391,400				412,000
Total liabilities measured at fair value		$	16,201,857			$	15,948,939
Other income related to instruments recorded at fair value during the three months ended June 30, 2026 and 2025		$	(1,026,133	)		$	(21,795,769	)
Other income related to instruments recorded at fair value during the six months ended June 30, 2026 and 2025		$	(252,918	)		$	3,549,019

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 June 30, 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.

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Results of Operations

The following table sets forth key components of our results of operations during the three months ended June 30, 2026 and 2025.

(dollars in thousands)

		Three Months Ended,
		2026				2025				$ Variance				% Variance
Net revenues		$	4,124			$	2,147			$	1,977				92.1	%
Cost of net revenues			1,026				614				(412	)			-67.1	%
Gross profit			3,098				1,533				1,565				102.1	%
Research and development expenses			854				741				(113	)			-15.2	%
Selling, general and administrative expenses			3,735				2,814				(921	)			-32.7	%
Total operating expenses			4,589				3,555				(1,034	)			-29.1	%
Operating loss			(1,491	)			(2,022	)			531				26.3	%
Other income (expense):
(Loss) from change in fair value of earnout liability			(193	)			(7,302	)			7,109				97.4	%
(Loss) in fair value of warrant liability			(833	)			(14,494	)			13,661				94.3	%
Interest income, net			110				61				49				80.3	%
Total other expense, net			(916	)			(21,735	)			20,819				95.8	%
(Loss) before provision for income taxes			(2,407	)			(23,757	)			21,350				89.9	%
Provision for income taxes			-				-				-				-
Net (loss)		$	(2,407	)		$	(23,757	)		$	21,350				89.9	%

Net Revenues - Net revenues for the three months ended June 30, 2026 increased $1,977,000 to $4,124,000 as compared to $2,147,000 for the three months ended June 30, 2025. The increase was due to increased commercial orders, which more than offset variability in the timing of federal awards during the period. Consistent with the concentrated, enterprise nature of our customer base, two customers represented approximately 84% of revenue for the three months ended June 30, 2026. Backlog as of June 30, 2026 was approximately $6.9 million, representing firm fixed price contracts awarded in the first and second quarters of 2026 that are expected to be shipped and primarily invoiced in the third quarter of 2026.

Cost of Net Revenues - Cost of net revenues primarily consists of product costs and post customer support. For the three months ended June 30, 2026, cost of sales increased $412,000 to $1,026,000 as compared to $614,000 for the three months ended June 30, 2025. The increase was due to increased sales and reflects product mix with increased higher margin commercial sales during the three months ended June 30, 2026, offset by raw material cost increases.

Research and Development Expenses - Research and development expenses for the three months ended June 30, 2026 increased $113,000 to $854,000 as compared to $741,000 for the three months ended June 30, 2025. The increase was due to increased expenses for product development in the United States and Taiwan.

Selling, General and Administrative Expenses - Selling, general and administrative expenses for the three months ended June 30, 2026 increased $921,000 to $3,735,000 as compared to $2,814,000 for the three months ended June 30, 2025. The increase is primarily due to an increase in stock-based compensation expense of $579,000 and other personnel costs.

Other (Expense) - Other expense for the three months ended June 30, 2026 was $916,000 as compared to other expense for the three months ended June 30, 2025 was $21,735,000. Other expense for the three months ended June 30, 2026 consisted of (i) loss from change in fair value of earnout liability of $193,000; (ii) loss from change in fair value of warrant liability of $833,000; and offset by (iii) interest income of $110,000. The loss from change in fair value of earnout liability resulted from an increase in the our share price. The expense from change in fair value of warrant liability was primarily the result of an increase in our stock price.

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Other expense for the three months ended June 30, 2025 was $21,735,000 as compared to other income of $17,486,000 for the three months ended June 30, 2024. Other expense for the three months ended June 30, 2025 consisted of (i) loss from change in fair value of earnout liability of $7,302,000; (ii) loss from change in fair value of warrant liability of $14,494,000; and (iii) other income of $61,000. The loss from change in fair value of various financial instruments was primarily the result of an increase in our stock price.

Net (Loss)- Net loss for the three months ended June 30, 2026 was $2,407,000 as compared to net (loss) of $23,757,000 for the three months ended June 30, 2025. The net loss primarily related to increases in selling, general and administrative and research and development expenses.

Net loss for the three months ended June 30, 2025 was $23,757,000 as compared to net income of $18,462,000 for the three months ended June 30, 2024. The net loss primarily related to noncash expenses of $22,264,000. Noncash items included (i) loss from change in warrant liability of $14,494,000; (ii) loss from change in earnout liability of $7,301,000; (iii) stock based compensation of $372,000; and (iv) net amortization of operating lease right of use asset of $97,000.

The following table sets forth key components of our results of operations during the six months ended June 30, 2026 and 2025.

(dollars in thousands)

		Six Months Ended,
		2026				2025				$ Variance				% Variance
Net revenues		$	10,477			$	7,650			$	2,827				37.0	%
Cost of net revenues			4,213				3,882				(331	)			-8.5	%
Gross profit			6,264				3,768				2,496				66.2	%
Research and development expenses			1,698				1,460				(238	)			-16.3	%
Selling, general and administrative expenses			7,638				6,044				(1,594	)			-26.4	%
Total operating expenses			9,336				7,504				(1,832	)			-24.4	%
Operating loss			(3,072	)			(3,736	)			664				17.8	%
Other income (expense):
(Loss) gain from change in fair value of earnout liability			(919	)			2,522				(3,441	)			-136.4	%
Gain from change in fair value of warrant liability			666				1,027				(361	)			-35.2	%
Interest income, net			198				138				60				43.5	%
Total other (expense) income, net			(55	)			3,687				(3,742	)			-101.5	%
(Loss) before provision for income taxes			(3,127	)			(49	)			(3,078	)			-6281.6	%
Provision for income taxes			-				-				-				-
Net (loss)		$	(3,127	)		$	(49	)		$	(3,078	)			-6281.6	%

Net Revenues - Net revenues for the six months ended June 30, 2026 increased $2,827,000 to $10,477,000 as compared to $7,650,000 for the six months ended June 30, 2025. The increase was due to increased commercial orders, which more than offset variability in the timing of federal awards during the period. Consistent with the concentrated, enterprise nature of our customer base, four customers represented approximately 89% of revenue for the three months ended June 30, 2026. Backlog as of June 30, 2026 was approximately $6.9 million, representing firm fixed price contracts awarded in the first and second quarters of 2026 that are expected to be shipped and primarily invoiced in the third quarter of 2026.

Cost of Net Revenues - Cost of net revenues primarily consists of product costs and post customer support. For the six months ended June 30, 2026, cost of sales increased $331,000 to $4,213,000 as compared to $3,882,000 for the six months ended June 30, 2025. The increase was due to increased sales and reflects product mix with increased higher margin commercial sales during the six months ended June 30, 2026, offset by raw material cost increases.

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Research and Development Expenses - Research and development expenses for the six months ended June 30, 2026 increased $238,000 to $1,698,000 as compared to $1,460,000 for the six months ended June 30, 2025. The increase was due to increased expenses for product development in the United States and Taiwan.

Selling, General and Administrative Expenses - Selling, general and administrative expenses for the six months ended June 30, 2026 increased $1,594,000 to $7,638,000 as compared to $6,044,000 for the six months ended June 30, 2025. The increase is primarily due to an increase in stock-based compensation expense of $816,000 and other personnel costs.

Other (Expense)Income - Other expense for the six months ended June 30, 2026 was $55,000 as compared to other income for the six months ended June 30, 2025 was $3,687,000. Other expense for the six months ended June 30, 2026 consisted of (i) loss from change in fair value of earnout liability of $919,000; offset by (ii) gain from change in fair value of warrant liability of $666,000; and (iii) interest income of $198,000. The loss from change in fair value of earnout liability resulted from the increase in the volatility factor to 76.8%. The reduction in gain from change in fair value of warrant liability was primarily the result of a decrease in our stock price as compared to the change in stock price during the six months ended June 30, 2025.

Other income for the six months ended June 30, 2025 was $3,687,000 as compared to other expense of $13,076,000 for the six months ended June 30, 2024. Other income for the six months ended June 30, 2025 consisted of (i) gain from change in fair value of earnout liability of $2,522,000; (ii) gain from change in fair value of warrant liability of $1,027,000; and (iii) other income of $138,000. The gain from change in fair value of various financial instruments was primarily the result of an increase in our stock price.

Net (Loss) - Net loss for the six months ended June 30, 2026 was $3,127,000 as compared to net loss of $49,000 for the six months ended June 30, 2025. The net loss primarily related to increases in selling, general and administrative and research and development expenses.

Net loss for the six months ended June 30, 2025 was $49,000. The net loss primarily related to an operating loss of $3,700,000 offset by noncash items of $2,569,000. Noncash items included (i) gain from change in warrant liability of $1,027,000; (ii) gain from change in earnout liability of 2,522,000; and offset by (iii) stock based compensation of $800,000; and (iv) net amortization of operating lease right of use asset of $180,000.

Liquidity and Capital Resources as of June 30, 2026 and 2025

Liquidity is our ability to generate funds to support our 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 $48.7 million as of June 30, 2026. As of June 30, 2026, we had cash and cash equivalents of $12.4 million and no outstanding debt. Based on our current available cash and operations, we have concluded there is no substantial doubt about our ability to continue as a going concern for at least twelve months from the issuance of these financial statements.

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 $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 six months ended June 30, 2026 was $579,000. This amount was primarily related to (i) net loss of 3,127,000; offset by (ii) noncash items of $2,077,000; and (iii) operating assets and liabilities changes of $1,629,000 (including a $314,000 increase in deferred revenues). Noncash items included (iv) loss from change in earnout liability of $919,000; (v) stock based compensation of $1,617,000; (vi) net amortization of operating lease right of use asset of $207,000; and offset by gain from change in warrant liability of $666,000.

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Net cash used in operating activities for the six months ended June 30, 2025 was $3,919,000. This amount was primarily related to (i) net loss of $49,000; (ii) net working capital reductions of $1,301,000 (including a $606,000 reduction in deferred revenues); and offset by (iii) noncash items of $2,569,000. Noncash items included (iv) gain from change in warrant liability of $1,027,000; (v) gain from change in earnout liability of 2,522,000; and offset by (vi) stock based compensation of $800,000; and (vii) net amortization of operating lease right of use asset of $180,000.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2026 was $56,000 and consisted of net proceeds from stock option and warrant exercises.

Net cash used in financing activities for the six months ended June 30, 2025 was $1,182,000 and consisted of (i) repayment of advances by founders of $1,300,000; and offset by (ii) net proceeds from exercise of warrants of $60,000; and (iii) proceeds from stock option exercises of $58,000.

Contractual Obligations and Commitments

						Less Than
Contractual Cash Obligations		Total				1 Year				1-3 Years
Operating lease cash payments		$	690,159			$	489,670			$	200,489

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. The option must be exercised by October 31, 2026. 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 $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 and six months ended June 30, 2026 have not materially changed to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2025.

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