```htmlQuality of Earnings Report: AIRO Group Holdings, Inc.

Quality of Earnings Report

AIRO Group Holdings, Inc. (NASDAQ: AIRO)

Date of Report: June 17, 2025

Executive Summary

This Quality of Earnings (QoE) report provides an analysis of AIRO Group Holdings, Inc. ("AIRO" or "the Company"), a technology-driven aerospace, defense, and neurorobotics company, following its Initial Public Offering (IPO) in May 2024. The IPO, which raised approximately $9 million gross ($7.5 million net), occurred in a challenging market environment, often described as launching "into the eye of the storm."

AIRO has demonstrated significant revenue growth, primarily fueled by acquisitions. However, the Company has incurred substantial operating and net losses in the past two fiscal years (2022-2023). Normalized EBITDA remained negative and worsened in 2023 compared to 2022, indicating increased cash burn despite revenue growth. Key normalization adjustments include goodwill impairment and various transaction-related costs.

The Company's business model is diversified across advanced avionics, air operations, training, and unmanned air systems. While these sectors offer growth potential, AIRO faces risks related to its ongoing losses, negative working capital, reliance on future funding, successful integration of acquisitions, technological development, and intense market competition. The recent IPO provided a critical infusion of capital, but the path to profitability and sustainable cash flow remains a key challenge.

This report highlights AIRO's financial performance, business model characteristics, growth trajectory, and associated risks. Further due diligence is recommended, particularly concerning the Company's strategy to achieve profitability, manage its cash burn rate, and navigate the competitive landscape in its various operating segments.

1. Company Overview

AIRO Group Holdings, Inc., formed in 2020, operates as a multi-faceted aerospace and defense company. It has grown through the acquisition of several established businesses and focuses on delivering a broad array of aerospace, defense solutions and services, and AI-enhanced neurorobotics. The Company operates through distinct brands and divisions including Aspen Avionics (advanced avionics), AIRO Drone and Sky-Watch (unmanned aerial systems and services), and Agile Defense (training and simulation services).

AIRO completed its IPO on May 15, 2024, listing on the Nasdaq Capital Market under the ticker "AIRO". The offering consisted of 1,800,000 shares of common stock at a price of $5.00 per share.

2. Data Analysis

2.1. Historical Financial Performance

The following table summarizes key financial data for AIRO Group Holdings, Inc. for the fiscal years ended December 31, 2023, and 2022, based on its S-1 Registration Statement. All figures are in thousands of U.S. dollars.

2.2. EBITDA and Normalized EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) provides a measure of operating profitability. Normalized EBITDA adjusts for non-recurring, non-operational, or one-time items to better reflect underlying sustainable earnings capacity.

<sup>(a)</sup> Interest expense component of "Other income (expense), net" as disclosed in S-1.
<sup>(b)</sup> From Consolidated Statements of Cash Flows in S-1.
<sup>(c)</sup> Identified from S-1 disclosures as non-recurring or transaction-specific items impacting SG&A or other operating expenses.

Key Observations:

• Reported revenues grew by 28.1% from 2022 to 2023.
• Gross profit margin slightly decreased from 32.1% in 2022 to 30.1% in 2023, potentially due to changes in revenue mix, increased costs, or pricing pressures.
• Operating expenses increased significantly in 2023, driven by higher R&D, SG&A, and a substantial goodwill impairment charge of $6.8 million.
• Net losses more than doubled in 2023 compared to 2022.
• EBITDA and Normalized EBITDA remained significantly negative in both periods, with Normalized EBITDA worsening from $(9.4) million in 2022 to $(11.9) million in 2023. This highlights increasing cash burn from core operations despite revenue growth and normalization adjustments.

2.3. Revenue Recognition

According to its S-1 filing, AIRO recognizes revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers." Revenue is recognized when control of promised goods or services is transferred to customers, in an amount reflecting the consideration the Company expects to receive. Specific policies vary by revenue stream:

• Product Revenue (Avionics, UAS): Recognized at a point in time, typically upon shipment or delivery and acceptance by the customer.
• Service Revenue (Air Operations, Training, Engineering Services): Recognized over time as services are performed or at a point in time upon completion and acceptance.
• Software Licenses: Can be recognized at a point in time (for perpetual licenses) or over time (for subscription-based or term licenses).

The diversity of revenue streams requires robust systems and processes for accurate revenue recognition. Deferred revenue on the balance sheet ($2.8 million as of Dec 31, 2023) indicates future obligations for services or products already paid for by customers.

2.4. Cost Structures and Margin Sustainability

AIRO's cost structure includes significant Cost of Revenue (69.9% of revenue in 2023), R&D expenses (25.2% of revenue in 2023), and SG&A expenses (110.2% of revenue in 2023).

• Cost of Revenue: Primarily includes costs of materials, labor, and manufacturing overhead for products, and direct costs associated with providing services. The slight increase in COGS as a percentage of revenue contributed to the decline in gross margin.
• R&D Expenses: Increased substantially in 2023, reflecting ongoing investment in new technologies and product development across its segments. While crucial for future growth, these investments currently pressure profitability.
• SG&A Expenses: Rose sharply in 2023. While some of this increase is attributed to one-time transaction and severance costs (adjusted in Normalized EBITDA), underlying SG&A also grew, likely due to business expansion, public company readiness costs, and integration of acquisitions.

Margin sustainability is a key concern. Gross margins are modest, and high operating expenses are leading to substantial losses. Achieving margin expansion and profitability will depend on scaling revenues significantly faster than costs, improving operational efficiencies, and realizing synergies from acquisitions.

2.5. Working Capital

As of December 31, 2023 (pre-IPO), AIRO had a negative working capital of $(5.5) million (Current Assets: $16.8M; Current Liabilities: $22.3M). Cash and cash equivalents were low at $1.5 million. This indicates liquidity constraints. The net proceeds of approximately $7.5 million from the May 2024 IPO are critical for funding operations and meeting short-term obligations. Continued negative cash flow from operations will necessitate further financing in the future.

3. Business Model Assessment

3.1. Core Revenue Streams and Cost Drivers

AIRO Group operates a diversified business model spanning several aerospace and defense sectors:

• Advanced Avionics (AA): Design, manufacturing, and sale of avionics systems for general aviation and potentially other aircraft. Revenue from product sales and related services.
• Air Operations (AO): Provision of manned and unmanned flight services, including surveillance, data collection, and critical missions. Revenue from service contracts. This includes AIRO Drone and Sky-Watch brands.
• Training (T): Development and delivery of aviation training solutions, including simulation technologies and services, primarily via its Agile Defense brand. Revenue from training programs and system sales/licenses.
• Unmanned Air Systems (UAS): Design, development, and manufacturing of unmanned aircraft and associated technologies. Revenue from UAS sales and support.

Key Cost Drivers:

• Personnel costs across R&D, manufacturing, service delivery, and G&A.
• Material and component costs for manufacturing avionics and UAS.
• R&D investment in new technologies and product enhancements.
• Sales and marketing expenses to expand market reach.
• Costs associated with integrating acquired businesses.
• Compliance and regulatory costs.

3.2. Scalability and Sustainability

Scalability: The scalability of AIRO's model depends on:

• Securing larger and longer-term contracts, particularly in defense and commercial UAS markets.
• Successfully commercializing R&D investments into market-leading products.
• Expanding manufacturing capacity and operational capabilities efficiently.
• Leveraging its diversified portfolio to offer integrated solutions.

Market demand in UAS, advanced avionics, and specialized training services is growing, offering scaling opportunities.

Sustainability: The current business model is not financially sustainable without external funding due to significant losses and cash burn. Long-term sustainability hinges on:

• Achieving profitability through revenue growth, improved gross margins, and operating expense control.
• Effectively managing cash flow and working capital.
• Successfully integrating past and future acquisitions to realize synergies.
• Maintaining access to capital markets or other funding sources until profitability is reached.

3.3. Key Operational Risks and Dependencies

• Financial Performance: History of losses and negative cash flows. Continued losses could impede access to capital and ability to operate.
• Integration Risk: AIRO has grown through acquisitions. Failure to effectively integrate acquired companies, technologies, and cultures can lead to operational inefficiencies and unrealized synergies.
• Market Competition: Operates in highly competitive markets with established players (large defense contractors, specialized tech firms) and agile new entrants.
• Technological Obsolescence: Rapid technological advancements require continuous R&D investment. Failure to innovate can lead to loss of market share.
• Regulatory Environment: Aviation, defense, and UAS operations are subject to stringent and evolving regulations (e.g., FAA). Compliance is costly, and changes can impact operations.
• Customer Concentration/Contract Dependency: Reliance on a limited number of key customers or contracts could pose a risk if those relationships are lost or scaled back. (Specifics on concentration not detailed here but common in industry).
• Supply Chain Risks: Disruptions in the supply of critical components can impact manufacturing and delivery schedules.
• Dependence on Key Personnel: Loss of key technical, managerial, or sales personnel could adversely affect the business.
• Economic Conditions: Defense budgets, commercial aviation health, and general economic conditions can impact demand for AIRO's products and services.

4. Growth Trajectory Evaluation

4.1. Historical Growth Rates and Drivers

AIRO reported revenue growth of 28.1% from $15.9 million in 2022 to $20.4 million in 2023. This growth is attributable to:

• Acquisitions: The Company's formation and expansion have been significantly driven by acquiring existing businesses with established revenue streams. The S-1 indicates the consolidation of several entities.
• Organic Growth within Acquired Units: Efforts to grow sales of existing products and services within the acquired entities post-acquisition.
• New Product/Service Introduction: Contributions from newly developed or enhanced offerings, although the impact relative to acquisitions is less clear from available data.

The growth in R&D spending suggests a focus on future organic growth through innovation.

4.2. Future Growth Potential

Future growth potential is linked to several factors:

• Market Expansion: Capitalizing on growing markets for UAS, AI-driven solutions, advanced avionics modernization, and specialized aerospace/defense training.
• Cross-Selling Synergies: Leveraging its diverse portfolio to offer bundled solutions to existing and new customers across its operating segments.
• Government and Defense Contracts: Securing larger contracts with U.S. and allied government/defense agencies.
• International Expansion: Expanding sales and operations in international markets for its products and services.
• Strategic Partnerships and Further Acquisitions: Potentially forming new alliances or undertaking further strategic acquisitions, subject to capital availability.

However, achieving this potential requires overcoming the current financial challenges and successfully executing its strategic plans. The recent IPO, while modest in size, provides some capital to pursue these growth initiatives.

4.3. Benchmarking Performance

Benchmarking AIRO against industry peers is challenging due to its diversified nature and current stage of development (post-IPO, still loss-making).

• Revenue Growth: A 28% revenue growth is respectable, but needs to be assessed against the growth rates of comparable small-cap aerospace & defense or specialized tech companies. Many high-growth tech companies also incur losses, but investors look for a clear path to profitability.
• Profitability Margins: AIRO's gross margins (around 30%) might be comparable to some hardware-centric aerospace businesses but are lower than many software or service-focused tech companies. Its negative operating and net margins are significantly below profitable peers.
• Valuation: Post-IPO valuation would need to be compared against peers based on revenue multiples (e.g., EV/Revenue), considering its growth rate versus profitability profile.

A detailed peer analysis would require identifying a specific set of comparable public companies and is beyond the scope of this initial QoE without further detailed market data.

5. Financial Trends Visualization

The chart above illustrates key financial metrics for AIRO Group Holdings, Inc. for FY 2022 and FY 2023.

6. Summary of Key Findings, Risks, and Areas for Further Due Diligence

6.1. Strengths

• Diversified Business Model: Operations across multiple segments (avionics, UAS, training, air ops) provide some resilience and cross-selling opportunities.
• Technology Focus: Emphasis on advanced technologies, including AI and neurorobotics, positions AIRO in potentially high-growth areas.
• Revenue Growth: Demonstrated ability to grow top-line revenue.
• Established Brands: Acquired entities like Aspen Avionics have existing market presence and brand recognition.
• Recent Capital Infusion: IPO proceeds provide needed short-term liquidity.

6.2. Risks and Red Flags

• Significant Operating Losses: Substantial and worsening net losses and negative Normalized EBITDA indicate high cash burn and an unsustainable financial model without continued funding.
• Negative Working Capital: Indicates potential short-term liquidity challenges despite IPO proceeds if cash burn is not controlled.
• Declining Gross Margin: Slight decrease in gross profit margin in 2023 is a concern.
• High Operating Expenses: R&D and SG&A costs are very high relative to revenue, pressuring profitability.
• Goodwill Impairment: A $6.8 million goodwill impairment in 2023 signals potential overpayment for past acquisitions or underperformance of acquired units.
• Reliance on External Financing: Given ongoing losses, the company will likely require additional financing in the future, which may not be available on favorable terms, or at all.
• Challenging IPO Market Context: The "eye of the storm" IPO implies a difficult capital market environment, potentially affecting future financing and valuation. The modest IPO raise ($9M gross) reflects this.
• Integration and Execution Risk: Successfully integrating acquired businesses and executing its growth strategy to achieve profitability are major hurdles.

6.3. Areas Requiring Further Due Diligence

• Path to Profitability: Detailed review of management's strategy and timeline to achieve positive net income and sustainable positive cash flow. Scrutinize underlying assumptions.
• Cash Burn Rate and Runway: Analysis of current cash burn rate post-IPO and projected runway with existing capital. Assess future funding needs and plans.
• Performance of Acquired Entities: Deeper dive into the individual performance and integration status of key acquired businesses. Understand reasons for goodwill impairment.
• Customer Contracts and Pipeline: Review of major customer contracts, revenue concentration, sales pipeline quality, and contract renewal rates.
• Competitive Positioning: In-depth analysis of competitive landscape and AIRO's differentiation in each of its operating segments.
• Management Team and Governance: Assessment of management team's experience, track record (especially in turning around or scaling similar businesses), and corporate governance practices post-IPO.
• Working Capital Management: Understand plans to improve working capital and manage supplier and customer terms.
• Impact of Q1 & Q2 2024 Performance: Once available, review financial results for periods post-December 31, 2023, to assess trends after the S-1 data cutoff and post-IPO.

Disclaimer: This Quality of Earnings Report has been prepared based on publicly available information as of the report date, primarily the AIRO Group Holdings, Inc. S-1 Registration Statement filed with the U.S. Securities and Exchange Commission. The analysis is for informational purposes only and should not be considered investment advice. While efforts have been made to ensure accuracy, no representation or warranty, express or implied, is made as to the accuracy or completeness of this information. A full Quality of Earnings analysis typically involves access to non-public company data and detailed discussions with management, which were not part of this assessment. Stakeholders should conduct their own comprehensive due diligence before making any investment decisions.

Citations & Sources

• AIRO Group Holdings, Inc. Form S-1 Registration Statement (File No. 333-272104), as amended and filed with the U.S. Securities and Exchange Commission. Specifically, prospectus dated May 15, 2024. (Available at: SEC EDGAR Database for AIRO Group Holdings, Inc. CIK: 0001925457)
• AIRO Group Holdings, Inc. Press Release: "AIRO Group Holdings Prices $9 Million Initial Public Offering" (May 15, 2024). (Typically found on company's investor relations website or newswires like GlobeNewswire, Business Wire). For example, a search for this title on financial news portals would yield the source.
• General news articles related to "AIRO Group IPO" for market context, e.g., from Reuters, Bloomberg, or other financial news outlets published around May 2024.

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