| DESCRIPTION OF ORGANIZATION, BUSINESS OPERATIONS AND GOING CONCERN | NOTE
1. DESCRIPTION OF ORGANIZATION, BUSINESS OPERATIONS AND GOING CONCERN Kernel
Group Holdings, Inc. (the “Company”) is a blank check company incorporated as a Cayman Islands exempted company on November
10, 2020. The Company was incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization
or similar business combination with one or more businesses that the Company has not yet identified (“Business Combination”). As
of June 30, 2023, the Company had not commenced any operations. All activity from November 10, 2020 through June 30, 2023, relates to
the Company’s formation and the preparation of its initial public offering (“Initial Public Offering”), as described
below, and since the closing of the Initial Public Offering, the search for a target for the Business Combination. The Company will not
generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company will generate
non-operating income in the form of dividend income, interest income or gains on investments on the cash and investments held in a Trust
Account from the proceeds derived from the Initial Public Offering. The
Company’s sponsor was Kernel Capital Holdings, LLC, a Delaware limited liability company (the “Original Sponsor”).
The registration statement for the Company’s Initial Public Offering was declared effective on February 2, 2021. On February 5,
2021, the Company consummated its Initial Public Offering of 30,475,000 3,975,000 10.00 304.8 17.4 10.7 Simultaneously
with the closing of the Initial Public Offering, the Company consummated the sale of 8,750,000 1.00 8.8 On
December 28, 2022 (the “Effective Date”), the Company entered into a purchase agreement with the Original Sponsor, and VKSS
Capital, LLC, a Delaware corporation (the “New Sponsor” or “Sponsor”), pursuant to which the New Sponsor, or
an entity designated by the New Sponsor, will purchase from the Original Sponsor 7,618,750 0.0001 8,750,000 0.0001 1.00 2,000,000 Upon
the closing of the Initial Public Offering and the Private Placement, approximately $ 304.8 10.00 The
Company’s management has broad discretion with respect to the specific application of the net proceeds of its Initial Public Offering
and the sale of Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward
consummating a Business Combination. The Company’s initial Business Combination must be with one or more operating businesses or
assets with a fair market value equal to at least 80% of the net assets held in the Trust Account (excluding the deferred underwriting
commissions and taxes payable on the interest earned on the Trust Account) at the time the Company signs a definitive agreement in connection
with the initial Business Combination. However, the Company will only complete a Business Combination if the post-transaction company
owns or acquires 50% or more of the outstanding voting securities of the target business or otherwise acquires a controlling interest
in the target business sufficient for it not to be required to register as an investment company under the Investment Company Act KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS The
Company will provide its holders of the Public Shares (the “Public Shareholders”) with the opportunity to redeem all or a
portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a general meeting called to
approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek shareholder approval
of a Business Combination or conduct a tender offer will be made by the Company. The Public Shareholders will be entitled to redeem their
Public Shares for a pro rata portion of the amount then in the Trust Account (initially anticipated to be $ 10.00 5,000,001 Notwithstanding
the foregoing, the Company’s Amended and Restated Memorandum and Articles of Association provide that a Public Shareholder, together
with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group”
(as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted
from redeeming its shares with respect to more than an aggregate of 15 The
Company’s New Sponsor, officers and directors agreed not to propose an amendment to the Company’s Amended and Restated
Memorandum and Articles of Association (A) to modify the substance or timing of the Company’s
obligation to allow the redemption of its Public Shares in connection with a Business Combination or to redeem 100% of its Public
Shares If
the Company is unable to complete a Business Combination within the Combination Period, the Company will (i) cease all operations except
for the purpose of winding up; (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public
Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest
earned on the funds held in the Trust Account and not previously released to the Company to pay its taxes, if any (less up to $ 100,000 KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS In
connection with the redemption of 100 100,000 The
Initial Shareholders agreed to waive their liquidation rights with respect to the Founder Shares if the Company fails to complete a Business
Combination within the Combination Period. However, if the Initial Shareholders should acquire Public Shares in or after the Initial
Public Offering, they will be entitled to liquidating distributions from the Trust Account with respect to such Public Shares if the
Company fails to complete a Business Combination within the Combination Period. The underwriters agreed to waive their rights to their
deferred underwriting commissions (see Note 6) held in the Trust Account in the event the Company does not complete a Business Combination
within the Combination Period and, in such event, such amounts will be included with the funds held in the Trust Account that will be
available to fund the redemption of the Company’s Public Shares. In the event of such distribution, it is possible that the per
share value of the residual assets remaining available for distribution in the Trust Account will be less than the $ 10.00 10.00 10.00 Charter Amendment and Share Redemptions In an extraordinary
general meeting held on February 3, 2023, shareholders approved the Charter Amendment, changing the structure and cost of the Company’s
right to extend the date (the “Termination Date”) by which the Company must (i) consummate a merger, capital stock exchange,
asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses (a
“business combination”), (ii) cease its operations if it fails to complete such business combination, and (iii) redeem or
repurchase 100 300,000 0.06 22,848,122 10.15 231.9 74.7 On each of February 9, 2023, March 7, 2023,
April 4, 2023, May 9, 2023, and June 6, 2023, the Company deposited $ 300,000 1,500,000 Proposed
Business Combination On
March 3, 2023, the Company entered into a business combination agreement by and among the Company, AIRO Group, Inc., a Delaware
corporation (“ParentCo”), Kernel Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ParentCo
(“Kernel Merger Sub”), AIRO Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ParentCo
(“AIRO Merger Sub”), VKSS Capital, LLC, in its capacity as the Sponsor, AIRO Group Holdings, Inc., a Delaware
corporation (“AIRO Group Holdings”), and AIRO Group Holdings’ sponsor, Dr. Chirinjeev Kathuria, in the capacity as the
representative for AIRO Group Holdings’ shareholders (the “Seller Representative”) (as may be amended and/or restated from time to time, the “Business
Combination Agreement”), pursuant to which, among other things, the Company will change the Company’s jurisdiction of
incorporation by deregistering as a Cayman Islands exempted company and continuing and domesticating as a corporation incorporated
under the laws of the State of Delaware (the “Domestication”). In
connection with the Domestication, each Class B ordinary share, par value $ 0.0001 0.0001 0.0001 0.0001 Following
the Domestication, the parties will effect the merger of Kernel Merger Sub with and into the Company, with the Company continuing as
the surviving entity as a wholly owned subsidiary of ParentCo (the “First Merger”). Immediately following the First Merger,
AIRO Merger Sub will merge with and into AIRO Group Holdings, with AIRO Group Holdings continuing as the surviving entity as a wholly
owned subsidiary of ParentCo (the “Second Merger” and the other transactions contemplated by the Business Combination Agreement,
together, the “Transaction”). KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS As
consideration for the Second Merger, the holders of AIRO Group Holdings’ securities collectively shall be entitled to receive from
ParentCo, in the aggregate, a number of shares of ParentCo common stock with an aggregate value equal to (the “AIRO Merger Consideration”)
(a) $770,000,000 minus (b) the amount, if any, by which the net working capital is less than negative $500,000, plus (c) the amount,
if any, by which the net working capital exceeds $500,000 (but not less than zero), minus (d) the amount, if any, by which the closing
net debt exceeds the target net debt of $75,000,000, by more than $500,000 (but not less than zero), plus (e) the amount, if any, by
which the target net debt of $75,000,000 exceeds closing net debt, minus (f) the amount, if any, by which the company transaction expenses
exceed the target company transaction expenses of $14,000,000 (but not less than zero). In addition, holders of AIRO Group Holdings’
securities shall also be entitled to receive from ParentCo, in the aggregate, an additional shares of ParentCo common stock with an aggregate
value of up to $330,000,000 in the event that for any full 12-month period (each an “Earnout Period”) commencing on or after
the Closing Date (the “Earnout Start Date”) and ending on or before the last day of the thirteenth full calendar quarter
following the Closing Date (the “Earnout End Date”, and the period between the Earnout Start Date and the Earnout End Date,
the “Earnout Eligibility Period”) ParentCo’s revenue is (i) greater than or equal to $42,600,000 for the first time
during the Earnout Eligibility Period, (ii) greater than or equal to $141,400,000 for the first time during the Earnout Eligibility Period,
and (iii) greater than or equal to $358,900,000 for the first time during the Earnout Eligibility Period, then ParentCo shall issue to
each of the stockholders of AIRO Group Holdings such stockholder’s pro rata share of Earnout Shares with a value equal to $66,000,000
and the Sponsor shall be issued Earnout Shares with a value equal to $6,600,000. In the event that ParentCo’s EBITDA for any Earnout
Period is (i) greater than or equal to $(19,300,000) for the first time during the Earnout Eligibility Period, (ii) greater than or equal
to $4,000,000 for the first time during the Earnout Eligibility Period and (iii) greater than or equal to $98,600,000 for the first time
during the Earnout Eligibility Period, then ParentCo shall issue to each of the stockholders of AIRO Group Holding such stockholder’s
pro rata share of Earnout Shares with a value equal to $44,000,000 and the Sponsor shall be issued Earnout Shares with a value equal
to $4,400,000. The Business Combination Agreement contains customary conditions to Closing, including the following mutual conditions of the
parties (unless waived): (i) approval of the shareholders of Kernel Group Holdings, Inc. and AIRO Group Holdings of the Transaction
and the other matters requiring shareholder approval; (ii) approvals of any required governmental authorities and completion of any
antitrust expiration periods; (iii) receipt of specified third party consents; (iv) no law or order preventing the Transaction; (v)
the Registration Statement having been declared effective by the SEC; (vi) no material uncured breach by the other party; (vii) no
occurrence of a Material Adverse Effect with respect to the other party; (viii) the satisfaction of the $5,000,001 minimum net
tangible asset test by Kernel; (ix) approval from Nasdaq for the listing of the shares of ParentCo’s common to be issued in
connection with the Transaction; and (x) reconstitution of the Post-Closing Board as contemplated under the Business Combination
Agreement. In
addition, unless waived by AIRO Group Holdings, the obligations of AIRO Group Holdings to consummate the Transaction are subject to the
satisfaction of the following additional Closing conditions, in addition to the delivery by Kernel of the Related Agreements (as defined
and described in greater detail below), customary certificates and other Closing deliverables: (i) the representations and warranties
of Kernel being true and correct as of the date of the Business Combination Agreement and as of the Closing (subject to customary exceptions,
including materiality qualifiers); (ii) Kernel having performed in all material respects its obligations and complied in all material
respects with its covenants and agreements under the Business Combination Agreement required to be performed or complied with by it on
or prior to the date of the Closing; (iii) absence of any Material Adverse Effect with respect to Kernel since the date of the Business
Combination Agreement which is continuing and uncured; (iv) the replacement of the Replacement Warrants and Replacement Options; (v)
at the Closing, Kernel having $50,000,000 in Unencumbered Cash, including funds remaining in the trust account (after giving effect to
the completion and payment of any redemptions and any Transaction Expenses) and the proceeds of the PIPE/Convertible Note Investment,
50% of any net cash proceeds of any capital investment raise and/or convertible debt raise conducted by the Company during
the period beginning on the effective date of the Business Combination and ending on the Closing Date, and any net cash proceeds of any
executed agreements regarding a capital investment raise and/or convertible debt raise conducted by Kernel or ParentCo in which such
cash proceeds are required to be paid to ParentCo during the thirty (30) day period beginning on the Closing Date KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS Finally,
unless waived by Kernel, the obligations of Kernel to consummate the Transaction are subject to the satisfaction of the following additional
Closing conditions, in addition to the delivery by Kernel of the Related Agreements (as defined and described in greater detail below),
customary certificates and other Closing deliverables: (i) the representations and warranties of AIRO Group Holdings being true and correct
as of the date of the Business Combination Agreement and as of the Closing (subject to customary exceptions, including materiality qualifiers);
(ii) AIRO Group Holdings having performed in all material respects their respective obligations and complied in all material respects
with their respective covenants and agreements under the Business Combination Agreement required to be performed or complied with by
them on or prior to the date of the Closing; (iii) absence of any Material Adverse Effect with respect to AIRO Group Holdings and its
subsidiaries on a consolidated basis since the date of the Business Combination Agreement which is continuing and uncured; (iv) delivery
of AIRO’s 2022 Audited Financials within 60 days of the Business Combination Agreement’s signing; (v) the completion of Kernel’s
legal due diligence of AIRO Group Holdings and its subsidiaries to Kernel’s reasonable satisfaction; (vi) the replacement of the
Replacement Warrants and Replacement Options; and (vii) the aggregate amount of all Indebtedness of the Target Companies due earlier
than 180 days after the Closing (less Company cash at Closing) is less than Fifty Million U.S. Dollars ($ 50,000,000 Risks
and Uncertainties Management
continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could
have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific
impact is not readily determinable as of the date of these unaudited condensed financial statements. The unaudited condensed financial
statements do not include any adjustments that might result from the outcome of this uncertainty. In
February 2022, the Russian Federation and Belarus commenced a military action with the country of Ukraine. As a result of this action,
various nations, including the United States, have instituted economic sanctions against the Russian Federation and Belarus. Further,
the impact of this action and related sanctions on the world economy are not determinable as of the date of these unaudited condensed
financial statements. The specific impact on the Company’s financial condition, results of operations, and cash flows is also not
determinable as of the date of these unaudited condensed financial statements. Going
Concern As
of June 30, 2023, the Company had approximately $ 804 10,612,626 The
Company’s liquidity needs to date have been satisfied through a contribution of $ 25,000 77,000 1,150,000 1,450,000 77,000 Management
has determined that the Company has access to funds from the Sponsor or an affiliate of the Sponsor, or certain of our officers and directors
to meet its needs through the earlier of the consummation of a Business Combination or one year from this filing. Over this time period,
the Company will be using these funds for paying existing accounts payable, identifying and evaluating prospective initial Business Combination
candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business
to merge with or acquire, and structuring, negotiating and consummating the Business Combination. In connection with the Company’s
assessment of going concern considerations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Update (“ASU”) 2014-15, “ Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS |
