| DESCRIPTION OF ORGANIZATION, BUSINESS OPERATIONS, RISKS AND UNCERTAINTIES AND GOING CONCERN | NOTE
1. DESCRIPTION OF ORGANIZATION, BUSINESS OPERATIONS, RISKS AND UNCERTAINTIES AND GOING CONCERN Kernel
Group Holdings, Inc. (“Kernel” or 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 March 31, 2024, the Company had not commenced any operations. All activity from November 10, 2020 through March 31, 2024 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 a 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 held in a trust account (“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 a private placement (the “Private Placement”) of
8,750,000 1.00 8.8 On
December 28, 2022, 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 7,618,750 75,000 50,000 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 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 CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 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
per share, plus any pro rata interest earned
on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations). These Public Shares will
be recorded at a redemption value and classified as temporary equity upon the completion of the Initial Public Offering, in accordance
with Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity.” In such case,
the Company will proceed with a Business Combination if a majority of the shares voted are voted in favor of the Business Combination.
If a shareholder vote is not required by applicable law or stock exchange listing requirements and the Company does not decide to hold
a shareholder vote for business or other reasons, the Company will, pursuant to the amended and restated memorandum and articles of association
(the “Amended and Restated Memorandum and Articles of Association”), conduct the redemptions pursuant to the tender offer
rules of the U.S. Securities and Exchange Commission (the “SEC”), and file tender offer documents with the SEC prior to completing
a Business Combination. If, however, a shareholder approval of the transactions is required by applicable law or stock exchange listing
requirements, or the Company decides to obtain shareholder approval for business or other reasons, the Company will offer to redeem shares
in conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant to the tender offer rules. Additionally, each Public
Shareholder may elect to redeem their Public Shares irrespective of whether they vote for or against the proposed transaction or whether
they were a Public Shareholder on the record date for the general meeting held to approve the proposed transaction. If the Company seeks
shareholder approval in connection with a Business Combination, the holders of the Founder Shares (as defined in Note 4) prior to this
Initial Public Offering (the “Initial Shareholders”) agreed to vote their Founder Shares and any Public Shares purchased
during or after the Initial Public Offering in favor of a Business Combination. In addition, the Initial Shareholders agreed to waive
their redemption rights with respect to their Founder Shares and Public Shares in connection with the completion of a Business Combination.
In addition, the Company agreed not to enter into a definitive agreement regarding an initial Business Combination without the prior
consent of the New Sponsor. 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% or more of the Public Shares, without the prior consent of the
Company. 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 CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 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. On May 24, 2023, the underwriters
agreed to waive their rights to their deferred underwriting commissions 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
Amendments and Share Redemptions In
an extraordinary general meeting held on February 3, 2023, shareholders approved a charter amendment (the “February Charter Amendment”),
changing the structure and cost of the Company’s right to extend the date by which the Company must (i) consummate 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 KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 The
shareholders of the Company approved the Amendment to the Amended and Restated Memorandum and Articles of Association of the Company
(the “August Charter Amendment”) at the August 3, 2023 shareholders meeting, changing the structure and cost of the Company’s
right to extend the Termination Date by up to six (6) one-month Extensions to February 5, 2024, provided that if any Extended Deadline
ends on a day that is not a business day, such Extended Deadline will be automatically extended to the next succeeding business day (the
“Second Extension Amendment Proposal”). To effect each one-month Extension, the Company, its Sponsor or any of their affiliates
or designees must deposit into the Company’s Trust Account with Continental an Extension Payment (after giving effect to redemptions
in connection with the approval of the August Charter Amendment) the lesser of (x) $150,000 or (y) $0.04 per share for each
of the Company’s Public Shares outstanding as of the applicable Extended Deadline, unless the closing of the Company’s initial
Business Combination shall have occurred, in exchange for a non-interest bearing, unsecured promissory note payable upon consummation
of a Business Combination. In connection with the approval of the Second Extension Amendment Proposal, the shareholders also approved
a proposal to amend the Trust Agreement, pursuant to which the Company’s Trust Agreement with Continental was amended to conform
the procedures in the Trust Agreement by which the Company may extend the date on which Continental must liquidate the Trust Account
if the Company has not completed its initial Business Combination to the procedures in the August Charter Amendment (the “Second
Trust Amendment Proposal”) In
connection with the approval of the Section Extension Amendment Proposal and the Second Trust Amendment Proposal at the August 3,
2023 shareholders meeting, holders of 1,310,929 10.42 13.6 On
February 1, 2024, the Company held an extraordinary general meeting of its shareholders pursuant to due notice. At the shareholders
meeting, the Company’s shareholders entitled to vote at the meeting cast their votes and approved a proposal to amend the
Trust Agreement to conform the procedures in the Trust Agreement by which the Company may extend the date on which Continental must
liquidate the Trust Account if the Company has not completed its initial Business Combination (the “Third Trust Amendment
Proposal”) to the procedures in an amendment to the Company’s Amended and Restated Memorandum and Articles of
Association which was also approved by the Company’s shareholders at the meeting (the “February Charter Extension
Amendment”). The February Charter Extension Amendment allows the Company to extend the Termination Date by up to six (6)
one-month Extensions to August 5, 2024 provided that if any Extended Deadline ends on a day that is not a business day, such Extended
Deadline will be automatically extended to the next succeeding business day(the “Third Extension Amendment Proposal”). In
connection with the approval of the Third Extension Amendment Proposal and the Third Trust Amendment Proposal at the February 1,
2024 shareholders meeting, holders of 5,806,608 10.80 62.7 5.6 KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 On
January 5, 2024, the Company deposited $ 150,000 into
the Trust Account to extend the date to consummate a Business Combination. Proposed
Business Combination On
March 3, 2023, the Company entered into an agreement by and among the Company, AIRO Group, Inc., a Delaware corporation
and a wholly owned subsidiary of the Company (“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”), the Company’s Sponsor, Dr. Chirinjeev Kathuria, in the capacity as the representative
for the Company’s shareholders (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation
(“AIRO Group Holdings” ), referred to collectively as the Parties (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”). 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) $770.0 million
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 $75.0 million, by more than $500,000 (but not less than zero), plus (e) the amount, if any, by which
the target net debt of $75.0 million exceeds closing net debt, minus (f) the amount, if any, by which the company transaction
expenses exceed the target company transaction expenses of $14.0 million (but not less than zero). In addition, holders of AIRO
Group Holdings’ securities shall have the contingent right to receive from ParentCo, in the aggregate, up to 33,000,000
additional shares of ParentCo common stock, and the Sponsor shall have the contingent right to receive up to 3,300,000 shares of
ParentCo common stock (the “Earnout Shares”). 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 $42.6 million for the first time during the Earnout Eligibility Period, (ii) greater than or equal to $141.4
million for the first time during the Earnout Eligibility Period, and (iii) greater than or equal to $358.9 million for the first
time during the Earnout Eligibility Period, then upon the occurrence of each (i), (ii), and (iii), ParentCo shall issue to each of
the stockholders of AIRO Group Holdings such stockholder’s pro rata share of 6,600,000 Earnout Shares and the Sponsor shall be
issued 660,000 Earnout Shares. In the event that ParentCo’s EBITDA for any Earnout Period is (x) less than or equal to
negative $19.3 million for the first time during the Earnout Eligibility Period, (y) greater than or equal to $4.0 million for the
first time during the Earnout Eligibility Period and (z) greater than or equal to $98.6 million for the first time during the Earnout
Eligibility Period, then upon the occurrence of each (x), (y), and (z), ParentCo shall issue to each of the stockholders of AIRO
Group Holding such stockholder’s pro rata share of 4,400,000 Earnout Shares and the Sponsor shall be issued 440,000 Earnout
Shares. KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 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 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) approval from Nasdaq for the listing of the shares of ParentCo’s common to be issued in connection with
the Transaction; and (ix) 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, 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 $50.0 million 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 private investment in public equity or convertible note investments,
fifty percent (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 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, 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 statements 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 $ 50.0 On
August 29, 2023, the Parties entered into the First Amendment to the Business Combination Agreement (the “First
Amendment”). The First Amendment amends the Business Combination Agreement to make certain changes to the earnout provisions
to fix the number of Earnout Shares that can be granted in each Earnout Period based on a $ 10.00 On
January 16, 2024, the Parties entered into the Second Amendment to the Business Combination Agreement (the “Second Amendment”).
The Second Amendment amends the Business Combination Agreement to change the terms under which the AIRO Group Holdings shareholders and
the Sponsor shall have a contingent right to receive the Earnout Shares as additional consideration based on ParentCo’s achievement
of certain revenue thresholds. The Second Amendment also amended the termination date pursuant to the original Business Combination Agreement,
from August 2, 2023 to August 5, 2024. On
February 5, 2024, the Parties entered into the Third Amendment to the Business Combination Agreement (the “Third Amendment”).
The Third Amendment amends the Business Combination Agreement and removed the previous requirement of the Company to satisfy
maintain a minimum of $ 5.0 KERNEL
GROUP HOLDINGS, INC. NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 Risks
and Uncertainties 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. The
escalation in October 2023 of the conflict between Israel and Hamas also could cause disruptions to global economic conditions and effect
the stability of the Middle East region. It is unknown how long any of these disruptions will continue and whether such disruptions will
become more severe. The
impact of these conflicts on the world economy is not determinable as of the date of these consolidated financial statements and 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 consolidated financial statements. As
a result of political tensions in the Middle East and the military action commenced in February 2022 by the Russian Federation and
Belarus in the country of Ukraine and related economic sanctions, the Company’s ability to consummate a Business Combination,
or the operations of a target business with which the Company ultimately consummates a Business Combination, may be materially and
adversely affected. Further, the Company’s ability to consummate a transaction may be dependent on the ability to raise equity
and debt financing which may be impacted by these events, including as a result of increased market volatility, or decreased market
liquidity in third-party financing being unavailable on terms acceptable to the Company or at all. The impact of this action and
related sanctions on the world economy and the specific impact on the Company’s financial position, results of operations
and/or ability to consummate a Business Combination are not yet determinable. The unaudited condensed consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty. Going
Concern As
of March 31, 2024, the Company had $ 804 8.4 The
Company’s liquidity needs to date have been satisfied through a contribution of $ 25,000 77,000 2.5 2.0
77,000 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 CONSOLIDATED FINANCIAL STATEMENTS MARCH
31, 2024 |
