UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant ☒
Filed by a Party other than the Registrant ☐
Check the appropriate box:
| ☐ | Preliminary Proxy Statement |
| ☐ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| ☒ | Definitive Proxy Statement |
| ☐ | Definitive Additional Materials |
| ☐ | Soliciting Material Pursuant to §240.14a-12 |
Kernel Group Holdings, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| ☒ | No fee required. |
| ☐ | Fee paid previously with preliminary materials. |
| ☐ | Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11 |
PROXY STATEMENT FOR EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS OF
KERNEL GROUP HOLDINGS, INC.
PROXY STATEMENT FOR
EXTRAORDINARY GENERAL MEETING OF
KERNEL GROUP HOLDINGS, INC.
(A CAYMAN ISLANDS EXEMPTED COMPANY)
PROSPECTUS FOR
95,934,699 SHARES OF COMMON STOCK AND
23,987,500 WARRANTS
OF
AIRO GROUP, INC.
The board of directors of Kernel Group Holdings, Inc., a Cayman Islands exempted company (“Kernel”) has unanimously approved the transactions (collectively, the “Business Combination”) contemplated by that certain Agreement and Plan of Merger, dated March 3, 2023 (as it may be amended, supplemented or otherwise modified from time to time, the “Business Combination Agreement”), by and among Kernel, 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 wholly owned subsidiary of ParentCo (“AIRO Merger Sub”), VKSS Capital, LLC, in the capacity as the representative from and after the First Effective Time (as defined below) for the stockholders of Kernel and ParentCo (the “ParentCo Representative”) and also in its capacity as Kernel’s sponsor (“Sponsor”), Dr. Chirinjeev Kathuria, in the capacity as the representative from and after the Second Effective Time for the AIRO stockholders as of immediately prior to the Second Effective Time (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO”), a copy of which is attached to this proxy statement/prospectus as Annex A, including the deregistration of Kernel under the Cayman Islands Companies Act (As Revised) and the domestication under Part XII of the Delaware General Corporation Law, pursuant to which Kernel’s jurisdiction of incorporation will be changed from the Cayman Islands to the State of Delaware (the “Domestication”). As described in this proxy statement/prospectus, Kernel’s shareholders are being asked to consider a vote upon each of the Domestication and the Business Combination, among other items.
In connection with the Domestication, each issued and outstanding Kernel Class A Ordinary Share, each issued and outstanding Kernel Class B Ordinary Share, each issued and outstanding Kernel Private Placement Warrant, each issued and outstanding Kernel Public Warrant, and each issued and outstanding Kernel Unit shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock, one share of Kernel Class B common stock, one Kernel private warrant, one Kernel public warrant and one Kernel public unit, respectively, and (ii) immediately following the Domestication, (a) each share of Kernel Class B common stock shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock, (b) the Kernel Class A common stock will be reclassified as Kernel common stock, and (c) each Kernel public unit will be separated into one share of Kernel common stock and one Kernel Public Warrant.
On the Closing Date, Kernel Merger Sub will merge with and into Kernel (the “First Merger”), with Kernel surviving the First Merger as a wholly owned subsidiary of ParentCo. In accordance with the terms and subject to the conditions of the Business Combination Agreement and the Proposed ParentCo Charter, (i) each share of Kernel common stock, each Kernel Private Placement Warrant, and each Kernel Public Warrant issued and outstanding immediately prior to the First Effective Time shall automatically be converted into and exchanged for one validly issued, fully paid and nonassessable share of ParentCo Common Stock, one ParentCo Private Placement Warrant or one ParentCo Public Warrant, respectively (“Kernel Merger Consideration”), (ii) each share of ParentCo Common Stock held by Kernel issued and outstanding immediately prior to the First Effective Time shall automatically be cancelled and shall cease to exist as of the First Effective Time, (iii) each share of Kernel Merger Sub Common Stock issued and outstanding as of immediately prior to the First Effective Time shall automatically be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the company surviving the First Merger. Immediately following the First Merger, AIRO Merger Sub will merge with and into AIRO (the “Second Merger”) with AIRO surviving the Second Merger as a wholly-owned subsidiary of ParentCo. In accordance with the terms and subject to the conditions of the Business Combination Agreement, the holders of AIRO’s 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 (a) $770,000,000 minus (b) the amount, if any, by which the net working capital is less than $(5,500,000) by more than $500,000, plus (c) the amount, if any, by which the net working capital is greater than $(5,500,000) by more than $500,000 (but not less than zero), minus (d) the amount, if any, by which the closing net debt exceeds $75,000,000 by more than $500,000 (but not less than zero), plus (e) the amount, if any, by which the closing net debt is less than $75,000,000, minus (f) the amount, if any, by which the company transaction expenses exceed $14,000,000 (such resulting amount, the “AIRO Merger Consideration”).
It is anticipated that, upon completion of the Business Combination, (i) Kernel’s Public Shareholders will retain an ownership interest of approximately 0.6% of the outstanding shares of ParentCo Common Stock, (ii) the AIRO stockholders (as defined in the accompanying proxy statement/prospectus) will own, collectively, approximately 85.9% of the outstanding shares of ParentCo Common Stock, and (iii) Kernel’s Sponsor will own approximately 8.4% of the outstanding shares of ParentCo Common Stock, in each case, assuming that none of Kernel’s outstanding Public Shares are redeemed in connection with the Business Combination, or approximately nil, 86.4%, and 8.4%, respectively, assuming that all of Kernel’s outstanding Public Shares are redeemed in connection with the Business Combination. See “Shareholder Proposal No. 1: The Business Combination Proposal — Post-Business Combination Ownership of ParentCo” for more details.
The number of shares of ParentCo Common Stock that this proxy statement/prospectus covers is the maximum number of shares that may be issued to AIRO stockholders and the maximum number of shares issued or issuable to the existing shareholders and warrant holders of Kernel, in each case, in connection with the Business Combination. The number of Warrants that this proxy statement/prospectus covers is the number of redeemable warrants issued by Kernel in its IPO, plus the Private Placement Warrants that were issued in a private placement simultaneously with Kernel’s IPO.
Kernel’s Units, Public Share and Public Warrants are currently listed on Nasdaq Capital Market (“Nasdaq”) under the symbols “KRNLU,” “KRNL,” and “KRNLW,” respectively. Kernel will apply for listing, to be effective at the time of the Business Combination, of ParentCo Common Stock and warrants on Nasdaq under the proposed symbols “AIRO” and “AIROW,” respectively. It is a condition of the consummation of the Business Combination that Kernel receive confirmation from Nasdaq that ParentCo Common Stock has been conditionally approved for listing on Nasdaq, but there can be no assurance such listing condition will be met or that Kernel will obtain such confirmation from Nasdaq, and you may not know whether the listing condition has been met at the time of the Extraordinary General Meeting (as defined below). If such listing condition is not met or if such confirmation is not obtained, the Business Combination will not be consummated unless the Nasdaq condition set forth in the Business Combination Agreement is waived by ParentCo.
Kernel will hold an extraordinary general meeting (the “Extraordinary General Meeting”) to consider matters relating to the Business Combination at 9:00 a.m., Eastern Time, on July 31, 2024. For the purposes of Cayman Islands Companies Law and the Second Amended and Restated Memorandum and Articles of Association of Kernel, the physical location of the Extraordinary General Meeting shall be Nelson Mullins Riley & Scarborough LLP, 101 Constitution Ave. NW, Suite 900, Washington, DC 20001, or you or your proxyholder will be able to attend and vote at the Extraordinary General Meeting online by visiting https://agm.issuerdirect.com/krnl and using a control number assigned by Continental Stock Transfer & Trust Company. To register and receive access to the Extraordinary General Meeting, registered shareholders and beneficial shareholders (those holding shares through a stock brokerage account or by a bank or other holder of record) will need to follow the instructions applicable to them provided in the accompanying proxy statement/prospectus.
Kernel is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and has elected to take advantage of certain reduced public company reporting requirements.
If you have any questions or need assistance voting your ordinary shares, please contact Issuer Direct Corporation, our proxy solicitor, by calling (919) 481-4000, or banks and brokers can call collect at (919) 481-4000, or by emailing proxy@issuerdirct.com. The notice of the Extraordinary General Meeting and the proxy statement/prospectus relating to the Business Combination will be available at https://agm.issuerdirect.com/krnl.
The accompanying proxy statement/prospectus provides shareholders of Kernel with detailed information about the Business Combination and other matters to be considered at the Extraordinary General Meeting of Kernel. We encourage you to read the entire accompanying proxy statement/prospectus, including the Annexes and other documents referred to therein, carefully and in their entirety. In particular, when you consider the recommendation of the board of directors of Kernel to vote in favor of the proposals described in this proxy statement/prospectus, you should keep in mind that Kernel’s directors and officers have interests in the Business Combination that are different from, in addition to or may conflict with your interests as a shareholder. For instance, the Sponsor, and the officers and directors of Kernel who have invested in the Sponsor entity, will benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to shareholders rather than liquidate. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion. You should also carefully consider the risk factors described in “Risk Factors” beginning on page 37 of the accompanying proxy statement/prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE TRANSACTIONS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS, PASSED UPON THE MERITS OR FAIRNESS OF THE BUSINESS COMBINATION OR RELATED TRANSACTIONS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY CONSTITUTES A CRIMINAL OFFENSE.
The accompanying proxy statement/prospectus is dated July 10, 2024, and is first being mailed to Kernel’s shareholders on or about July 10, 2024.
Kernel Group Holdings, Inc.
515 Madison 8th Floor – Suite 8078
New York, New York 10022
(646) 908-2659
NOTICE OF EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS OF
KERNEL GROUP HOLDINGS, INC.
TO BE HELD ON JULY 31, 2024
To the Stockholders of Kernel Group Holdings, Inc.:
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of the shareholders (the “Extraordinary General Meeting”) of Kernel Group Holdings, Inc. (“Kernel”), a Cayman Islands exempted company, will be held at 9:00 a.m., Eastern Time, on July 31, 2024, at Nelson Mullins Riley & Scarborough LLP, 101 Constitution Ave. NW, Suite 900, Washington, DC 20001. You will also be able to attend the Extraordinary General Meeting online, vote and submit your questions during the Extraordinary General Meeting by visiting https://agm.issuerdirect.com/krnl.
At the Extraordinary General Meeting, Kernel shareholders will be asked to consider and vote upon the following proposals (each, a “Proposal” and collectively, the “Proposals”), as more fully described in the accompanying proxy statement/prospectus:
| (1) | to adopt and approve an Agreement and Plan of Merger (the “Business Combination Agreement”) by and among Kernel, 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 wholly owned subsidiary of ParentCo (“AIRO Merger Sub”), VKSS Capital, LLC (“Sponsor”), in the capacity as the representative from and after the First Effective Time (as defined below) for the shareholders of Kernel and ParentCo immediately prior to the First Effective Time (the “ParentCo Representative”) and also in its capacity as Kernel’s sponsor, Dr. Chirinjeev Kathuria, in the capacity as the representative from and after the Second Effective Time for the AIRO stockholders as of immediately prior to the Second Effective Time (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO”), pursuant to which at the closing of the transactions contemplated by the Business Combination Agreement (the “Closing”), Kernel Merger Sub will merge with and into Kernel (the “First Merger”), with Kernel surviving the First Merger as a wholly owned subsidiary of ParentCo, and immediately following the First Merger, AIRO Merger Sub will merge with and into AIRO (the “Second Merger”), with AIRO surviving the Second Merger as a wholly-owned subsidiary of ParentCo. A copy of the Business Combination Agreement is attached to the accompanying proxy statement/prospectus as Annex A. We refer to this as the “Business Combination Proposal”; | |
| (2) | to consider and vote upon a proposal, as a special resolution under Cayman Islands Companies Law, that Kernel be transferred by way of continuation to Delaware pursuant to Article 47 of Kernel’s Amended and Restated Memorandum and Articles of Association (the “Existing Kernel Governing Documents”), Part XII of the Cayman Islands Companies Act, and Section 388 of the General Corporation Law of the State of Delaware and, immediately upon being de-registered in the Cayman Islands, Kernel be continued and domesticated as a corporation under the laws of the State of Delaware (the “Domestication Proposal”); |
| (3) | To adopt and approve the amendment and restatement of the Existing ParentCo Governing Documents by their deletion and replacement with the proposed amended and restated certificate of incorporation, a copy of which is attached to the proxy statement/prospectus as Annex B (the “Proposed ParentCo Charter”), and bylaws, a copy of which is attached to the proxy statement/prospectus as Annex C (the “Proposed ParentCo Bylaws” and, together with the Proposed ParentCo Charter, the “Proposed ParentCo Governing Documents”), of ParentCo which, if approved, would take effect upon closing of the First Merger (the “ParentCo Charter Amendment Proposal”);
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| (4) | to consider and vote upon a proposal to approve, as an ordinary resolution under Cayman Islands Companies Law, for purposes of complying with the applicable provisions of Nasdaq Listing Rules 5635(a) and (b), the issuance of more than 20% of Kernel’s issued and outstanding Class A Ordinary Shares (the “Nasdaq Proposal”); | |
| (5) | to approve and adopt the 2024 Equity Incentive Plan, a copy of which is attached to the accompanying proxy statement/prospectus as Annex D (the “Incentive Plan Proposal”); | |
| (6) | to approve and adopt the Employee Stock Purchase Plan, a copy of which is attached to the accompanying proxy statement/prospectus as Annex E (the “Employee Stock Purchase Plan Proposal”); | |
| (7) | to consider and vote to elect seven (7) directors to serve staggered terms on ParentCo’s board of directors until the 2025, 2026 and 2027 annual meeting of stockholders of ParentCo, respectively, and until their respective successors are duly elected and qualified (the “Election of Directors Proposal”); | |
| (8) | proposal to consider and vote upon a proposal, to approve amendments (the “NTA Amendments”) to Kernel’s Amended and Restated Memorandum and Articles of Association, which amendments shall be effective, if adopted and implemented by Kernel, immediately prior to the consummation of the Business Combination, to remove the requirements limiting Kernel’s ability to consummate an initial business combination if Kernel would have less than $5,000,001 in net tangible assets prior to or upon consummation of such initial business combination (the “NTA Proposal”); and | |
| (9) | to adopt and approve a proposal to adjourn the Extraordinary General Meeting to a later date or dates, if necessary to permit further solicitation and vote of proxies if it is determined by Kernel that more time is necessary or appropriate to approve one or more Proposals at the Extraordinary General Meeting (the “Adjournment Proposal”). |
Kernel’s board of directors (the “Kernel Board”) has adopted and approved the Business Combination Agreement and recommends a vote “FOR” the Business Combination Proposal, “FOR” the Domestication Proposal “FOR” the ParentCo Charter Amendment Proposal, “FOR” the Nasdaq Proposal, “FOR” the Incentive Plan Proposal, “FOR” the Employee Stock Purchase Plan Proposal, “FOR” the Election of Directors Proposal, and “FOR” the NTA Proposal, and “FOR” the Adjournment Proposal. Kernel does not expect a vote to be taken on any other matters at the Extraordinary General Meeting or any adjournment or postponement thereof. When you consider the recommendation of these proposals by the Kernel Board, you should keep in mind that the Sponsor and certain of Kernel’s directors and officers and others have interests in the Business Combination that may conflict with your interests as a shareholder. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” in the accompanying proxy statement/prospectus for a further discussion of these considerations.
Holders of record of Kernel’s Class A Ordinary Shares, par value $0.0001 per share, and Kernel’s Class B Ordinary Shares, par value $0.0001 per share (also referred to herein as “Founder Shares”) (collectively, the “Kernel Ordinary Shares”) at the close of business on July 10, 2024 (the “Record Date”) will be entitled to notice of and to vote at the Extraordinary General Meeting or any adjournment or postponement thereof. Each Kernel Ordinary Share entitles the holder thereof to one vote. The holders of the Founder Shares (the “Kernel Restricted Shareholders”) are parties to the Kernel Support Agreement pursuant to which they have agreed to vote their Founder Shares and any Class A Ordinary Shares purchased during or after our IPO in favor of the Business Combination. As of July 3, 2024, our Kernel Restricted Shareholders own approximately 93.7% of our issued and outstanding Kernel Ordinary Shares.
Attention is directed to the proxy statement/prospectus accompanying this notice (including the financial statements and annexes attached thereto) for a more complete description of the proposed Business Combination and related transactions and each of our Proposals. We encourage you to read the accompanying proxy statement/prospectus carefully. If you have any questions or need assistance voting your shares, please call our proxy solicitor, Issuer Direct Corporation at (919) 481-4000 or email Issuer Direct Corporation at proxy@issuerdirect.com.
All Kernel shareholders are cordially invited to attend the Extraordinary General Meeting in virtual format. Kernel shareholders may attend, vote and examine the list of Kernel shareholders entitled to vote at the Extraordinary General Meeting by visiting https://agm.issuerdirect.com/krnl and using the conference ID number listed on the proxy card. To ensure your representation at the Extraordinary General Meeting, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. To vote online, please have your proxy card available and visit https://www.iproxydirect.com/KRNL and follow the prompts to vote your shares. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares.
Your vote is important regardless of the number of shares you own. Whether you plan to attend the Extraordinary General Meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. If you sold or transferred your shares after the record date, it is still important that you vote. Each of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and NTA Proposal is interdependent upon the others and must be approved in order for Kernel to complete the Business Combination as contemplated by the Business Combination Agreement. The Business Combination Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, and the Adjournment Proposal all require the affirmative vote of a majority of the issued and outstanding Kernel Ordinary Shares cast by the shareholders represented in person (which would include presence at a virtual meeting) or by proxy at the Extraordinary General Meeting and entitled to vote thereon, voting as a single class. Each of the Domestication Proposal, the ParentCo Charter Amendment Proposal, and the NTA Proposal requires the affirmative vote of at least a two-thirds (2/3) majority of the issued and outstanding Kernel Ordinary Shares cast by the shareholders represented in person (which could include presence at a virtual meeting) or by proxy at the Extraordinary General Meeting and entitled to vote thereon, voting as a single class. The election of directors under the Election of Directors Proposal requires a majority vote of the Class B Ordinary Shares present in person (which would include presence at a virtual meeting) or represented by proxy and entitled to vote at the Extraordinary General Meeting.
| By Order of the Board of Directors, | ||
| /s/ Suren Ajjarapu | ||
| Suren Ajjarapu | ||
| Chief Executive Officer | ||
| July 10, 2024 |
TABLE OF CONTENTS
| i |
ADDITIONAL INFORMATION
You may request copies of this proxy statement/prospectus and any other publicly available information concerning Kernel, without charge, by written request to Kernel Group Holdings, Inc., 515 Madison Avenue, Suite 8133, New York, New York 10022, or by telephone request at (646) 908-2659; or Issuer Direct Corporation, our proxy solicitor, by calling (919) 481-4000, or banks and brokers can call collect at (919) 481-4000, or by emailing proxy@issuerdirect.com or from the SEC through the SEC website sec.gov.
In order for Kernel’s shareholders to receive timely delivery of the documents in advance of the Extraordinary General Meeting of Kernel to be held on July 31, 2024, you must request the information no later than five business days prior to the date of the Extraordinary General Meeting, by July 24, 2024.
ABOUT THIS PROXY STATEMENT/PROSPECTUS
No person has been authorized to give any information or any representation concerning us or the Business Combination (other than as contained in this proxy statement/prospectus) and we take no responsibility for, nor can we provide any assurance as to the reliability of, any other information that others may give you. You should not assume that the information contained or incorporated by reference in this proxy statement/prospectus is accurate as of any date other than the date on the front cover of this proxy statement/prospectus or the date of the incorporated document, as applicable.
In making an investment decision, prospective investors must rely on their own examination of us, and the terms of the Business Combination, including the merits and risks involved. Prospective investors should not construe anything in this proxy statement/prospectus as legal, business, or tax advice.
This proxy statement/prospectus contains summaries believed to be accurate with respect to certain documents, but reference is made to the actual documents for complete information. All such summaries are qualified in their entirety by such reference.
TRADEMARKS
This document contains references to trademarks, trade names and service marks belonging to other entities. Solely for convenience, trademarks, trade names and service marks referred to in this proxy statement/prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that the applicable licensor will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
| ii |
This summary term sheet, together with the sections entitled “Questions and Answers About the Proposals for Shareholders” and “Summary of the Proxy Statement,” summarizes certain information contained in this proxy statement/prospectus, but does not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus, including the attached Annexes, for a more complete understanding of the matters to be considered at the Extraordinary General Meeting. In addition, for definitions used commonly throughout this proxy statement/prospectus, including this summary term sheet, please see the section entitled “Frequently Used Terms.”
| ● | Kernel Group Holdings, Inc., a Cayman Islands exempted company, which we refer to as “Kernel”, is a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. | |
| ● | There are currently 8,128,091 Ordinary Shares, par value $0.0001 per share of Kernel issued and outstanding, consisting of (i) 509,341 Class A Ordinary Shares, and (ii) 7,618,750 Class B Ordinary Shares that were issued to Kernel’s original sponsor prior to its initial public offering (“IPO”). There are currently no shares of Kernel preferred stock issued and outstanding. In addition, Kernel issued 15,237,500 Public Warrants to purchase Class A Ordinary Shares (originally sold as part of the Units issued in Kernel’s IPO) as part of its IPO along with 8,750,000 Private Placement Warrants, issued to its original sponsor in a private placement on the IPO closing date. Each warrant entitles its holder to purchase one share of Kernel’s Class A Ordinary Shares at an exercise price of $11.50 per share, to be exercised only for a whole number of Class A Ordinary Shares. The warrants will become exercisable 30 days after the completion of the Business Combination, and they expire five years after the completion of the Kernel’s Business Combination or earlier upon redemption or liquidation. Once the warrants become exercisable, Kernel may redeem the outstanding Public Warrants (i) at a price of $0.01 per warrant, if the last sale price of Kernel’s Ordinary Shares equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third business day before Kernel sends the notice of redemption to the warrant holders or (ii) at varying prices depending on the then current fair market value of Kernel’s ordinary shares and the length of time from the closing of the Business Combination. For more information regarding the warrants, please see the section entitled “Description of Kernel’s and ParentCo’s Securities– Description of Kernel Capital Stock Prior to the Business Combination – Warrants.” | |
| ● | Holders of Class A Ordinary Shares and holders of Class B Ordinary Shares are entitled to one vote for each share held on all matters to be voted on by shareholders and will vote together as a single class on all matters submitted to a vote of the Kernel shareholders except as set forth herein or otherwise required by law. In connection with the Domestication, each issued and outstanding Kernel Class A Ordinary Share and each issued and outstanding Kernel Class B Ordinary Share shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock and one share of Kernel Class B common stock, respectively, and (ii) immediately following the Domestication, (a) each share of Kernel Class B common stock shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock, and the Kernel Class A common stock will be reclassified as Kernel common stock. For more information, please see the section entitled “Shareholder Proposal No. 2: The Domestication Proposal.” Assuming no additional Class A Ordinary Shares, or securities convertible into or exchangeable for, Class A Ordinary Shares, are issued by Kernel in connection with or in relation to the consummation of the Business Combination, the 7,618,750 Class B Ordinary Shares will automatically convert, on an as converted basis, into 7,618,750 Class A Ordinary Shares at the Domestication. | |
| ● | On March 3, 2023, Kernel entered into the Business Combination Agreement. A copy of the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A. | |
| ● | Kernel’s management and the Kernel Board considered various factors in determining whether to approve the Business Combination Agreement and the transactions contemplated thereby, including the Business Combination, the revenue and earnings growth potential of AIRO, the prospects for AIRO and its multi-faceted air mobility, autonomy & aerospace platform and the strength of the AIRO’s management team, which the Kernel Board believes positions AIRO for future growth and profitability. For more information about the Kernel Board’s decision-making process, see the section entitled “Shareholder Proposal No. 1: The Business Combination.” | |
| ● | At the Extraordinary General Meeting, the shareholders of Kernel will be asked to vote on: |
| 1. | a proposal to adopt and approve an Agreement and Plan of Merger (the “Business Combination Agreement”) by and among Kernel, 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 wholly owned subsidiary of ParentCo (“AIRO Merger Sub”), VKSS Capital, LLC, (“Sponsor”) in the capacity as the representative from and after the First Effective Time (as defined below) for the shareholders of Kernel and ParentCo (the “ParentCo Representative”) and also in the capacity as Kernel’s sponsor (“Sponsor”), and Dr. Chirinjeev Kathuria, in the capacity from and after the Second Effective Time as the representative for the AIRO stockholders as of immediately prior to the Second Effective Time (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO”) (the “Business Combination Agreement”) (the “Business Combination Proposal”); |
| 1 |
| 2. | a proposal to approve the domestication of Kernel (the “Domestication Proposal”); | |
| 3. | a proposal to adopt the proposed new certificate of incorporation of ParentCo upon the Closing in the form attached hereto as Annex B (the “ParentCo Charter Amendment Proposal”); | |
| 4. | a proposal to approve, for purposes of complying with applicable Nasdaq Listing Rules, the issuance of more than 20% of Kernel’s issued and outstanding Ordinary Shares and the resulting change in control in connection with the Business Combination (the “Nasdaq Proposal”); | |
| 5. | a proposal to approve and adopt the 2024 Equity Incentive Plan, a copy of which is attached to the accompanying proxy statement/prospectus as Annex D (the “Incentive Plan Proposal”); | |
| 6. | a proposal to approve and adopt the Employee Stock Purchase Plan, a copy of which is attached to the accompanying proxy statement/prospectus as Annex E (the “Employee Stock Purchase Plan Proposal”); | |
| 7. | a proposal to consider and vote to elect seven (7) directors to serve staggered terms on ParentCo’s board of directors until the 2024, 2025 and 2026 annual meeting of stockholders of ParentCo, respectively, and until their respective successors are duly elected and qualified (the “Election of Directors Proposal”); | |
| 8. | proposal to consider and vote upon a proposal, to approve amendments (the “NTA Amendments”) to Kernel’s Amended and Restated Memorandum and Articles of Association, which amendments shall be effective, if adopted and implemented by Kernel, immediately prior to the consummation of the Business Combination, to remove the requirements limiting Kernel’s ability to consummate an initial business combination if Kernel would have less than $5,000,001 in net tangible assets prior to or upon consummation of such initial business combination (the “NTA Proposal”); and | |
| 9. | a proposal to adjourn the Extraordinary General Meeting to a later date or dates, if necessary to permit further solicitation and vote of proxies if it is determined by Kernel that more time is necessary or appropriate to approve one or more Proposals at the Extraordinary General Meeting (the “Adjournment Proposal”). | |
| Please see the sections entitled “Shareholder Proposal No. 1: The Business Combination Proposal,” “Shareholder Proposal No. 2: The Domestication Proposal,” “Shareholder Proposal No. 3: The ParentCo Charter Amendment Proposal,” “Shareholder Proposal No. 4: The Nasdaq Proposal,” “Shareholder Proposal No. 5: The Incentive Plan Proposal,” “Shareholder Proposal No. 6: The Employee Stock Purchase Plan Proposal,” “Shareholder Proposal No. 7: The Election of Directors Proposal,” “Shareholder Proposal No. 8: The NTA Proposal,” and “Shareholder Proposal No. 9: The Adjournment Proposal.” Unless waived by the parties to the Business Combination Agreement, the closing of the Business Combination is conditioned on the approval of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal at the Extraordinary General Meeting. Each of the proposals at the Extraordinary General Meeting, other than the Adjournment Proposal, is conditioned on the approval of the others. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in this proxy statement/prospectus. |
| ● | Upon consummation of the Business Combination, we anticipate a ParentCo Board of nine (9) directors, which shall be divided into three classes, with the first class consisting of three (3) directors with an initial term that expires in 2026, the second class consisting of three (3) directors with an initial term that expires in 2025, and the third class consisting of three (3) directors with an initial term that expires in 2024. Such directors shall serve until their respective successors are duly elected and qualified, or until their earlier resignation, removal, or death. Please see the section entitled “Shareholder Proposal No. 7: The Election of Directors Proposal” for additional information. | |
| ● | Unless waived by the parties to the Business Combination Agreement, and subject to applicable law, the closing of the Business Combination is subject to a number of conditions set forth in the Business Combination Agreement including, among others, receipt of certain stockholder approvals contemplated by this proxy statement/prospectus. For more information about the closing conditions to the Business Combination, please see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal —Conditions to the Closing.” | |
| ● | The Business Combination Agreement may be terminated at any time prior to the consummation of the Business Combination upon agreement of the parties thereto, or by certain parties in specified circumstances. For more information about the termination rights under the Business Combination Agreement, please see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal —Conditions to the Closing.” |
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| ● | The proposed Business Combination involves numerous risks. For more information about these risks, please see the section entitled “Risk Factors.” | |
| ● | In considering the recommendation of the Kernel Board to vote in favor of the Business Combination, shareholders should be aware that, aside from their interests as shareholders, the Sponsor and Kernel’s directors and officers have interests in the Business Combination that are different from, or in addition to, those of other shareholders generally. Kernel’s directors were aware of and considered these interests, among other matters, in evaluating the Business Combination, and in recommending to shareholders that they approve the Business Combination. Shareholders should take these interests into account in deciding whether to approve the Business Combination. These interests include, among other things: |
| 1. | the fact that the Sponsor has agreed not to redeem any of the Founder Shares in connection with a shareholder vote to approve a proposed business combination; | |
| 2. | If Kernel does not complete a business combination by August 5, 2024 (the “Termination Date”), the proceeds from the sale of the Private Placement Warrants will be included in the liquidating distributions to Kernel’s Public Shareholders and the Private Placement Warrants will expire worthless; | |
| 3. | The Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share. If an initial business combination, such as the Business Combination, is not completed by August 5, 2024, Kernel will be required to dissolve and liquidate. In such event, the Kernel Class B Ordinary Shares currently held by the Sponsor, which were acquired from the Original Sponsor will be worthless because the Sponsor has agreed to waive its rights to any liquidation distributions; | |
| 4. | the fact that the Sponsor is entitled to receive reimbursement of $10,000 per month under an administrative support agreement for office space, secretarial and administrative support provided to Kernel, for which, as of the date hereof, our Sponsor has not been paid under this agreement since December 28, 2022, when VKSS Capital, LLC became Kernel’s Sponsor; | |
| 5. | as a condition to the IPO, all of the Founder Shares are subject to a lock-up and would be released only if specific conditions were met. In particular, subject to certain limited exceptions, all Founder Shares would be subject to a lock up until the earlier of (A) one year after the completion of Kernel’s Business Combination and (B) subsequent to the Business Combination, (x) if the closing price of the Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination or (y) the date on which Kernel completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Kernel’s shareholders having the right to exchange their Class A Ordinary Shares for cash, securities or other property; | |
| 6. | if the Trust Account is liquidated, including in the event Kernel is unable to complete a business combination within the required time period, the Sponsor has agreed to indemnify Kernel to ensure that the proceeds in the Trust Account are not reduced below $10.00 per Class A Ordinary Share by the claims of prospective target businesses with which Kernel has entered into an acquisition agreement or claims of any third party for services rendered or products sold to Kernel, but only if such a vendor or target business has not executed a waiver of any and all rights to seek access to the Trust Account; | |
| 7. | the anticipated continuation of two of our existing directors, Surendra Ajjarapu and Donald Fell, as directors of ParentCo; | |
| 8. | the continued indemnification of our existing directors and officers prior to the Business Combination and the continuation of our directors’ and officers’ liability insurance after the Business Combination; | |
| 9. | unless Kernel consummates a business combination, Kernel’s officers, directors, and the Sponsor will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account; | |
| 10. | that pursuant to the IPO Registration Rights Agreement, the Kernel Restricted Shareholders are entitled to registration of the shares of ParentCo Common Stock into which the Founder Shares will automatically convert at the time of the consummation of the Business Combination; and | |
| 11. | the Sponsor has agreed that the Private Placement Warrants and the underlying securities will not be sold or transferred by it until after Kernel has completed a business combination, subject to limited exceptions. |
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Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our,” and the “Company” refer to Kernel Group Holdings, Inc. (which prior to the Domestication is an exempted company incorporated under the laws of the Cayman Islands and thereafter a corporation incorporated under the laws of the State of Delaware). In this proxy statement/prospectus:
“Accounting Principles” means in accordance with GAAP as in effect at the date of the financial statement to which it refers or if there is no such financial statement, then as of the Closing Date, using and applying the same accounting principles, practices, procedures, policies and methods (with consistent classifications, judgments, elections, inclusions, exclusions and valuation and estimation methodologies) used and applied by the Target Companies in the preparation of the latest audited Company Financials (as defined in the Business Combination Agreement).
“AIRO” shall mean AIRO Group Holdings, Inc., a Delaware corporation.
“AIRO Merger Consideration” shall mean a number of shares of ParentCo Common Stock with an aggregate value equal to (a) $770,000,000 minus (b) the amount, if any, by which the Target Net Working Capital Amount exceeds the Net Working Capital by more than $500,000, plus (c) the amount, if any, by which the Net Working Capital exceeds the Target Net Working Capital Amount by more than $500,000 (but not less than zero), minus (d) the amount, if any, by which the Closing Net Debt exceeds the Target Net Debt, by more than $500,000 (but not less than zero), plus (e) the amount, if any, by which the Target Net Debt exceeds Closing Net Debt, minus (f) the amount, if any, by which the Company Transaction Expenses exceed the Target Company Transaction Expenses (but not less than zero), with each share of ParentCo Common Stock valued at the Per Share Price.
“AIRO Merger Sub” shall mean AIRO Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of ParentCo.
“AIRO Warrants” shall mean, collectively, that Warrant to Purchase Equity dated March 10, 2022 by and between AIRO and Stephenson Management Inc. and that Warrant to Purchase Equity dated March 10, 2022 by and between AIRO and Scarsdale Capital Inc. The term “AIRO Warrants” shall include the replacement warrants to purchase shares of ParentCo common stock that will be issued to Stephenson Management Inc. and Scarsdale Capital Inc. upon Closing of the Business Combination.
“Amended and Restated Memorandum and Articles of Association” means the amended and restated memorandum and articles of association of Kernel.
“Business Combination” shall mean the transactions contemplated by the Business Combination Agreement, whereby, among other things, Kernel will change its 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, following which, (i) Kernel Merger Sub will merge with and into Kernel, with Kernel continuing as the surviving entity as a wholly owned subsidiary of ParentCo (the “First Merger”), and (ii) AIRO Merger Sub will merge with and into AIRO, with AIRO continuing as the surviving entity as a wholly-owned subsidiary of ParentCo (the “Second Merger”).
“Business Combination Agreement” means that certain Agreement and Plan of Merger dated March 3, 2023 by and among Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Sponsor, Seller Representative, and AIRO.
“Cayman Islands Companies Law” means the Companies Act (As Revised) of the Cayman Islands as the same may be amended from time to time.
“Citigroup” shall mean Citigroup Global Markets Inc., the representative of the underwriters in the IPO.
“Class A Ordinary Shares” shall mean the Class A ordinary shares, par value $0.0001 per share, of Kernel.
“Class B Ordinary Shares” shall mean the Class B ordinary shares, par value $0.0001 per share, of Kernel.
“Closing” shall mean the closing of the Business Combination.
“Closing Company Cash” means, as of the Reference Time, the aggregate cash and cash equivalents of the Target Companies on hand or in bank accounts, including deposits in transit, minus the aggregate amount of outstanding and unpaid checks issued by or on behalf of the Target Companies as of such time.
“Closing Date” shall mean the date and time at which the Closing is actually being held.
“Closing Net Debt” means, as of the Reference Time, (a) the aggregate amount of all Indebtedness of the Target Companies, less (b) the Closing Company Cash, in each case of clauses (a) and (b), on a consolidated basis and as determined in accordance with the Accounting Principles.
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Company Transaction Expenses” means all fees and expenses of any of the Target Companies incurred or payable as of the Closing and not paid prior to the Closing (i) in connection with the consummation of the transactions contemplated hereby, including any amounts payable to professionals (including investment bankers, brokers, finders, attorneys, accountants and other consultants and advisors) retained by or on behalf of any Target Company, (ii) any change in control bonus, accrued but unpaid salary, transaction bonus, retention bonus, termination or severance payment or payment relating to terminated options, warrants or other equity appreciation, phantom equity, profit participation or similar rights, in any case, to be made to any current or former employee, independent contractor, director or officer of any Target Company at or after the Closing pursuant to any agreement to which any Target Company is a party prior to the Closing which become payable (including if subject to continued employment) as a result of the execution of this Agreement or the consummation of the transactions contemplated hereby, (iii) any sales, use, real property transfer, stamp, stock transfer or other similar transfer Taxes imposed on Target Company in connection with the Business Combination or the other transactions contemplated by this Agreement, and (iv) in connection with the Company’s prior attempt at completing an initial public offering or SPAC transaction, including any amounts payable to professionals (including investment bankers, brokers, finders, attorneys, accountants and other consultants and advisors) retained by or on behalf of any Target Company in connection with the Company’s attempted initial public offering or SPAC transaction.
“Continental” shall mean Continental Stock Transfer & Trust Company, the transfer agent.
“DGCL” shall mean the Delaware General Corporation Law, as amended.
“Definitive Proxy Statement” shall mean Kernel’s definitive proxy statement on Schedule 14A filed with the SEC on January 17, 2024.
“Earnout Eligibility Period” shall mean the period commencing on the Closing Date and ending on December 31, 2026.
“Earnout Shares” shall mean the 33,000,000 shares of ParentCo Common Stock which are comprised of three different tranches, issuable to AIRO stockholders during the Earnout Eligibility Period as additional consideration from ParentCo based on ParentCo’s revenue performance.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Existing Kernel Governing Documents” means Kernel’s Amended and Restated Memorandum and Articles of Association, as subsequently amended by that Amendment to the Amended and Restated Articles of Association dated February 3, 2023.
“Existing ParentCo Governing Documents” means ParentCo’s certificate of incorporation dated February 27, 2023 and ParentCo’s bylaws adopted February 27, 2023.
“Extension Meeting” means the Kernel extraordinary general meeting of shareholders held on February 3, 2023, at which shareholders voted upon, among other items, a proposal to amend Kernel’s amended and restated memorandum and articles of association to extend the date by which Kernel must consummate an initial business combination.
“Extension Meeting - Second” means the Kernel extraordinary general meeting of shareholders held on August 3, 2023, at which shareholders voted upon, among other items, a proposal to amend Kernel’s amended and restated memorandum and articles of association to extend the date by which Kernel must consummate an initial business combination.
“Extension Meeting - Third” means the Kernel extraordinary general meeting of shareholders to be held on February 1, 2024, at which shareholders will vote upon, among other items, the Extension Amendment Proposal.
“Extension Redemption” means the redemption of 22,848,122 Class A Ordinary Shares in connection with the Extension Meeting.
“Extension Redemption - Second” means the redemption of 1,310,929 Class A Ordinary Shares in connection with the Extension Meeting - Second.
“Extension Redemption - Third” means the redemption of Class A Ordinary Shares in connection with the Extension Meeting - Third.
“Extraordinary General Meeting” shall mean the Extraordinary General Meeting of the shareholders of Kernel, to be held on July 31, 2024 at 9:00 a.m. Eastern Time, which will be a virtual meeting conducted via live webcast.
“First Amendment to the Business Combination Agreement” shall mean that certain First Amendment to the Business Combination Agreement, dated August 29, 2023.
“First Effective Time” shall mean the time when the First Merger is consummated, upon the filing of the Certificate of Merger for the merger of Kernel Merger Sub with and into Kernel with the Delaware Secretary of State in accordance with the relevant provisions of the DGCL.
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“First Merger” shall mean the merger of Kernel Merger Sub with and into Kernel, with Kernel surviving as a wholly owned subsidiary of ParentCo.
“Founder Shares” shall mean the 7,618,750 Kernel Class B Ordinary Shares, par value $0.0001 per share, owned by the Sponsor and Kernel’s directors.
“Fourth Amendment to the Business Combination Agreement” shall mean that certain Fourth Amendment to the Business Combination Agreement, dated June 24, 2024.
“HSR Act” shall mean the Hart Scott Rodino Antitrust Act.
“Indebtedness” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money (including the outstanding principal and accrued but unpaid interest), (b) all obligations for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (c) any other indebtedness of such Person that is evidenced by a note, bond, debenture, credit agreement or similar instrument, (d) all obligations of such Person under leases that should be classified as capital leases in accordance with GAAP, (e) all obligations of such Person for the reimbursement of any obligor on any line or letter of credit, banker’s acceptance, guarantee or similar credit transaction, in each case, that has been drawn or claimed against, (f) all obligations of such Person in respect of acceptances issued or created, (g) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (h) all obligations secured by an Lien (as defined in the Business Combination Agreement) on any property of such Person, (i) any premiums, prepayment fees or other penalties, fees, costs or expenses associated with payment of any Indebtedness of such Person and (j) all obligation described in clauses (a) through (i) above of any other Person which is directly or indirectly guaranteed by such Person or which such Person has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which it has otherwise assured a creditor against loss.
“IPO” shall mean Kernel’s Initial Public Offering of Units, consummated on February 5, 2021.
“Kernel” shall mean Kernel Group Holdings, Inc., a Cayman Islands exempted company.
“Kernel Board” shall mean the board of directors of Kernel.
“Kernel Merger Consideration” shall mean the shares of ParentCo Common Stock, into which each share of Kernel common stock issued and outstanding immediately prior to the First Effective Time shall automatically convert.
“Kernel Merger Sub” shall mean Kernel Merger Sub, Inc., a Delaware corporation, and a wholly-owned subsidiary of ParentCo.
“Kernel Ordinary Shares” shall mean the Class A Ordinary Shares and Class B Ordinary Shares, par value $0.0001 per share, of Kernel.
“Kernel Restricted Shareholders” shall mean the holders of the Founder Shares.
“Kernel Support Agreement” shall mean the agreement by and among Kernel, Sponsor and certain shareholders of Kernel to, among other things, vote their shares of Kernel Ordinary Shares in favor of the adoption and approval of the Business Combination Agreement and the transactions contemplated thereby.
“Lock-Up Agreements” shall mean the agreements entered into by Kernel with the Sponsor and agreements entered into by ParentCo with the Sponsor and certain AIRO stockholders in form and substance mutually acceptable to the parties thereto.
“Net Working Capital” means, as of the Reference Time, (i) all current assets of the Target Companies (excluding, without duplication, Closing Company Cash), on a consolidated basis, minus (ii) all current liabilities of the Target Companies (excluding, without duplication, Indebtedness and unpaid Company Transaction Expenses), on a consolidated basis and as determined in accordance with the Accounting Principles; provided, that, for purposes of this definition, whether or not the following is consistent with the Accounting Principles, “current assets” will exclude any receivable from an AIRO stockholder.
“Original Sponsor” shall mean Kernel Capital Holdings, LLC.
“ParentCo” shall mean AIRO Group, Inc., a Delaware corporation.
“ParentCo Board” shall mean the board of directors of ParentCo.
‘ParentCo Common Stock” shall mean the common stock, par value $0.0001 per share, of the ParentCo.
“ParentCo Representative” shall mean VKSS Capital, LLC.
“Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof.
“Private Placement Warrants” shall mean the warrants to purchase Class A Ordinary Shares purchased in a private placement in connection with the IPO, or the ParentCo warrants issued in exchange for Kernel Private Placement Warrants.
“Proposals” shall mean the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Director Election Proposal, and the Adjournment Proposal.
“Proposed Kernel Bylaws” means the proposed bylaws of the Kernel to be in effect as of the Closing of the Business Combination, a form of which is attached as an exhibit to the registration statement of which this proxy statement/prospectus forms a part.
“Proposed Kernel Charter” means the proposed certificate of incorporation of the Kernel to be in effect as of the Closing of the Business Combination, a form of which is attached as an exhibit to the registration statement of which this proxy statement/prospectus forms a part.
“Proposed Kernel Governing Documents” means the Proposed Kernel Charter and Proposed Kernel Bylaws.
“Proposed ParentCo Bylaws” means the proposed bylaws of ParentCo to be in effect as of the Closing of the Business Combination, a form of which is attached as an exhibit to the registration statement of which this proxy statement/prospectus forms a part.
“Proposed ParentCo Charter” means the proposed certificate of incorporation of ParentCo to be in effect as of the Closing of the Business Combination, a form of which is attached as an exhibit to the registration statement of which this proxy statement/prospectus forms a part.
“Proposed ParentCo Governing Documents” means the Proposed ParentCo Charter and Proposed ParentCo Bylaws.
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“Pro Rata Share” shall mean (a) with respect to each AIRO stockholder, a fraction expressed as a percentage equal to (i) the portion of the AIRO Merger Consideration payable by ParentCo to such AIRO stockholder in accordance with the terms of the Business Combination Agreement, divided by (ii) the total AIRO Merger Consideration payable by ParentCo to all AIRO stockholders in accordance with the terms of the Business Combination Agreement, and (b) with respect to each Kernel shareholder, a fraction expressed as a percentage equal to (i) the portion of the Kernel Merger Consideration payable by ParentCo to such Kernel shareholder in accordance with the terms of the Business Combination Agreement, divided by (ii) the total Kernel Merger Consideration payable by ParentCo to all Kernel shareholders in accordance with the terms of the Business Combination Agreement.
“Public Shares” shall mean the Class A Ordinary Shares included in the Units sold in the IPO.
“Public Shareholders” shall mean the persons who own the Public Shares.
“Public Warrants” shall mean the warrants underlying the Public Units issued in the IPO, and after the Closing, shall mean the converted Public Warrants, with an exercise price of $11.50 per share of ParentCo Common Stock.
“Record Date” shall mean July 10, 2024.
“Redeemable” shall mean, in respect of the Public Warrants, the ability of ParentCo to redeem such Public Warrants after the closing of the proposed Business Combination, provided that certain other conditions as set forth in the Warrant Agreement are met.
“Redemption” shall mean the right of Kernel shareholders to have their Public Shares redeemed in accordance with the procedures set forth in this proxy statement/prospectus.
“Reference Time” means the close of business of AIRO on the Closing Date (but without giving effect to the transactions contemplated by the Business Combination Agreement, including any payments by ParentCo hereunder to occur at the Closing, but treating any obligations in respect of Indebtedness, Transaction Expenses or other liabilities that are contingent upon the consummation of the Closing as currently due and owing without contingency as of the Reference Time).
“Registration Rights Agreement” shall mean the Registration Rights Agreement by and among Kernel and significant AIRO stockholders required as a closing condition in the Business Combination Agreement.
“SEC” shall mean the U.S. Securities and Exchange Commission.
“Second Effective Time” shall mean the time when the Second Merger is consummated, upon the filing of the Certificate of Merger for the merger of AIRO Merger Sub with and into AIRO with the Delaware Secretary of State in accordance with the relevant provisions of the DGCL.
“Second Merger” shall mean the merger of AIRO Merger Sub with and into AIRO, with AIRO surviving as a wholly owned subsidiary of ParentCo.
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Seller Representative” shall mean Dr. Chirinjeev Kathuria.
“Sponsor” shall mean VKSS Capital, LLC, a Delaware limited liability company.
“Target Company” means each of AIRO and its direct and indirect subsidiaries.
“Target Company Transaction Expenses” shall mean $14,000,000.
“Target Net Debt” shall mean $75,000,000.
“Target Net Working Capital Amount” shall mean an amount equal to $(5,500,000).
“Transfer Agent” shall mean Continental.
“Trust Account” shall mean the trust account of Kernel, which holds the net proceeds of the IPO, together with interest earned thereon, less amounts released to pay franchise and income tax obligations.
“Units” shall mean units consisting of a Class A Ordinary Share and a warrant to purchase a Class A Ordinary Share, sold together as a unit in the IPO.
“Warrants” shall mean the Private Placement Warrants, the Public Warrants, the AIRO Warrants, and any other warrants to purchase capital stock of Kernel, ParentCo or AIRO.
“Warrant Agreement” shall mean the warrant agreement by and between Kernel and Continental Stock Transfer & Trust Company, dated February 5, 2021 (and, after the Closing, shall mean the Warrant Agreement as assumed by ParentCo).
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR SHAREHOLDERS
The following questions and answers briefly address some commonly asked questions about the Proposals to be presented at the Extraordinary General Meeting of Kernel shareholders. The following questions and answers do not include all the information that is important to shareholders of Kernel. We urge the shareholders of Kernel to carefully read this entire proxy statement/prospectus, including the annexes and other documents referred to herein. Capitalized terms not otherwise defined in these questions and answers shall have the meanings ascribed to them in the Business Combination Agreement, which is attached to the Proxy Statement as Annex A.
Why am I receiving this proxy statement/prospectus?
This proxy statement/prospectus and its annexes contain important information about the proposed Business Combination and the other matters to be acted upon at the Extraordinary General Meeting. You should read this proxy statement/prospectus and its annexes carefully and in their entirety.
Your vote is important. You are encouraged to submit your proxy as soon as possible after carefully reviewing this proxy statement/prospectus and its annexes.
Below are proposals on which Kernel shareholders are being asked to vote.
| (1) | to adopt and approve the Business Combination Proposal; | |
| (2) | to adopt and approve the Domestication Proposal; | |
| (3) | to adopt and approve the ParentCo Charter Amendment Proposal; | |
| (4) | to consider and vote upon the Nasdaq Proposal; | |
| (5) | to approve and adopt the Incentive Plan Proposal; | |
| (6) | to approve and adopt the Employee Stock Purchase Plan Proposal; | |
| (7) | to consider and vote on the Election of Directors Proposal; | |
| (8) | to consider and vote on the NTA Proposal; and | |
| (9) | to adopt and approve the Adjournment Proposal. |
Are the Proposals conditioned on one another?
Unless the Business Combination Proposal is approved, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal will not be presented to the shareholders of Kernel at the Extraordinary General Meeting. The Adjournment Proposal is not conditioned on the approval of any other Proposal set forth in this proxy statement/prospectus. It is important for you to note that in the event that the Business Combination Proposal does not receive the requisite vote for approval, then we will not consummate the Business Combination. If Kernel does not consummate the Business Combination and fails to complete an initial business combination by August 5, 2024, Kernel will be required to dissolve and liquidate its Trust Account by returning the then remaining funds in such account to its Public Shareholders. The approval of the Business Combination, the Domestication Proposal, the Nasdaq Proposal, the ParentCo Charter Amendment Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal are preconditions to the consummation of the Business Combination.
What will happen in the Business Combination?
At the Closing, Kernel Merger Sub shall be merged with and into Kernel (the “First Merger”), following which the separate corporate existence of Kernel Merger Sub shall cease and Kernel shall continue as the surviving corporation and a wholly owned subsidiary of ParentCo. Immediately thereafter, AIRO Merger Sub shall be merged with and into AIRO (the “Second Merger”, following which the separate corporate existence of AIRO Merger Sub shall cease and AIRO shall continue as the surviving corporation and a wholly owned subsidiary of ParentCo. In connection with the Business Combination, the cash held in the Trust Account will be used to fund redemptions by Kernel shareholders, and for working capital and general corporate purposes. A copy of the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A.
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What equity stake will current shareholders of Kernel and AIRO hold in ParentCo after the Closing?
It is anticipated that, upon the completion of the Business Combination, Kernel’s Public Shareholders will retain an ownership interest of approximately 0.6% of the outstanding capital stock of ParentCo, the Sponsor will retain an aggregate ownership interest of approximately 8.4% of the outstanding capital stock of ParentCo and the AIRO stockholders will own approximately 85.9% of the outstanding capital stock of ParentCo, in each case, assuming that none of Kernel’s outstanding Public Shares are redeemed in connection with the Business Combination, or approximately nil, 86.4%, and 8.4%, respectively, assuming that all of Kernel’s outstanding Public Shares are redeemed in connection with the Business Combination. The foregoing ownership percentages with respect to ParentCo following the Business Combination excludes any outstanding Warrants and assumes that there are no redemptions of any shares by Kernel’s Public Shareholders in connection with the Business Combination and Kernel does not engage in any kind of additional equity financing prior to the Closing. If the actual facts are different than these assumptions (which they are likely to be), the percentage ownership retained by Kernel’s existing shareholders in ParentCo will be different.
If any of Kernel’s Public Shareholders exercise their redemption rights, the percentage of ParentCo’s outstanding common stock held by ParentCo’s Public Shareholders will decrease and the percentages of ParentCo’s outstanding common stock held by the Sponsor and by the AIRO stockholders will increase, in each case, relative to the percentage held if none of the Public Shares are redeemed.
If any of Kernel’s Public Shareholders as of the Record Date redeem their Public Shares at Closing in accordance with the Existing Kernel Governing Documents but continue to hold Public Warrants after the Closing, the aggregate value of the Public Warrants that may be retained by them, based on the closing trading price per Public Warrant of $0.13 as of July 3, 2024, would be approximately $2.0 million, regardless of the amount of redemptions by the Public Shareholders. Upon the issuance of ParentCo common stock in connection with the Business Combination, the percentage ownership of ParentCo by Kernel’s Public Shareholders who do not redeem their Public Shares will be diluted. Kernel Public Shareholders that do not redeem their Public Shares in connection with the Business Combination will experience further dilution upon the exercise of Public Warrants that are retained after the Closing by redeeming Kernel Public Shareholders. The percentage of the total number of outstanding shares of ParentCo common stock that will be owned by Kernel Public Shareholders as a group will vary based on the number of Public Shares for which the holders thereof request redemption in connection with the Business Combination.
The table below shows the issued and outstanding shares under each of the Scenarios set forth above following the closing of the Business Combination based on the varying levels of redemptions by the Public Shareholders on a fully diluted basis, as well as potential sources of dilution. As further described herein under “Notes to Unaudited Pro Forma Combined Financial Information - Adjustments to Unaudited Pro Forma Combined Balance Sheet”, the Business Combination will not close under any scenario unless AIRO waives the Unencumbered Cash closing condition and the NTA Proposal is approved.
● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
| Scenarios | ||||||||||||||||||||||||
| 1 | 2 | 3 | ||||||||||||||||||||||
| Issued and Outstanding Share Basis | No Redemption | % Owned | 50% Redemption | % Owned | Maximum Redemption | % Owned | ||||||||||||||||||
| Kernel Public Shares | 509,341 | 0.6 | % | 254,671 | 0.3 | % | - | - | % | |||||||||||||||
| Kernel Founder Shares | 7,618,750 | 8.4 | % | 7,618,750 | 8.5 | % | 7,618,750 | 8.5 | % | |||||||||||||||
| AIRO shareholders (1) | 77,000,000 | 85.9 | % | 77,000,000 | 86.1 | % | 77,000,000 | 86.4 | % | |||||||||||||||
| Extension Shares (2) | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | |||||||||||||||
| Meteora Termination Shares (3) | 50,000 | 0.1 | % | 50,000 | 0.1 | % | 50,000 | 0.1 | % | |||||||||||||||
| Pro Forma common stock at March 31, 2024 | 89,628,091 | 100.0 | % | 89,373,421 | 100.0 | % | 89,118,750 | 100.0 | % | |||||||||||||||
| Potential sources of dilution: | ||||||||||||||||||||||||
| Public Warrants (4) | 15,237,500 | 17.0 | % | 15,237,500 | 17.0 | % | 15,237,500 | 17.1 | % | |||||||||||||||
| Private Warrants (5) | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | |||||||||||||||
| First Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Second Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Third Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| AIRO Warrants (7) | 266,230 | 0.3 | % | 266,230 | 0.3 | % | 266,230 | 0.3 | % | |||||||||||||||
| AIRO Options (8) | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | |||||||||||||||
| (1) | Does not reflect closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are not expected to be significant. |
| (2) | Assumes the issuance of Class A common stock under the terms of the Extension Agreement. The agreement calls for an issuance of up to 4,450,000 shares for the payment of extension payments including an estimated $1.75 million in working capital amounts. |
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| (3) | Assumes the issuance of 50,000 shares of ParentCo common stock to an entity designated by Meteora Special Opportunity Fund I, LP, Meteora Capital Partners, LP and Meteora Select Trading Opportunities Master, LP (collectively, “Meteora”) upon closing of the Business Combination in consideration for termination of the Forward Purchase Agreement. | |
| (4) | Assumes exercise of 15,237,500 Public Warrants (at a purchase price of $11.50 per Public Warrant) resulting in a cash inflow of $175,231,250 for ParentCo and 15,237,500 shares of ParentCo common stock issued to holders of Public Warrants. |
| (5) | Assumes exercise of 8,750,000 Private Placement Warrants (at $11.50 per Private Placement Warrant) resulting in a cash inflow of $100,625,000 for ParentCo and 8,750,000 shares of ParentCo common stock issued to holders of Private Placement Warrants. |
| (6) | Assumes the earnout measurements will be met per the Business Combination Agreement: |
(i) In the event ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
| (7) | Assumes exercise of 266,230 AIRO Warrants (at $4.17 per AIRO Warrant) resulting in a cash inflow of $1,110,179 for ParentCo and 266,230 shares of ParentCo common stock issued to holders of AIRO Warrants.
| |
| (8) | Assumes exercise of 1,435,615 AIRO Options (at $2.13 per AIRO Option) resulting in a cash inflow of $3,057,860 for ParentCo and 1,435,615 shares of ParentCo common stock issued to holders of AIRO Options. |
See the section entitled “Unaudited Pro Forma Combined Financial Information” for further information.
How much consideration will AIRO stockholders receive in connection with the Business Combination?
As consideration for the Second Merger, the AIRO stockholders 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 (a) $770,000,000 minus (b) the amount, if any, by which the net working capital is less than negative $5,500,000 by more than $500,000, plus (c) the amount, if any, by which the net working capital is greater than negative $5,500,000 by more than $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 is less than 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 (such resulting amount, the “AIRO Merger Consideration”).
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In addition, AIRO stockholders shall also be entitled to receive from ParentCo up to 33,000,000 additional shares of ParentCo common stock based on ParentCo’s achievement of certain revenue thresholds, as follows:
(a) if ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares;
(b) if ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares; and
(c) if ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares.
What conditions must be satisfied to complete the Business Combination?
Unless waived by the applicable party or parties to the Business Combination Agreement, and subject to applicable law, the completion of the Business Combination is subject to a number of conditions set forth in the Business Combination Agreement, including, among others, with respect to the obligations of all of the parties to the Business Combination Agreement:
| ● | the approval by the stockholders of each of AIRO and Kernel; | |
| ● | approvals of any required governmental authorities; | |
| ● | receipt of specified third-party consents; | |
| ● | no law or order preventing the transactions; | |
| ● | no material uncured breach by the other party; | |
| ● | after giving effect to the redemption, Kernel shall have at least $5,000,001 of net tangible assets as required by the Existing Kernel Governing Documents (this condition is not waivable); | |
| ● | the members of the Post-Closing Board (as defined below) shall have been elected or appointed as of the Closing; | |
| ● | the registration statement required by the Business Combination Agreement shall have been declared effective by the SEC and shall remain effective as of the Closing, and no stop order or similar order shall be in effect with respect to the registration statement; and | |
| ● | the shares of ParentCo common stock issued as Merger Consideration shall have been approved for listing on Nasdaq, subject to official notice of issuance (this condition is not waivable). |
In addition, unless waived by AIRO, the obligations of AIRO to consummate the Business Combination are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries: (a) the representations and warranties of Kernel being true and correct as of the date of the Business Combination Agreement and as of the Closing, except for those representations and warranties addressing matters only as of a particular date, and any failures to be true and correct that have not and would not reasonably be expected to have a Material Adverse Effect with respect to Kernel; (b) Kernel, ParentCo, Kernel Merger Sub, and AIRO Merger Sub 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 on or prior the date of the Closing; (c) absence of any Material Adverse Effect with respect to Kernel since the date of the Business Combination Agreement which is continuing and uncured; and (d) 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, 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 date of the Business Combination Agreement 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.
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Unless waived by Kernel, the obligations of Kernel, ParentCo, Kernel Merger Sub and AIRO Merger Sub to consummate the Business Combination are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries: (a) the representations and warranties of AIRO being true and correct as of the date of the Business Combination Agreement and as of the Closing, except for those representations and warranties addressing matters only as of a particular date, and any failures to be true and correct that have not and would not reasonably be expected to have a Material Adverse Effect with respect to AIRO; (b) AIRO 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 on or prior the date of the Closing; and (c) absence of any Material Adverse Effect with respect to AIRO as a whole since the date of the Business Combination Agreement which is continuing and uncured; (d) delivery of AIRO’s 2022 Audited Financials within 60 days of the Business Combination Agreement’s signing; (e) the completion of Kernel’s legal due diligence of AIRO and its subsidiaries to Kernel’s reasonable satisfaction; (f) the delivery of the Replacement Warrants and Replacement Options; and (g) the aggregate amount of all Indebtedness of the Target Companies due earlier than 180 days after the Closing (net of Company cash at Closing) is less than Fifty Million U.S. Dollars ($50,000,000).
For a summary of the conditions that must be satisfied or waived prior to the Closing of the Business Combination, see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal — Conditions to the Closing.”
Why is Kernel providing shareholders with the opportunity to vote on the Business Combination?
Under the Existing Kernel Governing Documents, Kernel must provide all holders of its Public Shares with the opportunity to have their Public Shares redeemed upon the consummation of Kernel’s initial business combination either in conjunction with a tender offer or in conjunction with a shareholder vote. For business and other reasons, Kernel has elected to provide its shareholders with the opportunity to have their Public Shares redeemed in connection with a shareholder vote rather than a tender offer. Therefore, Kernel is seeking to obtain the approval of its shareholders of the Business Combination in order to allow its Public Shareholders to effectuate redemptions of their Public Shares in connection with the Closing of the Business Combination.
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How many votes do I have at the Extraordinary General Meeting?
Kernel shareholders are entitled to one vote at the Extraordinary General Meeting for each Kernel Ordinary Share held of record as of July 10, 2024, the record date for the Extraordinary General Meeting (the “Record Date”). As of the close of business on the Record Date, there were 509,341 outstanding Kernel Ordinary Shares.
What vote is required to approve the Proposals presented at the Extraordinary General Meeting?
| (i) | Business Combination Proposal: The approval of the Business Combination Proposal requires the affirmative vote of a majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (ii) | Domestication Proposal: The approval of the Domestication Proposal requires the affirmative vote of at least a two-thirds (2/3) majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (iii) | ParentCo Charter Amendment Proposal: The approval of the ParentCo Charter Amendment Proposal requires the affirmative vote of at least a two-thirds (2/3) majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (iv) | Nasdaq Proposal: The approval of the Nasdaq Proposal requires the affirmative vote of a majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (v) | Equity Incentive Plan Proposal: The approval of the Equity Incentive Plan Proposal requires the affirmative vote of a majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (vi) | Employee Stock Purchase Plan Proposal: The approval of the Employee Stock Purchase Plan Proposal requires the affirmative vote of a majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date. that are present and vote at the Extraordinary General Meeting | |
| (vii) | Election of Directors Proposal: The approval of the Election of Directors Proposal requires the affirmative vote of a majority of the issued and outstanding Class B Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (viii) | NTA Proposal: The approval of the NTA Proposal requires the affirmative vote of at least a two-thirds (2/3) majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. | |
| (ix) | Adjournment Proposal: The approval of the Business Combination Proposal requires the affirmative vote of a majority of the issued and outstanding Kernel Ordinary Shares as of the Record Date that are present and vote at the Extraordinary General Meeting. |
As of the record date, Kernel had 8,128,091 Ordinary Shares issued and outstanding. Kernel shareholders are entitled to one vote at the Extraordinary General Meeting for each Ordinary Share held of record as of the record date. 7,618,750 Ordinary Shares are subject to the Kernel Support Agreement, pursuant to which the Sponsor have agreed to vote all of their shares in favor of the Business Combination.
Assuming all holders that are entitled to vote on such matter vote all of their Ordinary Shares in person or by proxy, no Public Shares will need to be voted in favor of each of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, the NTA Proposal, or the Adjournment Proposal in order to approve each of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, the NTA Proposal, and the Adjournment Proposal.
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Holders of Kernel Class B Ordinary Shares will have the right to elect all of Kernel’s directors prior to the closing of the Business Combination and holders of Kernel Class A Ordinary Shares will not have the right to vote on the election of directors during such time. A majority of the Kernel Class B Ordinary Shares will need to vote in favor of the Election of Directors Proposal.
If the Business Combination is not approved, the Domestication Proposal, the ParentCo Charter Amendment Proposal, Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal and the Election of Directors Proposal will not be presented to Kernel’s shareholders for a vote. The approval of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal are preconditions to the consummation of the Business Combination.
May Kernel, the Sponsor or Kernel’s directors, officers, advisors or their affiliates purchase shares in connection with the Business Combination?
In connection with the shareholder vote to approve Proposals, including the Business Combination Proposal, Kernel and its affiliates may purchase shares prior to the Closing from shareholders who would have otherwise elected to have their shares redeemed for a pro rata portion of the Trust Account upon consummation of the Business Combination. Such a purchase would in a privately negotiated purchase arrangement include a contractual acknowledgement that such shareholder, although still the record holder of such shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. While they have no current plans to do so, the Sponsor, Kernel’s directors, officers or advisors, or their affiliates reserve the right to purchase shares from holders of Kernel Ordinary Shares who have already elected to exercise their redemption rights, in which event such selling shareholders would be required to revoke their prior elections to redeem their shares. Any such transaction would be separately negotiated at the time of the transaction. The consideration for any such transaction would consist of cash and/or Kernel Ordinary Shares owned by the Sponsor and/or Kernel’s directors, officers, advisors, or their affiliates.
None of Kernel, the Sponsor or Kernel’s directors, officers or advisors, or their respective affiliates, will make any such purchases when they are in possession of any material non-public information not disclosed to the seller. Any Kernel Ordinary Shares purchased by the Sponsor or Kernel’s directors, officers or advisors, or their respective affiliates will not (i) be purchased at a price higher than the price offered through the redemption process in the Redemption, (ii) be voted in favor of the Business Combination or (iii) have redemption rights, and if such Kernel Ordinary Shares do have redemption rights, then such rights will be waived by each of the Sponsor, or Kernel’s directors, officers or advisors, or their respective affiliates. The Sponsor and each of Kernel’s directors, officers or advisors, or their respective affiliates received no additional consideration in exchange for the agreement to waive their redemption rights. The purpose of these purchases could be to increase the amount of cash available to Kernel for use in the Business Combination to satisfy the closing condition that requires Kernel to have a minimum amount of cash upon the consummation of the Business Combination, where it appears that such requirement would otherwise not be met. The purpose of these purchases would be to increase the amount of cash available to Kernel for use in the Business Combination.
As of the date of this proxy statement/prospectus, no agreements with respect to the private purchase of Public Shares by the persons described above have been entered into with any such investor or holder. In the event of any such newly purchased shares (i) the Sponsor or its affiliates will purchase the Kernel Public Shares at a price no higher than the price offered through the redemption process; (ii) any such purchases by Sponsor or its affiliates will not be voted in favor of approving the Business Combination; and (iii) the Sponsor and its affiliates have waived their redemption rights to such shares. Prior to the special meeting to approve the Business Combination, Kernel will disclose in a Form 8-K (i) the amount of Public Shares purchased outside of the redemption offer by the Sponsor or its affiliates, along with the purchase price; (ii) the purpose of the purchases by the Sponsor or its affiliates; (iii) the impact, if any, of the purchases by the Sponsor or its affiliates on the likelihood that the Business Combination transaction will be approved; (iv) the identities of shareholders who sold to the Sponsor or its affiliates (if not purchased on the open market) or the nature of shareholders (e.g., 5% security holders) who sold to the Sponsor or its affiliates; and (v) the number of Public Shares for which Kernel has received redemption requests pursuant to its redemption offer.
Unlike our Sponsor’s and Kernel Initial Shareholders’ holdings currently, such newly purchased shares (if any) by those purchasers would not be subject to a lock-up period under the terms of our Sponsor Support Agreement. However, these newly purchased shares would be subject to limitations on resale under Rule 144 of the Securities Act as “control securities”, to the extent those shares were acquired by an affiliate of Kernel, unless they are registered on a subsequent registration statement filed under the Securities Act. Limitations on resale would require those affiliated purchasers of such newly purchased shares to hold them for at least one year (from the date ParentCo files certain information on Form 8-K following the Closing in accordance with rules applicable to special purpose acquisition companies), assuming they are not registered on a registration statement following the Closing and ParentCo has fully complied with its reporting requirements and other requirements under Rule 144. When eligible to be sold, such securities if not registered under such a registration statement would be limited by applicable requirements of Rule 144, including limitations in their manner of sale and to the volume of sales eligible under Rule 144.
Entering into any such incentive arrangements may have an effect lowering the price of Kernel Ordinary Shares or possibly reducing the public float of ParentCo Ordinary Shares. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the Special Meeting. In addition, if such purchases are made, the public float of Kernel Ordinary Shares and the number of its beneficial holders may be reduced, possibly making it difficult to maintain the quotation, listing or trading of ParentCo Ordinary Shares on a national securities exchange.
What constitutes a quorum at the Extraordinary General Meeting?
Holders of a majority of Kernel Ordinary Shares being individuals present in person or by proxy or if a corporation or other non-natural person by its duly authorized representative or proxy shall be a quorum. If a quorum is not present within half an hour from the time appointed for the meeting to commence, the meeting shall stand adjourned to the same day in the next week at the same time and/or place or to such other day, time and/or place as the directors may determine. As of the Record Date, 4,064,046 Kernel Ordinary Shares would be required to achieve a quorum.
How will Kernel’s Sponsor, directors and officers vote?
The Sponsor has agreed to vote its Founder Shares (as well as any Public Shares purchased during or after the IPO) in favor of the Business Combination. Accordingly, if Kernel seeks shareholder approval of the Business Combination, it is more likely that the necessary shareholder approval will be received than would be the case if the Sponsor agreed to vote their Founder Shares in accordance with the majority of the votes cast by Kernel’s Public Shareholders.
What interests do Kernel’s current officers and directors have in the Business Combination?
The Sponsor (including certain equity holders of the Sponsor), and certain of Kernel’s directors and executive officers (including Suren Ajjarapu who is Kernel’s chief executive officer and the Sponsor’s controlling equity holder) may have interests in the Business Combination that are different from or in addition to (and which may conflict with) your interests. These interests include:
| ● | unless Kernel consummates a business combination, Kernel’s officers, directors and the Sponsor will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account; |
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| ● | as a condition to the IPO, all of the Founder Shares are subject to a lock-up and would be released only if specified conditions were met. In particular, subject to certain limited exceptions, all Founder Shares would be subject to a lock up until the earlier of (A) one year after the completion of Kernel’s Business Combination and (B) subsequent to the Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination or (y) the date on which Kernel completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Kernel’s shareholders having the right to exchange their Class A Ordinary Shares for cash, securities or other property; |
| ● | the Private Placement Warrants purchased by the Sponsor will be worthless if a business combination is not consummated; | |
| ● | the Sponsor has agreed that the Private Placement Warrants and the underlying securities will not be sold or transferred by it until after Kernel has completed a business combination, subject to limited exceptions; | |
| ● | the Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share, which it purchased from the Original Sponsor on December 28, 2022. If an initial business combination, such as the Business Combination, is not completed by August 5, 2024, Kernel will be required to dissolve and liquidate. In such event, the Kernel Class B Ordinary Shares currently held by the Sponsor, which were acquired from the Original Sponsor will be worthless because the Sponsor has agreed to waive its rights to any liquidation distribution; | |
| ● | the fact that the Sponsor has agreed not to redeem any of the Founder Shares in connection with a shareholder vote to approve a proposed business combination; | |
| ● | the anticipated continuation of two of our existing directors, Surendra Ajjarapu and Donald Fell, as directors of ParentCo; | |
| ● | the continued indemnification of our existing directors and officers prior to the Business Combination and the continuation of our directors’ and officers’ liability insurance after the Business Combination; | |
| ● | that pursuant to the IPO Registration Rights Agreement, the Kernel Restricted Shareholders are entitled to registration of the shares of ParentCo Common Stock into which the Founder Shares will automatically convert at the time of the consummation of the Business Combination; | |
| ● | the fact that our Sponsor is entitled to receive reimbursement of $10,000 per month under an administrative support agreement for office space, secretarial and administrative support provided to Kernel, for which, as of the date hereof, our Sponsor has already been paid $0; | |
| ● | if Kernel does not complete a business combination by August 5, 2024 (the “Termination Date”) (by electing to extend the date to consummate a business combination on a monthly basis for up to six additional times by an additional one month, until August 5, 2024), the proceeds from the sale of the Private Placement Warrants will be included in the liquidating distributions to Kernel’s Public Shareholders and the Private Placement Warrants will expire worthless; and | |
| ● | if the Trust Account is liquidated, including in the event Kernel is unable to complete a business combination within the required time period, the Sponsor has agreed to indemnify Kernel to ensure that the proceeds in the Trust Account are not reduced below $10.00 per Public Share by the claims of prospective target businesses with which Kernel has entered into an acquisition agreement or claims of any third party for services rendered or products sold to Kernel, but only if such a vendor or target business has not executed a waiver of any and all rights to seek access to the Trust Account. |
Kernel’s Board considered these interests when reviewing the proposed terms of the Business Combination and how they might impact the identification of and negotiations with AIRO and how they might impact the ParentCo if the Business Combination were to be completed. In reviewing these interests, and others deemed relevant by the Kernel Board, the Board concluded that, on the whole, these interests provided an alignment between the interests of Kernel’s officers and directors, on the one hand, and those of Kernel’s shareholders, on the other hand. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” in the accompanying proxy statement/prospectus for a further discussion of these considerations.
These interests may influence Kernel’s directors and executive officers in making their recommendation that you vote in favor of the approval of the Business Combination.
What happens if I sell my Class A Ordinary Shares before the Extraordinary General Meeting?
The Record Date is earlier than the date of the Extraordinary General Meeting. If you transfer your Class A Ordinary Shares after the Record Date, but before the Extraordinary General Meeting, unless the transferee obtains from you a proxy to vote those shares, you will retain your right to vote at the Extraordinary General Meeting. However, you will not be able to seek redemption of your shares because you will no longer be able to deliver them for cancellation upon consummation of the Business Combination. If you transfer your Class A Ordinary Shares prior to the Record Date, you will have no right to vote those shares at the Extraordinary General Meeting or redeem those shares for a pro rata portion of the proceeds held in our Trust Account.
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What happens if I vote against the Business Combination Proposal?
Pursuant to the Existing Kernel Governing Documents, if the Business Combination Proposal is not approved and Kernel does not otherwise consummate an alternative business combination by August 5, 2024, Kernel will be required to dissolve and liquidate its Trust Account by returning the then remaining funds in such account to the Public Shareholders.
Do I have redemption rights?
Pursuant to the Existing Kernel Governing Documents holders of Public Shares may elect to have their shares redeemed for cash at the applicable redemption price per share calculated in accordance with the Existing Kernel Governing Documents. For illustrative purposes, based on approximately $5.5 million of funds in the Trust Account and 509,341 shares subject to possible redemption, in each case, following the Extension Redemption, this would have amounted to approximately $10.80 per issued and outstanding Public Share. If a holder exercises its redemption rights, then such holder will be exchanging its shares of Kernel Ordinary Shares for cash. Such a holder will be entitled to receive cash for its Public Shares only if it properly demands redemption and delivers its shares (either physically or electronically) to Kernel’s Transfer Agent prior to the Extraordinary General Meeting. See the section entitled “Extraordinary General Meeting of Kernel Shareholders — Redemption Rights” for the procedures to be followed if you wish to redeem your shares for cash.
Notwithstanding the foregoing, a Public Shareholder, together with any affiliate of such holder or any other person with whom such holder is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking redemption with respect to more than 15% of the Kernel Ordinary Shares without the consent of Kernel. Accordingly, all Public Shares in excess of 15% held by a Public Shareholder, together with any affiliate of such Public Shareholder or any other person with whom such holder is acting in concert or as a “group,” will not be redeemed without the consent of Kernel.
Will how I vote affect my ability to exercise redemption rights?
No. You may exercise your redemption rights whether you vote your shares of Kernel Ordinary Shares “FOR” or “AGAINST” the Business Combination Proposal or abstain from a vote on the Business Combination Proposal or any other Proposal described by this proxy statement/prospectus. As a result, the Business Combination Agreement can be approved by shareholders who will redeem their shares and no longer remain shareholders, leaving shareholders who choose not to redeem their shares holding shares in a company with a potentially less liquid trading market, fewer shareholders, potentially less cash and the potential inability to meet the listing standards of Nasdaq.
Why is Kernel Proposing the NTA Proposal?
The adoption of the proposed amendments to remove the net asset test limitation from Kernel’s Amended and Restated Memorandum and Articles of Association is being proposed in the NTA Proposal in order to facilitate the consummation of the Business Combination, by removing the limitation on its ability to consummate an initial business combination if Kernel would have less than $5,000,001 in net tangible assets prior to or upon consummation of such initial business combination. The purpose of the net asset test limitation was initially to ensure that Kernel’s Ordinary Shares are not deemed to be a “penny stock” pursuant to Rule 3a51-1 under the Exchange Act. Because the Kernel Ordinary Shares and ParentCo Ordinary Shares would not be deemed to be a “penny stock” pursuant to other applicable provisions of Rule 3a51-1 under the Exchange Act, Kernel is presenting the NTA Proposal so that the parties may consummate the Business Combination even if Kernel does not have at least $5,000,001 in net tangible assets prior to or upon consummation of the Business Combination.
If Kernel redeems its Public Shares in an amount in excess of the current redemption limitation and its securities do not meet Nasdaq’s continued listing requirements, Nasdaq may delist Kernel’s securities from trading on its exchange. If Nasdaq delists any of Kernel’s securities from trading on its exchange and it is not able to list such securities on another approved national securities exchange, Kernel expects that such securities could be quoted on an over-the-counter market. If this were to occur, Kernel or ParentCo could face significant material adverse consequences, including: (i) a limited availability of market quotations for Kernel’s securities, (ii) reduced liquidity for Kernel’s securities, (iii) a determination that Kernel’s Public Shares are “penny stocks” which will require brokers trading in Kernel’s Public Shares to adhere to more stringent rules, including being subject to the depository requirements of Rule 419 of the Securities Act, and possibly result in a reduced level of trading activity in the secondary trading market for Kernel’s securities, (iv) a decreased ability to issue additional securities or obtain additional financing in the future, and (v) a less attractive acquisition vehicle to a target business in connection with an initial business combination. The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Kernel’s public shares, units and warrants qualify as covered securities under such statute. If Kernel were no longer listed on Nasdaq, its securities would not qualify as covered securities under such statute and it would be subject to regulation in each state in which it offers its securities.
How do I exercise my redemption rights?
In connection with the Business Combination, holders of Public Shares may seek to redeem their Public Shares regardless of whether such Public Shareholder votes “FOR” or “AGAINST” the Business Combination Proposal.
To exercise your redemption rights, you must demand that Kernel redeem your Public Shares. In connection with tendering your shares for redemption, you must elect either to physically tender your share certificates to Continental, at Continental Stock Transfer & Trust Company, One State Street Plaza, 30th Floor, New York, New York 10004-1561, Attn: SPAC Administration Team, at least two (2) business days prior to the Extraordinary General Meeting or deliver your shares to Continental electronically using The Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, which election would likely be determined based on the manner in which you hold your shares.
Certificates that have not been tendered in accordance with these procedures at least two (2) business days prior to the Extraordinary General Meeting will not be redeemed for cash. In the event that a Public Shareholder tenders its shares and decides that it does not want to redeem its Public Shares, such shareholder may withdraw the tender. If you delivered your Public Shares for redemption to Continental and decide prior to the Extraordinary General Meeting not to redeem your Public Shares, you may request that Continental return the shares (physically or electronically). You may make such request by contacting Continental at the address listed below:
Continental Stock Transfer & Trust Company
One State Street Plaza, 30th Floor
New York, New York 10004-1561
Attn: SPAC Administration Team
Email: SPACredemptions@continentalstock.com
Notwithstanding the foregoing, a Public Shareholder, together with any affiliate of such holder or any other person with whom such holder is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking redemption with respect to more than 15% of the Kernel Ordinary Shares without the consent of Kernel. Accordingly, all Public Shares in excess of 15% held by a Public Shareholder, together with any affiliate of such Public Shareholder or any other person with whom such holder is acting in concert or as a “group,” will not be redeemed without the consent of Kernel.
Shareholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the Transfer Agent and time to effect delivery. It is Kernel’s understanding that shareholders should generally allot at least two weeks to obtain physical certificates from the Transfer Agent. However, Kernel does not have any control over this process and it may take longer than two weeks. Shareholders who hold their shares in street name will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically.
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Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests and thereafter, with Kernel’s consent, until the vote is taken with respect to the Business Combination. If you delivered your shares for redemption to Kernel’s Transfer Agent and decide within the required timeframe not to exercise your redemption rights, you may request that Kernel’s Transfer Agent return the shares (physically or electronically). You may make such request by contacting Kernel’s Transfer Agent at the phone number or address listed under the question “Who can help answer my questions?” below.
What are the federal income tax consequences of exercising my redemption rights?
Kernel shareholders who exercise their redemption rights to receive cash in exchange for their Ordinary Shares generally will be required to treat the transaction as a sale of such shares and recognize gain or loss upon the redemption in an amount equal to the difference, if any, between the amount of cash received and the tax basis of the Ordinary Shares redeemed. Such gain or loss should be treated as capital gain or loss if such shares were held as a capital asset on the date of the redemption. The redemption, however, may be treated as a distribution to a redeeming shareholder for U.S. federal income tax purposes if the redemption does not effect a sufficient reduction (as determined under applicable federal income tax law) in the redeeming shareholder’s percentage ownership in us (whether such ownership is direct or through the application of certain attribution and constructive ownership rules). Any amounts treated as such a distribution will constitute a dividend to the extent not in excess of our current and accumulated earnings and profits as measured for U.S. federal income tax purposes. Any amounts treated as a distribution and that are in excess of our current and accumulated earnings and profits will reduce the redeeming shareholder’s basis in his or her redeemed Ordinary Shares, and any remaining amount will be treated as gain realized on the sale or other disposition of our Ordinary Shares. These tax consequences are described in more detail in the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal — Certain Material U.S. Federal Income Tax Considerations of the Redemption.” The discussion in the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal — Certain Material U.S. Federal Income Tax Considerations of the Redemption,” insofar as it relates to matters of United States federal tax law and regulations or legal conclusions with respect thereto, reflects the opinion of Nelson Mullins Riley & Scarborough LLP, counsel to Kernel, as to the material U.S. federal income tax consequences of the Business Combination. We urge you to consult your tax advisor regarding the tax consequences of exercising your redemption rights.
If I am a holder of Warrants, can I exercise redemption rights with respect to my Warrants?
No. The holders of Warrants have no redemption rights with respect to such Warrants.
If I am a Unit holder, can I exercise redemption rights with respect to my Units?
No. Holders of outstanding Units must separate the underlying Public Shares and Public Warrants prior to exercising redemption rights with respect to the Public Shares.
If you hold Units registered in your own name, you must deliver the certificate for such Units to Continental, with written instructions to separate such Units into Public Shares and Public Warrants. This must be completed far enough in advance to permit the mailing of the Public Share certificates back to you so that you may then exercise your redemption rights upon the separation of the Public Shares from the Units. See “How do I exercise my redemption rights?” above. The address of Continental is listed under the question “Who can help answer my questions?” below.
If a broker, dealer, commercial bank, trust company or other nominee holds your Units, you must instruct such nominee to separate your Units. Your nominee must send written instructions by facsimile to Continental. Such written instructions must include the number of Units to be split and the nominee holding such Units. Your nominee must also initiate electronically, using DTC’s deposit withdrawal at custodian (“DWAC”) system, a withdrawal of the relevant Units and a deposit of an equal number of Public Shares, and Public Warrants. This must be completed far enough in advance to permit your nominee to exercise your redemption rights upon the separation of the Public Shares from the Units. While this is typically done electronically the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your Public Shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights.
Do I have appraisal rights if I object to the proposed Business Combination?
No. There are no appraisal rights available to holders of Kernel Ordinary Shares in connection with the Business Combination.
What happens to the funds held in the Trust Account upon consummation of the Business Combination?
If the Business Combination is consummated, the funds held in the Trust Account will be released to pay:
| ● | Kernel shareholders who properly exercise their redemption rights; | |
| ● | certain other fees, costs and expenses (including regulatory fees, legal fees, accounting fees, printer fees, and other professional fees) that were incurred by Kernel or AIRO in connection with the transactions contemplated by the Business Combination and pursuant to the terms of the Business Combination Agreement; | |
| ● | any loans owed by Kernel to its Sponsor for any Kernel transaction expenses, extension costs or other administrative expenses incurred by Kernel; and | |
| ● | for general corporate purposes including, but not limited to, working capital for operations. |
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What happens if a substantial number of the Public Shareholders vote in favor of the Business Combination Proposal and exercise their redemption rights?
The Public Shareholders are not required to vote “FOR” the Business Combination or vote at all in order to exercise their redemption rights and Public Shareholders who vote in favor of the Business Combination my also nevertheless exercise their redemption rights. Accordingly, the Business Combination may be consummated even though the funds available from the Trust Account and the number of Public Shareholders are reduced as a result of redemptions by Public Shareholders.
On February 3, 2023, Kernel held an extraordinary general meeting of shareholders, at which shareholders voted upon, among other items, a proposal (the “Extension Amendment Proposal”) to amend Kernel’s governing documents (the “Charter Amendment”) to extend the date by which Kernel must consummate an initial business combination from February 5, 2023 by up to six (6) one-month Extensions (defined below) to August 5, 2023 (the “Extension Meeting”). At the Extension Meeting, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Charter Amendment.
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting, a total of 200 Kernel shareholders elected to redeem an aggregate of 22,848,122 Public Shares. Following the payment of redemptions, Kernel had approximately $77.6 million left in its Trust Account.
On August 3, 2023, Kernel held an extraordinary general meeting of shareholders, at which shareholders voted upon, among other items, a proposal (the “Second Extension Amendment Proposal”) to amend Kernel’s governing documents (the “Second Charter Amendment”) to extend the date by which Kernel must consummate an initial business combination from August 5, 2023 by up to six (6) one-month Extensions to February 5, 2024 (the “Extension Meeting - Second”). At the Extension Meeting - Second, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Second Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Second Charter Amendment.
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting - Second, holders of 1,310,929 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.44 per share, for an aggregate of approximately $13.7 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $65.9 million.
On February 1, 2024, Kernel held an extraordinary general meeting of its shareholders (the “Extension Meeting - Third”). At the Extension Meeting - Third, the Company’s shareholders entitled to vote at the meeting cast their votes and approved a proposal (the “Third Extension Amendment Proposal”) to amend the Kernel’s Amended and Restated Memorandum and Articles of Association (the “Third Charter Amendment”) to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A Ordinary Shares included as part of the Units sold in Kernel’s IPO. The Third Charter Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”), unless the closing of Kernel’s initial business combination shall have occurred. At the Extension Meeting - Third, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Third Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Third Charter Amendment.
In connection with the approval of the Third Extension Amendment Proposal and the Third Trust Amendment Proposal at the Extension Meeting - Third, holders of 5,806,608 of the Kernel’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account will have a balance of approximately $5.5 million.
The table below presents the trust value per share to a Public Shareholder that elects not to redeem across a range of redemptions scenarios. For purposes of calculating the redemption scenarios, the trust value date as of December 31, 2023 is used because such date is the date the redemption requests in connection with the Extension Meeting - Second were effectuated.
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● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
| Scenarios | ||||||||||||||||||||||||
| 1 | 2 | 3 | ||||||||||||||||||||||
| Issued and Outstanding Share Basis | No Redemption | % Owned | 50% Redemption | % Owned | Maximum Redemption | % Owned | ||||||||||||||||||
| Kernel Public Shares | 509,341 | 0.6 | % | 254,671 | 0.3 | % | - | - | % | |||||||||||||||
| Kernel Founder Shares | 7,618,750 | 8.4 | % | 7,618,750 | 8.5 | % | 7,618,750 | 8.5 | % | |||||||||||||||
| AIRO shareholders (1) | 77,000,000 | 85.9 | % | 77,000,000 | 86.1 | % | 77,000,000 | 86.4 | % | |||||||||||||||
| Extension Shares (2) | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | |||||||||||||||
| Meteora Termination Shares (3) | 50,000 | 0.1 | % | 50,000 | 0.1 | % | 50,000 | 0.1 | % | |||||||||||||||
| Pro Forma common stock at March 31, 2024 | 89,628,091 | 100.0 | % | 89,373,421 | 100.0 | % | 89,118,750 | 100.0 | % | |||||||||||||||
| Potential sources of dilution: | ||||||||||||||||||||||||
| Public Warrants (4) | 15,237,500 | 17.0 | % | 15,237,500 | 17.0 | % | 15,237,500 | 17.1 | % | |||||||||||||||
| Private Warrants (5) | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | |||||||||||||||
| First Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Second Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Third Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| AIRO Warrants (7) | 266,230 | 0.3 | % | 266,230 | 0.3 | % | 266,230 | 0.3 | % | |||||||||||||||
| AIRO Options (8) | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | |||||||||||||||
| (1) | Does not reflect closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are not expected to be significant. |
| (2) | Assumes the issuance of Class A common stock under the terms of the Extension Agreement. The agreement calls for an issuance of up to 4,450,000 shares for the payment of extension payments including an estimated $1.75 million in working capital amounts. |
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| (3) | Assumes the issuance of 50,000 shares of ParentCo common stock to an entity designated by Meteora upon closing of the Business Combination in consideration for termination of the Forward Purchase Agreement. |
| (4) | Assumes exercise of 15,237,500 Public Warrants (at a purchase price of $11.50 per Public Warrant) resulting in a cash inflow of $175,231,250 for ParentCo and 15,237,500 shares of ParentCo common stock issued to holders of Public Warrants. |
| (5) | Assumes exercise of 8,750,000 Private Placement Warrants (at $11.50 per Private Placement Warrant) resulting in a cash inflow of $100,625,000 for ParentCo and 8,750,000 shares of ParentCo common stock issued to holders of Private Placement Warrants. |
| (6) | Assumes the earnout measurements will be met per the Business Combination Agreement: |
(i) In the event ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
| (7) | Assumes exercise of 266,230 AIRO Warrants (at $4.17 per AIRO Warrant) resulting in a cash inflow of $1,110,179 for ParentCo and 266,230 shares of ParentCo common stock issued to holders of AIRO Warrants.
| |
| (8) | Assumes exercise of 1,435,615 AIRO Options (at $2.13 per AIRO Option) resulting in a cash inflow of $3,057,860 for ParentCo and 1,435,615 shares of ParentCo common stock issued to holders of AIRO Options. |
The following table illustrates the potential impact of redemptions on the per share value of the shares owned by non-redeeming shareholders at the following redemption levels:
| Redemption Level | ||||||||||||
| None | 50% | Maximum - 100% | ||||||||||
| Implied Value Per Kernel Class A Ordinary Share | $ | 8.59 | $ | 8.62 | $ | 8.64 | ||||||
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What happens if the Business Combination is not consummated?
There are certain circumstances under which the Business Combination Agreement may be terminated. See the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal — Conditions to the Closing” for information regarding the parties’ specific termination rights.
If, as a result of the termination of the Business Combination Agreement or otherwise, Kernel is unable to complete the Business Combination or another initial business combination transaction by August 5, 2024, the Existing Kernel Governing Documents provide that it will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible, subject to lawfully available funds therefor, redeem 100% of the Public Shares in consideration of a per-share price, payable in cash, equal to the quotient obtained by dividing (A) 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 it to pay franchise and income taxes payable, by (B) the total number of then outstanding Public Shares, which redemption will completely extinguish rights of the Public Shareholders (including the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemptions, subject to the approval of Kernel’s remaining shareholders and the Kernel Board in accordance with applicable law, dissolve and liquidate, subject (in the case of (ii) and (iii) above) to its obligations under the Cayman Islands Companies Law to provide for claims of creditors and other requirements of applicable law.
Kernel expects that the amount of any distribution its Public Shareholders will be entitled to receive upon its dissolution will be approximately the same as the amount they would have received if they had redeemed their shares in connection with the Business Combination, subject in each case to Kernel’s obligations under the DGCL to provide for claims of creditors and other requirements of applicable law. Holders of Founder Shares have waived any right to any liquidation distribution with respect to those shares.
In the event of liquidation, there will be no distribution with respect to Kernel’s outstanding Public Warrants. Accordingly, the Public Warrants will expire worthless.
When is the Business Combination expected to be completed?
The Closing is expected to take place (a) the second business day following the satisfaction or waiver of the conditions described below under the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal —Conditions to the Closing” or (b) such other date as agreed to by the parties to the Business Combination Agreement in writing, in each case, subject to the satisfaction or waiver of the Closing conditions. The Business Combination Agreement may be terminated by either Kernel or AIRO if the Closing has not occurred by August 5, 2024, subject to certain exceptions. For a description of the conditions to the completion of the Business Combination, see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal – Conditions to the Closing.”
What do I need to do now?
You are urged to read carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the Business Combination will affect you as a shareholder. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card or, if you hold your shares through a brokerage firm, bank or other nominee, on the voting instruction form provided by the broker, bank or nominee.
How do I vote?
If you were a holder of record of Kernel Ordinary Shares on July 10, 2024, the Record Date, you may vote with respect to the Proposals virtually at the Extraordinary General Meeting, or by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, you should follow the instructions provided by your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to virtually attend the Extraordinary General Meeting and vote, obtain a proxy from your broker, bank or nominee.
What will happen if I abstain from voting or fail to vote at the Extraordinary General Meeting?
At the Extraordinary General Meeting, Kernel will count a properly executed proxy marked “ABSTAIN” with respect to a particular Proposal as present for purposes of determining whether a quorum is present. Abstentions will have the same effect as a vote “AGAINST” the Business Combination Proposal, the Domestication Proposal and the ParentCo Charter Amendment Proposal. Broker non-votes will not be counted as present for the purposes of establishing a quorum and will have no effect on any of the Proposals.
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What will happen if I sign and return my proxy card without indicating how I wish to vote?
Signed and dated proxies received by Kernel without an indication of how the shareholder intends to vote on a Proposal will be voted “FOR” each Proposal presented to the shareholders. The proxyholders may use their discretion to vote on any other matters which properly come before the Extraordinary General Meeting. If you fail to indicate how you vote, you will not be able to exercise your redemption rights.
If I am not going to attend the Extraordinary General Meeting, should I return my proxy card instead?
Yes. Whether you plan to attend the Extraordinary General Meeting or not, please read the enclosed proxy statement/prospectus carefully, and vote your shares by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided.
If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me?
No. Under the rules of various national and regional securities exchanges, your broker, bank or nominee cannot vote your shares with respect to non-discretionary matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. Kernel believes the Proposals presented to the shareholders will be considered non-discretionary and therefore your broker, bank or nominee cannot vote your shares without your instruction. Your bank, broker or other nominee can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares in accordance with directions you provide.
May I change my vote after I have mailed my signed proxy card?
Yes. You may change your vote by sending a later-dated, signed proxy card to Kernel’s secretary at the address listed below so that it is received by Kernel’s secretary prior to the Extraordinary General Meeting or attend the Extraordinary General Meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Kernel’s secretary, which must be received by Kernel’s secretary prior to the Extraordinary General Meeting.
What should I do if I receive more than one set of voting materials?
You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast your vote with respect to all of your shares.
Who will solicit and pay the cost of soliciting proxies?
Kernel will pay the cost of soliciting proxies for the Extraordinary General Meeting. Kernel has engaged Issuer Direct Corporation (“Issuer Direct”) to assist in the solicitation of proxies for the Extraordinary General Meeting. Kernel has agreed to pay Issuer Direct its customary fee, plus disbursements. Kernel will reimburse Issuer Direct for reasonable out-of-pocket expenses and will indemnify Issuer Direct and its affiliates against certain claims, liabilities, losses, damages and expenses. Kernel will also reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of shares of Kernel Ordinary Shares for their expenses in forwarding soliciting materials to beneficial owners of Kernel’s Ordinary Shares and in obtaining voting instructions from those owners. Kernel’s directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.
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Who can help answer my questions?
If you have questions about the proposals or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card you should contact:
Kernel Group Holdings, Inc.
515 Madison Avenue, Suite 8078
New York, New York 10022
Attn: Suren Ajjarapu
Telephone No.: (646) 908-2659
You may also contact our proxy solicitor at:
Issuer Direct Corporation
One Glenwood Ave, Suite 1001
Raleigh, NC 27603
Telephone No.: (919) 481-4000
Email: proxy@issuerdirect.com
To obtain timely delivery, Kernel shareholders must request the materials no later than 15 business days prior to the Extraordinary General Meeting.
You may also obtain additional information about Kernel from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find More Information.”
If you intend to seek redemption of your Public Shares, you will need to send a letter demanding redemption and deliver your stock (either physically or electronically) to Kernel’s Transfer Agent prior to the Extraordinary General Meeting in accordance with the procedures detailed under the question “How do I exercise my redemption rights?” If you have questions regarding the certification of your position or delivery of your stock, please contact:
Continental Stock Transfer & Trust Company
One State Street Plaza, 30th Floor
New York, New York 10004-1561
Attn: SPAC Administration Team
Email: SPACredemptions@continentalstock.com
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SUMMARY OF THE PROXY STATEMENT
This Summary of the Proxy Statement, together with the sections entitled “Summary Term Sheet” and “Questions and Answers About the Proposals for Shareholders” summarize information contained in this proxy statement/prospectus, but do not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus, including the attached annexes, for a more complete understanding of the matters to be considered at the Extraordinary General Meeting. In addition, for definitions of terms commonly used throughout this proxy statement/prospectus, including in this Summary of the Proxy Statement, see the section entitled “Frequently Used Terms.” Capitalized terms not otherwise defined in the Proxy Statement shall have the meanings ascribed to them in the Business Combination Agreement, which is attached to the Proxy Statement as Annex A. Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our,” and the “Company” refer to Kernel Group Holdings, Inc.
Kernel
Kernel is a blank check company incorporated as a Cayman Islands exempted company on November 10, 2020 for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. Kernel’s Units, Class A Ordinary Shares and warrants are trading on Nasdaq under the symbols “KRNL,” “KRNLU,” and “KRNLW,” respectively. The mailing address of Kernel’s principal executive office is 515 Madison Avenue, Suite 8078, New York, New York 10022. The telephone number is (646) 908-2659.
On February 3, 2023, Kernel held an extraordinary general meeting of shareholders, at which shareholders voted upon, among other items, a proposal (the “Extension Amendment Proposal”) to amend Kernel’s governing documents (the “Charter Amendment”) to extend the date by which Kernel must consummate an initial business combination from February 5, 2023 by up to six (6) one-month Extensions (defined below) to August 5, 2023 (the “Extension Meeting”). At the Extension Meeting, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Charter Amendment.
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting, a total of 200 Kernel shareholders elected to redeem an aggregate of 22,848,122 Public Shares. Following the payment of redemptions, Kernel had approximately $77.6 million left in its Trust Account.
On August 3, 2023, Kernel held an extraordinary general meeting of shareholders, at which shareholders voted upon, among other items, a proposal (the “Second Extension Amendment Proposal”) to amend Kernel’s governing documents (the “Second Charter Amendment”) to extend the date by which Kernel must consummate an initial business combination from August 5, 2023 by up to six (6) one-month Extensions to February 5, 2024 (the “Extension Meeting - Second”). At the Extension Meeting - Second, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Second Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Second Charter Amendment.
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting - Second, holders of 1,310,929 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.44 per share, for an aggregate of approximately $13.7 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $65.9 million.
On February 1, 2024, Kernel held an extraordinary general meeting of its shareholders (the “Extension Meeting - Third”). At the Extension Meeting - Third, the Company’s shareholders entitled to vote at the meeting cast their votes and approved a proposal (the “Third Extension Amendment Proposal”) to amend the Kernel’s Amended and Restated Memorandum and Articles of Association (the “Third Charter Amendment”) to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A Ordinary Shares included as part of the Units sold in Kernel’s IPO. The Third Charter Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”), unless the closing of Kernel’s initial business combination shall have occurred. At the Extension Meeting - Third, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Third Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Third Charter Amendment.
In connection with the approval of the Third Extension Amendment Proposal and the Third Trust Amendment Proposal at the Extension Meeting - Third, holders of 5,806,608 of the Kernel’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account will have a balance of approximately $5.5 million.
On February 5, 2024, Kernel received a notice from the staff of the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, unless Kernel timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”), Kernel’s securities would be subject to suspension and delisting from The Nasdaq Capital Market at the opening of business on February 14, 2024, due to Kernel’s non-compliance with Nasdaq IM-5101-2, which requires that a special purpose acquisition company must complete one or more business combinations within 36 months of the effectiveness of its IPO registration statement. Since Kernel’s registration statement for its initial public offering became effective on February 2, 2021, it was required by this rule to complete its initial business combination by no later than February 2, 2024. Kernel timely requested a hearing before the Panel to request sufficient time to complete the Business Combination with AIRO Group Holdings. The hearing request will result in a stay of any suspension or delisting action pending the hearing. The hearing took place on April 11, 2024. On April 19, 2024, the Panel issued written notice of its decision to grant the Company’s request for an exception to its listing deficiencies until July 1, 2024 in view of the Company’s substantial steps toward closing its previously announced initial business combination with AIRO Group Holdings and its plan for achieving compliance with Nasdaq listing rules upon closing of the transaction for listing on The Nasdaq Capital Market. On June 20, 2024, the Company requested that the Panel extend the deadline to regain compliance from July 1, 2024 to August 5, 2024, and on June 20, 2024, the request was granted. There can be no assurance that Kernel will be able to satisfy Nasdaq’s continued listing requirements, regain compliance with Nasdaq IM-5101-2, and maintain compliance with other Nasdaq listing requirements.
Kernel Merger Sub
Kernel Merger Sub is a wholly-owned subsidiary of ParentCo, formed on January 25, 2023, to consummate the Business Combination. On the Closing Date, Kernel Merger Sub will merge with and into Kernel, with Kernel surviving the First Merger as a wholly-owned subsidiary of ParentCo. The mailing address of Kernel Merger Sub’s principal executive office is 515 Madison Avenue, Suite 8078 New York, New York 10022. Its telephone number is (646) 908-2659. After the consummation of the First Merger, Kernel Merger Sub will cease to exist as a separate legal entity.
AIRO Merger Sub
AIRO Merger Sub is a wholly-owned subsidiary of ParentCo, formed on February 27, 2023, to consummate the Business Combination. On the Closing Date, immediately following the First Merger, AIRO Merger Sub will merge with and into AIRO, with AIRO surviving the Second Merger as a wholly-owned subsidiary of ParentCo. The mailing address of AIRO Merger Sub’s principal executive office is 515 Madison Avenue, Suite 8078 New York, New York 10022. Its telephone number is (646) 908-2659. After the consummation of the Second Merger, AIRO Merger Sub will cease to exist as a separate legal entity.
AIRO Group, Inc.
AIRO Group, Inc., a Delaware corporation (“ParentCo”), was formed on February 27, 2023 for the purpose of facilitating the Business Combination. As a result of the Domestication and Mergers, ParentCo will succeed Kernel as registrant and public company pursuant to the federal securities laws. Prior to the Business Combination, ParentCo has had no business activity or operations other than in preparation for the Business Combination.
The mailing address of ParentCo’s principal executive office is 515 Madison Avenue, Suite 8078 New York, New York 10022. Its telephone number is (646) 908-2659.
AIRO
AIRO Group, Inc. n/k/a Old AGI, Inc., a Delaware corporation (“Legacy AIRO”), was formed on March 16, 2020 for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry, including those that are discussed in this prospectus as having been acquired by AIRO. AIRO was formed on August 30, 2021, and Legacy AIRO became a wholly owned subsidiary of AIRO through a reorganization effective as of October 5, 2021. AIRO then entered into a series of transactions to develop its business across four primary divisions, as further discussed below: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility.
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The Business Combination Proposal
On March 6, 2023, Kernel entered into the Business Combination Agreement, pursuant to which at the closing of the transactions contemplated by the Business Combination Agreement (the “Closing”), Kernel Merger Sub will merge with and into Kernel (the “First Merger”), with Kernel continuing as the surviving corporation and wholly-owned subsidiary of ParentCo. Immediately following the First Merger, AIRO Merger Sub will merge with and into AIRO (the “Second Merger”), with AIRO continuing as the surviving corporation and wholly-owned subsidiary of ParentCo.
On August 29, 2023, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor 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 per share price.
On January 16, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor 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 stockholders 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 changes the “Outside Date” from August 2, 2023 to August 5, 2024.
On February 5, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor entered into the Third Amendment to the Business Combination Agreement (the “Third Amendment”). The Third Amendment amends the Business Combination Agreement to remove the requirement that Kernel have net tangible assets of at least $5,000,001 at Closing.
On June 24, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor entered into the Fourth Amendment to the Business Combination Agreement (the “Fourth Amendment”). The Fourth Amendment amends the Business Combination Agreement to delete the Sponsor’s right to receive Earnout Shares.
Merger Consideration
As consideration for the Second Merger, the AIRO stockholders 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 (a) $770,000,000 minus (b) the amount, if any, by which the net working capital is less than negative $5,500,000 by more than $500,000, plus (c) the amount, if any, by which the net working capital is greater than negative $5,500,000 by more than $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 is less than 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 (such resulting amount, the “AIRO Merger Consideration”).
In addition, AIRO stockholders shall also be entitled to receive from ParentCo up to 33,000,000 additional shares of ParentCo common stock as additional consideration based on ParentCo’s achievement of certain revenue thresholds during the Earnout Eligibility Period, as follows:
(a) if ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares;
(b) if ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares; and
(c) if ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares.
For more information, see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal – Merger Consideration.”
Representations and Warranties
The Business Combination Agreement contains customary representations and warranties by each of Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, and AIRO. Certain of the representations are subject to specified exceptions and qualifications contained in the Business Combination Agreement or in information provided pursuant to certain disclosure schedules to the Business Combination Agreement.
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Covenants of the Parties
Each party agreed in the Business Combination Agreement to use its commercially reasonable efforts to effect the Closing and consummate the transactions contemplated by the Business Combination Agreement. The Business Combination Agreement also contains certain customary covenants by each of the parties during the period between the signing of the Business Combination Agreement and the earlier of the Closing or the termination of the Business Combination Agreement in accordance with its terms (the “Interim Period”), including, among other things, those relating to: (i) the provision of access to their properties, books and personnel; (ii) the operation of their respective businesses in the ordinary course of business; (iii) the provision by AIRO to Kernel of unaudited financial statements on a monthly, quarterly and annual basis and audited financial statements as of December 31, 2022 within 60 days of the Business Combination Agreement’s signing (“AIRO’s 2022 Audited Financials”); (iv) Kernel’s public filings; (v) use of Kernel’s Unencumbered Cash; (vi) no insider trading; (vii) notifications of certain breaches, consent requirements or other matters; (viii) the preparation and filing of the Registration Statement as described in more detail below, (ix) public announcements; and (x) confidentiality. Each party also agreed during the Interim Period not to solicit or enter into any inquiry, proposal or offer, or any indication of interest in making an offer or proposal for an alternative competing transactions, to notify the others as promptly as practicable in writing of the receipt of any inquiries, proposals or offers, requests for information or requests relating to an alternative competing transaction or any requests for non-public information relating to such transaction, and to keep the other party informed of the status of any such inquiries, proposals, offers or requests for information. The Business Combination Agreement also contains certain customary post-Closing covenants regarding (a) maintenance of books and records; (b) tax matters; and (c) indemnification of directors and officers and the purchase of tail directors’ and officers’ liability insurance.
In addition, AIRO agreed to obtain its required shareholder approvals in the manner required under its governing documents and applicable law for the execution, delivery and performance of the Business Combination Agreement and each of the ancillary documents to the Business Combination Agreement to which AIRO is or is required to be a party or bound, and the consummation of the transactions contemplated thereby, including the Business Combination.
In the Business Combination Agreement the parties made customary covenants regarding the registration statement on Form S-4 to be filed by ParentCo with SEC under the Securities Act.
Kernel will distribute a proxy statement to seek the consent of Kernel’s shareholders to, among other things, (i) adopt and approve the Business Combination Agreement and the Transaction; (ii) approve, to the extent necessary, the issuance of any shares in connection with any PIPE/Convertible Note Investment; (iii) approve the certificate of incorporation of Kernel in connection with the Merger; (iv) the appointment of the members of ParentCo’s post-Closing board of directors (the “Post-Closing Board”); (v) such other matters as Kernel and AIRO shall hereafter mutually determine to be necessary or appropriate in order to effect the Transaction and (vi) the adjournment of the Extraordinary General Meeting, if necessary or desirable in the reasonable determination of Kernel.
The parties agreed that the Post-Closing Board will consist of nine directors, comprised of (i) two directors designated prior to the Closing by Kernel, at least one of whom will be required to qualify as an independent director under Nasdaq rules, and (ii) seven designated by AIRO, at least four of whom will be required to qualify as an independent director under Nasdaq rules.
The parties further agreed to take all action necessary so that the individuals serving as the chief executive officer and chief financial officer, respectively, of ParentCo immediately after the Closing will be the same individuals (in the same office) as that of AIRO immediately prior to the Closing.
Conditions to Consummation of the Merger
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 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 (not waivable); (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, the obligations of AIRO 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, ParentCo, Kernel Merger Sub, and AIRO Merger Sub 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 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, 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 date of the Business Combination Agreement 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.
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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 AIRO 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 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 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 AIRO 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 and its subsidiaries to Kernel’s reasonable satisfaction; (vi) the delivery 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 (net of AIRO cash at Closing) is less than Fifty Million U.S. Dollars ($50,000,000).
Termination
The Business Combination Agreement may be terminated under certain customary and limited circumstances at any time prior to the Closing, including: (i) by mutual written consent of Kernel and AIRO; (ii) by either Kernel and AIRO if any of the conditions to Closing have not been satisfied or waived by August 5, 2024 (the “Outside Date”), provided that any breach or violation of any representation, warranty or covenant of the party seeking termination is not the cause of the failure of the Closing to occur by the Outside Date; (iii) by either Kernel or AIRO if a governmental authority of competent jurisdiction has issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Transaction, and such order or other action has become final and non-appealable; (iv) by either Kernel or AIRO in the event of the other party’s uncured breach, if such breach would result in the failure of a closing condition (and so long as the terminating party is not also in breach under the Business Combination Agreement); (v) by Kernel if there has been a Material Adverse Effect on AIRO and its subsidiaries on a consolidated basis following the date of the Business Combination Agreement that is uncured and continuing; and (vi) by either Kernel or AIRO if Kernel and AIRO holds a special meeting of its shareholders to approve the Business Combination Agreement and the Transaction, and the required approvals related to the Business Combination Agreement and the Transaction of either Kernel’s shareholders or AIRO’s shareholders is not obtained.
If the Business Combination Agreement is terminated, all further obligations of the parties under the Business Combination Agreement (except for certain obligations related to publicity, confidentiality, fees and expenses, trust fund waiver, no recourse, termination and general provisions) will terminate, and no party to the Business Combination Agreement will have any further liability to any other party thereto except for liability for fraud. The Business Combination Agreement does not provide for any termination fees.
Trust Account Waiver
AIRO agrees that it and its affiliates will not have any right, title, interest or claim of any kind in or to any monies in Kernel’s Trust Account held for its Public Shareholders, and agrees not to, and waives any right to, make any claim against the Trust Account (including any distributions therefrom).
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Management
The following persons are expected to serve as executive officers and directors of ParentCo following the Business Combination. For biographical information concerning AIRO’s executive officers and AIRO’s designees to the Post-Closing Board, see “Management After the Business Combination – Executive Officers and Directors after the Business Combination.” For biographical information concerning the Kernel designees to the Post-Closing Board, see “Information About Kernel — Directors and Executive Officers.”
| Name | Age | Position | ||
| Executive Officers: | ||||
| Joseph D. Burns | 62 | Chief Executive Officer, Director | ||
| John Uczekaj | 65 | President, Chief Operating Officer, Director | ||
| Dr. Mariya Pylypiv | 35 | Chief Financial Officer | ||
| Employee Director: | ||||
| Dr. Chirinjeev Kathuria | 59 | Executive Chairman, Director | ||
| Non-Employee Directors: | ||||
| John M. Belcher | 83 | Director | ||
| Gregory D. Winfree | 59 | Director | ||
| Surendra Ajjarapu | 53 | Director | ||
| Donald Fell | 78 | Director |
Pursuant to the Existing Kernel Governing Documents, in connection with the Business Combination, holders of Public Shares may elect to have their shares redeemed for cash at the applicable redemption price per share calculated in accordance with the Existing Kernel Governing Documents. For illustrative purposes, based on approximately $77.6 million of funds in the Trust Account and 7,626,878 shares subject to possible redemption, in each case, following the Extension Redemption, this would have amounted to approximately $10.17 per issued and outstanding Public Share. If a holder of Public Shares exercises his, her or its redemption rights in connection with the Business Combination, such holder will be exchanging his, her or its Public Shares for cash. Such a holder will be entitled to receive cash for its Public Shares only if he, she or it properly demands redemption and delivers its Public Shares (either physically or electronically) to Kernel’s Transfer Agent at least two (2) business days prior to the Extraordinary General Meeting. Holders of Public Shares may elect to redeem their shares whether or not such shares are voted at the Extraordinary General Meeting. See the section entitled “Extraordinary General Meeting of Kernel shareholders — Redemption Rights.”
The Business Combination involves numerous risks. For more information about these risks, see the section entitled “Risk Factors.”
The Domestication Proposal
Kernel is proposing that its shareholders approve the Domestication Proposal to change Kernel’s jurisdiction of incorporation from the Cayman Islands to the State of Delaware. Please see the section entitled “Shareholder Proposal No. 2 – The Domestication Proposal.”
The ParentCo Charter Amendment Proposal
Kernel is proposing that its shareholders vote to approve the amendment and restatement of the Existing ParentCo Governing Documents by their deletion and replacement with the proposed new certificate of incorporation and bylaws. Please see the section entitled “Shareholder Proposal No. 3 – The ParentCo Charter Amendment Proposal.”
The Nasdaq Proposal
Kernel is proposing that its shareholders vote to approve, for purposes of complying with Nasdaq Listing Rules 5635(a) and (b), the issuance of more than 20% of issued and outstanding Class A Ordinary Shares in connection with the Business Combination. Please see the section entitled “Shareholder Proposal No. 4 – The Nasdaq Proposal.”
The Incentive Plan Proposal
Kernel is proposing that its shareholders approve and adopt the Equity Incentive Plan, which will become effective upon the Closing of the Business Combination. Please see the section entitled “Shareholder Proposal No. 5 – The Incentive Plan Proposal.”
The Employee Stock Purchase Plan Proposal
Kernel is proposing that its shareholders approve and adopt the Employee Stock Purchase Plan, which will become effective upon the Closing of the Business Combination. Please see the section entitled “Shareholder Proposal No. 6 – The Employee Stock Purchase Plan Proposal”.
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The Election of Directors Proposal
Kernel is proposing that its shareholders vote to elect seven (7) directors to serve staggered terms on the ParentCo Board until the 2024, 2025 and 2026 annual meeting of stockholders of ParentCo, respectively, and until their respective successors are duly elected and qualified. Please see the section entitled “Shareholder Proposal No. 7 — The Election of Directors Proposal.”
The NTA Proposal
Kernel is proposing that its shareholders vote to approve amendments to Kernel’s Amended and Restated Memorandum and Articles of Association, which amendments shall be effective, if adopted and implemented by Kernel, immediately prior to the consummation of the Business Combination, to remove the requirements limiting Kernel’s ability to consummate an initial business combination if Kernel would have less than $5,000,001 in net tangible assets prior to or upon consummation of such initial business combination. Please see the section entitled “Shareholder Proposal No. 8 — The NTA Proposal.”
The Adjournment Proposal
Kernel shareholders will be asked to consider and vote upon a proposal to adjourn the Extraordinary General Meeting to a later date or dates if, based upon the tabulated vote at the time of the Extraordinary General Meeting, there are not sufficient votes to approve the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal or the Employee Stock Purchase Plan Proposal. Please see the section entitled “Shareholder Proposal No. 9 — The Adjournment Proposal.”
Interests of Kernel’s Directors and Officers and Others in the Business Combination.
The Kernel Board has adopted and approved the Business Combination Agreement. In arriving at its recommendations, the Kernel Board carefully considered a number of factors described in this proxy statement/prospectus. Please see section entitled “Shareholder Proposal No. 1: The Business Combination Proposal.”
When you consider the recommendation of the Kernel Board in favor of approval of the Proposals, you should keep in mind that the Sponsor (including certain equity holders of the Sponsor) and certain of Kernel’s directors and executive officers (including Suren Ajjarapu who is Kernel’s chief executive officer) may have interests in the Business Combination that are different from or in addition to (and which may conflict with) your interests as a shareholder. These interests include, among other things:
| ● | unless Kernel consummates a business combination, Kernel’s officers, directors and the Sponsor will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account; | |
| ● | as a condition to the IPO, all of the Founder Shares are subject to a lock-up and would be released only if specified conditions were met. In particular, subject to certain limited exceptions, all Founder Shares would be subject to a lock up until the earlier of (A) one year after the completion of Kernel’s Business Combination and (B) subsequent to the Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination or (y) the date on which Kernel completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Kernel’s shareholders having the right to exchange their Class A Ordinary Shares for cash, securities or other property; |
| ● | the Sponsor will pay an aggregate of $1.00 for their Class B Ordinary Shares and their Private Placement Warrants to the Original Sponsor upon the Closing of the Business Combination. Effectively, the Sponsor paid $0.01 per Class B Ordinary Share, and, in addition, has the right to acquire 8,750,000 shares of common stock at a price of $11.50 per share. Thus, if the price of the stock falls significantly from the initial public offering price of $10.00 per share, our Sponsor will still receive a positive rate of return even in a scenario where our Public Shareholders would experience a negative rate of return in ParentCo from our initial public offering price of $10.00 per share; the Sponsor also has the ability to receive additional returns if our price rises above $11.50 per share; | |
| ● | the aggregate dollar amount that the Sponsor and its affiliates have at risk depending on the completion of an initial business combination, including the Business Combination, is approximately $83.6 million, as of July 3, 2024, which amount includes the current value of securities held (7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants), assuming a trading price of $11.01 per Kernel Class A Ordinary Share and $0.13 per Kernel Public Warrants (based upon the respective closing prices of the Kernel Class A Ordinary Shares and the Kernel Public Warrant on Nasdaq on July 3, 2024. | |
| ● | the Sponsor (and one of Kernel’s directors who is a member of the Sponsor) has invested in Kernel an aggregate of $4,450,000, comprised of a total of $4,450,000 loaned by investors to the Sponsor, which is in turn loan by the Sponsor to Kernel, which is responsible for paying the all principal on the loans, and $360,000 owed by Kernel to the Sponsor in accrued expenses related to rent for office space, administrative and support services. | |
| ● | in addition, the aggregate dollar amount that the Kernel officers and directors have at risk depending on the completion of an initial business combination, including the Business Combination, is approximately $4,450,000, as of July 3, 2024 (assuming that the future value of ParentCo Ordinary Shares will be the same as the current value of each Kernel Ordinary Share), which as described above consists of the 4,450,000 shares of ParentCo Common Stock to be issued to Kernel’s officers and directors in accordance with the terms of Kernel’s IPO within 10 days following the closing of the Business Combination that shall be exchanged for the equivalent number of ParentCo Ordinary Shares. | |
| ● | the Sponsor currently holds 7,493,750 shares, the aggregate value of which is approximately $82.5 million as of July 3, 2024, based on the closing price per share of Kernel Class A Ordinary Shares of $11.01. | |
| ● | even if the trading price of the shares of ParentCo Common Stock were as low as $0.0000001 per share, the aggregate market value of the Kernel Class B Ordinary Shares alone (without taking into account the value of the Private Placement Warrants) would exceed the initial investment in Kernel by the Sponsor. As a result, the Sponsor is likely to be able to make a substantial profit on their investment in Kernel at a time when shares of ParentCo Common Stock have lost significant value. On the other hand, if Kernel liquidates without completing a business combination before August 5, 2024, the Sponsor will likely lose its entire investment in Kernel. |
| ● | the Private Placement Warrants purchased by the Sponsor will be worthless if a business combination is not consummated; | |
| ● | the Sponsor has agreed that the Private Placement Warrants and the underlying securities will not be sold or transferred by it until after Kernel has completed a business combination, subject to limited exceptions; |
| ● | the Sponsor and its affiliates’ total potential ownership in the ParentCo, assuming the exercise and conversion of all of securities following the consummation of the Business Combination, is estimated to comprise approximately 21.2% of outstanding ParentCo Ordinary Shares in a no redemption scenario, 21.2% of outstanding ParentCo Ordinary Shares in a 50% redemption scenario and 21.3% of outstanding ParentCo Ordinary Shares in a maximum redemption scenario (see the section entitled “Beneficial Ownership of Securities” for more information); |
| ● | the fact that the Sponsor will pay an aggregate of $1.00 for its Founder Shares to the Original Sponsor upon Closing and such securities will have a significantly higher value at the time of the Business Combination, and that in the case the Business Combination is not consummated Kernel would liquidate rendering such Founder Shares worthless; |
| ● | the Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share, which it purchased for $1.00 due to the Original Sponsor at the Closing of the Business Combination. If an initial business combination, such as the Business Combination, is not completed by August 5, 2024, Kernel will be required to dissolve and liquidate. In such event, the Kernel Class B Ordinary Shares currently held by the Sponsor, which were acquired from the Original Sponsor will be worthless because the Sponsor has agreed to waive its rights to any liquidation distribution |
| ● | the fact that the Sponsor has agreed not to redeem any of the Founder Shares in connection with a shareholder vote to approve a proposed business combination; | |
| ● | the anticipated continuation of two of our existing directors, Surendra Ajjarapu and Donald Fell, as directors of ParentCo; |
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| ● | the continued indemnification of our existing directors and officers prior to the Business Combination and the continuation of our directors’ and officers’ liability insurance after the Business Combination; | |
| ● | that pursuant to the IPO Registration Rights Agreement, the Kernel Restricted Shareholders are entitled to registration of the shares of ParentCo Common Stock into which the Founder Shares will automatically convert at the time of the consummation of the Business Combination; | |
| ● | the fact that our Sponsor is entitled to receive reimbursement of $10,000 per month under an administrative support agreement for office space, secretarial and administrative support provided to Kernel), for which, as of the date hereof, our Sponsor has already been paid $0; | |
| ● | if Kernel does not complete a business combination by August 5, 2024, the proceeds from the sale of the Private Placement Warrants will be included in the liquidating distributions to Kernel’s Public Shareholders and the Private Placement Warrants will expire worthless; and | |
| ● | the Sponsor will receive 4,450,000 shares of ParentCo common stock in consideration for the extension loans only upon the completion of the Business Combination | |
| ● | if the Trust Account is liquidated, including in the event Kernel is unable to complete a business combination within the required time period, the Sponsor has agreed to indemnify Kernel to ensure that the proceeds in the Trust Account are not reduced below $10.00 per Public Share by the claims of prospective target businesses with which Kernel has entered into an acquisition agreement or claims of any third party for services rendered or products sold to Kernel, but only if such a vendor or target business has not executed a waiver of any and all rights to seek access to the Trust Account. |
Kernel’s Board considered these interests, among other matters when reviewing and evaluating the proposed terms of the Business Combination, how they might impact the identification of and negotiations with AIRO, and how they might impact the ParentCo if the Business Combination were to be completed. In reviewing these interests, and others deemed relevant by the Kernel Board, the Kernel Board concluded that, on the whole, these interests provided an alignment between the interests of Kernel’s officers and directors, on the one hand, and those of Kernel’s shareholders, on the other hand.
The Existing Kernel Governing Documents provide that the doctrine of corporate opportunity will not apply with respect to any of its officers or directors in circumstances where the application of the doctrine would conflict with any fiduciary duties or contractual obligations they may have, except as set forth in the Existing Kernel Governing Documents. Certain of Kernel’s officers and directors presently have, and any of them in the future may have additional, fiduciary or contractual obligations to other entities, including entities that are affiliates of the Sponsor, pursuant to which such officer or director is or will be required to present a business combination opportunity to such entity. Accordingly, if any of our officers or directors becomes aware of a business combination opportunity which is suitable for an entity to which he has then-current fiduciary or contractual obligations, he will honor his fiduciary or contractual obligations to present such business combination opportunity to such entity, subject to their fiduciary duties under applicable law. Kernel’s Board evaluated and considered three (3) potential target companies as candidates for a possible business combination transaction with Kernel, and Kernel’s Board did not believe that the other fiduciary duties or contractual obligations of its officers and directors materially affected Kernel’s ability to source a potential business combination. Kernel’s Board considered the factors supporting, and risks and uncertainties related to, a business combination with AIRO as set forth above under “Recommendation of the Kernel Board and Reasons for the Business Combination,” and did not believe that such other fiduciary duties or contractual obligations impacted such consideration.
Risk Factors
In evaluating the Proposals set forth in this proxy statement/prospectus, you should carefully read this proxy statement/prospectus, including the annexes, and especially consider the factors discussed in the section entitled “Risk Factors.”
Risks Related to ParentCo and its Common Stock Following the Business Combination
| ● | ParentCo will incur increased costs as a result of operating as a public company, and its management will devote substantial time to compliance with its public company responsibilities and corporate governance practices. | |
| ● | If, following the Business Combination, securities or industry analysts do not publish or cease publishing research or reports about ParentCo, its business or its market, or if they change their recommendations regarding ParentCo’s securities adversely, the price and trading volume of ParentCo’s securities could decline. | |
| ● | There can be no assurance that ParentCo common stock that will be issued in connection with the Business Combination will be approved for listing on Nasdaq or, if approved, will continue to be so listed following the closing of the Business Combination, or that we will be able to comply with the continued listing standards of Nasdaq. ParentCo’s failure to meet the continued listing requirements of Nasdaq could result in a delisting of its securities. | |
| ● | The market price of ParentCo common stock may decline as a result of the Business Combination or other market factors. |
Risks Related to Kernel and the Business Combination
| ● | Subsequent to the consummation of the Business Combination, ParentCo may be required to take write-downs or write-offs, or ParentCo may be subject to restructuring, impairment or other charges that could have a significant negative effect on ParentCo’s financial condition, results of operations and the price of ParentCo’s securities, which could cause you to lose some or all of your investment. | |
| ● | Kernel may not be able to consummate an initial business combination within the required time period, in which case it would cease all operations except for the purpose of winding up and it would redeem the Public Shares and liquidate. | |
| ● | The Sponsor or Kernel’s directors, executive officers or advisors or their respective affiliates may elect to purchase shares from Public Shareholders, which may influence the vote on the Business Combination and reduce the public “float” of Kernel Ordinary Shares. |
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| ● | The nominal purchase price paid by the Sponsor for the Founder Shares may significantly dilute the implied value of the Public Shares in the event Kernel completes an initial business combination. In addition, the value of the Sponsor’s Founder Shares will be significantly greater than the amount the Sponsor paid to purchase such shares in the event Kernel completes an initial business combination, even if the business combination causes the trading price of ParentCo’s common stock to materially decline. | |
| ● | Kernel’s Sponsor, executive officers and directors have potential conflicts of interest in recommending that stockholders vote in favor of approval of the Business Combination Proposal and approval of the other proposals described in this proxy statement/prospectus. | |
| ● | There are risks to Kernel’s shareholders who are not affiliates of the Sponsor of becoming stockholders of ParentCo through the Business Combination rather than acquiring securities of AIRO directly in an underwritten public offering, including no independent due diligence review by an underwriter and conflicts of interest of the Sponsor. | |
| ● | Certain of Kernel’s officers and directors are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by Kernel and, accordingly, may have conflicts of interest in allocating their time and determining to which entity a particular business opportunity should be presented. | |
| ● | Kernel shareholders who do not redeem their shares of Kernel Ordinary Shares will have a reduced ownership and voting interest after the Business Combination and will exercise less influence over management. | |
| ● | Kernel’s shareholders may be held liable for claims by third parties against Kernel to the extent of distributions received by them. |
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SELECTED HISTORICAL FINANCIAL INFORMATION OF KERNEL
We are providing the following selected historical financial information to assist you in your analysis of the financial aspects of the Business Combination. Kernel’s condensed balance sheet data as of March 31, 2024 and the condensed statement of operations data for the three months ended March 31, 2024 are derived from Kernel’s unaudited condensed financial statements included elsewhere in this registration statement. Kernel’s balance sheet data as of December 31, 2023 and the statement of operations data for the year ended December 31, 2023 is derived from Kernel’s audited financial statements included elsewhere in this registration statement.
The information is only a summary and should be read in conjunction with the Company’s financial statements and related notes and “Kernel’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this registration statement. Kernel’s historical results are not necessarily indicative of future results, and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.
| For the Three Months Ended | For the Year Ended | |||||||
| Income Statement Data (in thousands): | March 31, 2024 | December 31, 2023 | ||||||
| Revenue | $ | - | $ | - | ||||
| Operating expenses | $ | 458 | $ | 2,569 | ||||
| Other income/(expense) | $ | (363 | ) | $ | (4,972 | ) | ||
| Net loss | $ | (821 | ) | $ | (7,541 | ) | ||
| As of | ||||||||
| Balance Sheet Data (in thousands): | March 31, 2024 | December 31, 2023 | ||||||
| Total current assets | $ | 92 | $ | 28 | ||||
| Total assets | $ | 5,656 | $ | 67,848 | ||||
| Total liabilities | $ | 9,457 | $ | 13,809 | ||||
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SELECTED HISTORICAL FINANCIAL INFORMATION OF AIRO
We are providing the following selected historical financial information to assist you in your analysis of the financial aspects of the Business Combination. AIRO’s condensed consolidated balance sheet data as of March 31, 2024 and the condensed consolidated statement of operations data for the three months ended March 31, 2024 are derived from AIRO’s unaudited condensed consolidated financial statements included elsewhere in this registration statement. AIRO’s consolidated balance sheet data as of December 31, 2023 and the consolidated statement of operations data for the year ended December 31, 2023 is derived from AIRO’s audited consolidated financial statements included elsewhere in this registration statement.
The information is only a summary and should be read in conjunction with AIRO’s consolidated financial statements and related notes and “AIRO’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this registration statement. AIRO’s historical results are not necessarily indicative of future results, and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.
| For the Three Months Ended | For the Year Ended | |||||||
| Consolidated Statements of Operations Data (in thousands): | March 31, 2024 | December 31, 2023 | ||||||
| Revenue | $ | 13,740 | $ | 43,254 | ||||
| Operating expenses | $ | 8,950 | $ | 34,846 | ||||
| Other expense | $ | 557 | $ | 20,230 | ||||
| Net loss | $ | (2,010 | ) | $ | (32,456 | ) | ||
| As of | As of | |||||||
| Consolidated Balance Sheet Data (in thousands): | March 31, 2024 | December 31, 2023 | ||||||
| Total current assets | $ | 16,628 | $ | 19,157 | ||||
| Total assets | $ | 729,052 | $ | 737,523 | ||||
| Total liabilities | $ | 137,695 | $ | 142,067 | ||||
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SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Defined terms included below shall have the same meaning as terms defined and included elsewhere in this registration statement.
The following summary unaudited pro forma combined financial data (the “Summary Pro Forma Information”) gives effect to the transactions contemplated by the Business Combination (the “Transaction”). The Business Combination will be accounted for as a reverse recapitalization, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Under this method of accounting, although ParentCo is the legal acquirer, Kernel will be treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination will be reflected as the equivalent of AIRO issuing shares for the net assets of Kernel, followed by a recapitalization whereby no goodwill or other intangible assets are recorded. Operations prior to the Business Combination will be those of AIRO. There will be no accounting effect or change in the carrying amount of the assets and liabilities as a result of the reverse recapitalization.
The summary unaudited pro forma combined balance sheet as of March 31, 2024 gives effect to the Transaction as if it had occurred on March 31, 2024.
The summary unaudited pro forma combined statements of operations for the three months ended March 31, 2024 and the year ended December 31, 2023 gives effect to the Transaction as if it had occurred on January 1, 2023.
The Summary Pro Forma Information has been derived from, and should be read in conjunction with, the more detailed unaudited pro forma combined financial information included in the section entitled “Unaudited Pro Forma Combined Financial Information” in this registration statement and the accompanying notes thereto. The unaudited pro forma combined financial information is based upon, and should be read in conjunction with, the historical financial statements and related notes of Kernel and AIRO for the applicable periods included in this registration statement.
The Summary Pro Forma Information has been presented for informational purposes only and is not necessarily indicative of what the ParentCo’s financial position or results of operations actually would have been had the Business Combination been completed as of the dates indicated. In addition, the Summary Pro Forma Information does not purport to project the future financial position or operating results of the ParentCo following the reverse recapitalization.
The unaudited pro forma combined financial information has been prepared using the assumptions below with respect to the potential redemption into cash of Kernel Class A Ordinary:
● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
The Business Combination will not close under any scenario unless AIRO waives the Unencumbered Cash closing condition and the NTA Proposal is approved.
Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented. Significant assumptions include conversions of debt to equity as further described in the notes to the unaudited pro forma combined financial information. These conversion agreements have been executed but do not take effect until no later than two days prior to closing of the Business Combination. The pro forma adjustments also do not include additional Unencumbered Cash provided by Kernel beyond funds remaining in its trust account in each redemption scenario though, pursuant to the Business Combination Agreement, it is required to deliver $50 million in Unencumbered Cash at Closing unless such condition is waived by AIRO. While Kernel is pursuing various avenues of financing to meet such closing condition, no definitive agreements have been executed, so no proceeds from such efforts are reflected in the pro forma adjustments. As part of the pro forma adjustments, AIRO included adjustments to recognize interest, contingent consideration expense related to Jaunt Air Mobility LLC, and additional sales and marketing expense related to the Aspen Management Carveout Plan.
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The unaudited pro forma combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination. The pro forma adjustments reflecting the consummation of the Business Combination are based on certain available information as of the date of these unaudited pro forma combined financial statements and certain assumptions and methodologies that Kernel believes are reasonable under the circumstances. The unaudited pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Kernel believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma combined financial information.
The unaudited pro forma combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of ParentCo. They should be read in conjunction with the historical financial statements and notes thereto of Kernel and AIRO.
| Pro Forma Combined | ||||||||||||
| (in thousands, except share and per share data) | Assuming No Redemptions | Assuming 50% Redemptions | Assuming Maximum Redemptions | |||||||||
| Summary Unaudited Pro Forma Condensed Combined Statement of Operations Data for the Year Ended December 31, 2023 | ||||||||||||
| Net loss | $ | (126,603 | ) | $ | (126,603 | ) | $ | (126,603 | ) | |||
| Net loss per share, Class A common stock – basic and diluted | $ | (1.41 | ) | $ | (1.42 | ) | $ | (1.42 | ) | |||
| Weighted average shares outstanding of Class A common stock – basic and diluted | 89,628,091 | 89,373,421 | 89,118,750 | |||||||||
| Summary Unaudited Pro Forma Condensed Combined Statement of Operations Data for the Three Months ending March 31, 2024 | ||||||||||||
| Net loss | $ | (2,472 | ) | $ | (2,472 | ) | $ | (2,472 | ) | |||
| Net loss per share, Class A common stock -basic and diluted | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | |||
| Weighted average shares outstanding of Class A common stock – basic and diluted | 89,628,091 | 89,373,421 | 89,118,750 | |||||||||
| Summary Unaudited Pro Forma Combined Balance Sheet Data as of March 31, 2024 | ||||||||||||
| Total assets | $ | 721,014 | $ | 721,014 | $ | 721,014 | ||||||
| Total liabilities | $ | 75,054 | $ | 77,836 | $ | 80,618 | ||||||
| Total stockholders’ equity | $ | 645,960 | $ | 643,178 | $ | 640,396 | ||||||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this proxy statement/prospectus are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and are being made pursuant to the safe harbor provisions contained therein. These forward-looking statements relate to current expectations and strategies, future operations, future financial positioning, future revenue, projected costs, prospects, current plans, current objectives of management and expected market growth, and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from expectations, estimates, and projections expressed or implied by these forward-looking statements and, consequently, you should not rely on these forward-looking statements as a guarantee, an assurance, a prediction or a definitive statement of fact or probability of future events. In some cases, you can identify forward-looking statements through the use of words or phrases such as “may”, “should”, “could”, “predict”, “potential”, “plan”, “seeks”, “believe”, “will likely result”, “expect”, “continue”, “will continue”, “will”, “will be”, “anticipate”, “seek”, “estimate”, “intend”, “project”, “would”, “outlook”, “intend”, “strive”, and similar expressions, or the negative version of those words or phrases or other comparable words or phrases of a future or forward-looking nature, but the absence of such words does not mean that a statement is not forward-looking. These forward-looking statements are not historical facts, but instead they are predictions, projections and other statements about future events are based upon estimates and assumptions that, while considered reasonable by Kernel and its management, and AIRO and its management, as the case may be, are inherently uncertain. These forward-looking statements are provided for illustrative purposes only and actual events and circumstances are difficult or impossible to predict and will differ from assumptions.
Forward-looking statements in this proxy statement/prospectus include, but are not limited to, statements about the:
| ● | benefits from the Business Combination; |
| ● | ability to complete an initial business combination, including the Business Combination; |
| ● | satisfaction or waiver (if applicable) of the conditions to the Business Combination; |
| ● | future financial performance following the Business Combination; |
| ● | estimates regarding expenses, future revenue, capital requirements and needs for additional financing; |
| ● | intended benefits of AIRO’s business model; |
| ● | expected use of the proceeds from the Business Combination; |
| ● | success in retaining or recruiting, or changes required in, officers, key employees or directors following the Business Combination; |
| ● | officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving the Business Combination, as a result of which they would then receive expense reimbursements; |
| ● | public securities’ potential liquidity and trading; |
| ● | use of proceeds not held in the Trust Account or available to ParentCo from interest income on the Trust Account balance; |
| ● | impact from the outcome of any known and unknown litigation; |
| ● | future financial performance, including financial projections and business metrics and any underlying assumptions thereunder; |
| ● | future business or product expansion, including estimated revenues and losses, projected costs, prospects and plans; |
| ● | future capital requirements and sources and uses of cash; and |
| ● | impact of competition and developments and projections relating to competitors and industry. |
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Many factors may cause actual results to differ materially from these forward-looking statements including, but not limited to:
| ● | the risk that the Business Combination may not be completed in a timely manner, per Kernel’s business combination deadlines or otherwise, or at all, including as a result of the occurrence of any event, change or other circumstances that could give rise to the termination of negotiations, including negotiations related to the underlying Business Combination Agreement or subsequent definitive agreements with respect to the proposed Business Combination, which may adversely affect the price of our securities; |
| ● | the risk of failure to satisfy the conditions to the consummation of the Business Combination, including the approval of the Business Combination Agreement by our stockholders, the satisfaction of the minimum net tangible assets and minimum cash at closing requirements and the receipt of certain governmental, regulatory and third party approvals; |
| ● | the risk of not being able to meet Nasdaq listing standards following the consummation of the proposed Business Combination; |
| ● | the effect of the announcement or pendency of the proposed Business Combination on business relationships, operating results, and business generally; |
| ● | the risk that the announcement or completion of the proposed Business Combination disrupts current plans and operations; |
| ● | the outcome of any legal proceedings that may be instituted against us or others following the announcement of the proposed Business Combination and any definitive agreements with respect thereto; |
| ● | the risk of the potential inability to complete the proposed Business Combination due to the failure to obtain approval of our equity holders or to satisfy other conditions to closing in the Business Combination Agreement; |
| ● | the risk of changes to the proposed structure of the proposed Business Combination that may be required or appropriate as a result of applicable laws or regulations; |
| ● | the risk of an inability to recognize the anticipated benefits of the proposed Business Combination and achieve commercialization and development plans, which may be affected by, among other things, competition and the ability of the combined company to grow and manage growth profitably, maintain relationships with customers and retain its management and key employees; |
| ● | costs related to the proposed Business Combination; |
| ● | the risk of changes in applicable laws or regulations; |
| ● | the risk of potential failures to realize and achieve estimates of expenses, pro forma results, profitability and underlying assumptions with respect to stockholder redemptions and purchase price and other adjustments; |
| ● | the risk of the need and ability to raise additional capital and the terms on which such capital is received; |
| ● | the possibility that we may be adversely impacted by other economic, business, and/or competitive factors |
| ● | changes in domestic and global general economic conditions; |
| ● | the risk of loss of any key executives; |
| ● | the risk of loss of any relationships with key partners; |
| ● | the risk of loss of any relationships with key suppliers; |
| ● | the risk that ParentCo will need to raise additional capital to execute its business plan, which may not be available on acceptable terms or at all; |
| ● | the risk that COVID-19 may continue to impact business and financial conditions; |
| ● | the risk of data security breaches, cyber-attacks or other network outages; and |
| ● | other risks and uncertainties indicated in this proxy statement/prospectus, including those under “Risk Factors”, and other documents filed or to be filed with the SEC by Kernel or ParentCo. |
The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that will be described in the “Risk Factors” section of this proxy statement/prospectus and the amendments hereto, and other documents to be filed by us from time to time with the SEC, which are publicly available on the SEC’s website at www.sec.gov. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements, and while we may elect to update these forward-looking statements at some point in the future, they assume no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. We are not giving any assurance that we will achieve our expectations. These forward-looking statements should not be relied upon as representing our assessments as of any date subsequent to the date of this press release. Accordingly, undue reliance should not be placed upon the forward-looking statements.
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You should carefully consider the following risk factors in addition to the other information included in this proxy statement/prospectus, including matters addressed in the section entitled “Cautionary Note Regarding Forward-Looking Statements,” before deciding how to vote your shares of Kernel Ordinary Shares. Please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus. The occurrence of one or more of the events or circumstances described in these risk factors, alone or in combination with other events or circumstances, may adversely affect the ability to complete or realize the anticipated benefits of the Business Combination and may have a material adverse effect on the business, financial condition and operating results of AIRO and ParentCo following the Business Combination. The risks discussed below may not prove to be exhaustive and are based on certain assumptions made by Kernel and AIRO that later may prove to be incorrect or incomplete. Kernel and AIRO may face additional risks and uncertainties that are not presently known to Kernel or AIRO or that Kernel and AIRO currently deem immaterial, which may also impair ParentCo’s business, financial condition or results of operations. The following discussion should be read in conjunction with the financial statements of AIRO and the financial statements of Kernel and the notes thereto included elsewhere in this proxy statement/prospectus.
Risks Related to AIRO’s Business
The following risk factors will apply to the business and operations of ParentCo following the Closing. These risk factors are not exhaustive, and investors are encouraged to perform their own investigation with respect to the business, financial condition and operating results of AIRO and the business, financial condition and operating results of ParentCo following the completion of the Business Combination.
Unless the context requires otherwise, references to “AIRO,” in this section are to the business and operations of AIRO prior to the Business Combination which will be the business of ParentCo after the Business Combination, and references to “ParentCo” “we”, “us” or “our” in this section are to the business and operations of ParentCo as directly or indirectly affected by AIRO by virtue of ParentCo’s ownership of the business of AIRO after the Business Combination. Following the Business Combination, ParentCo will be a holding company with no direct operations or material assets, other than the operations and assets of AIRO. Accordingly, ParentCo’s stockholders and warrant holders will be subject to all of the risks of the business of AIRO following the Business Combination.
Our limited operating history as a combined company and our evolving business make it difficult to evaluate our current business and future prospects and increase the risk of your investment.
We were organized on August 30, 2021 for the purpose of acquiring and integrating various companies in the aerospace and defense industry. See “Business of AIRO – Formation of AIRO Group Holdings, Inc.” Our limited operating history and rapidly evolving business make it difficult to evaluate our current business, future prospects and plan for growth. We will continue to encounter significant risks and uncertainties frequently experienced by growing companies in rapidly changing and heavily regulated industries, such as attracting new customers to our products and services; retaining customers and encouraging them to utilize new products and services that we make available; competition from other companies; hiring, integrating, training and retaining skilled personnel; developing new solutions; determining prices for our solutions; unforeseen expenses; challenges in forecasting accuracy; and new or adverse regulatory developments affecting aspects of the aerospace and defense industry. Further, because we depend, in part, on market acceptance of our newer and future products and services, it is difficult to evaluate trends that may affect our business and whether our expansion will be profitable. If we have difficulty launching new products or services, then our reputation may be harmed and our business, financial condition and results of operations may be adversely affected. If our assumptions regarding these and other similar risks and uncertainties that relate to our business, which we use to plan our business, are incorrect or change as we gain more experience operating as a combined company, or if we do not address these challenges successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
We have identified a material weakness in our internal control over financial reporting. We have made and continue to make changes to our internal controls to remediate this material weakness. However, if we are unable to effectively remediate this material weakness, identify additional material weaknesses in the future, or otherwise fail to maintain effective internal control over financial reporting, then we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Any failure to maintain effective internal control over financial reporting could cause us to fail to accurately or timely report our financial condition or results of operations to meet our reporting obligations.
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We have identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As further discussed in “Business of AIRO”, AIRO acquired six subsidiaries during the first two fiscal quarters of 2022. Several of AIRO’s recently-acquired subsidiaries did not have adequate personnel to manage their accounting functions and did not maintain a segregation of duties between different roles at their organizations. In addition, in the course of preparing its consolidated financial statements for the periods in which the acquisitions occurred, AIRO did not have an effective risk assessment process that successfully identified and assessed risks of material misstatement to ensure controls were designed and implemented to respond to those risks, and it did not have an effective monitoring process to assess the consistent operation of internal control over financial reporting and remediate known control deficiencies. As a result of these deficiencies, AIRO did not effectively implement and operate process-level control activities related to the accounting and reporting for the six acquisitions, including the fair value of its common stock issued in certain of the transactions, resulting in the restatement of its consolidated financial statements as of and for the year ended December 31, 2022, as well as its unaudited condensed consolidated financial statements for the six month period ended June 30, 2022, the nine month period ended September 30, 2022, the three month period ended March 31, 2023, the six month period ended June 30, 2023 and the nine month period ended September 30, 2023.
While we have made changes to our accounting processes and other internal controls as a combined company and have engaged additional accounting personnel, we cannot assure that the measures we have taken to date, actions we continue to take, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to this material weakness and restatement of our consolidated financial statements.
We are a relatively small company with limited accounting staff. Our limited staff and resources may affect our internal controls over financial reporting. Our failure to implement measures that will ensure adequate controls over our financial and other reporting processes could cause us to fail to meet our financial and other reporting obligations.
We are a relatively small company with limited accounting staff. The limited staff may not allow for effective internal controls over financial reporting due to the lack of adequate segregation of duties and insufficient secondary review of GAAP. Due to our current staffing limitations, we cannot be certain that the measures we implement in the future will ensure that we design, undertake, and maintain adequate controls over our financial processes and reporting. Any failure by us to hire and retain experienced accounting and financial reporting personnel, implement required new or improved controls, or any difficulties we encounter in their implementation, could cause us to fail to meet our reporting obligations.
Our or our subsidiaries’ failure to comply with covenants under debt instruments could adversely affect our business and financial condition.
The agreements governing our and our subsidiaries’ indebtedness contain restrictive covenants that will limit our and our subsidiaries’ ability to engage in activities that may be in our and their long-term best interests. The creditors who hold our debt could accelerate amounts due in the event that we default on these covenants, which could potentially trigger a default or acceleration of the maturity of our other debt. If we are unable to comply with any covenant, we may need to obtain waivers from the required creditors under our debt instruments to avoid default.
Our failure to comply with the terms of certain promissory notes entered into with former stockholders of several of AIRO’s wholly-owned subsidiaries could adversely affect our business, financial condition, results of operations or liquidity.
As discussed below in “Business of AIRO - Formation of AIRO Group Holdings, Inc.,” in connection with the Put-Together Transaction (as defined in the notes to AIRO’s financial statements below), AIRO entered into promissory notes with the equity holders (the “Note Holders”) of Agile Defense, CDI, Sky-Watch and AIRO Drone (all as defined below under “Business of AIRO”) (the “AIRO Subsidiaries”). The promissory notes become payable within five (5) business days after the common stock of ParentCo begins public trading. Each promissory note is secured by all of the shares of AIRO’s interest in the respective AIRO Subsidiary (the “Collateral”). If we are unable to repay the principal amount of one or more of the promissory notes when due, then the associated Note Holders may take possession of and exercise control over the Collateral, resulting in our loss of all or partial ownership of such AIRO Subsidiary, which could adversely affect our business and financial condition.
We operate in evolving markets, which makes it difficult to evaluate our business and future prospects.
Our drones, electric vertical take-off and landing (“eVTOL”) aircraft and other products are sold in new and rapidly evolving markets. Accordingly, our business and future prospects may be difficult to evaluate. We cannot accurately predict the extent to which demand for our products and services will increase, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:
| ● | generate sufficient revenue to maintain profitability; | |
| ● | acquire and maintain market share; | |
| ● | achieve or manage growth in our operations; | |
| ● | develop and renew contracts; | |
| ● | attract and retain leadership and other highly-qualified personnel; | |
| ● | acquire baseline technology and platforms due to the scarcity of available assets around the globe; | |
| ● | adapt to required redirection or changes in services or direction caused by geopolitical crises; | |
| ● | successfully develop and commercially market new products and services; | |
| ● | keep pace with technological developments; | |
| ● | timely address the increasingly sophisticated needs of our customers; | |
| ● | secure sufficient quantities or cost-effective production of our products due to supply-chain challenges; | |
| ● | adapt to new or changing policies and spending priorities of governments and government agencies; and | |
| ● | access initial and additional capital when required and on reasonable terms. |
If we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations, prospects and financial condition would be materially harmed.
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We face significant competition from other firms, some of which have substantially greater resources than us.
The defense and broader aerospace industry is highly competitive and generally characterized by intense competition to win contracts. Our current principal competitors include the following: (i) for our Uncrewed Air Systems Division: AeroVironment, Inc. (AVAV), Zipline International Inc., AgEagle Aerial Systems, Inc. (UAVS), Draganfly Inc. (DPRO), and Drone Delivery Canada Corp. (TAKOF); (ii) for our Training Division: Lockheed Martin Corporation (LMT), Raytheon Technologies Corporation (RTX), Northrop Grumman Corporation (NOC), Draken International, Inc., Top Aces Inc., Airborne Tactical Advantage Company, LLC, Tactical Air Defense Services Inc., Air USA, Inc., Embry-Riddle Aeronautical University, Inc., Spartan Aviation Industries, Inc., ATP, Inc., and FlightSafety International, Inc.; (iii) for our Advanced Avionics Division: Honeywell International Inc. (HON; “Honeywell”), Avidyne Corporation, Collins Aerospace, Dynon Avionics, Inc., uAvionix Corporation, L3Harris Technologies, Inc. (LHX), and Garmin Ltd. (GRMN); and (iv) for our Electric Air Mobility Division: BETA Technologies, Inc., Volocopter GmbH, Wisk Aero LLC, Joby Aviation, Inc. (JOBY), Archer Aviation Inc. (ACHR), Vertical Aerospace Ltd. (EVTL), Lilium N.V. (LILM), and Eve Holding Inc. (EVEX) in addition to ground transportation services, such as Uber Technologies, Inc. (UBER) and Lyft, Inc. (LYFT), and incumbent aircraft carrier services, such as Blade Air Mobility, Inc. (BLDE) and NetJets Inc. Some of these firms have substantially greater financial, management, research and marketing resources than us. Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, price and the availability of key professional personnel, including those with security clearances. Furthermore, many of our competitors may be able to utilize their substantially greater resources and economies of scale to develop competing products and technologies, manufacture in high volumes more efficiently, divert sales away from us by winning broader contracts or hire away our employees by offering more lucrative compensation packages. Small business competitors may be able to offer more cost competitive solutions, due to their lower overhead costs, and take advantage of small business incentives and set-aside programs for which we are ineligible. In order to secure contracts successfully when competing with larger, well-financed companies, we may be forced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, which could adversely affect our margins.
We expect to incur substantial R&D costs and devote significant resources to identifying and commercializing new products and services, which could significantly reduce our profitability and may never result in revenue to us.
Our future growth depends on penetrating new markets, adapting existing products to new applications, and introducing new products and services that achieve market acceptance. We plan to incur substantial R&D costs as part of our efforts to design, develop and commercialize new products and services and enhance existing products. We believe that there are significant investment opportunities in a number of our business areas. Because we account for internal R&D as an operating expense, these expenditures will adversely affect our earnings in the future. Further, our R&D programs may not produce successful results, and our new products and services may not achieve market acceptance, create additional revenue or become profitable, which could materially harm our business, prospects, financial results and liquidity.
Even if the Business Combination is successful, we will require substantial additional capital at a future date to finance our operations and fund our R&D. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce and/or eliminate our R&D activities, as well as our commercialization efforts.
Developing products and services in the defense and broader aerospace industry is a very time-consuming, expensive and uncertain process that takes years to complete. Our operations, as well as our R&D, have consumed substantial amounts of cash since they began. We expect our expenses to increase in connection with our ongoing activities, particularly as we advance the development of our aircraft and other products, seek regulatory approvals, and launch and commercialize our products at scale. Following the Business Combination, we also expect to incur additional costs associated with operating a public company. Accordingly, we will need to obtain substantial additional funding in order to maintain our continuing operations. If we are unable to raise capital when needed or on acceptable terms, then we may be forced to delay, reduce or eliminate our R&D activities as well as our commercialization efforts.
Our consumers may experience service failures or interruptions due to defects in the software, infrastructure, components or engineering system that compromise our products and services, or due to errors in product installation, any of which could harm our business.
Our products and services may contain undetected defects in the software, infrastructure, components or engineering system. Sophisticated software and applications, such as those adopted and offered by us in connection with or as a part of our eVTOL, drone, and avionics offerings, may contain “bugs” that can unexpectedly interfere with the software and applications’ intended operations. Our communication services may from time to time experience outages, service slowdowns or errors. Defects may also occur in components or processes used in our products or for our services.
There can be no assurance that we will be able to detect and fix all defects in the hardware, software and services we offer. Failure to do so could result in decreases in sales of our products and services, lost revenues, significant warranty and other expenses, decreases in customer confidence and loyalty, losing market share to our competitors, and harm to our reputation.
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We rely on a limited number of suppliers in Canada and Europe for critical components and raw materials used to manufacture and develop our products. If we are forced to use suppliers outside these jurisdictions and, as a result, such materials become scarce or unavailable, or such suppliers fail, then we may incur delays in development, manufacture and delivery of our products, which could damage our business.
Particularly in our Advanced Avionics, Uncrewed Air Systems and Electric Air Mobility Divisions, we obtain hardware components, raw materials, and various systems and subsystems from a limited group of suppliers located in Canada and Europe, some of which are sole source suppliers. We do not have long-term agreements with any of these suppliers that obligate them to continue to sell such components, materials, systems or subsystems to us. Our reliance on these suppliers involves significant risk and uncertainty, including whether such suppliers will provide an adequate supply of products of sufficient quality, will increase prices for the products and will perform their obligations on a timely basis. Changes in business conditions, wars, governmental changes, political intervention, and other factors beyond our control or which we do not presently anticipate, could also affect our suppliers’ ability to deliver components to us on a timely basis. Furthermore, if we experience significant increased demand, or need to replace our existing suppliers, there can be no assurance that additional supplies of component parts will be available when required on terms that are acceptable to us, or at all, or that any supplier would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner. In addition, certain components and raw materials used in the development and manufacture of our products are periodically at risk of supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery. If shortages occur and we are unable to obtain components from third party suppliers in the quantities and of the quality we require, on a timely basis and at acceptable prices, then we may not be able to timely complete development of or deliver our products on a timely or cost effective basis to our customers, which could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results of operations, prospects and financial condition. Moreover, if any of our suppliers become financially unstable, or otherwise unable or unwilling to provide us with raw materials or components, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to redesign our products to accommodate components from different suppliers. Even if we are successful at locating alternative suppliers the costs of the components may be higher than the original supplier’s components or we may be required to purchase in larger quantities than we normally would, which may result in higher inventory levels than desired. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources or are required to redesign our products. We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all. In particular, the global COVID-19 pandemic has disrupted manufacturing and some supply chains, including our supply chain, which has had, and is expected to continue to have, a significant impact, both direct and indirect, on businesses and commerce worldwide.
We do not control our suppliers’ labor or other compliance practices, including environmental, health and safety practices. If our current suppliers, or any other suppliers we may use in the future, violate U.S. or foreign laws or regulations, we may be subjected to extra duties, significant monetary penalties, adverse publicity, the seizure and forfeiture of products that we are attempting to import or the loss of our import privileges. The effects of these factors could render the conduct of our business in a particular country undesirable or impractical and have a negative impact on our operating results.
We are impacted by increasing stakeholder interest in public company performance, disclosure, and goal-setting with respect to environmental, social, and governance (“ESG”) matters.
In response to growing customer, investor, employee, governmental, and other stakeholder interest in the ESG practices of public companies, we plan to hire a Chief Sustainability Officer to guide our work in and reporting on our ESG initiatives. Our ability to achieve any goals in connection with our ESG initiatives is subject to numerous risks, many of which are outside of our control. Examples of such risks include: (a) the availability and cost of low- or non-carbon-based energy sources and technologies, (2) evolving regulatory requirements affecting ESG standards or disclosures, (3) the availability of suppliers that can meet our sustainability, diversity and other standards, (4) our ability to recruit, develop, and retain diverse talent in our labor markets, and (5) the impact of our organic growth and acquisitions or dispositions of businesses or operations. In addition, standards for tracking and reporting on ESG maters have not been harmonized and continue to evolve. Our processes and controls for reporting of ESG matters may not always comply with evolving and disparate standards for identifying, measuring, and reporting ESG metrics, our interpretation of reporting standards may differ from those of others, and such standards may change over time, any of which could result in significant revisions to our reported progress in our ESG initiatives.
If our ESG practices do not meet evolving investor or other stakeholder expectations and standards, then our reputation, our ability to attract or retain employees and our attractiveness as an investment, supplier, business partner, or acquirer could be negatively impacted.
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There may be a future shortage of pilots who meet the training standards required by our customers, which could reduce our ability to sell our aircraft at scale and on the timelines contemplated.
There may be a future shortage of pilots that could exacerbate over time as more pilots in the industry approach mandatory retirement age. This will affect the aviation industry, including advanced air mobility (“AAM”) services and, more specifically, our business. If we are unable to hire, train, and retain qualified pilots, our business could be harmed, and we may be unable to implement our growth plans.
We are subject to cybersecurity and other security risks to our operational systems, security systems, infrastructure, integrated software in our aircraft and customer data processed by us or third-party vendors, which risks are amplified by our work for world governments.
We are at risk for interruptions, outages and breaches of our: (i) operational systems, including business, financial, accounting, product development, data processing or production processes, owned by us or our third-party vendors or suppliers; (ii) facility security systems, owned by us or our third-party vendors or suppliers; (iii) aircraft technology, including powertrain and avionics and flight control software, owned by us or our third-party vendors or suppliers; (iv) the integrated software in our aircraft; or (v) customer data that we process or our third-party vendors or suppliers process on our behalf. As a government contractor, these security threats to our information technology (“IT”) infrastructure and facilities are amplified. Although we utilize various procedures and controls to monitor and mitigate these threats, there can be no assurance that these procedures and controls will be sufficient to prevent disruptions, the unauthorized release of confidential technical information, the misappropriation of intellectual property or trade secrets, financial or banking information or corruption of data. Accordingly, any significant operational delays, or any destruction, manipulation or improper use of our data, information systems or networks could adversely affect our financial results and damage the reputation for our products and services. The occurrence of some of these risks may be increased due to the increase in remote working by our employees, suppliers, contractors and other third parties due to the COVID-19 pandemic. Due to the ever-developing nature of such risks, the impact of any potential incident cannot be predicted. If we or our partners are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could materially and adversely affect our business, prospects and financial results. Additionally, expenses resulting from cyber security attacks and other security risks may not be fully insured or otherwise mitigated, which could harm our financial results. If our security measures and systems do not operate as we expect them to, we may be required to expend significant resources to make corrections or find alternative sources for performing these functions.
It remains unclear how the coronavirus (COVID-19) pandemic may impact our business, financial condition, results of operations and growth.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The pandemic has adversely affected economies and financial markets worldwide, as well as business operations and the conduct of commerce generally. While the WHO declared the pandemic ended in 2023, the extent of the business disruption and financial impact depend on factors beyond our knowledge and control making it difficult for us to accurately predict the duration or magnitude of the adverse results of the outbreak and its effects on our business, results of operations or financial condition at this time, but such effects may be material. In addition, our continued access to sources of liquidity depend on global economic conditions and the condition of global financial markets. Given the uncertainty caused by the pandemic, there is no guarantee that debt or equity financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding.
Our commercial aviation products, systems and services businesses are affected by global demand and economic factors that could negatively impact our financial results.
The operating results of our commercial aviation products, systems and services businesses – particularly our Electric Air Mobility and Advanced Avionics Divisions – may be adversely affected by downturns in the global demand for air travel, which impacts new aircraft production and orders, and global flying hours, which impacts air transport, regional and business aircraft utilization rates and pilot training needs. The aviation industry is highly cyclical, and the level of demand for air travel is correlated to the strength of the U.S. and international economies and is impacted by long-term trends in airline passenger and cargo traffic. The results of our commercial aviation businesses also depend on other factors, including general economic growth, political stability in both developed and emerging markets, pricing pressures, trends in capital goods markets and changes in original equipment manufacturer production rates. Our commercial aviation businesses experienced adverse COVID-related impacts in fiscal 2020 and remain at a higher risk of further adverse COVID-related impacts.
Our business and financial performance could be adversely affected by inflation.
Until recently, the inflation rate has generally been low in the geographies where we operate. However, recently, the inflation rate in the U.S. reached a 40-year high, primarily as a result of higher energy costs and global supply chain disruptions. In the event of a significant increase in consumer prices, particularly over an extended period of time, customer demand for our products and services could be adversely affected and we could experience lower than expected sales. In addition, if any of our suppliers implemented price increases in response to higher raw material, labor, and energy costs or otherwise, we may not be able to pass along such price increased to our customers and our profitability may be reduced. The occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations.
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We cannot predict the consequences of future geopolitical events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability.
Ongoing instability and current conflicts in global markets, including in Eastern Europe, the Middle East and Asia, and the potential for other conflicts and future terrorist activities, as well as other recent geopolitical events throughout the world, including the ongoing conflict in Ukraine and new or increased tariffs and potential trade wars, have created and may continue to create economic and political uncertainties and impacts that could have a material adverse effect on our business, operations, and profitability. We have not experienced, and do not anticipate, any disruption in our supply chain or other business operations due to the ongoing conflict in Ukraine. We sell drones that are being deployed by Ukraine via sales to other NATO nations, but given the uncertainty of the future of that conflict we have not projected continuing sales in that area in our financial projections. As the conflict expands or contracts, diminished sales would have little or no impact on our financial position, while increased sales would be reflected in increased revenue. However, notwithstanding our current and anticipated position, these types of matters can cause uncertainty in financial markets and may significantly increase the political, economic and social instability in geographic areas in which we operate now or may operate in the future. If credit in financial markets outside of the U.S. tightened, it could adversely affect the ability of our international customers and suppliers to obtain financing and could result in a decrease in or cancellation of orders for our products, systems and services or impact the ability of our customers to make payments.
Risks Related to Electric Air Mobility
The market for eVTOL aircraft and electric air mobility (“EAM”) has not been established with precision, is still emerging and may not achieve the growth potential we expect or may grow more slowly than expected, which may harm our business, financial condition, and results of operations.
The EAM market is still emerging and has not been established with precision. We are uncertain as to what extent market acceptance will grow, if at all. Our customers will likely initially launch operations in a limited number of metropolitan areas. The success of these markets, if any, and the opportunity for future growth in these and other markets may not be representative of the potential market for EAM in other metropolitan areas. Our success will depend to a substantial extent on regulatory approval and availability of eVTOL technology, as well as the willingness of commuters and travelers to widely adopt air mobility as an alternative for ground transportation. If the public does not perceive EAM as beneficial, or chooses not to adopt EAM as a result of concerns regarding safety, affordability, value proposition or for other reasons, then the market for our aircraft may not develop, may develop more slowly than we expect or may not achieve the growth potential we expect. Any of the foregoing could materially adversely affect our business, financial condition, prospects, and results of operations.
There may be reluctance by consumers to adopt this new form of mobility, or an unwillingness to pay aircraft operators’ projected prices.
Our growth is highly dependent upon the adoption by consumers of an entirely new form of mobility offered by eVTOL aircraft and the EAM market. If consumers do not adopt this new form of mobility or are not willing to pay the projected prices for the aerial ridesharing services provided by our customers, our prospects, financial condition and operating results will be harmed. This market is new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, new aircraft announcements and changing consumer demands and behaviors. There may be heightened public skepticism of this nascent technology and its adopters. In particular, there could be negative public perception surrounding eVTOL aircraft, including the overall safety and the potential for injuries or death occurring as a result of accidents involving eVTOL aircraft, regardless of whether any such safety incidents involve our aircraft. Any of the foregoing risks and challenges could adversely affect our prospects, business, financial condition, and results of operations.
Our success in a given market will depend on our customers’ ability to develop a network of passengers and accurately assess and predict passenger demand and price sensitivity. Demand and price sensitivity may fluctuate based on a variety of factors, including macroeconomic factors, quality of service, negative publicity, safety incidents, corporate reporting related to safety, quality of customer support, perceived political or geopolitical affiliations, or dissatisfaction with our products and offerings in general. If the operators of our aircraft fail to attract passengers or fail to accurately predict demand and price sensitivity, it could reduce demand for our aircraft and harm our financial performance.
We expect that a large driver of passenger demand for EAM will be time savings when compared with alternative modes of transportation. Should operators of our aircraft be unable to deliver a sufficient level of time savings for passengers, or if expected time savings are impacted by delays or cancellations, it could reduce consumer demand and, in turn, demand for our aircraft. If demand does not materialize or falls, our business, financial conditions, prospects, and results of operations could be adversely affected.
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Operators of our aircraft may be unable to reduce end-user pricing over time at rates sufficient to stimulate demand for our aircraft, drive expected growth and accomplish planned production.
Operators of our aircraft may not be able to successfully reduce end-user pricing over time to increase demand, address new market segments and develop a significantly broader customer base. We expect that initial end-user pricing may be most applicable to relatively affluent consumers, and operators will need to address additional markets and expand their customer demographic in order to further grow their EAM business. If operators are unable to meet their end-user pricing projections, then demand for our aircraft will decline and we will be unable to meet our production plans, resulting in an increase in our per-unit costs, adversely affecting our results of operations.
Our aircraft may not perform at the level we expect, and may have design or manufacturing deficiencies, such as higher than expected noise profile, lower payload than initially estimated, shorter range and/or shorter useful lives than we anticipate.
Our aircraft may contain defects in design or manufacture that may cause them not to perform as expected or that may require repair. For example, our aircraft may have a higher noise profile than we expect or carry a lower payload or have shorter maximum battery range than we estimate. Our aircraft also use a substantial amount of software code to operate. Software products are inherently complex and often contain defects and errors when first introduced. There can be no assurance that we will be able to detect and fix these defects in these products prior to their use. While we have performed extensive testing, in some instances we are still relying on projections and models to validate the projected performance of our aircraft. To date, we have been unable to validate the performance of our aircraft over the expected lifetime of the aircraft.
Accidents or safety incidents involving eVTOL aircraft, us or our competitors could have a material adverse effect on our business, financial condition, and results of operations.
Test flying prototype aircraft is inherently risky, and accidents or incidents involving our aircraft are possible. Urban environments may present particular challenges to the operators of UAS, such as an increased risk of collisions resulting in property damage, injury or death. As the usage of UAS has increased, the danger of such collisions has increased. Any such occurrence would negatively impact our development, testing and certification efforts, and could result in re-design, certification delay and/or postponements or delays to the sales of our aircraft It could also significantly damage the reputation of and support for UAS in general.
The operation of aircraft is subject to various risks, and we expect demand for our aircraft to be impacted by accidents or other safety issues regardless of whether such accidents or issues involve our aircraft. Such accidents or incidents could also have a material impact on our ability to obtain certification from the Transport Canada Civil Aviation (“TCCA”), the U.S. Federal Aviation Administration (“FAA”), and/or the European Union Aviation Safety Agency (“EASA”) (the TCCA, FAA and EASA together, the “Civil Aviation Authorities”) for our aircraft, or to obtain such certification in a timely manner. Such events could impact confidence in a particular aircraft type or the air transportation services industry as a whole, particularly if such accidents or disasters were due to a safety fault. We believe that regulators and the general public are still forming their opinions about the safety and utility of aircraft that are highly reliant on lithium-ion batteries and/or advanced flight control software capabilities. An accident or other safety incident involving either our aircraft or a competitor’s aircraft during these early stages of opinion formation could have a disproportionate impact on the longer-term view of the emerging EAM market.
Further, if our personnel, our aircraft or other types of aircraft are involved in a public incident, accident, catastrophe or regulatory enforcement action, we could be exposed to significant reputational harm and potential legal liability. The insurance we carry may be inapplicable or inadequate to cover any such incident, accident, catastrophe or action. In the event that our insurance is inapplicable or inadequate, we may be forced to bear substantial losses from an incident or accident, which would adversely impact our business, results of operations and financial condition.
Our competitors may commercialize their technology before us, either in general or in specific markets.
While we expect to be one of the pioneering companies to market eVTOL aircraft, we expect this industry to be increasingly competitive, and it is possible that our competitors could get to market before us, either generally or in specific markets. Even if we are first to market, we may not fully realize the benefits we anticipate, and we may not receive any competitive advantage or may be overcome by other competitors. Many of our current and potential competitors are larger and have substantially greater resources than we have and expect to have in the future. They may also be able to devote greater resources to the development of their current and future technologies or the promotion and sale of their offerings, or offer lower prices. In particular, our competitors may be able to obtain the relevant certification and approvals for their aircraft before us.
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We may encounter obstacles outside of our control that slow market adoption of eVTOL aircraft or aerial rideshares, such as infrastructure limitations, regulatory requirements and challenges in the certification process.
The fleet market for electric aircraft is new and untested and is characterized by rapidly changing and evolving government regulation and industry standards. If we are unable to get through the certification process on the timeline planned, then our business, financial conditions, prospects, and results of operations could be adversely affected.
In addition, while our aircraft will be operating within the existing aviation airspace and infrastructure, long-term continued adoption of EAM will depend on operators’ ability to develop and operate vertiports in desirable locations in metropolitan locations. Developing and operating vertiport locations will require permits and approvals from federal, state, and local regulatory authorities and government bodies, and operation of our aircraft will depend on such permits and approvals. If our operators are prohibited, restricted, or delayed from developing and operating desirable vertiport locations, then demand for our aircraft could decline and our business could be adversely affected.
If we experience harm to our reputation and brand by customers, employees or operators, our business, financial condition, and results of operations could be adversely affected.
Continuing to increase the strength of our reputation and brand for high-performing, sustainable, safe and cost-effective EAM is critical to our ability to attract and retain customers and partners. In addition, our growth strategy includes international expansion through joint ventures or other partnerships with local companies that would benefit from our reputation and brand recognition. The successful development of our reputation and brand will depend on several factors, many of which are outside of our control. Negative perception of our aircraft or company may harm our reputation and brand, including as a result of:
| ● | complaints or negative publicity or reviews about us, independent third-party aircraft operators, passengers, or other brands or events that we associate with, even if factually incorrect or based on isolated incidents; | |
| ● | changes to our operations, safety and security or other policies that customers, end-users or others perceive as overly restrictive, unclear or inconsistent with our values; | |
| ● | illegal, negligent, reckless or otherwise inappropriate behavior by operators or independent third parties involved in the operation of our business or by our management team or other employees; | |
| ● | actual or perceived disruptions or defects in our aircraft; | |
| ● | litigation over, or investigations by regulators into, our operations or those of our independent third-party aircraft operators; | |
| ● | a failure to operate our business in a way that is consistent with our values; | |
| ● | negative responses by independent third-party aircraft operators to new mobility offerings; or | |
| ● | any of the foregoing with respect to our competitors, to the extent such resulting negative perception affects the public’s perception of us or our industry as a whole. |
Any of the foregoing could adversely affect our business, financial condition, and results of operations.
In order to reach production for our aircraft, we need to develop complex software and technology systems in coordination with our partners and suppliers, and there can be no assurance such systems will be successfully developed.
We anticipate that our aircraft will use a substantial amount of sophisticated software and hardware to operate. The development of such advanced technologies is inherently complex, and we will need to coordinate with our partners and suppliers in order to reach production for our aircraft. Defects and errors may be revealed over time and our control over the performance of third-party services and systems may be limited. Thus, our potential inability to develop the necessary software and technology systems may harm our competitive position.
We are relying on third-party partners to develop a number of emerging technologies for use in our products. These technologies are not today, and may not ever be, commercially viable. There can be no assurances that our partners will be able to meet the technological requirements, production timing, and volume requirements to support our business plan. In addition, the technology may not comply with the cost, performance, useful life, and warranty characteristics that we anticipate in our business plan or may have performance problems related to mechanical or software defects. As a result, our business plan could be significantly adversely impacted, and we may incur significant liabilities under warranty claims, which could adversely affect our business, prospects, and results of operations.
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We may not be able to produce aircraft in the volumes and on the timelines projected.
There are significant challenges associated with mass producing aircraft in the volumes that we are projecting. The aerospace industry has traditionally been characterized by significant barriers to entry, including large capital requirements, investment costs of designing and manufacturing aircraft, long lead times to bring aircraft to market from the concept and design stage, the need for specialized design and development expertise, extensive regulatory requirements, difficulty establishing a brand name and image, and the need to establish maintenance and service locations. As a manufacturer of electric aircraft, we face a variety of added challenges to entry that a traditional aircraft manufacturer would not encounter, including additional costs of developing and producing an electric powertrain, regulations associated with the transport of lithium-ion batteries and unproven high-volume consumer demand for a fully electric aerial mobility service. Additionally, we are developing production lines for components and at volumes for which there is little precedent within the traditional aerospace industry. If we are not able to overcome these barriers, our business, prospects, operating results and financial condition will be negatively impacted, and our ability to grow our business will be harmed.
We will also need to do extensive testing to ensure that the aircraft is in compliance with applicable TCCA safety regulations and other relevant regulations prior to beginning mass production. In addition to certification of the aircraft, we will be required to obtain TCCA approval to manufacture completed aircraft pursuant to a TCCA-approved type design (e.g., type certificate). Production approval involves initial TCCA manufacturing approval and extensive ongoing oversight of mass produced aircraft. If we are unable to obtain production approval for the aircraft, or if TCCA imposes unanticipated restrictions as a condition of approval, our projected costs of production could increase substantially.
The timing of our production ramp is dependent upon finalizing certain aspects of the design, engineering, component procurement, testing, build out, and manufacturing plans in a timely manner and upon our ability to execute these plans within the current timeline. It is also dependent on being able to timely obtain TCCA certification.
Unsatisfactory safety performance of our aircraft as a result of our customers’ operations could have a material adverse effect on our business, financial condition, and results of operation.
There can be no assurance that our operator customers will not experience operational or process failures and other problems, including pilot error, cyberattacks or other intentional acts, that could result in potential safety risks. Any actual or perceived safety issues may result in significant reputational harm to the EAM industry and, accordingly, our business, in addition to tort liability, increased safety infrastructure and other costs that may arise. Such issues could result in increased regulation or other systemic consequences. Adverse publicity affecting the industry and our reputation as a result of accidents, operational failures, or other safety incidents could have a material adverse effect on our business, financial condition, prospects, and results of operation. In addition, our aircraft may be grounded by regulatory authorities due to safety concerns that could have a material adverse impact on our business, financial condition, operating results and prospects.
Risks Related to Our U.S. Government Contracts
We are subject to extensive government regulation, and our failure to comply with applicable regulations may subject us to penalties that restrict our ability to conduct our business.
As a contractor to the U.S. government and provider of various technologies, we are subject to and must comply with various government regulations that impact our revenue, operating costs, profit margins and the internal organization and operation of our business. We also need special security clearances and regulatory approvals to continue working on certain projects with the U.S. government. Our failure to comply with applicable regulations, rules and approvals, changes in the government’s interpretation of such regulations, rules and approvals as have been and are applied to our contracts, proposals or business or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, a decrease in profitability, the loss of our government contracts or our suspension or debarment from contracting with the U.S. government generally, any of which could harm our business, financial condition, and results of operations. We are also subject to certain regulations of comparable government agencies in other countries, and our failure to comply with these non-U.S. regulations could also harm our business, financial condition or results of operations.
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U.S. government contracts are subject to a competitive bidding process, are generally not fully funded at inception, and contain certain provisions that may be unfavorable to us, which could result in contracts and opportunities consuming significant resources without generating revenue.
U.S. government contracts typically involve long lead times for design and development, and are subject to significant changes in scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The termination or reduction of funding for a government program would result in a loss of anticipated future revenue attributable to that program. In addition, U.S. government contracts generally contain provisions permitting termination, in whole or in part, at the government’s convenience. Because a substantial majority of our revenue is dependent on the procurement, performance and payment under our U.S. government contracts, the termination of one or more critical government contracts could have a negative impact on our results of operations and financial condition.
U.S. government contracts are frequently awarded only after formal, protracted competitive bidding processes and, in many cases, unsuccessful bidders for U.S. government contracts are provided the opportunity to protest contract awards through various agency, administrative and judicial channels. Competitive bidding presents a number of risks, including the following:
| ● | the need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns; | |
| ● | the substantial cost and managerial time and effort that must be spent to prepare bids and proposals for contracts that may not be awarded to us; | |
| ● | the need to estimate accurately the resources and cost structure that will be required to service any contract we are awarded; and | |
| ● | the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding. |
We rely to a significant degree on sales to the U.S. government, particularly to agencies of the DoD, and a decline in government budgets, funding, changes in spending or budgetary priorities, or delays in contract awards may materially adversely affect our future revenue, business, financial condition, results of operations, cash flow and equity.
We derive a significant portion of our total sales from the U.S. government and its agencies, either as a prime contractor or subcontractor, particularly in connection with our Uncrewed Air Systems and Training Divisions. The Department of Defense (“DoD”) is our principal U.S. government customer. We believe that the success and growth of our business for the foreseeable future will continue to depend to a significant degree on our ability to win government contracts, in particular from the DoD.
The U.S. government may modify, curtail or terminate one or more of our contracts.
The U.S. government contracting party may modify, curtail or terminate its contracts with us, without prior notice and either at its convenience or for default based on performance. In addition, funding pursuant to our U.S. government contracts may be reduced or withheld as part of the U.S. Congressional appropriations process due to fiscal constraints, changes in U.S. national security strategy and/or priorities or other reasons. Historically, our Training Division has received some U.S. government contract funding under programs designed to benefit “small businesses” as defined under certain provisions of the U.S. Small Business Administration (“SBA”) regulations. The SBA regulations address multiple different programs that have varying eligibility requirements. While we believe that we will continue to be eligible as a small business under some programs, we will likely not be eligible under others. Moreover, the SBA regulations are subject to different interpretations, and the U.S. government may determine that we should no longer be classified as small. If the U.S. government made such a determination, it could terminate, cancel, or decide not to award options on existing agreements.
Any loss or anticipated loss or reduction of expected funding and/or modification, curtailment, or termination of one or more of our U.S. government contracts could have a material adverse effect on our earnings, cash flow and/or financial position, as well as our access to government testing facilities and/or our ability to secure pre-certification operating experience and/or revenues.
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Risks Related to Legal and Regulatory Requirements
Some of our products and services are subject to local, state, federal and international regulatory frameworks that are costly to comply with, are subject to interpretation, may be dependent on political pressures and factors and/or are subject to change.
Many of the products we develop and manufacturer are highly dependent on our ability to meet local, state, federal and international regulations. In particular, our ability to meet the certification requirements for our products in the U.S. and abroad could determine the ability to sell, deliver, and manufacture our products, and therefore, could impact our operating results. These regulations include design and manufacture of products and components. While a common framework exists among many regulatory authorities allowing for recognition of different regulatory approvals by other regulatory entities, often times there are differences that require additional validation to meet the requirements of a specific entity. The risk not only lies in the viability of a particular product but also the time to market. Delays in the process are not unusual and can lead to delays in bringing product to market. These delays could result in financial and competitive impacts on AIRO’s operations. For a description of the regulatory frameworks that apply to our products and services, see “Business of AIRO — Government Regulation.”
All of our divisions are highly regulated and our ability to generate revenues and profit may be limited by regulatory restrictions and/or changes.
Aerospace manufacturers and aircraft operators are subject to extensive regulatory and legal requirements that involve significant compliance costs. The Civil Aviation Authorities may issue regulations relating to the operation of aircraft that could require significant expenditures. Implementation of the requirements created by such regulations may result in increased costs for our EAM passengers and us. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of our operations or reduce the demand for air travel. If adopted, these measures could have the effect of raising fares, reducing revenue and increasing costs. We cannot ensure that these and other laws or regulations enacted in the future will not have a negative impact on our business, financial condition, and results of operations.
Governments and regulatory agencies in the markets where we manufacture and sell drone products may enact additional regulations relating to product safety and consumer protection in the future, and may also increase the penalties for failure to comply with product safety and consumer protection regulations. In addition, one or more of our customers might require changes in our products, such as the non-use of certain materials, in the future. Complying with any such additional regulations or requirements could impose increased costs on our business. Similarly, increased penalties for non-compliance could subject us to greater expenses in the event any of our products were found to not comply with such regulations. Such increased costs or penalties could have a negative impact on our business, financial condition, and results of operations.
International sales may pose different economic, regulatory, competition and other risks.
All of our divisions sell their products and/or services to international customers and these sales may grow in the future. International sales are subject to numerous political and economic factors, budget uncertainty, regulatory requirements, significant competition, taxation, and other risks associated with doing business outside the U.S. In international sales, we face substantial competition from both U.S. manufacturers and international manufacturers whose governments sometimes provide R&D assistance, marketing subsidies and other assistance for their products and services.
Risks Related to AIRO Intellectual Property
If we fail to protect, or incur significant costs in defending or enforcing our intellectual property and other proprietary rights, our business, financial condition, and results of operations could be materially harmed.
Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, a portion of our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. In addition, the U.S. government has licenses under certain of our patents and certain other intellectual property that are developed or used in performance of government contracts, and it may use or authorize others to use such patents and intellectual property for government and other purposes. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and our rights may be challenged by third parties. The laws of countries other than the U.S. may be even less protective of our intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual property. If one or more of these employees leave our employment to work for one of our competitors, then they may disseminate this proprietary information despite our established procedures and policies to prevent such dissemination, which may as a result damage our competitive position. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed. From time to time, we have initiated lawsuits to protect our intellectual property and other proprietary rights. Pursuing these claims is time consuming and expensive and could adversely impact our results of operations.
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In addition, affirmatively defending our intellectual property rights and investigating whether any of our products or services violate the rights of others may entail significant expense. Our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, then the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we prevail.
We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain technologies in the future.
We may become subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. Defending against, or otherwise addressing, any such claims, whether they are with or without merit, could be time-consuming and expensive, and could divert our management’s attention away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from these claims could require us to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit our use of the technology. We cannot ensure that we would be able to: obtain from the third party asserting the claim a license on commercially reasonable terms, if at all; develop alternative technology on a timely basis, if at all; or obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. An adverse determination also could prevent us from offering our products to others. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition.
Risks Related to Tax and Accounting Matters
Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.
We may from time to time generate net operating loss carryforwards for U.S. federal and state income tax purposes that are subject to expiration. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, changes in our ownership may limit the amount of our net operating loss carryforwards and tax credit carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of our company of more than 50 percentage points within a three-year period. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and tax credit carryforwards before they expire. Private placements and other transactions that we may execute, as well as the Business Combination, may trigger such an ownership change pursuant to Section 382. Any such limitation, sales of our common stock by our existing stockholders or additional sales of our common stock by us, could have a material adverse effect on our results of operations in future years. Our ability to utilize those net operating loss carryforwards could be limited by an “ownership change” as described above, which could result in increased tax liability to us. Net operating losses generated after December 31, 2017 are not subject to expiration, but may not be carried back to prior taxable years, except that net operating losses generated in 2018, 2019 and 2020 may be carried back five taxable years. Additionally, the deductibility of such U.S. federal net operating losses is limited to 80% of our taxable income in any taxable year beginning after December 31, 2020.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
We will be required to disclose changes made in our internal controls and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls annually, beginning with our second Annual Report on Form 10-K. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). However they will not be required to do so for so long as we are an emerging growth company. We could be an emerging growth company for up to five years from the date of the first sale of Kernel Class A Ordinary Shares in Kernel’s IPO. An independent assessment of the effectiveness of our internal controls over financial reporting could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls over financial reporting could lead to restatements of our financial statements and require us to incur the expense of remediation.
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Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to certain reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
Risks Related to Our Securities
The price of our stock and Public Warrants may be volatile, and you could lose all or part of your investment.
The trading price of ParentCo’s common stock and Public Warrants following the Closing is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this proxy statement/prospectus, these factors include:
| ● | announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; | |
| ● | our ability to effectively manage our growth; | |
| ● | actual or anticipated variations in quarterly operating results; | |
| ● | our cash position; | |
| ● | our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public; | |
| ● | changes in the market valuations of similar companies; | |
| ● | overall performance of the equity markets; | |
| ● | sales of our common stock and Public Warrants by us or our stockholders in the future; | |
| ● | low trading volume of our common stock, which may impair our ability to raise capital or enter into strategic collaborations and acquisitions by using our common stock as consideration; | |
| ● | changes in accounting practices; | |
| ● | ineffectiveness of our internal controls; | |
| ● | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
| ● | significant lawsuits, including patent or stockholder litigation; | |
| ● | general political and economic conditions, including any impact of the ongoing COVID-19 pandemic; and | |
| ● | other events or factors, many of which are beyond our control. |
In addition, the stock market in general, and the market for aerospace & defense companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors, as well as local or global socio-economic and political factors, including the conflict between Russia and Ukraine and between Israel and Hamas, may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of ParentCo’s common stock and Public Warrants after the Closing does not exceed the price you paid for them, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources.
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The terms of the Warrant Agreement may be amended.
Amending our warrant agreement would require the affirmative vote of holders of at least 50% of the Public Warrants and, solely with respect to any amendment to the terms of the Private Placement Warrants or any provision of the warrant agreement with respect to the Private Placement Warrants, holders of 50% of the number of the then outstanding Private Placement Warrants. Notwithstanding the foregoing, we may lower the exercise price or extend the duration of the exercise period of the warrants in certain circumstances without the consent of the warrant holders.
We may redeem the Private Placement Warrants and Public Warrants (collectively, the “ParentCo warrants”) after the closing of the Business Combination if the reported last sale price of the ParentCo common stock equals or exceeds $18.00 per share (as adjusted for share subdivisions, share dividends, rights issuances, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period commencing once the warrants become exercisable.
Once the ParentCo warrants become exercisable, we may redeem not less than all of them at a price of $0.01 per warrant upon not less than 30 days’ prior written notice of redemption (such period, the “30-day Redemption Period”) to each warrant holder if, and only if, the reported last sale price of the ParentCo common stock equals or exceeds $18.00 per share (as adjusted for share subdivisions, share dividends, rights issuances, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period commencing once the warrants become exercisable and ending three business days before we send the notice of redemption to the warrant holders. The trading price for the Kernel common stock has never equaled or exceeded $18.00 per share.
If and when the ParentCo warrants become redeemable we may exercise our redemption right if there is a current registration statement in effect with respect to the ParentCo common stock underlying such warrants. Redemption of the outstanding ParentCo warrants could force you to: (i) exercise your warrants and pay the related exercise price at a time when it may be disadvantageous for you to do so; (ii) sell your warrants at the then-current market price when you might otherwise wish to hold your warrants; or (iii) accept the nominal redemption price, which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants. In these circumstances, and you choose option (i) to exercise the ParentCo warrants, the value received upon exercise of the ParentCo warrants (1) may be less than the value warrant holders would have received if they had exercised their public ParentCo warrants at a later time where the underlying share price is higher and (2) may not compensate the holders for the value of the ParentCo warrants. If you choose to sell under option (ii) there is no guarantee the sale price will be high enough to compensate warrant holders for the value of the ParentCo warrants.
We will not redeem the ParentCo warrants as described above unless a registration statement under the Securities Act covering the issuance of the ParentCo Ordinary Shares issuable upon exercise of the warrants is then effective and a current prospectus relating to those ParentCo Ordinary Shares is available throughout the 30-day Redemption Period, except if the warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration under the Securities Act.
If we call the ParentCo warrants for redemption as described above, our management will have the option to require all holders that wish to exercise the warrants to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on a “cashless basis,” our management will consider, among other factors, our cash position, the number of warrants that are outstanding and the dilutive effect on our shareholders of issuing the maximum number of shares of ParentCo common stock issuable upon the exercise of the ParentCo warrants. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of ParentCo Common Stock equal to the quotient obtained by dividing (i) the product of the number shares of ParentCo Common Stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (ii) the fair market value. The “fair market value” for this purpose shall mean the average reported last sale price of the ParentCo Common Stock for the 10 trading days ending on the third trading day prior to the date on which we send the notice of redemption to the holders of the ParentCo warrants.
As provided in the Warrant Agreement, in the event we elect to redeem the ParentCo warrants, we will fix a date for the redemption (the “Redemption Date”). We will mail or cause to be mailed notice of redemption by first class mail, postage prepaid, not less than thirty (30) days prior to the Redemption Date to the registered holders of the warrants to be redeemed at their last addresses as they shall appear on the registration books. Any notice mailed in such manner shall be conclusively presumed to have been duly given whether or not the registered holder received such notice.
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As ParentCo has no obligation to net cash settle the ParentCo warrants, such warrants may expire worthless.
In no event will ParentCo have any obligation to net cash settle the ParentCo warrants. Furthermore, there are no contractual penalties for failure to deliver securities to the holders of ParentCo warrants upon consummation of an initial business combination, including the Business Combination, or exercise of the warrants. Accordingly, the warrants may expire worthless.
ParentCo does not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
ParentCo currently anticipates that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Furthermore, future debt or other financing arrangements may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock.
ParentCo’s principal stockholders and management will own a significant percentage of our stock following the Closing and will be able to exert significant control over matters subject to stockholder approval.
Immediately following the Closing, ParentCo’s executive officers, directors and their affiliates, as well as our principal stockholders will beneficially hold, in the aggregate, approximately 44.5% of our outstanding voting stock (assuming maximum redemptions). These stockholders, acting together, would be able to significantly influence all matters requiring stockholder approval. For example, these stockholders would be able to significantly influence elections of directors, amendments of our governing documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
ParentCo’s issuance of additional capital stock in connection with financings, acquisitions, investments, our stock incentive plan, employee stock purchase plan or otherwise will dilute all other stockholders.
ParentCo expects to issue additional capital stock in the future that will result in dilution to all other stockholders. ParentCo expects to grant equity awards to employees, directors, and consultants under our stock incentive plan and employee stock purchase plan. ParentCo may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in complementary companies, products, or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock, including as a result of the exercise of any warrants to purchase shares of common stock, may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.
ParentCo will incur increased costs as a result of operating as a public company, and its management will devote substantial time to compliance with its public company responsibilities and corporate governance practices.
If Kernel and AIRO complete the Business Combination and ParentCo becomes a public company, it will incur significant legal, accounting and other expenses that AIRO did not incur as a private company, and these expenses may increase even more after ParentCo is no longer an emerging growth company, as defined in Section 2(a) of the Securities Act.
ParentCo will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which will require, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and Nasdaq to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial reporting controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Recent legislation permits emerging growth companies to implement many of these requirements over a longer period for the first five fiscal years from the date of first sale of Kernel’s Class A Ordinary Shares in its IPO. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.
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ParentCo expects the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have an adverse effect on our business. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. ParentCo cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on the ParentCo Board, the ParentCo board committees or as ParentCo executive officers.
AIRO’s management team has limited experience managing a public company.
Most of the members of AIRO’s management team who will become the management team of ParentCo have limited to no experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. AIRO’s management team has not worked together at prior companies that were publicly traded. AIRO’s management team may not successfully or efficiently manage their new roles and responsibilities. AIRO’s transition to being a public company subjects it to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from ParentCo’s senior management and could divert their attention away from the day-to-day management of ParentCo’s business, which could have a material adverse effect on ParentCo’s business, financial condition and results of operations.
The Proposed ParentCo Charter requires, to the fullest extent permitted by law, that derivative actions brought in ParentCo’s name, as applicable, against their respective directors, officers, other employees or stockholders for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware, which may have the effect of discouraging lawsuits against Kernel’s or ParentCo’s directors, officers, other employees or stockholders, as applicable.
Pursuant to the Proposed ParentCo Charter, as will be in effect upon the closing of the Business Combination, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any state law claims for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware, our amended and restated certificate of incorporation or our amended and restated by-laws; (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or by-laws; or (v) any action asserting a claim governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein, or the Delaware forum provision. This exclusive forum provision will not apply to any causes of action arising under the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Unless we consent in writing to the selection of an alternate forum, the United States District Courts shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, or the federal forum provision, as our principal office is located in Providence, Rhode Island. In addition, ParentCo’s Charter, as will be in effect upon the Closing, provides that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the Delaware forum provision and the Federal forum provision; provided, however, that stockholders cannot and will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.
The Delaware forum provision and the federal forum provision may impose additional litigation costs on stockholders who assert the provision is not enforceable and may impose more general additional litigation costs in pursuing any such claims, particularly if the stockholders do not reside in or near the State of Delaware. In addition, these forum selection clauses in the Proposed ParentCo Charter may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officers and employees even though an action, if successful, might benefit our stockholders. In addition, while the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court were “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our federal forum provision. If the federal forum provision is found to be unenforceable, we may incur additional costs associated with resolving such matters. The federal forum provision may also impose additional litigation costs on stockholders who assert the provision is not enforceable or invalid. The Court of Chancery of the State of Delaware and the United States District Courts may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.
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Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, both state and federal courts have jurisdiction to entertain such claims. As noted above, the Proposed ParentCo Charter provides that the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action under the Securities Act. Due to the concurrent jurisdiction for federal and state courts created by Section 22 of the Securities Act over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, there is uncertainty as to whether a court would enforce the exclusive forum provision. Investors also cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
Claims for indemnification by ParentCo’s directors and officers may reduce ParentCo’s available funds to satisfy successful third-party claims against ParentCo and may reduce the amount of money available to ParentCo.
The Proposed ParentCo Charter and Proposed ParentCo Bylaws will provide that ParentCo will indemnify its directors and officers, in each case to the fullest extent permitted by Delaware law. In addition, as permitted by Section 145 of the DGCL, the Proposed ParentCo Charter and Bylaws and its indemnification agreements that it will enter into with its directors and officers will provide that:
| ● | ParentCo will indemnify its directors and officers for serving ParentCo in those capacities or for serving other business enterprises at its request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; | |
| ● | ParentCo may, in its discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; | |
| ● | ParentCo will be required to advance expenses, as incurred, to its directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; | |
| ● | ParentCo will not be obligated pursuant to the Proposed ParentCo Charter or Bylaws to indemnify a person with respect to proceedings initiated by that person against ParentCo or its other indemnitees, except with respect to proceedings authorized by the ParentCo Board or brought to enforce a right to indemnification; and | |
| ● | the rights conferred in the Proposed ParentCo Charter and Bylaws are not exclusive, and ParentCo is authorized to enter into indemnification agreements with its directors, officers, employees and agents and to obtain insurance to indemnify such persons. |
If, following the Business Combination, securities or industry analysts do not publish or cease publishing research or reports about ParentCo, its business or its market, or if they change their recommendations regarding ParentCo’s securities adversely, the price and trading volume of ParentCo’s securities could decline.
The trading market for ParentCo’s securities will be influenced by the research and reports that industry or securities analysts may publish about ParentCo, its business, market or competitors. Securities and industry analysts do not currently, and may never, publish research on ParentCo. If no securities or industry analysts commence coverage of ParentCo, ParentCo’s share price and trading volume would likely be negatively impacted. If any of the analysts who may cover ParentCo change their recommendation regarding ParentCo common stock adversely or provide more favorable relative recommendations about ParentCo’s competitors, the price of shares of ParentCo common stock would likely decline. If any analyst who may cover ParentCo were to cease coverage of ParentCo or fail to regularly publish reports on it, ParentCo could lose visibility in the financial markets, which in turn could cause its share price or trading volume to decline.
Future issuances of debt securities and equity securities may adversely affect ParentCo, including the market price of ParentCo common stock and may be dilutive to existing stockholders.
In the future, we may incur debt or issue equity-ranking senior to ParentCo common stock. Those securities will generally have priority upon liquidation. Such securities also may be governed by an indenture or other instrument containing covenants restricting ParentCo’s operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of ParentCo common stock. Because our decision to issue debt or equity in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. As a result, future capital raising efforts may reduce the market price of ParentCo common stock and be dilutive to existing stockholders.
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There can be no assurance that ParentCo common stock and Public Warrants that will be issued in connection with the Business Combination will be approved for listing on Nasdaq or, if approved, will continue to be so listed following the closing of the Business Combination, or that we will be able to comply with the continued listing standards of Nasdaq. ParentCo’s failure to meet the continued listing requirements of Nasdaq could result in a delisting of its Securities.
In connection with the closing of the Business Combination, we intend to list ParentCo’s common stock and warrants on Nasdaq under the symbols “AIRO” and “AIROW,” respectively. AIRO has the right to terminate the Business Combination Agreement if ParentCo’s securities are not approved for listing, subject to notice of issuance, at the time of the closing of the Business Combination Agreement. ParentCo’s continued eligibility for listing may depend on the number of Kernel’s shares that are redeemed. If, after the Business Combination, Nasdaq delists ParentCo’s shares from trading on its exchange for failure to meet the listing standards, ParentCo and its stockholders could face significant material adverse consequences including, but not limited to:
| ● | a limited availability of market quotations for ParentCo’s securities; | |
| ● | reduced liquidity for ParentCo’s securities; | |
| ● | a determination that ParentCo common stock is a “penny stock,” which will require brokers trading in ParentCo common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for ParentCo common stock; | |
| ● | a limited amount of analyst coverage; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If ParentCo common stock and Public Warrants are listed on Nasdaq, they will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. While we are not aware of a state, other than the state of Idaho, having used these powers to prohibit or restrict the sale of securities issued by blank check companies, certain state securities regulators view blank check companies unfavorably and might use these powers, or threaten to use these powers, to hinder the sale of securities of blank check companies in their states. Further, if ParentCo was no longer listed on Nasdaq, ParentCo’s securities would not be covered securities and ParentCo would be subject to regulation in each state in which ParentCo offers its securities.
If, after listing, ParentCo fails to satisfy the continued listing requirements of Nasdaq such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist its securities. Such a delisting would likely have a negative effect on the price of the securities and would impair your ability to sell or purchase the securities when you wish to do so. In the event of a delisting, ParentCo can provide no assurance that any action taken by it to restore compliance with listing requirements would allow its securities to become listed again, stabilize the market price or improve the liquidity of its securities, prevent its securities from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements. Additionally, if ParentCo’s securities are not listed on, or become delisted from, Nasdaq for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of these securities may be more limited than if they were quoted or listed on Nasdaq or another national securities exchange. You may be unable to sell your ParentCo securities unless a market can be established or sustained.
An active market for ParentCo’s securities may not develop, which would adversely affect the liquidity and price of ParentCo’s securities.
The price of ParentCo’s securities may vary significantly due to factors specific to ParentCo as well as to general market or economic conditions. Furthermore, an active trading market for ParentCo’s securities may never develop or, if developed, it may not be sustained. Holders of ParentCo’s securities may be unable to sell their securities unless a market can be established and sustained.
The market price of ParentCo’s securities may decline as a result of the Business Combination or other market factors.
If the perceived benefits of the Business Combination do not meet the expectations of investors or securities analysts, the market price of Kernel’s securities prior to the Closing may decline following the Closing when they trade as ParentCo securities. The market values of ParentCo’s securities at the time of the Business Combination may vary significantly from the market price of Kernel’s securities on the date the Business Combination Agreement was executed, the date of this proxy statement/prospectus or the date on which Kernel’s shareholders vote on the Business Combination.
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In addition, following the Business Combination, fluctuations in the price of ParentCo’s securities could contribute to the loss of all or part of your investment. Prior to the Business Combination, there has not been a public market for AIRO common stock. Accordingly, the valuation ascribed to AIRO may not be indicative of the price that will prevail in the trading market following the Business Combination. If an active market for ParentCo’s securities develops and continues, the trading price of ParentCo’s securities following the Business Combination could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond ParentCo’s control. Any of the factors listed below could have a material adverse effect on your investment in ParentCo’s securities and ParentCo’s securities may trade at prices significantly below the price you paid for your Kernel securities. In such circumstances, the trading price of ParentCo’s securities may not recover and may experience a further decline.
The market price of ParentCo securities may decline as a result of the Business Combination and for a number of other reasons including:
| ● | if investors react negatively to the prospects of ParentCo’s business and the prospects of the Business Combination; | |
| ● | if the effect of the Business Combination on ParentCo’s business and prospects is not consistent with the expectations of securities or industry analysts; | |
| ● | if ParentCo does not achieve the perceived benefits of the Business Combination as rapidly or to the extent anticipated by securities or industry analysts; | |
| ● | actual or anticipated fluctuations in ParentCo’s quarterly financial results or the quarterly financial results of companies perceived to be similar to it; | |
| ● | changes in the market’s expectations about ParentCo’s results of operations; | |
| ● | success of competitors; | |
| ● | changes in financial estimates and recommendations by securities analysts concerning ParentCo or the aerospace and aviation industry in general; | |
| ● | operating and share price performance of other companies that investors deem comparable to ParentCo; | |
| ● | ParentCo’s ability to market new and enhanced products and technologies on a timely basis; | |
| ● | changes in laws and regulations affecting ParentCo’s business; | |
| ● | ParentCo’s ability to meet compliance requirements; | |
| ● | commencement of, or involvement in, litigation involving ParentCo; | |
| ● | changes in ParentCo’s capital structure, such as future issuances of securities or the incurrence of additional debt; | |
| ● | the volume of ParentCo’s securities available for public sale; or | |
| ● | any major change in ParentCo Board or management. |
Future sales, or the perception of future sales, by ParentCo or its stockholders in the public market following the Business Combination could cause the market price for ParentCo common stock to decline.
The sale of shares of ParentCo common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of ParentCo common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for ParentCo to sell equity securities in the future at a time and at a price that it deems appropriate.
Upon consummation of the Business Combination, it is currently expected that ParentCo will have a total of 89,628,091 shares of ParentCo common stock outstanding (excluding any outstanding Warrants and assuming that (i) there are no redemptions of any shares by Kernel’s Public Shareholders in connection with the Business Combination, (ii) no awards are issued under the 2024 Equity Incentive Plan or the Employee Stock Purchase Plan (“ESPP”), and (iii) Kernel does not engage in any kind of equity financing prior to the Closing). All shares currently held by Kernel Public Shareholders will be freely tradable without registration under the Securities Act, and without restriction, following the Closing, by persons other than ParentCo’s “affiliates” (as defined under Rule 144 of the Securities Act, “Rule 144”), including ParentCo’s directors, executive officers and other affiliates.
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In connection with the Business Combination, certain existing AIRO stockholders, who are expected to collectively own approximately 77,000,000 shares of ParentCo common stock following the Business Combination, have agreed with Kernel, subject to certain exceptions, not to dispose of or hedge any of their shares of ParentCo common stock or securities convertible into or exchangeable for shares of ParentCo common stock during the period from the date of the Closing and ending on the earlier of (x) one year from the Closing or (y) subsequent to the Closing, if the reported last sale price of ParentCo’s Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, right issuances, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination. For more information, see the section of this proxy statement/prospectus entitled “Shareholder Proposal No. 1: The Business Combination Proposal—Business Combination Agreement.”
In addition, the shares of ParentCo common stock reserved for future issuance under the 2024 Equity Incentive Plan and ESPP will become eligible for sale in the public market once those shares are issued, subject to any applicable vesting requirements, lockup agreements and other restrictions imposed by law. Assuming the Business Combination Proposal and the Nasdaq Proposal are approved and subject to approval by stockholders, the proposed 2024 Equity Incentive Plan and ESPP will initially reserve up to 12,000,000 shares of ParentCo common stock following the consummation of the Business Combination for issuance as awards in accordance with the terms of the 2024 Equity Incentive Plan and ESPP. ParentCo is expected to file one or more registration statements on Form S-8 under the Securities Act to register shares of ParentCo common stock or securities convertible into or exchangeable for shares of ParentCo common stock issued pursuant to the 2024 Equity Incentive Plan or the ESPP. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. The initial registration statement on Form S-8 is expected to cover shares of ParentCo common stock.
In the future, ParentCo may also issue its securities in connection with investments or acquisitions. The amount of shares of ParentCo common stock issued in connection with an investment or acquisition could constitute a material portion of the then-outstanding shares of ParentCo common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to ParentCo stockholders.
ParentCo will qualify as an “emerging growth company” as well as a “smaller reporting company” within the meaning of the Securities Act, and if ParentCo takes advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make ParentCo’s securities less attractive to investors and may make it more difficult to compare ParentCo’s performance with other public companies.
Following the consummation of the Business Combination, ParentCo will qualify as an “emerging growth company” within the meaning of the Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, ParentCo may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies for as long as ParentCo continues to be an emerging growth company, including, but not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in ParentCo’s periodic reports and proxy statements and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, ParentCo’s stockholders may not have access to certain information they may deem important. ParentCo will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of ParentCo common stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which ParentCo has total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which ParentCo has issued more than $1,000,000,000 in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Kernel Ordinary Shares in the Kernel IPO. Investors may find ParentCo’s securities less attractive because ParentCo will rely on these exemptions. Kernel cannot predict whether investors will find ParentCo’s securities less attractive because it will rely on these exemptions. If some investors find ParentCo’s securities less attractive as a result of its reliance on these exemptions, the trading prices of ParentCo’s securities may be lower than they otherwise would be, there may be a less active trading market for its securities and the trading prices of its securities may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of ParentCo’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
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Additionally, ParentCo will qualify as a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K promulgated by the SEC. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. ParentCo will remain a smaller reporting company for so long as the market value of its common stock held by non-affiliates is less than $250.0 million measured on the last business day of its second fiscal quarter, or its annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of its common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. To the extent ParentCo takes advantage of such reduced disclosure obligations, it may also make comparison of its consolidated financial statements with other public companies difficult or impossible.
The unaudited pro forma financial information included herein may not be indicative of what ParentCo’s actual financial position or results of operations would have been.
The unaudited pro forma combined financial information included herein is presented for illustrative purposes only and is not necessarily indicative of what ParentCo’s actual financial position or results of operations would have been had the Business Combination been completed on the dates indicated. See the section entitled “Unaudited Pro Forma Combined Financial Information” for more information.
Transfers of ParentCo’s securities utilizing Rule 144 of the Securities Act may be limited.
A significant portion of ParentCo’s securities are restricted from immediate resale. Holders should be aware that transfers of ParentCo securities pursuant to Rule 144 may be limited as Rule 144 is not available, subject to certain exceptions, for the resale of securities initially issued by shell companies (other than business combination related shell companies) or issuers that have been at any time previously a shell company. As a result, we anticipate that holders will not be able to sell their restricted ParentCo securities pursuant to Rule 144 without registration until one year after the Business Combination has been completed.
Risks Related to Kernel and the Business Combination
The following risk factors will apply to Kernel and the Business Combination. These risk factors are not exhaustive, and investors are encouraged to perform their own investigation into the implications of the Business Combination for investors. Unless the context requires otherwise, references to “we”, “us” or “our” in this section are to Kernel.
Subsequent to the consummation of the Business Combination, ParentCo may be required to take write-downs or write-offs, or ParentCo may be subject to restructuring, impairment or other charges that could have a significant negative effect on ParentCo’s financial condition, results of operations and the price of ParentCo’s securities, which could cause you to lose some or all of your investment.
Although Kernel has conducted due diligence on AIRO, this diligence may not surface all material issues that may be present with AIRO’s business. Factors outside of AIRO’s and outside of Kernel’s control may, at any time, arise. As a result of these factors, ParentCo may be forced to later write-down or write-off assets, restructure its operations, or incur impairment or other charges that could result in ParentCo reporting losses. Even if Kernel’s due diligence successfully identified certain risks, unexpected risks may arise, and previously known risks may materialize in a manner not consistent with Kernel’s preliminary risk analysis. Even though these charges may be non-cash items and therefore not have an immediate impact on ParentCo’s liquidity, the fact that ParentCo reports charges of this nature could contribute to negative market perceptions about ParentCo or its securities. In addition, charges of this nature may cause ParentCo to be unable to obtain future financing on favorable terms or at all.
The Sponsor and Kernel’s executive officers and directors have agreed to vote in favor of the Business Combination, regardless of how the Public Shareholders vote.
Unlike many other blank check companies in which the Founder, executive officers and directors agree to vote their founder shares in accordance with the majority of the votes cast by the Public Shareholders in connection with an initial business combination, the Sponsor and Kernel’s executive officers and directors have agreed (and their permitted transferees will agree), pursuant to the terms of the Kernel Support Agreement entered into with Kernel, to vote any shares of Kernel Ordinary Shares held by them in favor of the Business Combination. Kernel expects that the Sponsor and Kernel’s executive officers and directors (and their permitted transferees) will own at least approximately 49.7% of the issued and outstanding shares of Kernel Ordinary Shares at the time of any such stockholder vote. As a result, Kernel would not need any of the Public Shares sold in the IPO to be voted in favor of an initial business combination in order to have Kernel’s initial business combination approved, assuming all of the outstanding shares of Kernel Ordinary Shares vote.
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Kernel may not be able to consummate an initial business combination within the required time period, in which case it would cease all operations except for the purpose of winding up and it would redeem the Public Shares and liquidate.
The Sponsor and Kernel’s executive officers and directors have agreed that Kernel must complete its initial business combination by August 5, 2024, Kernel may not be able to consummate an initial business combination within such time period. However, Kernel’s ability to complete its initial business combination may be negatively impacted by general market conditions, volatility in the capital and debt markets and the other risks described herein.
If Kernel is unable to consummate its initial business combination within the required time period, it will, as promptly as reasonably possible but not more than ten business days thereafter, distribute the aggregate amount then on deposit in the Trust Account (net of taxes payable, and less up to $100,000 of interest to pay dissolution expenses), pro rata to the Public Shareholders by way of redemption and cease all operations except for the purposes of winding up of its affairs, as further described herein. This redemption of Public Shareholders from the Trust Account will be effected as required by function of the Existing Kernel Governing Documents and prior to any voluntary winding up.
The transactions may not be completed on the terms or timeline currently contemplated, or at all.
The consummation of the Business Combination is subject to the satisfaction (or, if applicable, valid waiver) of various conditions, including (a) approval of the Business Combination by Kernel shareholders, (b) the absence of any legal restraint (including legal actions or proceedings pursued by U.S. state authorities in the relevant states) preventing the consummation of the transactions, (c) the expiration or termination of any applicable waiting period under the HSR Act, (d) the clearance of this proxy statement/prospectus the SEC, (e) the delivery by each party to the other party of a certificate with respect to (i) the truth and accuracy of such party’s representations and warranties as of execution of the Business Combination Agreement and as of the closing of the Business Combination and (ii) the performance by such party of covenants contained in the Business Combination Agreement and (f) other customary closing conditions. See “Business Combination Agreement — Conditions to Closing the Business Combination.” There is no guarantee that these conditions will be satisfied (or, if applicable, validly waived) in a timely manner or at all, in which case closing of the transactions may be delayed or may not occur and the benefits expected to result from the transactions may not be achieved.
If the Business Combination is not completed for any reason, the price of Kernel Ordinary Shares may decline to the extent that the market price of such shares reflects or previously reflected positive market assumptions that the Business Combination would be completed and the related benefits would be realized. In addition, Kernel and AIRO have expended and will continue to expend significant management time and resources and have incurred and will continue to incur significant expenses due to legal, advisory, printing and financial services fees related to the Business Combination and related transactions. Many of these expenses must be paid regardless of whether the Business Combination and related transactions are consummated. As a result of the conditions to closing of the Business Combination and related transactions, some of which are dependent upon the actions of third parties, the parties cannot provide any assurance that the Business Combination and related transactions will be consummated in a timely manner or at all.
The Sponsor or Kernel’s directors, executive officers or advisors or their respective affiliates may elect to purchase shares from Public Shareholders, which may influence the vote on the Business Combination and reduce the public “float” of Kernel Ordinary Shares.
In connection with the shareholder vote to approve Proposals, including the Business Combination Proposal, Kernel and its affiliates may purchase shares prior to the Closing from shareholders who would have otherwise elected to have their shares redeemed for a pro rata portion of the Trust Account upon consummation of the Business Combination. Such a purchase would in a privately negotiated purchase arrangement include a contractual acknowledgement that such shareholder, although still the record holder of such shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. While they have no current plans to do so, the Sponsor, Kernel’s directors, officers or advisors, or their affiliates reserve the right to purchase shares from holders of Kernel Ordinary Shares who have already elected to exercise their redemption rights, in which event such selling shareholders would be required to revoke their prior elections to redeem their shares. Any such transaction would be separately negotiated at the time of the transaction. The consideration for any such transaction would consist of cash and/or Kernel Ordinary Shares owned by the Sponsor and/or Kernel’s directors, officers, advisors, or their affiliates.
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None of Kernel, the Sponsor or Kernel’s directors, officers or advisors, or their respective affiliates, will make any such purchases when they are in possession of any material non-public information not disclosed to the seller. Any Kernel Ordinary Shares purchased by the Sponsor or Kernel’s directors, officers or advisors, or their respective affiliates will not (i) be purchased at a price higher than the price offered through the redemption process in the Redemption, (ii) be voted in favor of the Business Combination or (iii) have redemption rights, and if such Kernel Ordinary Shares do have redemption rights, then such rights will be waived by each of the Sponsor, or Kernel’s directors, officers or advisors, or their respective affiliates. The Sponsor and each of Kernel’s directors, officers or advisors, or their respective affiliates received no additional consideration in exchange for the agreement to waive their redemption rights. The purpose of these purchases could be to increase the amount of cash available to Kernel for use in the Business Combination to satisfy the closing condition that requires Kernel to have a minimum amount of cash upon the consummation of the Business Combination, where it appears that such requirement would otherwise not be met. The purpose of these purchases would be to increase the amount of cash available to Kernel for use in the Business Combination.
As of the date of this proxy statement/prospectus, no agreements with respect to the private purchase of Public Shares by the persons described above have been entered into with any such investor or holder. In the event of any such newly purchased shares (i) the Sponsor or its affiliates will purchase the Kernel Public Shares at a price no higher than the price offered through the redemption process; (ii) any such purchases by Sponsor or its affiliates will not be voted in favor of approving the Business Combination; and (iii) the Sponsor and its affiliates have waived their redemption rights to such shares. Prior to the special meeting to approve the Business Combination, Kernel will disclose in a Form 8-K (i) the amount of Public Shares purchased outside of the redemption offer by the Sponsor or its affiliates, along with the purchase price; (ii) the purpose of the purchases by the Sponsor or its affiliates; (iii) the impact, if any, of the purchases by the Sponsor or its affiliates on the likelihood that the Business Combination transaction will be approved; (iv) the identities of shareholders who sold to the Sponsor or its affiliates (if not purchased on the open market) or the nature of shareholders (e.g., 5% security holders) who sold to the Sponsor or its affiliates; and (v) the number of Public Shares for which Kernel has received redemption requests pursuant to its redemption offer.
Unlike our Sponsor’s holdings currently, such newly purchased shares (if any) by those purchasers would not be subject to a lock-up period under the terms of our Sponsor Support Agreement. However, these newly purchased shares would be subject to limitations on resale under Rule 144 of the Securities Act as “control securities”, to the extent those shares were acquired by an affiliate of Kernel, unless they are registered on a subsequent registration statement filed under the Securities Act. Limitations on resale would require those affiliated purchasers of such newly purchased shares to hold them for at least one year (from the date ParentCo files certain information on Form 8-K following the Closing in accordance with rules applicable to special purpose acquisition companies), assuming they are not registered on a registration statement following the Closing and ParentCo has fully complied with its reporting requirements and other requirements under Rule 144. When eligible to be sold, such securities if not registered under such a registration statement would be limited by applicable requirements of Rule 144, including limitations in their manner of sale and to the volume of sales eligible under Rule 144.
Entering into any such incentive arrangements may have an effect lowering the price of Kernel Ordinary Shares or possibly reducing the public float of ParentCo Ordinary Shares. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the Special Meeting. In addition, if such purchases are made, the public float of Kernel Ordinary Shares and the number of its beneficial holders may be reduced, possibly making it difficult to maintain the quotation, listing or trading of ParentCo Ordinary Shares on a national securities exchange.
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The nominal purchase price paid by the Sponsor for the Founder Shares may significantly dilute the implied value of the Public Shares in the event Kernel completes the Business Combination. In addition, the value of the Sponsor’s Founder Shares will be significantly greater than the amount the Sponsor paid to purchase such shares in the event Kernel completes the Business Combination, even if the Business Combination causes the trading price of ParentCo’s common stock to materially decline.
The Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share, which it purchased for $1.00 due to the Original Sponsor at the Closing of the Business Combination. The amount held in Kernel’s Trust Account was $67,819,662 as of December 31, 2023, implying a value of $4.91 per outstanding Public Share.
The following table shows the Public Shareholders’ and Kernel’s initial stockholders’ (including the Sponsor’s) investment per share and how these compare to the implied value of one share of ParentCo common stock upon the completion of the Business Combination. The following table assumes that (i) Kernel’s valuation is $8,128,091 (which is the amount held in Kernel’s Trust Account as of March 31, 2024), (ii) no additional interest is earned on the funds held in the Trust Account, (iii) no Public Shares are redeemed in connection with the Business Combination and (iv) all Founder Shares are held by the Sponsor and independent directors upon completion of the Business Combination, and does not take into account other potential impacts on Kernel’s valuation at the time of the Business Combination such as (a) the value of Kernel’s Public Warrants and Private Placement Warrants contained, (b) the trading price of Kernel’s common stock, (c) the Business Combination transaction costs, (d) any equity issued or cash paid to the AIRO equity holders, (e) any equity issued to other third party investors, or (f) AIRO’s business itself.
| Public Shares held by Public Shareholders | 509,341 | |||
| Founder Shares held by the Sponsor and independent directors | 7,618,750 | |||
| Total shares of common stock | 8,128,091 | |||
| Total funds in trust at March 31, 2024 | $ | 5,563,640 | ||
| Public Shareholders’ investment per Public Share | $ | 10.00 | ||
| The Sponsor’s investment per Founder Share | $ | 0.01 | ||
| Implied value per share of ParentCo common stock upon the Business Combination | $ | 0.68 |
Based on these assumptions, each share of ParentCo common stock would have an implied value of $4.91 per share upon completion of the Business Combination, representing a 50.9% decrease/increase from the initial implied value of $10.00 per Public Share. While the implied value of $4.91 per share upon completion of the Business Combination would represent a dilution to Kernel’s Public Shareholders, this would represent a significant increase in value for the Sponsor relative to the price it paid for each Founder Share. At $4.91 per share, the 7,493,750 shares of ParentCo common stock that the Sponsor and Kernel’s independent directors holding Founder Shares would own upon completion of the Business Combination would have an aggregate implied value of $36,801,931. As a result, even if the trading price of ParentCo common stock significantly declines, the value of the Founder Shares held by the Sponsor and independent directors will be significantly greater than the amount the Sponsor paid to purchase such shares. In addition, the Sponsor could potentially recoup its entire investment, inclusive of its investment in the Private Placement Warrants, even if the trading price of ParentCo common stock after the Business Combination is as low as $0.00 per share. As a result, the Sponsor and independent directors holding Founder Shares are likely to earn a substantial profit on their investment in Kernel upon disposition of shares of ParentCo common stock even if the trading price of ParentCo common stock declines after Kernel completes the Business Combination. The Sponsor and independent directors holding Founder Shares may therefore be economically incentivized to complete an initial business combination with a riskier, weaker-performing or less-established target business, or on terms less favorable to the Public Shareholders, rather than liquidating Kernel. This dilution would increase to the extent that Public Shareholders seek redemptions from the Trust Account for their Public Shares.
Public Shareholders who redeem their Kernel Ordinary Shares may continue to hold any Public Warrants they own, which results in additional dilution to non-redeeming holders upon exercise of the Public Warrants.
Public Shareholders who redeem their Kernel Ordinary Shares may continue to hold any Public Warrants they owned prior to redemption, which results in additional dilution to non-redeeming holders upon exercise of such Public Warrants. Assuming all redeeming Public Shareholders acquired Units in the IPO and continue to hold the Public Warrants that were included in the Units, 15,237,500 Public Warrants would be retained by redeeming Public Shareholders with a value of approximately $2.0 million, based on the market price of $0.13 of the Public Warrants as of July 3, 2024. As a result, the redeeming Public Shareholders would recoup their entire investment and continue to hold Public Warrants with an aggregate market value of approximately $2.0 million, while non-redeeming Public Shareholders would suffer additional dilution in their percentage ownership and voting interest of ParentCo upon exercise of the Public Warrants held by redeeming Public Shareholders.
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The exercise of Kernel warrants for shares of Kernel Class A Common Stock would increase the number of shares eligible for future resale in the public market and result in dilution to stockholders of Kernel. Such dilution will increase if more shares of Kernel Class A Common Stock are redeemed.
As of the record date, Kernel had warrants to purchase an aggregate of 23,987,500 shares of Kernel Class A Common Stock outstanding, which includes 15,237,500 underlying Public Warrants and 8,750,000 underlying Private Placement Warrants (collectively, the “Kernel warrants”). The Kernel warrants will become exercisable commencing 30 days after the completion of the Business Combination. The likelihood that the Kernel warrants will be exercised increases if the trading price of ParentCo common stock exceeds the exercise price of the warrants, which is $11.50 per share.
Based on the closing price of $0.13 per warrant on Nasdaq on July 3, 2024, the most recent practicable date prior to the date of this proxy statement/prospectus, the Kernel warrants have an aggregate market value of approximately $3.1 million. However, there is no guarantee that the Kernel warrants will ever be in the money after they become exercisable and prior to their expiration, and as such, the warrants may expire worthless.
To the extent the Kernel warrants are exercised, additional shares of ParentCo common stock will be issued, which will result in dilution to the holders of ParentCo common stock and increase the number of shares eligible for resale in the public market. The dilution, as a percentage of outstanding shares, caused by the exercise of the Kernel warrants will increase if a large number of holders of Kernel Class A Common Stock elect to redeem their shares in connection with the Business Combination. Holders of Kernel warrants do not have a right to redeem the warrants. Further, the redemption of Kernel Class A Common Stock without any accompanying redemption of Public Warrants will increase the dilutive effect of the exercise of Public Warrants. Sales of substantial numbers of shares issued upon the exercise of warrants in the public market or the potential that such warrants may be exercised could also adversely affect the market price of ParentCo common stock.
Kernel’s Sponsor, executive officers and directors have potential conflicts of interest in recommending that stockholders vote in favor of approval of the Business Combination Proposal and approval of the other proposals described in this proxy statement/prospectus.
When considering the Kernel Board’s recommendation that Kernel’s shareholders vote in favor of the approval of the Business Combination Proposal and the other proposals described in this proxy statement/prospectus, Kernel’s shareholders should be aware that the Sponsor and certain of Kernel’s executive officers and directors (including Suren Ajjarapu who is Kernel’s chief executive officer and the Sponsor’s controlling shareholder) have interests in the Business Combination that may be different from, or in addition to, the interests of Kernel’s shareholders generally. These interests include:
| ● | unless Kernel consummates a business combination, Kernel’s officers, directors and the Sponsor will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account; | |
| ● | as a condition to the IPO, all of the Founder Shares are subject to a lock-up and would be released only if specified conditions were met. In particular, subject to certain limited exceptions, all Founder Shares would be subject to a lock up until the earlier of (A) one year after the completion of Kernel’s Business Combination and (B) subsequent to the Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per unit (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination or (y) the date on which Kernel completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Kernel’s shareholders having the right to exchange their Class A Ordinary Shares for cash, securities or other property; | |
| ● | the Private Placement Warrants purchased by the Sponsor will be worthless if a business combination is not consummated; | |
| ● | the Sponsor has agreed that the Private Placement Warrants and the underlying securities will not be sold or transferred by it until after Kernel has completed a business combination, subject to limited exceptions; | |
| ● | the Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share, which it purchased for $1.00 due to the Original Sponsor at the Closing of the Business Combination. If an initial business combination, such as the Business Combination, is not completed by August 5, 2024, Kernel will be required to dissolve and liquidate. In such event, the Kernel Class B Ordinary Shares currently held by the Sponsor, which were acquired from the Original Sponsor will be worthless because the Sponsor has agreed to waive its rights to any liquidation distributions; | |
| ● | the fact that the Sponsor has agreed not to redeem any of the Founder Shares in connection with a stockholder vote to approve a proposed business combination; | |
| ● | the anticipated continuation of two of our existing directors, Suren Ajjarapu and Donald Fell, as directors of ParentCo; | |
| ● | the continued indemnification of our existing directors and officers prior to the Business Combination and the continuation of our directors’ and officers’ liability insurance after the Business Combination; | |
| ● | that pursuant to the IPO Registration Rights Agreement, the Kernel Restricted Stockholders are entitled to registration of the shares of ParentCo Common Stock into which the Founder Shares will automatically convert at the time of the consummation of the Business Combination; | |
| ● | the fact that our Sponsor is entitled to receive reimbursement of $10,000 per month under an administrative support agreement for office space, secretarial and administrative support provided to Kernel), for which, as of the date hereof, our Sponsor has already been paid $0]; | |
| ● | If Kernel does not complete a business combination by August 5, 2024 (by electing to extend the date to consummate a business combination on a monthly basis for up to six additional times by an additional one month each time), the proceeds from the sale of the Private Placement Warrants will be included in the liquidating distributions to Kernel’s Public Shareholders and the Private Placement Warrants will expire worthless; and | |
| ● | if the Trust Account is liquidated, including in the event Kernel is unable to complete a business combination within the required time period, the Sponsor has agreed to indemnify Kernel to ensure that the proceeds in the Trust Account are not reduced below $10.00 per Public Share by the claims of prospective target businesses with which Kernel has entered into an acquisition agreement or claims of any third party for services rendered or products sold to Kernel, but only if such a vendor or target business has not executed a waiver of any and all rights to seek access to the Trust Account. |
These interests may have influenced Kernel’s directors in making their recommendation that you vote in favor of the Business Combination Proposal and the other proposals described in this proxy statement/prospectus.
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There are risks to Kernel’s shareholders who are not affiliates of the Sponsor of becoming stockholders of ParentCo through the Business Combination rather than acquiring securities of AIRO directly in an underwritten public offering, including no independent due diligence review by an underwriter and conflicts of interest of the Sponsor.
Because there is no independent third-party underwriter involved in the Business Combination or the issuance of common stock in connection therewith, investors will not receive the benefit of any outside independent review of Kernel’s and AIRO’s respective finances and operations. Underwritten public offerings of securities conducted by a licensed broker-dealer are subjected to a due diligence review by the underwriter or dealer manager to satisfy statutory duties under the Securities Act, the rules of Financial Industry Regulatory Authority, Inc. (“FINRA”) and the national securities exchange where such securities are listed. Additionally, underwriters or dealer-managers conducting such public offerings are subject to liability for any material misstatements or omissions in a registration statement filed in connection with the public offering. As no such review will be conducted in connection with the Business Combination, Kernel’s shareholders must rely on the information in this proxy statement/prospectus and will not have the benefit of an independent review and investigation of the type normally performed by an independent underwriter in a public securities offering.
In addition, the Sponsor and certain of Kernel’s executive officers and directors have interests in the Business Combination that may be different from, or in addition to, the interests of Kernel’s shareholders generally. Such interests may have influenced Kernel’s directors in making their recommendation that you vote in favor of the Business Combination Proposal and the other proposals described in this proxy statement/prospectus. See “Risk Factors — Kernel’s Sponsor, executive officers and directors have potential conflicts of interest in recommending that stockholders vote in favor of approval of the Business Combination Proposal and approval of the other proposals described in this proxy statement/prospectus,” “— The nominal purchase price paid by the Sponsor for the Founder Shares may significantly dilute the implied value of the Public Shares in the event Kernel completes an initial business combination. In addition, the value of the Sponsor’s Founder Shares will be significantly greater than the amount the Sponsor paid to purchase such shares in the event Kernel completes an initial business combination, even if the business combination causes the trading price of ParentCo’s common stock to materially decline” and “— Certain of Kernel’s officers and directors are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by Kernel and, accordingly, may have conflicts of interest in allocating their time and determining to which entity a particular business opportunity should be presented.”
Certain of Kernel’s officers and directors are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by Kernel and, accordingly, may have conflicts of interest in allocating their time and determining to which entity a particular business opportunity should be presented.
Until Kernel consummates a business combination, it intends to engage in the business of identifying and combining with one or more businesses, subject to restrictions in the Business Combination Agreement. The Sponsor and Kernel’s officers and directors are, and may in the future become, affiliated with entities (such as operating companies or investment vehicles) that are engaged in a similar business, including other special purpose acquisition companies with a class of securities registered under the Exchange Act. As a result, Kernel’s officers and directors presently have, and any of them in the future may have additional, fiduciary or contractual obligations to other entities, including entities that are affiliates of the Sponsor.
Kernel’s officers and directors also may become aware of business opportunities which may be appropriate for presentation to Kernel and the other entities to which they owe certain fiduciary or contractual duties. The Existing Kernel Governing Documents provide that Kernel renounce its interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as Kernel’s director or officer and such opportunity is one Kernel is legally and contractually permitted to undertake and would otherwise be reasonable for Kernel to pursue, and to the extent the director or officer is permitted to refer that opportunity to Kernel without violating any legal obligation.
In the absence of the “corporate opportunity” waiver in the Existing Kernel Governing Documents, certain candidates would not be able to serve as an officer or director. Kernel believes it substantially benefits from having representatives who bring significant, relevant and valuable experience to Kernel’s management, and, as a result, the inclusion of the “corporate opportunity” waiver in in the Existing Kernel Governing Documents provides Kernel with greater flexibility to attract and retain the officers and directors that Kernel feels are the best candidates.
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However, the personal and financial interests of Kernel’s directors and officers may influence their motivation in timely identifying and selecting a target business and completing a business combination. The different timelines of competing business combinations could cause Kernel’s directors and officers to prioritize a different business combination over finding a suitable acquisition target for Kernel’s business combination. Consequently, Kernel’s directors’ and officers’ discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in Kernel’s shareholders’ best interest, which could negatively impact the timing for a business combination.
Kernel does not believe, however, that the fiduciary duties or contractual obligations of its officers and directors or waiver of corporate opportunity materially affected its search for an acquisition target or will materially impact its ability to complete the Business Combination. While certain of Kernel’s directors and officers serve as officers and directors to other entities (such as operating companies or investment vehicles) that are engaged in a similar business, including other special purpose acquisition companies, no opportunity was presented to Kernel that was also presented to any of the other entities and no opportunity that would have been appropriate for presentation to Kernel was also presented to the other entities. Kernel’s Board evaluated and considered three (3) potential target companies as candidates for a possible business combination transaction with Kernel, and Kernel’s Board did not believe that the other fiduciary duties or contractual obligations of its officers and directors materially affected Kernel’s ability to source a potential business combination. For more information, see the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination.”
The waiver of fees by Citigroup Global Markets Inc. may indicate that they may be unwilling to be associated with the disclosures in this proxy statement/prospectus or the underlying business analysis related to the Business Combination.
Kernel contacted Citigroup after the Extension Meeting resulting in the redemption of 22,848,122 Kernel Class A Ordinary Shares with only $74.7 million remaining in the Trust Account. The IPO underwriting services being provided by the IPO Underwriter were complete at the time of the IPO, with any fees payable to the IPO Underwriters contingent upon the closing of the Business Combination therefore Kernel requested Citigroup Global Markets Inc. to waive its rights to the deferred underwriting commission.
On May 24, 2023, Citigroup Global Markets Inc., the underwriter of the Kernel IPO waived its rights to the deferred underwriting commission totaling $10.7 million held in the Trust Account. Citigroup Global Markets Inc. did not provide a reason for waiving its deferred underwriting commission. Representatives of Citigroup Global Markets Inc. did not review or comment on any of the disclosures in this proxy statement/prospectus. Accordingly, no inference should be drawn that Citigroup Global Markets Inc. agrees with the disclosure regarding their respective waiver. Shareholders should be aware that such waivers indicate that Citigroup Global Markets Inc. does not want to be associated with the disclosures in this proxy statement/prospectus or any underlying business analysis related to the transaction described herein. Further, pursuant to the letter received on May 24, 2023, Citigroup Global Markets Inc. ceased and refuses to act in every office, capacity and relationship with respect to the Business Combination.
Citigroup Global Markets Inc. has performed all its obligations under the Underwriting Agreement to obtain its fee and is therefore gratuitously waiving its right to be compensated. Such a fee waiver for services already rendered is unusual. Kernel was not made aware of the reasons why Citigroup Global Markets Inc. waived the deferred underwriting commission fee. Citigroup Global Markets Inc. has not performed any additional services for Kernel after the IPO and is not expected to perform any additional services following the consummation of the Business Combination.
Kernel shareholders who do not redeem their Kernel Ordinary Shares will have a reduced ownership and voting interest after the Business Combination and will exercise less influence over management.
Upon the issuance of Kernel Ordinary Shares in connection with the Business Combination, the percentage ownership of Public Shareholders who do not redeem their Kernel Ordinary Shares will be diluted. The percentage of ParentCo’s common stock that will be owned by Public Shareholders as a group will vary based on the number of Public Shares for which the holders thereof request redemption in connection with the Business Combination. To illustrate the potential ownership percentages of Public Shareholders under different redemption levels, based on the number of issued and outstanding Kernel Ordinary Shares and AIRO Capital Stock on July 3, 2024, after giving effect to the Extension Redemption, and based on the ParentCo common stock expected to be issued in the Business Combination, non-redeeming Public Shareholders, as a group, will own:
| ● | if there are no redemptions of Public Shares, 0.6% of ParentCo’s common stock expected to be outstanding immediately after the Business Combination; or | |
| ● | if there are maximum redemptions of 100% of the outstanding Public Shares, none of ParentCo’s common stock expected to be outstanding immediately after the Business Combination. |
Because of this, Public Shareholders, as a group, will have less influence on the board of directors, management and policies of ParentCo than they now have on the board of directors, management and policies of Kernel.
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The ownership percentage with respect to ParentCo following the Business Combination does not take into account the following potential issuances of securities, which will result in further dilution to Public Shareholders who do not redeem their Public Shares:
| ● | the issuance of up to 15,237,500 shares upon exercise of the Public Warrants at a price of $11.50 per share; | |
| ● | the issuance of up to 8,750,000 shares upon exercise of the Private Placement Warrants held by the Sponsor following the Business Combination at a price of $11.50 per share; | |
| ● | the issuance of up to 8,000,000 shares under the 2024 Equity Incentive Plan; and | |
| ● | the issuance of up to 4,000,000 shares under the ESPP; | |
| ● | if the Sponsor, or Kernel’s officers, directors or their affiliates make any working capital loans prior to the closing of the Business Combination, they may convert up to $1,500,000 of those loans into 1,500,000 warrants at a price of $1.00 per warrant. |
If all such shares were issued immediately after the Business Combination, based on the number of issued and outstanding Kernel Ordinary Shares and AIRO Capital Stock on July 3, 2024, after giving effect to the Extension Redemption and based on the ParentCo Common Stock expected to be issued in the Business Combination, non-redeeming Public Shareholders, assuming no redemptions of Public Shares, as a group, would own 0.6% of ParentCo’s common stock outstanding assuming all such shares were issued immediately after the Business Combination.
Unlike many blank check companies, Kernel does not have a specified maximum redemption threshold. The absence of such a redemption threshold may make it easier for Kernel to consummate the Business Combination even if a substantial majority of Kernel’s shareholders do not agree.
Since Kernel has no specified percentage threshold for redemption contained in its amended and restated memorandum and articles of association, its structure is different in this respect from the structure used by many blank check companies. Historically, blank check companies would not be able to consummate an initial business combination if the holders of such company’s Public Shares voted against a proposed business combination and elected to convert or redeem more than a specified maximum percentage of the shares sold in such company’s initial public offering, which percentage threshold was typically between 19.99% and 39.99%. As a result, many blank check companies were unable to complete a business combination because the number of shares voted by their Public Shareholders electing conversion or redemption exceeded the maximum conversion or redemption threshold pursuant to which such company could proceed with its initial business combination. As a result, Kernel may be able to consummate the Business Combination even if a substantial majority of the Public Shareholders do not agree with the Business Combination and have redeemed their shares. However, in no event will Kernel redeem Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001 upon the consummation of the Business Combination unless the NTA Proposal passes. If enough Public Shareholders exercise their redemption rights such that Kernel cannot satisfy the net tangible asset requirement, unless the NTA Proposal passes, Kernel would not proceed with the redemption of Public Shares and the Business Combination, and instead may search for an alternate business combination. However, because the minimum cash requirements provided in the Business Combination Agreement may be waived by AIRO, if Kernel did not proceed with the Business Combination in such situation, it may be in breach of its obligations under the Business Combination Agreement, which could have an adverse effect on its ability to consummate an alternate business combination.
Public Shareholders will not have any rights or interests in funds from the Trust Account, except under certain limited circumstances. To liquidate their investment, therefore, Public Shareholders may be forced to sell their securities, potentially at a loss.
Public Shareholders are entitled to receive funds from the Trust Account only (i) in the event of a redemption to Public Shareholders prior to any winding up in the event Kernel does not consummate its initial business combination or its liquidation, (ii) if they redeem their shares in connection with an initial business combination that Kernel consummates or, (iii) if they redeem their shares in connection with a stockholder vote to amend the Existing Kernel Governing Documents (A) to modify the substance or timing of Kernel’s obligation to redeem 100% of the Public Shares if Kernel does not complete its initial business combination within 12 months from the closing of the IPO subject to extensions in accordance with the Existing Kernel Governing Documents or (B) with respect to any other provision relating to Kernel’s pre-business combination activity and related stockholders’ rights. In no other circumstances will a stockholder have any right or interest of any kind to the funds in the Trust Account. Accordingly, to liquidate their investment, the Public Shareholders may be forced to sell their securities, potentially at a loss.
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If third parties bring claims against Kernel, the proceeds held in the Trust Account could be reduced and the per share redemption amount received by stockholders may be less than $10.00 per share.
Kernel’s placing of funds in the Trust Account may not protect those funds from third-party claims against Kernel. Although Kernel has sought to have all vendors, service providers (other than its independent registered public accounting firm), prospective target businesses or other entities with which it does business execute agreements with Kernel waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account for the benefit of the Public Shareholders, such parties may not execute such agreements, or even if they execute such agreements they may not be prevented from bringing claims against the Trust Account, including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with respect to a claim against Kernel’s assets, including the funds held in the Trust Account. If any third party refuses to execute an agreement waiving such claims to the monies held in the Trust Account, Kernel’s management will perform an analysis of the alternatives available to it and will only enter into an agreement with a third party that has not executed a waiver if management believes that such third party’s engagement would be significantly more beneficial to Kernel than any alternative.
Examples of possible instances where Kernel may engage a third party that refuses to execute a waiver include the engagement of a third-party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where Kernel is unable to find a service provider willing to execute a waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with Kernel and will not seek recourse against the Trust Account for any reason. Upon redemption of Kernel’s Public Shares, if Kernel is unable to complete the Business Combination within the prescribed timeframe, or upon the exercise of a redemption right in connection with the Business Combination, Kernel will be required to provide for payment of claims of creditors that were not waived that may be brought against Kernel within the 10 years following redemption. Accordingly, the per share redemption amount received by Public Shareholders could be less than the $10.00 per share initially held in the Trust Account, due to claims of such creditors.
The Sponsor has agreed that it will be liable to Kernel if and to the extent any claims by a third party (other than Kernel’s independent registered public accounting firm) for services rendered or products sold to Kernel, or a prospective target business with which Kernel has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below (1) $10.00 per Public Share or (2) such lesser amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account due to reductions in the value of the trust assets, in each case net of the interest which may be withdrawn to pay Kernel’s franchise and income taxes (less up to $100,000 of interest to pay dissolution expenses), except as to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under Kernel’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act. Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. Kernel believes that the Sponsor’s only assets are securities of Kernel and, therefore, the Sponsor may not be able to satisfy those obligations. Kernel has not asked the Sponsor to reserve for such obligations. As a result, if any such claims were successfully made against the Trust Account, the funds available for Kernel’s initial business combination and redemptions could be reduced to less than $10.00 per Public Share. In such event, Kernel may not be able to complete its initial business combination, and its stockholders would receive such lesser amount per share in connection with any redemption of their Public Shares. None of Kernel’s officers or directors will indemnify Kernel for claims by third parties including, without limitation, claims by vendors and prospective target businesses.
Kernel’s directors may decide not to enforce indemnification obligations against the Sponsor, resulting in a reduction in the amount of funds in the Trust Account available for distribution to the Public Shareholders.
In the event that the proceeds in the Trust Account are reduced below $10.00 per Public Share and the Sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, Kernel’s independent directors would determine whether to take legal action against the Sponsor to enforce such indemnification obligations. It is possible that Kernel’s independent directors in exercising their business judgment may choose not to do so in any particular instance. If Kernel’s independent directors choose not to enforce these indemnification obligations, the amount of funds in the Trust Account available for distribution to Public Shareholders may be reduced below $10.00 per Public Share.
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Kernel’s shareholders may be held liable for claims by third parties against Kernel to the extent of distributions received by them.
The Existing Kernel Governing Documents provide that Kernel will continue in existence only until 30 months from the closing of the IPO. As promptly as reasonably possible following the redemptions Kernel is required to make to the Public Shareholders in such event, subject to the approval of Kernel’s remaining stockholders and the Kernel Board, Kernel would dissolve and liquidate, subject to its obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. Kernel cannot assure you that it will properly assess all claims that may be potentially brought against it. As such, Kernel’s shareholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of Kernel’s shareholders may extend well beyond the third anniversary of the date of distribution. Accordingly, Kernel cannot assure you that third parties will not seek to recover from Kernel’s shareholders amounts owed to them by Kernel.
If Kernel is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against Kernel which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Kernel’s shareholders. Furthermore, because Kernel intends to distribute the proceeds held in the Trust Account to the Public Shareholders promptly after expiration of the time Kernel has to complete an initial business combination, this may be viewed or interpreted as giving preference to the Public Shareholders over any potential creditors with respect to access to or distributions from Kernel’s assets. Furthermore, the Kernel Board may be viewed as having breached their fiduciary duties to Kernel’s creditors and/or may have acted in bad faith, and thereby exposing itself and Kernel to claims of punitive damages, by paying Public Shareholders from the Trust Account prior to addressing the claims of creditors. Kernel cannot assure you that claims will not be brought against Kernel for these reasons.
Kernel may amend the terms of the Public Warrants in a manner that may be adverse to holders with the approval by the holders of at least a majority of the then outstanding Public Warrants.
The Public Warrants were issued in registered form under the Kernel Warrant Agreement between Continental Stock Transfer & Trust Company, as warrant agent, and Kernel. The Kernel Warrant Agreement provides that the terms of the Public Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision but requires the approval by the holders of at least a majority of the then outstanding Public Warrants to make any change that adversely affects the interests of the registered holders. Accordingly, Kernel may amend the terms of the Public Warrants in a manner adverse to a holder if holders of at least a majority of the then outstanding Public Warrants approve of such amendment. Although Kernel’s ability to amend the terms of the Public Warrants with the consent of a majority of the then outstanding Public Warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the Public Warrants, convert the Public Warrants into stock or cash, shorten the exercise period or decrease the number of warrant shares issuable upon exercise of a Public Warrant.
ParentCo may redeem your unexpired Public Warrants prior to their exercise at a time that is disadvantageous to you, thereby making your Public Warrants worthless.
ParentCo will have the ability to redeem outstanding Public Warrants (i) at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of Kernel Ordinary Shares equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date ParentCo gives notice of redemption, or (ii) at varying prices depending on the then current fair market value of Kernel’s Ordinary Shares and the length of time from the closing of the Business Combination. If and when the Public Warrants become redeemable by ParentCo, ParentCo may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Public Warrants could force you (i) to exercise your Public Warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your Public Warrants at the then-current market price when you might otherwise wish to hold your Public Warrants or (iii) to accept the nominal redemption price which, at the time the outstanding Public Warrants are called for redemption, is likely to be substantially less than the market value of your Public Warrants. None of the Private Placement Warrants will be redeemable by ParentCo so long as they are held by their initial purchasers or their permitted transferees.
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If we do not file and maintain a current and effective proxy statement/prospectus relating to the common stock issuable upon exercise of the warrants, holders will only be able to exercise such warrants on a “cashless basis.”
If we do not file and maintain a current and effective prospectus relating to the ParentCo common stock issuable upon exercise of the warrants at the time that holders wish to exercise such warrants, they will only be able to exercise them on a “cashless basis” provided that an exemption from registration is available. As a result, the number of shares of ParentCo common stock that holders will receive upon exercise of the warrants will be fewer than it would have been had such holder exercised its warrant for cash. Further, if an exemption from registration is not available, holders would not be able to exercise on a cashless basis and would only be able to exercise their warrants for cash if a current and effective proxy statement/prospectus relating to the ParentCo common stock issuable upon exercise of the warrants is available. Under the terms of certain warrant agreements, we have agreed to use its best efforts to meet these conditions and to file and maintain a current and effective proxy statement/prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that it will be able to do so. If we are unable to do so, the potential “upside” of the holder’s investment in ParentCo may be reduced or the warrants may expire worthless.
Even if Kernel consummates the Business Combinations, there is no guarantee that the Public Warrants will ever be in the money, and they may expire worthless and the terms of warrants may be amended.
The exercise price for the Public Warrants is $11.50 per share of common stock. There is no guarantee that the Public Warrants will ever be in the money prior to their expiration, and as such, the Public Warrants may expire worthless.
In addition, Kernel’s Public Warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and Kernel. The warrant agreement provides that the terms of the Public Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants to make any other change. Accordingly, Kernel may amend the terms of the Public Warrants in a manner adverse to a holder if holders of at least 65% of the then outstanding Public Warrants approve of such amendment. Although Kernel’s ability to amend the terms of the Public Warrants with the consent of at least 65% of the then outstanding Public Warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the Public Warrants, shorten the exercise period or decrease the number of shares and their respective affiliates and associates have of common stock purchasable upon exercise of a Public Warrant.
The exercise price for our Public Warrants is higher than in many similar blank check company offerings in the past, and, accordingly, the Public Warrants are more likely to expire worthless.
The exercise price of our Public Warrants is higher than is typical with many similar blank check companies in the past. Historically, with regard to units offered by blank check companies, the exercise price of a Public Warrant was generally a fraction of the purchase price of the units in the initial public offering. The exercise price for our Public Warrants is $11.50 per share, subject to adjustment as provided therein. As a result, the Public Warrants are less likely to ever be in the money and more likely to expire worthless.
Public Warrants will become exercisable for the ParentCo common stock, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
Our Public Warrants are exercisable for 15,237,500 shares of common stock as part of our IPO at $11.50 per share. The additional shares of our common stock issued upon exercise of our Public Warrants will result in dilution to the then existing holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock.
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Holders who redeem their public shares of Kernel Class A Common Stock may continue to hold any Public Warrants that they own, which results in additional dilution to non-redeeming holders upon exercise of the Public Warrants.
Public stockholders who redeem their shares of Kernel Class A Common Stock may continue to hold any Public Warrants that they owned prior to redemption, which results in additional dilution to non-redeeming holders upon exercise of such Public Warrants. Assuming the maximum redemption of the shares of Kernel Class A Common Stock held by the redeeming holders of Kernel public shares, up to 15,237,500 publicly traded warrants would be retained by redeeming holders of Kernel public shares (assuming all such holders elected not to exercise their warrants) with an aggregate market value of approximately $2.0 million, based on the market price of $0.13 per Public Warrant as of July 3, 2024. As a result, the redeeming holders of Kernel public shares would recoup their entire investment and continue to hold Public Warrants with an aggregate market value of up to approximately $2.0 million, while non-redeeming holders of Kernel public shares would suffer additional dilution in their percentage ownership and voting interest of AIRO if the Business Combination is consummated, upon exercise of Public Warrants by redeeming holders of Kernel public shares. However, if redemptions exceed the amount allowable for consummation of the Business Combination, or the Business Combination is otherwise not consummated, the Kernel warrants will not be exercisable and expire worthless.
The Public Warrants are not identical to the Private Warrants and may allow for different rights to exercise following the Closing of the Business Combination.
The Private Placement Warrants are identical to the Public Warrants except that the Private Placement Warrants, (i) may not, subject to certain limited exceptions, be transferred, assigned or sold by the holders until 30 days after the completion of the Business Combination, (ii) are not redeemable while held by Kernel’s Sponsor or its permitted transferees; and (iii) have different terms for cashless exercise. For more information on these differences, see the section “Description of Kernel’s and ParentCo’s Securities – Warrants”.
We may redeem the Public Warrants after the closing of the Business Combination if the reported last sale price of the ParentCo common stock equals or exceeds $18.00 per share (as adjusted for share subdivisions, share dividends, rights issuances, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period commencing once the warrants become exercisable.
Once the Public Warrants become exercisable, we may redeem not less than all of them at a price of $0.01 per warrant upon not less than 30 days’ prior written notice of redemption (such period, the “30-day Redemption Period”) to each warrant holder if, and only if, the reported last sale price of the ParentCo common stock equals or exceeds $18.00 per share (as adjusted for share subdivisions, share dividends, rights issuances, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period commencing once the warrants become exercisable and ending three business days before we send the notice of redemption to the warrant holders. The trading price for the Kernel common stock has never equaled or exceeded $18.00 per share. The Public Warrants may also be redeemed at varying prices depending on the then current fair market value of Kernel’s Ordinary Shares and the length of time from the closing of the Business Combination.
If and when the Public Warrants become redeemable, we may exercise our redemption right if there is a current registration statement in effect with respect to the ParentCo common stock underlying such warrants. Redemption of the outstanding Public Warrants could force you to: (i) exercise your warrants and pay the related exercise price at a time when it may be disadvantageous for you to do so; (ii) sell your warrants at the then-current market price when you might otherwise wish to hold your warrants; or (iii) accept the nominal redemption price, which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants. In these circumstances, and you choose option (i) to exercise the Public Warrants, the value received upon exercise of the Public Warrants (1) may be less than the value warrant holders would have received if they had exercised their Public Warrants at a later time where the underlying share price is higher and (2) may not compensate the holders for the value of the Public Warrants. If you choose to sell under option (ii) there is no guarantee the sale price will be high enough to compensate warrant holders for the value of the Public Warrants.
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We will not redeem the Public Warrants as described above unless a registration statement under the Securities Act covering the issuance of the ParentCo common stock issuable upon exercise of the warrants is then effective and a current prospectus relating to those shares of ParentCo common stock is available throughout the 30-day Redemption Period, except if the warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration under the Securities Act.
If we call the Public Warrants for redemption as described above, our management will have the option to require all holders that wish to exercise the warrants to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on a “cashless basis,” our management will consider, among other factors, our cash position, the number of warrants that are outstanding and the dilutive effect on our shareholders of issuing the maximum number of shares of ParentCo common stock issuable upon the exercise of the Public Warrants. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of ParentCo common stock equal to the quotient obtained by dividing (i) the product of the number of shares of ParentCo common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (ii) the fair market value. The “fair market value” for this purpose shall mean the average reported last sale price of the shares of ParentCo common stock for the 10 trading days ending on the third trading day prior to the date on which we send the notice of redemption to the holders of the Public Warrants.
As provided in the Warrant Agreement, in the event we elect to redeem the Public Warrants, we will fix a date for the redemption (the “Redemption Date”). We will mail or cause to be mailed notice of redemption by first class mail, postage prepaid, not less than thirty (30) days prior to the Redemption Date to the registered holders of the warrants to be redeemed at their last addresses as they shall appear on the registration books. Any notice mailed in such manner shall be conclusively presumed to have been duly given whether or not the registered holder received such notice.
ParentCo has no obligation to net cash settle the Public Warrants, and such warrants may expire worthless.
ParentCo has no obligation to net cash settle the Public Warrants. Furthermore, there are no contractual penalties for failure to deliver securities to the holders of Public Warrants upon consummation of an initial business combination, including the Business Combination, or exercise of the warrants. Accordingly, the warrants may expire worthless.
The Warrant Agreement will designate the courts of the State of New York or the United States District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of Public Warrants, which could limit the ability of warrant holders to obtain a favorable judicial forum for disputes with Kernel.
The Warrant Agreement will provide that, subject to applicable law, (i) any action, proceeding or claim against us arising out of or relating in any way to the Warrant Agreement, including under the Securities Act, will be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and (ii) that Kernel irrevocably submits to such jurisdiction, which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. Kernel will waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum.
Notwithstanding the foregoing, these provisions of the Warrant Agreement will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum. Any person or entity purchasing or otherwise acquiring any interest in any of Kernel’s warrants shall be deemed to have notice of and to have consented to the forum provisions in the Warrant Agreement. If any action, the subject matter of which is within the scope the forum provisions of the Warrant Agreement, is filed in a court other than a court of the State of New York or the United States District Court for the Southern District of New York (a “foreign action”) in the name of any holder of our warrants, such holder shall be deemed to have consented to: (x) the personal jurisdiction of the state and federal courts located in the State of New York in connection with any action brought in any such court to enforce the forum provisions (an “enforcement action”), and (y) having service of process made upon such warrant holder in any such enforcement action by service upon such warrant holder’s counsel in the foreign action as agent for such warrant holder.
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This choice-of-forum provision may limit a warrant holder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Kernel, which may discourage such lawsuits. Alternatively, if a court were to find this provision of the Warrant Agreement inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, Kernel may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect Kernel’s business, financial condition and results of operations and result in a diversion of the time and resources of Kernel’s management and board of directors.
We have not registered the shares of ParentCo common stock issuable upon exercise of the Public Warrants under the Securities Act or any state securities laws at this time, and such registration may not be in place when an investor desires to exercise Public Warrants, thus precluding such investor from being able to exercise its Public Warrants except on a cashless basis and potentially causing such Public Warrants to expire worthless.
We have not registered the shares of common stock issuable upon exercise of the Public Warrants under the Securities Act or any state securities laws at this time. However, under the terms of the warrant agreement, we have agreed that as soon as practicable, but in no event later than 15 business days after the closing of our initial business combination, we will use our best efforts to file with the SEC a registration statement for the registration under the Securities Act of the shares of common stock issuable upon exercise of the warrants and thereafter will use our best efforts to cause the same to become effective within 60 business days following our initial business combination and to maintain a current proxy statement/prospectus relating to the common stock issuable upon exercise of the Public Warrants, until the expiration of the Public Warrants in accordance with the provisions of the warrant agreement. We cannot assure you that we will be able to do so if, for example, any facts or events arise which represent a fundamental change in the information set forth in the registration statement or proxy statement, the financial statements contained or incorporated by reference therein are not current or correct or the SEC issues a stop order. If the shares issuable upon exercise of the Public Warrants are not registered under the Securities Act, we will be required to permit holders to exercise their Public Warrants on a cashless basis. However, no Public Warrant will be exercisable for cash or on a cashless basis, and we will not be obligated to issue any shares to holders seeking to exercise their Public Warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder or an exemption from registration is available. Notwithstanding the above, if our common stock is at the time of any exercise of a Public Warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, we may, at our option, require holders of Public Warrants who exercise their Public Warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration statement, and in the event we do not so elect, we will use our best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available. In no event will we be required to net cash settle any Public Warrant, or issue securities or other compensation in exchange for the Public Warrants in the event that we are unable to register or qualify the shares underlying the Public Warrants under applicable state securities laws and there is no exemption available. If the issuance of the shares upon exercise of the Public Warrants is not so registered or qualified or exempt from registration or qualification, the holder of such Public Warrant shall not be entitled to exercise such Public Warrant and such Public Warrant may have no value and expire worthless. In such event, holders who acquired their Public Warrants as part of a purchase of Units will have paid the full Unit purchase price solely for the shares of common stock included in the Units. If and when the Public Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. We will use our best efforts to register or qualify such shares of common stock under the blue sky laws of the state of residence in those states in which the warrants were offered by us in the IPO. However, there may be instances in which holders of our Public Warrants may be unable to exercise such Public Warrants but holders of our Private Placement Warrants may be able to exercise such Private Placement Warrants.
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Kernel will require Public Shareholders who wish to redeem their Kernel Ordinary Shares in connection with the Business Combination to comply with specific requirements for redemption that may make it more difficult for them to exercise their redemption rights prior to the deadline for exercising their rights.
Kernel will require the Public Shareholders seeking to exercise their redemption rights, whether they are record holders or hold their shares in “street name,” to either tender their certificates to Kernel’s transfer agent prior to the expiration date set forth in the tender offer documents mailed to such holders, or in the event Kernel distributes proxy materials, up to two business days prior to the vote on the proposal to approve the Business Combination, or to deliver their shares to the transfer agent electronically using DTC’s DWAC System, at the holder’s option. To obtain a physical stock certificate, a stockholder’s broker and/or clearing broker, DTC and Kernel’s transfer agent will need to act to facilitate this request. It is Kernel’s understanding that stockholders should generally allot at least one week to obtain physical certificates from the transfer agent. However, because Kernel does not have any control over this process or over the brokers or DTC, it may take significantly longer than one week to obtain a physical stock certificate. While Kernel has been advised that it takes a short time to deliver shares through the DWAC System, this may not be the case. Under Kernel’s memorandum and articles of association, it is required to provide at least two days’ advance notice of any stockholder meeting, which would be the minimum amount of time a stockholder would have to determine whether to exercise redemption rights. Accordingly, if it takes longer than Kernel anticipates for stockholders to deliver their shares, stockholders who wish to redeem may be unable to meet the deadline for exercising their redemption rights and thus may be unable to redeem their shares. In the event that a stockholder fails to comply with the various procedures that must be complied with to validly tender or redeem Public Shares, its shares may not be redeemed.
Additionally, despite Kernel’s compliance with the proxy rules, stockholders may not become aware of the opportunity to redeem their shares.
There is some uncertainty regarding the U.S. federal income tax consequences to holders of Kernel Ordinary Shares who elect to exercise their redemption rights.
There is some uncertainty regarding the U.S. federal income tax consequences to holders of Kernel Ordinary Shares who exercise their redemption rights. The uncertainty of tax consequences relates primarily to the individual circumstances of the taxpayer and include (i) whether the redemption results in a distribution or a sale taxable as capital gain, and (ii) whether such capital gain, if applicable, is “long-term” or “short-term.” Whether the redemption qualifies for sale treatment will depend largely on whether the holder owns (or is deemed to own) any shares of Kernel Ordinary Shares following the redemption, and if so, the total number of shares of Kernel Ordinary Shares held by the holder both before and after the redemption relative to all shares of Kernel Ordinary Shares outstanding both before and after the redemption. The redemption generally will be treated as a sale, rather than a distribution, if the redemption (i) is “substantially disproportionate” with respect to the holder, (ii) results in a “complete termination” of the holder’s interest in Kernel or (iii) is “not essentially equivalent to a dividend” with respect to the holder. Due to the personal and subjective nature of certain of such tests and the absence of clear guidance from the Internal Revenue Service (the “IRS”), there is uncertainty as to whether a holder who elects to exercise its redemption rights will be taxed on any gain from the redemption as ordinary income or capital gain. See the section entitled “Shareholder Proposal No. 1: The Business combination Proposal – Certain Material U.S. Federal Income Tax Considerations of the Redemption.”
Kernel or ParentCo may be the target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Business Combination from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger or business combination agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Kernel’s or AIRO’s liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Business Combination, then that injunction may delay or prevent the Business Combination from being completed, which may adversely affect Kernel’s or AIRO’s or, if the Business Combination is completed but delayed, ParentCo’s business, financial position and results of operations. Neither Kernel nor AIRO can predict whether any such lawsuits will be filed.
ParentCo may be subject to securities litigation, which is expensive and could divert management attention.
Following the Business Combination, ParentCo’s share price may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities litigation, including class action litigation. ParentCo may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on ParentCo’s business, financial condition, and results of operations. Any adverse determination in litigation could also subject ParentCo to significant liabilities.
The SEC issued final rules to regulate special purpose acquisition companies that may increase our costs and the time needed to complete our initial business combination.
With respect to the regulation of special purpose acquisition companies like the Company (“SPACs”), on January 24, 2024, the SEC adopted the previously proposed rules (the “SPAC Rules”) relating to, among other items, disclosures in business combination transactions involving SPACs and private operating companies; the condensed financial statement requirements applicable to transactions involving shell companies; the use of projections by SPACs in SEC filings in connection with proposed business combination transactions; the potential liability of certain participants in proposed business combination transactions. These SPAC Rules may increase the costs of and the time needed to negotiate and complete an initial business combination, and may constrain the circumstances under which we could complete an initial business combination.
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If we are deemed to be an investment company for purposes of the Investment Company Act, we would be required to institute burdensome compliance requirements and our activities would be severely restricted and, as a result, we may abandon our efforts to consummate an initial business combination and liquidate.
Whether a SPAC is an investment company as defined in the Investment Company Act is a question of facts and circumstances according to the adopting release, which added, “Given the individualized nature of this analysis, and … depending on the facts and circumstances, a SPAC could be an investment company at any stage of its operations.” As a result, it is possible that a claim could be made that we have been operating as an unregistered investment company.
If we are deemed to be an investment company under the Investment Company Act, our activities would be severely restricted. In addition, if we are deemed to be an investment company and subject to compliance with and regulation under the Investment Company Act, we would be subject to additional regulatory burdens and expenses for which we have not allotted funds. As a result, unless we are able to modify our activities so that we would not be deemed an investment company, we would expect to abandon our efforts to complete an initial business combination and instead to liquidate the Company.
Moreover, if we are deemed to be an investment company under the Investment Company Act, we may be required to liquidate our Trust Account by returning the then remaining funds in such account to the Public Shareholders and then proceed to liquidate and dissolve. If we are required to liquidate and dissolve, we will be unable to complete our business combination with AIRO, we may lose the opportunity for any stock price appreciation and our outstanding warrants would expire worthless.
To mitigate the risk that we might be deemed to be an investment company for purposes of the Investment Company Act, in February 2023, we instructed Continental Stock Transfer & Trust Company, the trustee with respect to the Trust Account to liquidate the investments held in the Trust Account and instead to hold the funds in the Trust Account in cash until the earlier of the consummation of our initial Business Combination or our liquidation. In July 2023, we instructed the trustee to instead hold the funds in the Trust Account in an interest-bearing demand deposit account at a bank until the earlier of the consummation of our initial Business Combination or our liquidation. As a result, following such liquidation of investments in the Trust Account, we will receive less interest on the funds held in the Trust Account than we would have received had we not liquidated such investments in the Trust Account, which would reduce the dollar amount our Public Shareholders would receive upon any redemption or liquidation of the Company.
Until February 2023, the funds in the Trust Account had been, since our IPO, been held only in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds investing solely in U.S. government treasury obligations and meeting certain conditions under Rule 2a-7 under the Investment Company Act. However, to mitigate the risk of us being deemed to be an unregistered investment company (including under the subjective test of Section 3(a)(1)(A) of the Investment Company Act) and thus subject to regulation under the Investment Company Act, in February 2023, we instructed Continental Stock Transfer & Trust Company, the trustee with respect to the Trust Account to liquidate the investments held in the Trust Account and instead to hold the funds in the Trust Account in cash until the earlier of the consummation of our initial Business Combination or our liquidation. In July 2023, we instructed the trustee to instead hold the funds in the Trust Account in an interest-bearing demand deposit account at a bank until the earlier of the consummation of our initial Business Combination or our liquidation. Following such liquidation, we may receive less interest on the funds held in the Trust Account than the interest we would have received pursuant to our original Trust Account investments; however, interest previously earned on the funds held in the Trust Account still may be released to us to pay our taxes, if any, and certain other expenses as permitted. Consequently, the transfer of the funds in the Trust Account into cash in February 2023 and to an interest-bearing demand deposit account at a bank in February 2023 could reduce the dollar amount our Public Shareholders would receive upon any redemption or our liquidation.
Notwithstanding the divestment of all investments in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds investing solely in U.S. government treasury obligations effective as of January 24, 2024, we may still be deemed to be an investment company under the Investment Company Act, which could require us to liquidate our Trust Account by returning the then remaining funds in such account to the Public Shareholders and then proceed to liquidate and dissolve. If we are required to liquidate and dissolve, we will be unable to complete our business combination with AIRO, we may lose the opportunity for any stock price appreciation and our outstanding warrants would expire worthless.
The ability of Kernel’s Public Shareholders to exercise redemption rights in combination with the Business Combination with respect to a large number of Kernel’s Public Shares may adversely affect the liquidity and trading of Kernel’s securities and may impact Kernel’s ability to complete the Business Combination.
Pursuant to Kernel’s Amended and Restated Memorandum and Articles of Association, a Public Shareholder may request that Kernel redeem all or a portion of such Public Shareholder’s Public Shares for cash in connection with the Business Combination. The ability of Kernel’s Public Shareholders to exercise such redemption rights with respect to a large number of Kernel’s Public Shares may adversely affect the liquidity of Kernel’s Class A Ordinary Shares. As a result, you may be unable to sell your Class A Ordinary Shares even if the per-share market price is higher than the per-share redemption price paid to Public Shareholders that elect to redeem their Public Shares in connection with the Businesss Combination.
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Following the Business Combination, ParentCo’s securities will be listed on Nasdaq. However, Kernel cannot assure you that its securities will continue to be listed on Nasdaq prior to the Business Combination or that ParentCo’s securities will continue to be listed on Nasdaq following the Business Combination. In order to continue listing its securities on Nasdaq, Kernel must maintain certain financial, distribution and stock price levels. Generally, Kernel must maintain a minimum number of holders of its securities (generally 300 public holders). Additionally, in connection with the Business Combination, ParentCo will be required to demonstrate compliance with Nasdaq’s initial listing requirements, which are more rigorous than Nasdaq’s continued listing requirements, in order to continue to maintain the listing of ParentCo’s securities on Nasdaq. Generally, ParentCo must maintain a minimum amount of stockholders’ equity (generally $4.0 million) and a minimum number of holders of its securities (generally 300 unrestricted, round-lot holders). ParentCo may be unable to meet those initial listing requirements at that time, and Kernel cannot assure you that ParentCo will be able to meet those initial listing requirements at that time.
If Kernel redeems its Public Shares in an amount in excess of the current redemption limitation and its securities do not meet Nasdaq’s continued listing requirements, Nasdaq may delist Kernel’s securities from trading on its exchange. If Nasdaq delists any of Kernel’s securities from trading on its exchange and it is not able to list such securities on another approved national securities exchange, Kernel expects that such securities could be quoted on an over-the-counter market. If this were to occur, Kernel or ParentCo could face significant material adverse consequences, including: (i) a limited availability of market quotations for Kernel’s securities, (ii) reduced liquidity for Kernel’s securities, (iii) a determination that Kernel’s Public Shares are “penny stocks” which will require brokers trading in Kernel’s Public Shares to adhere to more stringent rules, including being subject to the depository requirements of Rule 419 of the Securities Act, and possibly result in a reduced level of trading activity in the secondary trading market for Kernel’s securities, (iv) a decreased ability to issue additional securities or obtain additional financing in the future, and (v) a less attractive acquisition vehicle to a target business in connection with an initial business combination. The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Kernel’s public shares, units and warrants qualify as covered securities under such statute. If Kernel were no longer listed on Nasdaq, its securities would not qualify as covered securities under such statute and it would be subject to regulation in each state in which it offers its securities.
If Nasdaq delists ParentCo’s securities from trading on its exchange and ParentCo is not able to list its securities on another national securities exchange, Kernel expects such securities could be quoted on an over-the counter market. If this were to occur, ParentCo could face significant material adverse consequences, including:
| ● | a limited availability of market quotations for ParentCo’ssecurities; | |
| ● | reduced liquidity for ParentCo’s securities; | |
| ● | a determination that ParentCo’s Common Stock is a “penny stock,” which will require brokers trading in ParentCo’s Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for ParentCo’s securities; | |
| ● | a limited amount of news and analyst coverage; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
If ParentCo’s securities are listed on Nasdaq following the Business Combination and qualify as covered securities and are subsequently delisted, ParentCo’s securities would not be covered securities and ParentCo would be subject to regulation in each state in which ParentCo offers its securities.
Additionally, the Business Combination was subject to a closing condition pursuant to the Business Combination Agreement that unless waived by the parties thereto, that Kernel shall have at least $5,000,001 of net tangible assets immediately following the closing of the Business Combination. On February 1, 2024, Kernel held the Extension Meeting – Third, and holders of 5,806,608 of Kernel’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $5.5 million. As a result of the decreased balance of the Trust Account, on February 5, 2024, Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor amended the Business Combination Agreement to remove the closing condition that Kernel have net tangible assets of at least $5,000,001 at Closing. If the Kernel shareholders do not approve the NTA Proposal to remove the net tangible asset requirement from Kernel’s Amended and Restated Memorandum and Articles of Association, the Business Combination will not close in any redemption scenario. If the Business Combination does not close, Public Shareholders who do not elect to redeem their Public Shares in connection with the shareholder meeting to approve the Business Combination may be unable to recover their investment except through sales of Kernel’s shares on the open market or upon our liquidation or redemption of shares. The price of Kernel’s shares may be volatile, and there can be no assurance that shareholders will be able to dispose of Kernel’s shares at favorable prices, or at all.
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Nasdaq may delist Kernel’s securities from its exchange which could limit investors’ ability to make transactions in its securities and subject Kernel to additional trading restrictions.
Kernel is listed on The Nasdaq Capital Market. Nasdaq IM-5101-2 requires that a special purpose acquisition company completes one or more business combinations within 36 months of the effectiveness of its IPO registration statement, which, in the case of Kernel, would be February 2, 2024 (the “Nasdaq Deadline”). The approval of the Third Charter Amendment at the Extension Meeting -Third extended the date by which Kernel must complete it initial business combination to August 5, 2024, which is beyond the Nasdaq Deadline. As a result, Kernel’s Amended and Restated Memorandum and Articles of Association do not comply with Nasdaq rules.
On February 5, 2024, Kernel received a notice from the staff of the Listing Qualifications Department of The Nasdaq Stock Market LLC indicating that, unless Kernel timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”), Kernel’s securities would be subject to suspension and delisting from The Nasdaq Capital Market at the opening of business on February 14, 2024, due to Kernel’s non-compliance with Nasdaq IM-5101-2. Kernel timely requested a hearing before the Panel to request sufficient time to complete the Business Combination with AIRO Group Holdings. The hearing took place on April 11, 2024. On April 19, 2024, the Panel issued written notice of its decision to grant the Company’s request for an exception to its listing deficiencies until July 1, 2024 in view of the Company’s substantial steps toward closing its previously announced initial business combination with AIRO Group Holdings and its plan for achieving compliance with Nasdaq listing rules upon closing of the transaction for listing on The Nasdaq Capital Market. On June 20, 2024, the Company requested that the Panel extend the deadline to regain compliance from July 1, 2024 to August 5, 2024, and on June 20, 2024, the request was granted. There can be no assurance that Kernel will be able to satisfy Nasdaq’s continued listing requirements, regain compliance with Nasdaq IM-5101-2, and maintain compliance with other Nasdaq listing requirements. We cannot assure you that Nasdaq will not delist Kernel.
If Nasdaq delists any of Kernel’s securities from trading on its exchange and Kernel is not able to list its securities on another national securities exchange, Kernel expects such securities could be quoted on an over-the counter market. If this were to occur, Kernel could face significant material adverse consequences, including:
| ● | Kernel’s ability to complete an initial business combination with a target company contemplating a Nasdaq listing; | |
| ● | a limited availability of market quotations for Kernel’s securities; | |
| ● | reduced liquidity for Kernel’s securities; | |
| ● | a determination that Kernel’s Class A ordinary share are a “penny stock,” which will require brokers trading in Kernel’s Class A ordinary shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for Kernel’s securities; | |
| ● | a limited amount of news and analyst coverage; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because Kernel’s units, Class A ordinary shares, and warrants are currently listed on Nasdaq, Kernel’s units, Class A ordinary shares, and warrants are covered securities. If Kernel is no longer listed on Nasdaq, Kernel’s securities would not be covered securities and Kernel would be subject to regulation in each state in which Kernel offers its securities.
Without additional financing, it is possible that our shareholders will vote in favor of the Business Combination and related proposals and yet the Business Combination may not close.
Even if the Business Combination Agreement is approved by the shareholders of Kernel, specified conditions must be satisfied or waived before the parties to the Business Combination Agreement are obligated to complete the Business Combination. For further details, see “Shareholder Proposal No. 1 - Business Combination Proposal — Conditions to Consummation of the Merger.” Kernel and AIRO may not satisfy all of the closing conditions in the Business Combination Agreement. In particular, the Business Combination Agreement requires that after giving effect to the payment of expenses set forth in the Business Combination Agreement, at the Closing, Kernel having $50,000,000 in Unencumbered Cash.
Without any additional financing transactions, Kernel will not meet the Unencumbered Cash requirement under any redemption scenario. Therefore, without additional financing, assuming the Unencumbered Cash requirement is not waived by AIRO, the Business Combination will not close in any redemption scenario. There is no assurance that Kernel will enter into additional financing transactions at all. Accordingly, it is possible that the shareholders of both companies may approve the Business Combination and yet the transaction may not close because one or more other conditions to Closing are not satisfied or waived. For further information about the ability of the Business Combination to close, see “Notes to Unaudited Pro Forma Combined Financial Information - Adjustments to Unaudited Pro Forma Combined Balance Sheet.”
Additionally, if the Kernel shareholders do not approve the NTA Proposal to remove the net tangible asset requirement from Kernel’s Amended and Restated Memorandum and Articles of Association, the Business Combination will not close in any redemption scenario. For more information, see “Notes to Unaudited Pro Forma Combined Financial Information - Adjustments to Unaudited Pro Forma Combined Balance Sheet.”
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EXTRAORDINARY GENERAL MEETING OF KERNEL SHAREHOLDERS
General
Kernel is furnishing this proxy statement/prospectus to its stockholders as part of the solicitation of proxies by the Kernel Board for use at the Extraordinary General Meeting to be held on July 31, 2024 and at any adjournment or postponement thereof. This proxy statement/prospectus provides Kernel’s shareholders with information they need to know to be able to vote or direct their vote to be cast at the Extraordinary General Meeting.
Date, Time and Place
The Extraordinary General Meeting will be held on July 31, 2024, at 9:00 a.m. Eastern Time, at Nelson Mullins Riley & Scarborough LLP, 101 Constitution Ave. NW, Suite 900, Washington, DC 20001. You also can attend the Extraordinary General Meeting online, and vote and submit your questions during the Extraordinary General Meeting via a live webcast available at https://agm.issuerdirect.com/krnl.
Purpose of the Extraordinary General Meeting
At the Extraordinary General Meeting, Kernel is asking holders of its Class A Ordinary Shares and Class B Ordinary Shares:
| ● | To consider and vote upon the Business Combination Proposal; | |
| ● | To consider and vote upon the Domestication Proposal; | |
| ● | To consider and vote upon the ParentCo Charter Amendment Proposal; | |
| ● | To consider and vote upon the Nasdaq Proposal; | |
| ● | To consider and vote upon the Incentive Plan Proposal; | |
| ● | To consider and vote upon the Employee Stock Purchase Plan Proposal; | |
| ● | To consider and vote upon the Election of Directors Proposal; | |
| ● | To consider and vote upon the NTA Proposal; and | |
| ● | To consider and vote upon the Adjournment Proposal, if presented at the Extraordinary General Meeting. |
Recommendation of the Kernel Board
The Kernel Board has unanimously determined that each of the Proposals is fair to and in the best interests of Kernel and its stockholders, and has unanimously approved such Proposals. The Kernel Board unanimously recommends that stockholders:
| ● | vote “FOR” the Business Combination Proposal; | |
| ● | vote “FOR” the Domestication Proposal; | |
| ● | vote “FOR” the ParentCo Charter Amendment Proposal; | |
| ● | vote “FOR” the Nasdaq Proposal; | |
| ● | vote “FOR” the Incentive Plan Proposal; | |
| ● | vote “FOR” the Employee Stock Purchase Plan Proposal; | |
| ● | vote “FOR” the Election of Directors Proposal; | |
| ● | vote “FOR” the NTA Proposal; and | |
| ● | vote “FOR” the Adjournment Proposal, if presented at the Extraordinary General Meeting. |
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When you consider the recommendation of the Kernel Board in favor of approval of the Proposals, you should keep in mind that the Sponsor (including certain equity holders of the Sponsor), and certain of Kernel’s directors and executive officers (including Suren Ajjarapu who is Kernel’s chief executive officer and the Sponsor’s controlling equity holder) may have interests in the Business Combination that are different from or in addition to (or which may conflict with) your interests as a stockholder. These interests include, among other things:
| ● | unless Kernel consummates a business combination, Kernel’s officers, directors and the Sponsor will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account; | |
| ● | as a condition to the IPO, all of the Founder Shares are subject to a lock-up and will be released only if specified conditions are met. In particular, subject to certain limited exceptions, all Founder Shares are subject to a lock up until the earlier of (A) one year after the completion of Kernel’s Business Combination and (B) subsequent to the Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination or (y) the date on which Kernel completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Kernel’s shareholders having the right to exchange their Class A Ordinary Shares for cash, securities or other property; | |
| ● | the Private Placement Warrants purchased by the Sponsor will be worthless if a business combination is not consummated; | |
| ● | the Sponsor has agreed that its Private Placement Warrants and the underlying securities will not be sold or transferred by it until after Kernel has completed a business combination, subject to limited exceptions; | |
| ● | the Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share, which it purchased from the Original Sponsor on December 28, 2022. If an initial business combination, such as the Business Combination, is not completed by August 5, 2024, Kernel will be required to dissolve and liquidate. In such event, the Kernel Class B Ordinary Shares currently held by the Sponsor, which were acquired from the Original Sponsor, will be worthless because the Sponsor has agreed to waive its rights to any liquidation distributions; | |
| ● | the fact that the Sponsor has agreed not to redeem any of the Founder Shares in connection with a stockholder vote to approve a proposed business combination; | |
| ● | the anticipated continuation of two of our existing directors, Suren Ajjarapu and Donald Fell, as directors of ParentCo; | |
| ● | the continued indemnification of our existing directors and officers prior to the Business Combination and the continuation of our directors’ and officers’ liability insurance after the Business Combination; | |
| ● | that pursuant to the IPO Registration Rights Agreement, the Kernel Restricted Stockholders are entitled to registration of the shares of ParentCo Common Stock into which the Founder Shares will automatically convert at the time of the consummation of the Business Combination; | |
| ● | the fact that our Sponsor is entitled to receive reimbursement of $10,000 per month under an administrative support agreement for office space and secretarial and administrative support provided to Kernel), for which, as of the date hereof, our Sponsor has not been paid; | |
| ● | if Kernel does not complete a business combination by August 5, 2024, contingent on Sponsor’s electing to extend the date to consummate a business combination on a monthly basis up to six times, the proceeds from the sale of the Private Placement Warrants will be included in the liquidating distributions to Kernel’s Public Shareholders and the Private Placement Warrants will expire worthless; and | |
| ● | if the Trust Account is liquidated, including in the event Kernel is unable to complete a business combination within the required time period, the Sponsor has agreed to indemnify Kernel to ensure that the proceeds in the Trust Account are not reduced below $10.00 per Public Share by the claims of prospective target businesses with which Kernel has entered into an acquisition agreement or claims of any third party for services rendered or products sold to Kernel, but only if such a vendor or target business has not executed a waiver of any and all rights to seek access to the Trust Account. |
For more information, see the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination.”
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Voting Power; Record Date
You will be entitled to vote or direct votes to be cast at the Extraordinary General Meeting if you owned shares of Kernel Ordinary Shares at the close of business on July 10, 2024 which is the Record Date. You are entitled to one vote for each share of Kernel Ordinary Shares that you owned as of the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. On the Record Date, there were 8,128,091 shares of Kernel Ordinary Shares outstanding, of which 509,341 are Public Shares and 7,618,750 are Founder Shares.
Vote of the Sponsor, Directors and Officers
In connection with the IPO, Kernel entered into agreements with each of its Original Sponsor, directors and officers pursuant to which each agreed to vote any Ordinary Shares owned by it in favor of the Business Combination and for all other Proposals presented at the Extraordinary General Meeting. These agreements apply to the Sponsor as they relate to the Founder Shares and any shares underlying the Private Placement Warrants.
Kernel’s Sponsor, directors and officers have waived any redemption rights, including with respect to Class A Ordinary Shares issued or purchased in the IPO or in the aftermarket, in connection with Business Combination. The Founder Shares have no redemption rights upon Kernel’s liquidation and will be worthless if no business combination is effected by Kernel by August 5, 2024, subject to Sponsor’s electing to extend the date to consummate a business combination on a monthly basis for up to six times by an additional one month each time. The Sponsor and each of Kernel’s directors and officers received no additional consideration in exchange for the agreement to waive their redemption rights.
Quorum and Required Vote for Proposals
A quorum of Kernel stockholders is necessary to hold a valid meeting. A quorum will be present at the Extraordinary General Meeting if a majority of the Ordinary Shares outstanding and entitled to vote at the Extraordinary General Meeting is represented in person or by proxy at the Extraordinary General Meeting.
The approvals of the Business Combination Proposal, Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal and the Adjournment Proposal are required to be passed by a simple majority of the stockholders as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at the Extraordinary General Meeting. The approvals of the Domestication Proposal, the ParentCo Charter Amendment Proposal, and the NTA Proposal are required to be passed by at least a two-thirds (2/3) majority of the stockholders as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at the Extraordinary General Meeting. In computing the majority when a poll is demanded, regard shall be had to the number of votes to which each stockholder is entitled by the Existing Kernel Governing Documents.
Under the Existing Kernel Governing Documents, the election of directors under the Election of Directors Proposal requires passage by a simple majority of the holders of the Class B Ordinary Shares that, being entitled to do so, vote in person or, where proxies are allowed, by proxy at the Extraordinary General Meeting. Prior to the closing of a business combination, holders of Class A Ordinary Shares have no right to vote on the appointment or removal of any director.
If the Business Combination Proposal is not approved, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal will not be presented to the Kernel shareholders for a vote. The approval of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal are preconditions to the consummation of the Business Combination. The Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal are conditioned on the approval of the Business Combination Proposal.
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It is important for you to note that in the event the Proposals do not each receive the requisite vote for approval, then Kernel will not consummate the Business Combination. If Kernel does not consummate the Business Combination and fails to complete an initial business combination by August 5, 2024, Kernel will be required to dissolve and liquidate its Trust Account by returning the then remaining funds in such account to the Public Shareholders.
Abstentions and Broker Non-Votes
Abstentions and broker non-votes, while considered present for the purposes of establishing a quorum, are not treated as votes cast and will have no effect on the Business Combination, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal. Broker non-votes will not be counted as present for the purposes of establishing a quorum and will have no effect on any of the Proposals.
Voting Your Shares
Each Kernel Ordinary Shares that you own in your name entitles you to one vote. If you are a record owner of your shares, there are two ways to vote your Ordinary Shares at the Extraordinary General Meeting:
| ● | You Can Vote By Signing and Returning the Enclosed Proxy Card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by the Kernel Board “FOR” the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal. Votes received after a matter has been voted upon at the Extraordinary General Meeting will not be Counted. | |
| ● | You can vote in person at the Extraordinary General Meeting. |
If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. If you wish to attend the meeting and vote in person and your shares are held in “street name,” you must obtain a legal proxy from your broker, bank or nominee. That is the only way Kernel can be sure that the broker, bank or nominee has not already voted your shares.
Revoking Your Proxy
If you are a record owner of your shares and you give a proxy, you may change or revoke it at any time before it is exercised by doing any one of the following:
| ● | you may send another proxy card with a later date; or | |
| ● | you may notify Kernel’s secretary in writing before the Extraordinary General Meeting that you have revoked your proxy. |
If your shares are held in “street name” or are in a margin or similar account, you should contact your broker for information on how to change or revoke your voting instructions.
Who Can Answer Your Questions About Voting Your Shares
If you are a stockholder and have any questions about how to vote or direct a vote in respect of your Kernel Ordinary Shares, you may call Issuer Direct Corporation, Kernel’s proxy solicitor, at (919) 481-4000 or email: proxy@issuerdirect.com.
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No Additional Matters May Be Presented at the Extraordinary General Meeting
The Extraordinary General Meeting has been called only to consider the approval of the Proposals. Under the Existing Kernel Governing Documents, other than procedural matters incident to the conduct of the Extraordinary General Meeting, no other matters may be considered at the Extraordinary General Meeting if they are not included in this proxy statement/prospectus, which serves as the notice of the Extraordinary General Meeting.
Redemption Rights
Pursuant to the Existing Kernel Governing Documents, any holders of Public Shares may demand that such shares be redeemed in exchange for a pro rata share of the aggregate amount on deposit in the Trust Account, less franchise and income taxes payable, calculated as of two (2) business days prior to the consummation of the Business Combination. If demand is properly made and the Business Combination is consummated, these shares, immediately prior to the Business Combination, will cease to be outstanding and will represent only the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account which holds the proceeds of the IPO (calculated as of two (2) business days prior to the consummation of the Business Combination, including interest earned on the funds held in the Trust Account and not previously released to it to pay Kernel’s franchise and income taxes). For illustrative purposes, based on approximately $5.5 million of funds in the Trust Account and 509,341 shares subject to possible redemption, in each case, following the Extension Redemption, this would have amounted to approximately $10.80 per issued and outstanding Public Share.
In order to exercise your redemption rights, you must:
| ● | affirmatively vote either for or against the Business Combination Proposal; | |
| ● | check the box on the enclosed proxy card to elect redemption; | |
| ● | check the box on the enclosed proxy card marked “Stockholder Certification” if you are not acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) with any other stockholder with respect to shares of common stock; | |
| ● | prior to 5:00 p.m. Eastern time on July 29, 2024 (two (2) business days before the Extraordinary General Meeting), tender your shares physically or electronically and submit a request in writing that we redeem your Public Shares for cash to Continental Stock Transfer & Trust Company, Kernel’s Transfer Agent, at the following address: |
Continental Stock Transfer & Trust Company
One State Street Plaza, 30 Floor
New York, New York 10004-1561
Attn: SPAC Administration Team
E-mail: SPACredemptions@continentalstock.com
and
| ● | deliver your Public Shares either physically or electronically through DTC to Kernel’s Transfer Agent at least two (2) business days before the Extraordinary General Meeting. Stockholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the Transfer Agent and time to effect delivery. It is Kernel’s understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the Transfer Agent. However, Kernel does not have any control over this process and it may take longer than two weeks. Stockholders who hold their shares in street name will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically. If you do not submit a written request and deliver your Public Shares as described above, your shares will not be redeemed. |
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Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests (and submitting shares to the Transfer Agent) and thereafter, with Kernel’s consent, until the vote is taken with respect to the Business Combination. If you delivered your shares for redemption to Kernel’s Transfer Agent and decide within the required timeframe not to exercise your redemption rights, you may request that Kernel’s Transfer Agent return the shares (physically or electronically). You may make such request by contacting Kernel’s Transfer Agent at the phone number or address listed above.
Prior to exercising redemption rights, stockholders should verify the market price of Kernel Ordinary Shares as they may receive higher proceeds from the sale of their Kernel Ordinary Shares in the public market than from exercising their redemption rights if the market price per share is higher than the redemption price. We cannot assure you that you will be able to sell your Kernel Ordinary Shares in the open market, even if the market price per share is higher than the redemption price stated above, as there may not be sufficient liquidity in Kernel Ordinary Shares when you wish to sell your shares.
If you exercise your redemption rights, your shares of Kernel Ordinary Shares will cease to be outstanding immediately prior to the Business Combination and will only represent the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account. You will no longer own those shares and will have no right to participate in, or have any interest in, the future growth of AIRO, if any. You will be entitled to receive cash for these shares only if you properly and timely demand redemption.
If the Business Combination is not approved and Kernel does not consummate an initial business combination by August 5, 2024, Kernel will be required to dissolve and liquidate its Trust Account by returning the then remaining funds in such account to the Public Shareholders and the Public Warrants and Private Placement Warrants will expire worthless.
Appraisal Rights
Kernel shareholders do not have appraisal rights in connection with the Business Combination Proposal or the other Proposals.
Proxy Solicitation
Kernel is soliciting proxies on behalf of the Kernel Board. This solicitation is being made by mail but also may be made by telephone or in person. Kernel and its directors, officers and employees may also solicit proxies in person.
Kernel has hired Issuer Direct Corporation to assist in the proxy solicitation process. Kernel will pay Issuer Direct Corporation its customary fee plus disbursements.
Kernel will ask banks, brokers and other institutions, nominees and fiduciaries to forward the proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. Kernel will reimburse them for their reasonable expenses.
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SHAREHOLDER PROPOSAL NO. 1: THE BUSINESS COMBINATION PROPOSAL
General
Holders of Kernel Ordinary Shares are being asked to approve and adopt the Business Combination Agreement and the transactions contemplated thereby, including the Business Combination. Kernel shareholders should carefully read this proxy statement/prospectus in its entirety for more detailed information concerning the Business Combination Agreement. The Business Combination Agreement is attached as Annex A to this proxy statement/prospectus. Please see the sections entitled “Shareholder Proposal No. 1: The Business Combination Proposal — The Business Combination Agreement” and “Shareholder Proposal No. 1: The Business Combination Proposal — General Description of the Business Combination Agreement” below for additional information and a summary of certain terms of the Business Combination Agreement. You are urged to carefully read the Business Combination Agreement in its entirety before voting on this proposal.
Because Kernel is holding a stockholder vote on the Business Combination, Kernel may consummate the Business Combination only if it is approved by a majority of the shares present or represented by proxy and entitled to vote at a meeting as of the Record Date for the Extraordinary General Meeting.
The Business Combination Agreement
The subsections that follow this subsection describe the material provisions of the Business Combination Agreement, but do not purport to describe all of the terms of the Business Combination Agreement. The following summary is qualified in its entirety by reference to the complete text of the Business Combination Agreement, a copy of which is attached as Annex A, which is incorporated herein by reference. Stockholders and other interested parties are urged to read the Business Combination Agreement in its entirety carefully, as amended (and, if appropriate, with the advice of financial and legal counsel), because it is the primary legal document that governs the Business Combination. The Business Combination Agreement and all descriptions thereof are being furnished to provide information regarding the terms of the Business Combination and are not intended to provide any factual information regarding the parties to the Business Combination or their respective businesses or affairs.
The Business Combination Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Business Combination Agreement or other specific dates, which may be updated prior to the Closing of the Business Combination. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Business Combination Agreement. The representations, warranties and covenants in the Business Combination Agreement are also modified in important part by the disclosure schedules attached thereto which are not filed publicly and which are subject to a contractual standard of materiality different from that generally applicable to stockholders. The disclosure schedules were used for the purpose of allocating risk among the parties rather than establishing matters as facts. We do not believe that the disclosure schedules contain information that is material to an investment decision. Accordingly, you should not rely on the representations and warranties in the Business Combination Agreement as characterizations of the actual state of facts about the respective parties. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Business Combination Agreement, which subsequent information may or may not be fully reflected in our public disclosures.
General Description of the Business Combination Agreement
On March 3, 2023, Kernel entered into the Business Combination Agreement by and among Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Sponsor, Seller Representative, and AIRO, pursuant to which, among other things, Kernel will change its 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”).
On August 29, 2023, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor 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 per share price.
On January 16, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor 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 stockholders 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 changes the “Outside Date” from August 2, 2023 to August 5, 2024.
On February 5, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor entered into the Third Amendment to the Business Combination Agreement (the “Third Amendment”). The Third Amendment amends the Business Combination Agreement to remove the closing condition that Kernel have net tangible assets of at least $5,000,001 at Closing.
On June 24, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor entered into the Fourth Amendment to the Business Combination Agreement, which amends the Business Combination Agreement to delete the Sponsor’s right to receive Earnout Shares.
In connection with the Domestication, each issued and outstanding Kernel Class A Ordinary Share, each issued and outstanding Kernel Class B Ordinary Share, each issued and outstanding Kernel Private Placement Warrant, each issued and outstanding Kernel Public Warrant, and each issued and outstanding Kernel Unit shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock, one share of Kernel Class B common stock, one Kernel Private Placement Warrant, one Kernel Public Warrant and one Kernel Unit, respectively, and (ii) immediately following the domestication, (a) each share of Kernel Class B common stock shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock, (b) the Kernel Class A common stock will be reclassified as Kernel common stock, and (c) each Kernel Unit will be separated into one share of Kernel common stock and one Kernel Public Warrant.
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Following the Domestication, the parties will affect the merger of Kernel Merger Sub with and into Kernel, with Kernel 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, with AIRO 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”).
Merger Consideration
As consideration for the Second Merger, the AIRO stockholders 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 (a) $770,000,000 minus (b) the amount, if any, by which the net working capital is less than negative $5,500,000 by more than $500,000, plus (c) the amount, if any, by which the net working capital is greater than negative $5,500,000 by more than $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 is less than 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 (such resulting amount, the “AIRO Merger Consideration”).
In addition, AIRO stockholders shall also be entitled to receive from ParentCo up to 33,000,000 additional shares of ParentCo common stock as additional consideration based on ParentCo’s achievement of certain revenue thresholds during the Earnout Eligibility Period, as follows:
(a) if ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s Pro Rata Share of 11,000,000 Earnout Shares;
(b) if ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s Pro Rata Share of 11,000,000 Earnout Shares; and
(c) if ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
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Representations and Warranties
The Business Combination Agreement contains customary representations and warranties by each of Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, and AIRO. Certain of the representations are subject to specified exceptions and qualifications contained in the Business Combination Agreement or in information provided pursuant to certain disclosure schedules to the Business Combination Agreement.
Covenants of the Parties
Each party agreed in the Business Combination Agreement to use its commercially reasonable efforts to effect the Closing and consummate the transactions contemplated by the Business Combination Agreement. The Business Combination Agreement also contains certain customary covenants by each of the parties during the period between the signing of the Business Combination Agreement and the earlier of the Closing or the termination of the Business Combination Agreement in accordance with its terms (the “Interim Period”), including, among other things, those relating to: (i) the provision of access to their properties, books and personnel; (ii) the operation of their respective businesses in the ordinary course of business; (iii) the provision by AIRO to Kernel of unaudited financial statements on a monthly, quarterly and annual basis and audited financial statements as of December 31, 2022 within 60 days of the Business Combination Agreement’s signing (“AIRO’s 2022 Audited Financials”); (iv) Kernel’s public filings; (v) use of Kernel’s Unencumbered Cash; (vi) no insider trading; (vii) notifications of certain breaches, consent requirements or other matters; (viii) the preparation and filing of the Registration Statement as described in more detail below, (ix) public announcements; and (x) confidentiality. Each party also agreed during the Interim Period not to solicit or enter into any inquiry, proposal or offer, or any indication of interest in making an offer or proposal for an alternative competing transactions, to notify the others as promptly as practicable in writing of the receipt of any inquiries, proposals or offers, requests for information or requests relating to an alternative competing transaction or any requests for non-public information relating to such transaction, and to keep the other party informed of the status of any such inquiries, proposals, offers or requests for information. The Business Combination Agreement also contains certain customary post-Closing covenants regarding (a) maintenance of books and records; (b) tax matters; and (c) indemnification of directors and officers and the purchase of tail directors’ and officers’ liability insurance.
In addition, AIRO agreed to obtain its required shareholder approvals in the manner required under its governing documents and applicable law for the execution, delivery and performance of the Business Combination Agreement and each of the ancillary documents to the Business Combination Agreement to which AIRO is or is required to be a party or bound, and the consummation of the transactions contemplated thereby, including the merger.
In the Business Combination Agreement the parties made customary covenants regarding the registration statement on Form S-4 to be filed by ParentCo with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”).
Kernel will distribute a proxy statement to seek the consent of Kernel’s shareholders to, among other things, (i) adopt and approve the Business Combination Agreement and the Transaction; (ii) approve, to the extent necessary, the issuance of any shares in connection with any PIPE/Convertible Note Investment; (iii) approve the certificate of incorporation of Kernel in connection with the Merger; (iv) the appointment of the members of ParentCo’s post-Closing board of directors (the “Post-Closing Board”); and (v) such other matters as Kernel and AIRO shall hereafter mutually determine to be necessary or appropriate in order to effect the Transaction and (vi) the adjournment of the Extraordinary General Meeting, if necessary or desirable in the reasonable determination of Kernel.
The parties agreed that the Post-Closing Board will consist of nine directors, comprised of (i) two directors designated prior to the Closing by Kernel, at least one of whom will be required to qualify as an independent director under Nasdaq rules, and (ii) seven designated by AIRO, at least four of whom will be required to qualify as an independent director under Nasdaq rules.
The parties further agreed to take all action necessary so that the individuals serving as the chief executive officer and chief financial officer, respectively, of ParentCo immediately after the Closing will be the same individuals (in the same office) as that of AIRO immediately prior to the Closing.
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Conditions to Consummation of the Merger
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 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, the obligations of AIRO 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, ParentCo, Kernel Merger Sub, and AIRO Merger Sub 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, ParentCo, Kernel Merger Sub, and AIRO Merger Sub 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 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, fifty percent (50%) of any net cash proceeds of any capital investment raise and/or convertible debt raise conducted by AIRO during the period beginning on the date of the Business Combination Agreement 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, ParentCo, Kernel Merger Sub, and AIRO Merger Sub to consummate the Transaction are subject to the satisfaction of the following additional Closing conditions, in addition to the delivery by AIRO 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 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 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 AIRO 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 and its subsidiaries to Kernel’s reasonable satisfaction; (vi) the delivery 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 (net of Company cash at Closing) is less than Fifty Million U.S. Dollars ($50,000,000).
Termination
The Business Combination Agreement may be terminated under certain customary and limited circumstances at any time prior to the Closing, including: (i) by mutual written consent of Kernel and AIRO; (ii) by either Kernel and AIRO if any of the conditions to Closing have not been satisfied or waived by August 5, 2024 (the “Outside Date”), provided that any breach or violation of any representation, warranty or covenant of the party seeking termination is not the cause of the failure of the Closing to occur by the Outside Date; (iii) by either Kernel or AIRO if a governmental authority of competent jurisdiction has issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Transaction, and such order or other action has become final and non-appealable; (iv) by either Kernel or AIRO in the event of the other party’s uncured breach, if such breach would result in the failure of a closing condition (and so long as the terminating party is not also in breach under the Business Combination Agreement); (v) by Kernel if there has been a Material Adverse Effect on AIRO and its subsidiaries on a consolidated basis following the date of the Business Combination Agreement that is uncured and continuing; and (vi) by either Kernel or AIRO if Kernel and AIRO holds a special meeting of its shareholders to approve the Business Combination Agreement and the Transaction, and the required approvals related to the Business Combination Agreement and the Transaction of either Kernel’s shareholders or AIRO’s shareholders is not obtained.
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If the Business Combination Agreement is terminated, all further obligations of the parties under the Business Combination Agreement (except for certain obligations related to publicity, confidentiality, fees and expenses, trust fund waiver, no recourse, termination and general provisions) will terminate, and no party to the Business Combination Agreement will have any further liability to any other party thereto except for liability for fraud. The Business Combination Agreement does not provide for any termination fees.
Trust Account Waiver
AIRO agrees that it and its affiliates will not have any right, title, interest or claim of any kind in or to any monies in Kernel’s Trust Account held for its Public Shareholders, and agrees not to, and waives any right to, make any claim against the Trust Account (including any distributions therefrom).
Post-Business Combination Ownership of ParentCo
The ownership of ParentCo immediately following the Business Combination will be as follows:
● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
The Business Combination will not close under any scenario unless AIRO waives the Unencumbered Cash closing condition and the NTA Proposal is approved.
The table below shows the issued and outstanding shares under each of the Scenarios set forth above following the closing of the Business Combination:
Share Ownership in ParentCo (4)
| Issued and Outstanding Share Basis | No Redemption (1) | % Owned | 50% Redemption (2) | % Owned | Maximum Redemption (3) | % Owned | ||||||||||||||||||
| Kernel Public Shares | 509,341 | 0.6 | % | 254,671 | 0.3 | % | - | - | % | |||||||||||||||
| Kernel Founder Shares | 7,618,750 | 8.4 | % | 7,618,750 | 8.5 | % | 7,618,750 | 8.5 | % | |||||||||||||||
| AIRO shareholders (1) | 77,000,000 | 85.9 | % | 77,000,000 | 86.1 | % | 77,000,000 | 86.4 | % | |||||||||||||||
| Extension Shares (2) | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | |||||||||||||||
| Meteora Termination Shares (3) | 50,000 | 0.1 | % | 50,000 | 0.1 | % | 50,000 | 0.1 | % | |||||||||||||||
| Pro Forma common stock at March 31, 2024 | 89,628,091 | 100.0 | % | 89,373,421 | 100.0 | % | 89,118,750 | 100.0 | % | |||||||||||||||
| (1) | Does not reflect closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are not expected to be significant. |
| (2) | Assumes the issuance of Class A common stock under the terms of the Extension Agreement. The agreement calls for an issuance of up to 4,450,000 shares to Sponsor for the payment of extension payments and working capital deposits. | |
| (3) | Assumes the issuance of 50,000 shares of ParentCo common stock to an entity designated by Meteora upon closing of the Business Combination in consideration for termination of the Forward Purchase Agreement. |
| (4) | Excludes (a) an estimated 15,237,500 shares underlying the Public Warrants held by the Kernel Public Stockholders, (b) 8,750,000 shares underlying the Private Placement Warrants held by Sponsor, (c) 266,230 shares underlying the AIRO Warrants, and (d) 1,435,615 shares underlying the AIRO Options. |
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In addition, upon consummation of the Business Combination, there will be outstanding an aggregate of 15,237,500 Public Warrants held by the Kernel Public Shareholders and 8,750,000 Private Placement Warrants held by Sponsor. Each of Kernel’s outstanding whole warrants is exercisable commencing 30 days following Closing for one share of ParentCo Common Stock. Therefore, as of the date of this proxy statement/prospectus, if we assume each outstanding whole warrant is exercised and one share of ParentCo common stock is issued as a result of such exercise, with payment to ParentCo of the exercise price of $11.50 per whole warrant for one whole share, ParentCo’s fully-diluted share capital would increase by a total of 23,987,500 shares, with approximately $275,856,250 paid to ParentCo to exercise the warrants, assuming cash exercise.
The numbers of shares and percentage interests set forth in the above table under the three redemption scenarios also do not take into account (i) shares issuable pursuant to the 2024 Stock Option and Incentive Plan proposed in Shareholder Proposal No. 5: The Incentive Plan Proposal, (ii) shares issuable pursuant to the Employee Stock Purchase Plan proposed in Shareholder Proposal No. 6: The Employee Stock Purchase Plan Proposal, (iii) potential future exercise of the AIRO Warrants for up to 266,230 shares of ParentCo common stock, and (iv) potential future exercise of the AIRO Options for up to 1,435,615 shares of ParentCo common stock. The exercise, issuance or vesting of any of these shares could have a dilutive effect on those Kernel shareholders who do not elect to redeem their shares.
If the actual facts are different than the assumptions set forth above, the share numbers set forth above will be different. For more information, please see the section entitled “Unaudited Pro Forma Combined Financial Information.”
Related Agreements
The reference to and description of any of the following agreements are qualified in their entirety by reference to the full text of such agreement filed with this proxy statement/prospectus or incorporated by reference herein.
Lock-Up Agreement
Simultaneously with the Closing of the Business Combination, all Significant Company Holders (as defined in the Business Combination Agreement) and the Sponsor shall enter into lock-up agreement (the “Lock-up Agreements”) with ParentCo and ParentCo Representative providing for a lock-up period commencing on the Closing Date and ending on the earlier of (A) one year from the Closing or (B) subsequent to the Closing, (x) if the reported last sale price of ParentCo’s common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, right issuances, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination, or (ii) the date Kernel consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of AHAC’s stockholders having the right to exchange their shares of AHAC common stock for cash, securities or other property.
Non-Competition Agreement
Simultaneously with the Closing, all Significant Company Holders (as defined in the Business Combination Agreement) shall enter into non-competition and non-solicitation agreements (the “Non-Competition Agreement”), pursuant to which they will agree not to compete with ParentCo and AIRO. The form of Non-Competition Agreement will be negotiated by Kernel and AIRO in good faith and must be mutually acceptable to both Kernel and AIRO. The Non-Competition Agreements are expected to contain customary provisions.
Registration Rights Agreement
At the Closing, AIRO stockholders shall enter into a registration rights agreement with Kernel providing for the right to demand registrations, piggy-back registrations and shelf registrations with respect to the Merger Consideration shares, in a form mutually agreed to by Kernel and AIRO and duly executed by ParentCo.
Board of Directors and Management Following the Business Combination
The following persons are expected to serve as executive officers and directors of ParentCo following the Business Combination. For biographical information concerning the AIRO executive officers and AIRO designees to the Post-Closing Board, see “Business of AIRO — Executive Officers and Directors of AIRO.” For biographical information concerning the Kernel’s designees to the Post-Closing Board, see “Information About Kernel — Officers and Directors.” In addition, following the Closing, the Post-Closing Board will appoint an additional independent director to the ParentCo Board.
| Name | Age | Position | ||
| Executive Officers: | ||||
| Joseph D. Burns | 62 | Chief Executive Officer, Director | ||
| John Uczekaj | 65 | President, Chief Operating Officer, Director | ||
| Dr. Mariya Pylypiv | 35 | Chief Financial Officer | ||
| Employee Director: | ||||
| Dr. Chirinjeev Kathuria | 59 | Executive Chairman, Director | ||
| Non-Employee Directors: | ||||
| John M. Belcher | 83 | Director | ||
| Gregory D. Winfree | 59 | Director | ||
| Surendra Ajjarapu | 53 | Director | ||
| Donald Fell | 78 | Director |
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Interests of Kernel’s Directors and Officers and Others in the Business Combination
The Sponsor (including certain equity holders of the Sponsor), and certain of Kernel’s directors and executive officers (including Suren Ajjarapu who is Kernel’s chief executive officer and the Sponsor’s controlling equity holder) may have interests in the Business Combination that are different from or in addition to (and which may conflict with) your interests. These interests include:
| ● | unless Kernel consummates a business combination, Kernel’s officers, directors and the Sponsor will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the Trust Account; | |
| ● | as a condition to the IPO, all of the Founder Shares are subject to a lock-up and would be released only if specified conditions were met. In particular, subject to certain limited exceptions, all Founder Shares would be subject to a lock up until the earlier of (A) one year after the completion of Kernel’s Business Combination and (B) subsequent to the Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination or (y) the date on which Kernel completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Kernel’s shareholders having the right to exchange their Class A Ordinary Shares for cash, securities or other property; | |
| ● | the Sponsor will pay an aggregate of $1.00 for their Class B Ordinary Shares and their Private Placement Warrants to the Original Sponsor upon the Closing of the Business Combination. Effectively, the Sponsor paid $0.01 per Class B Ordinary Share, and, in addition, has the right to acquire 8,750,000 shares of common stock at a price of $11.50 per share. Thus, if the price of the stock falls significantly from the initial public offering price of $10.00 per share, our Sponsor will still receive a positive rate of return even in a scenario where our Public Shareholders would experience a negative rate of return in ParentCo from our initial public offering price of $10.00 per share; the Sponsor also has the ability to receive additional returns if our price rises above $11.50 per share; | |
●
| the aggregate dollar amount that the Sponsor and its affiliates have at risk depending on the completion of an initial business combination, including the Business Combination, is approximately $83.6 million, as of July 3, 2024, which amount includes the current value of securities held, assuming a trading price of $11.01 per Kernel Class A Ordinary Share and $0.13 per Kernel Public Warrants. | |
●
| the Sponsor (and one of Kernel’s directors who is a member of the Sponsor) has invested in Kernel an aggregate of $4,450,000, comprised of a total of $4,450,000 loaned by investors to the Sponsor, which is in turn loan by the Sponsor to Kernel, which is responsible for paying the all principal on the loans, and $360,000 owed by Kernel to the Sponsor in accrued expenses related to rent for office space, administrative and support services. | |
●
| in addition, the aggregate dollar amount that the Kernel officers and directors have at risk depending on the completion of an initial business combination, including the Business Combination, is approximately $4,450,000, as of July 3, 2024 (assuming that the future value of ParentCo Ordinary Shares will be the same as the current value of each Kernel Ordinary Share), which as described above consists of the 4,450,000 shares of ParentCo Common Stock to be issued to Kernel’s officers and directors in accordance with the terms of Kernel’s IPO within 10 days following the closing of the Business Combination that shall be exchanged for the equivalent number of ParentCo Ordinary Shares. | |
●
| even if the trading price of the shares of ParentCo Common Stock were as low as $0.0000001 per share, the aggregate market value of the Kernel Class B Ordinary Shares alone (without taking into account the value of the Private Placement Warrants) would exceed the initial investment in Kernel by the Sponsor. As a result, the Sponsor is likely to be able to make a substantial profit on their investment in Kernel at a time when shares of ParentCo Common Stock have lost significant value. On the other hand, if Kernel liquidates without completing a business combination before August 5, 2024, the Sponsor will likely lose its entire investment in Kernel. |
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| ● | the Private Placement Warrants purchased by the Sponsor will be worthless if a business combination is not consummated; | |
| ● | the Sponsor has agreed that the Private Placement Warrants and the underlying securities will not be sold or transferred by it until after Kernel has completed a business combination, subject to limited exceptions; | |
| ● | the Sponsor and its affiliates’ total potential ownership in the ParentCo, assuming the exercise and conversion of all of securities following the consummation of the Business Combination, is estimated to comprise approximately 8.4% of outstanding ParentCo Ordinary Shares in a no redemption scenario, 8.4% of outstanding ParentCo Ordinary Shares in a 50% redemption scenario and 8.4% of outstanding ParentCo Ordinary Shares in a maximum redemption scenario (see the section entitled “Security Ownership of Certain Beneficial Owners and Management” for more information). | |
| ● | the fact that the Sponsor will pay aggregate of $1.00 for its Founder Shares to the Original Sponsor upon Closing and such securities will have a significantly higher value at the time of the Business Combination, and that in the case the Business Combination is not consummated Kernel would liquidate rendering such Founder Shares worthless; | |
| ● | the Sponsor is currently the owner of 7,493,750 Kernel Class B Ordinary Shares and 8,750,000 Kernel Private Placement Warrants, each of which is exercisable to purchase one Kernel Class A Ordinary Share, which it purchased for $1.00 due to the Original Sponsor at the Closing of the Business Combination. If an initial business combination, such as the Business Combination, is not completed by August 5, 2024, Kernel will be required to dissolve and liquidate. In such event, the Kernel Class B Ordinary Shares currently held by the Sponsor, which were acquired from the Original Sponsor will be worthless because the Sponsor has agreed to waive its rights to any liquidation distribution; | |
| ● | the fact that the Sponsor has agreed not to redeem any of the Founder Shares in connection with a shareholder vote to approve a proposed business combination; | |
| ● | the anticipated continuation of two of our existing directors, Suren Ajjarapu and Donald Fell, as directors of ParentCo; | |
| ● | the continued indemnification of our existing directors and officers prior to the Business Combination and the continuation of our directors’ and officers’ liability insurance after the Business Combination; | |
| ● | that pursuant to the IPO Registration Rights Agreement, the Kernel Restricted Shareholders are entitled to registration of the shares of ParentCo Common Stock into which the Founder Shares will automatically convert at the time of the consummation of the Business Combination; | |
| ● | the fact that our Sponsor is entitled to receive reimbursement of $10,000 per month under an administrative support agreement for office space, secretarial and administrative support provided to Kernel, for which, as of the date hereof, our Sponsor has already been paid $0; | |
| ● | if Kernel does not complete a business combination by August 5, 2024, the proceeds from the sale of the Private Placement Warrants will be included in the liquidating distributions to Kernel’s Public Shareholders and the Private Placement Warrants will expire worthless; and | |
| ● | the Sponsor will receive 4,450,000 shares of ParentCo common stock in consideration for the extension loans only upon the completion of the Business Combination; | |
| ● | if the Trust Account is liquidated, including in the event Kernel is unable to complete a business combination within the required time period, the Sponsor has agreed to indemnify Kernel to ensure that the proceeds in the Trust Account are not reduced below $10.00 per Public Share by the claims of prospective target businesses with which Kernel has entered into an acquisition agreement or claims of any third party for services rendered or products sold to Kernel, but only if such a vendor or target business has not executed a waiver of any and all rights to seek access to the Trust Account. |
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Kernel’s Board considered these interests, among other matters when reviewing and evaluating the proposed terms of the Business Combination, how they might impact the identification of and negotiations with AIRO, and how they might impact the ParentCo if the Business Combination were to be completed. In reviewing these interests, and others deemed relevant by the Kernel Board, the Board concluded that, on the whole, these interests provided an alignment between the interests of Kernel’s officers and directors, on the one hand, and those of Kernel’s shareholders, on the other hand.
The Existing Kernel Governing Documents provides that the doctrine of corporate opportunity will not apply with respect to any of its officers or directors in circumstances where the application of the doctrine would conflict with any fiduciary duties or contractual obligations they may have, except as set forth in the Existing Kernel Governing Documents. Certain of Kernel’s officers and directors presently have, and any of them in the future may have additional, fiduciary or contractual obligations to other entities, including entities that are affiliates of the Sponsor, pursuant to which such officer or director is or will be required to present a business combination opportunity to such entity. Accordingly, if any of our officers or directors becomes aware of a business combination opportunity which is suitable for an entity to which he has then-current fiduciary or contractual obligations, he will honor his fiduciary or contractual obligations to present such business combination opportunity to such entity, subject to their fiduciary duties under applicable law. Kernel’s Board evaluated and considered three (3) potential target companies as candidates for a possible business combination transaction with Kernel, and Kernel’s Board did not believe that the other fiduciary duties or contractual obligations of its officers and directors materially affected Kernel’s ability to source a potential business combination. Kernel’s Board considered the factors supporting, and risks and uncertainties related to, a business combination with AIRO as set forth above under “Recommendation of the Kernel Board and Reasons for the Business Combination,” and did not believe that such other fiduciary duties or contractual obligations impacted such consideration.
Background of the Business Combination
The following is a discussion of the background of Kernel’s efforts to effect an initial business combination, and its negotiations with and evaluation of AIRO, the Business Combination Agreement and related matters. The terms of the Business Combination are the result of negotiations among the representatives of Kernel and AIRO. The following also sets forth a description of the background of these negotiations and the resulting Business Combination.
Kernel is a blank check company incorporated in the Cayman Islands on November 10, 2020. Kernel was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses, while the company may pursue an initial business combination with any business in any industry, commercial sector or location, the initial focus was on identifying acquisition opportunities in the commerce Enablement, Supply Chain, Logistics and related Technology Infrastructure sectors.
On February 5, 2021, Kernel completed the Kernel IPO of 30,475,000 Units at a price of $10.00 per Unit, generating gross proceeds to Kernel of $304,750,000 before underwriting discounts and expenses, which includes the full exercise by the underwriter of its over-allotment option in the amount of 3,975,000 Units. Each Unit consists of one Kernel Class A Ordinary Share and one-half of one Public Warrant. Each whole Public Warrant will become exercisable at a price of $11.50 per share on the later of 30 days after the completion of an initial business combination or 12 months from the closing of the Kernel IPO and will expire five years after the completion of Kernel’s initial business combination, or earlier upon redemption or liquidation. On February 5, 2021, simultaneously with the closing of the Kernel IPO, Kernel completed the Private Placement, which involved the private sale of an aggregate of 8,750,000 Private Placement Warrants at a purchase price of $1.00 per Private Placement Warrant, generating gross proceeds to Kernel of $8,750,000. The Private Placement Warrants are identical to the Public Warrants sold as part of the Units in the Kernel IPO, except that Kernel’s original sponsor agreed not to transfer, assign or sell any of the Private Placement Warrants (except to certain permitted transferees) until 30 days after the completion of Kernel’s initial business combination.
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Upon the closing of the Kernel IPO (including the over-allotment) and the Private Placement, a total of $304,750,000, comprised of the proceeds from the Kernel IPO, was placed in the Trust Account at J.P. Morgan Chase Bank, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee. Except with respect to interest earned on the funds held in the Trust Account that may be released to Kernel to pay its taxes (less up to $100,000 of interest to pay any dissolution expenses), the funds held in the Trust Account will not be released from the Trust Account until the earliest of (i) the completion of Kernel’s initial business combination, (ii) the redemption of any of Kernel’s Public Shares properly submitted in connection with a shareholder vote to amend the Kernel Charter (a) to allow redemption in connection with Kernel’s initial business combination or modify the substance or timing of its obligation to redeem 100% of Kernel’s Public Shares if it does not complete its initial business combination by the deadline or (b) with respect to any other provision relating to shareholders’ rights or pre-business combination activity, and (iii) the redemption of Kernel’s Public Shares if it is unable to complete its initial business combination by the deadline, subject to applicable law.
Prior to the completion of the Kernel IPO, neither Kernel, nor anyone on its behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction with Kernel.
Kernel’s management and the Kernel Board evaluated and considered three (3) potential target companies as candidates for a possible business combination transaction with Kernel.
Kernel reviewed the potential acquisition opportunities based on criteria that were the same or similar to the criteria that the Kernel Board used in evaluating the potential Business Combination with AIRO (as discussed in greater detail below), which included, among other things, quantitative criteria, such as evaluation metrics customarily used by industry analysts in comparison to their publicly listed peers, as well as qualitative criteria, such as the markets in which potential target companies operate and their competitive positions and “track records” within such markets, the experience of the potential target companies’ management teams and the potential for revenue and earnings growth. Kernel focused on sectors and companies that its management believed would benefit from being a publicly traded company on a stock exchange in the United States.
Representatives of Kernel also engaged in significant due diligence and detailed discussions directly with the senior executives of AIRO prior to executing the non-binding letter of intent with AIRO.
Kernel’s management team reviewed and evaluated potential acquisitions based on the factors discussed under “Recommendation of the Kernel Board and Reasons for the Business Combination”, below, as well as the following criteria:
| ● | Benefits from a Public Currency and Access to Public Equity Markets. Access to the public equity markets could allow the target company to utilize additional forms of capital, enhancing its ability to pursue accretive acquisitions, high-return capital projects, and/or strengthen its balance sheet and recruit and retain key employees through the use of publicly-traded equity compensation. | |
| ● | Has a Strong Competitive Position and Growing Platform. Kernel sought to invest in companies that we believed possess not only established business models and sustainable competitive advantages, but also a growing platform for equity investors. | |
| ● | Operated by a Talented and Incentivized Management Team. Kernel focused on companies with strong and experienced management teams that desire a significant equity stake in the post-business combination company. We sought to partner with a management team and/or seller who is well-incentivized and aligned in an effort to create shareholder value. | |
| ● | Benefits from Our Ability to Uniquely Structure Transaction to Unlock and Maximize Value. Kernel looked for situations where our experience in public markets could add value for both sides of the transaction. |
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Kernel’s management and the Kernel Board, in consultation with Kernel’s business and financial advisors, determined that the other alternative business combination targets with which Kernel negotiated a letter of intent were less attractive than AIRO when taking into account the factors described above and the various targets’ respective management teams, strategies, business prospects, valuations and likelihood of execution. Ultimately, Kernel determined to abandon each of its other potential acquisition opportunities, as further described in more detail below, either because (i) Kernel concluded that the alternative target companies or the terms of a potential business combination with such alternative target companies would not be suitable for Kernel, particularly in comparison to the opportunity for a business combination with AIRO or (ii) the alternative target companies did not have, or could not quickly and easily prepare, SEC-compliant financial statements on a schedule consistent with Kernel’s timing limitations, or posed extensive structuring, regulatory or other considerations that likely would delay a transaction or create uncertainty that was not acceptable to the Kernel Board.
For additional details regarding the reasons of the Kernel Board for approving the Business Combination, see the section of this proxy statement entitled “Recommendation of the Kernel Board and Reasons for the Business Combination.”
Timeline of the Business Combination
As discussed herein, immediately after the completion of the Kernel IPO on February 5, 2021, Kernel’s management began to seek potential candidates for a business combination. In addition, Kernel was contacted by a number of individuals and entities with respect to potential business combination opportunities.
Between December 28, 2022, the date VKSS Capital LLC became the sponsor, and January 10, 2023, the date on which Kernel entered into a non-binding letter of intent with AIRO, Kernel’s management team and representatives of Kernel:
| ● | identified and evaluated three (3) potential acquisition target companies; each of which were screened for completion of audit requirement, quality of investor decks, complete data rooms, evaluation of the target market, the company position in the market, initial management interaction and enterprise market value vs asking price for business combination. | |
| ● | entered into non-disclosure agreements (“NDAs”), containing customary terms regarding confidentiality, without imposing exclusivity or other similar restrictions, with three (3) companies that Kernel’s management team considered to be potential appropriate acquisition targets (including AIRO), to facilitate due diligence review of confidential materials from these companies; | |
| ● | completed reviews, and had discussions with management, of three (3) companies that were considered by Kernel’s management team to be appropriate targets (including AIRO); and | |
| ● | negotiated non-binding letters of intent with one potential target company, (including the non-binding letter of intent with AIRO executed by the parties on January 10, 2023 as more particularly described below). |
Of the three (3) potential acquisition targets with which Kernel entered into preliminary discussions, Kernel proceeded to enter into more substantive negotiations with AIRO Group Holdings, Inc. The remaining two candidates were eliminated for not being able to produce timely audited financial results or because the valuation for a potential merger was deemed by Kernel’s Board to be unreasonable.
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On January 3, 3023, Mr. Chirinjeev Kathuria, Executive Chairman contacted Mr. Ajjarapu about a potential target operating in the aerospace industry (AIRO), which was interested in potentially engaging in a business combination transaction with a SPAC.
Kernel indicated its interest in pursuing a possible transaction with AIRO and on January 4, 2023, Kernel entered into an NDA with AIRO and received access to the Data Room for due diligence.
On January 9, 2023, the board of Kernel attended an AIRO management presentation. During the presentation, Mr. Joe Burns, CEO and Mr. John Uczekaj, President and COO of AIRO, described AIRO’s corporate structure with four companies, competitive advantages, current indications and growth potential, in addition to providing an overview of AIRO’s business plan. The presentation was followed by a question-and-answer session.
Previously Kernel had engaged Nelson Mullins Riley & Scarborough LLP (“Nelson Mullins”) to represent Kernel on any new targets. Nelson Mullins, in addition to Kernel, began the review of the information in the data room. The non-binding letter of intent (the “LOI”) between Kernel and AIRO was executed on January 10, 2023.
From January 10, 2023 until March 3, 2023, representatives of Kernel and AIRO met daily to discuss the Business Combination. Mr. Ajjarapu (CEO of Kernel) and Dr. Chirinjeev Kathuria (Executive Chairman of AIRO) participated in each such meeting. Other high-level executives, financial advisors and legal counsel of each of Kernel and AIRO participated in some of the meetings. The meetings lasted, on average, 15 minutes. The meetings primarily centered around key commercial deal terms, such as AIRO’s valuation, minimum cash requirements, the structure of the earnout, whether a PIPE would be needed (and potential providers therefor), and the need to enter into the Forward Purchase Agreement. Once the parties determined that the Forward Purchase Agreement should be entered into, the parties discussed potential providers and key terms governing such arrangements. The parties also discussed the need to conclude AIRO’s audit in a timely fashion and the need for, and status of, the required third party opinions. During the aforementioned meetings, AIRO also stated they wanted to be entitled to contingent consideration in the form of earn-out shares. The Kernel Board deemed this request to be reasonable and desired to provide this additional consideration to incentivize AIRO’s management team to drive up shareholder value.
On January 18, 2023, the Kernel Board discussed AIRO, the evaluation of the company and the need for a fairness opinion. The Kernel Board unanimously voted to move forward with a fairness opinion. The Mentor Group, Inc. was contacted and engaged to provide the board an evaluation of AIRO.
Kernel made a preliminary, verbal offer to AIRO, which valued AIRO at $600 million. Kernel relied on a third-party evaluation and information provided by AIRO dated early 2022 which showed the average price to sales for comparable companies was 1.1x. AIRO projected the revenue in 2026 at $710 million which was lowered to determine the initial verbal offer. The offer was deemed too low by AIRO. Kernel’s initial offer developed into the final valuation through the various meetings between Kernel and AIRO, detailed conversations with AIRO’s executives and financial team, and separate conversations with Kernel’s financial advisors, discounted cash flow analyses prepared by The Mentor Group, legal, technical and financial due diligence. Kernel’s receipt of The Mentor Group initial enterprise value range of $655 million to $1.8 billion. The Kernel Board concluded that $770 million represented a fair price, and agreed to reflect such price in the Business Combination Agreement.
The Forward Purchase Agreement was executed on February 28, 2023 and was subsequently terminated as of November 27, 2023.
On March 1, 2023, the Kernel Board discussed the logistics and update of the Business Combination Agreement with Nelson Mullins. There were no red flags during the firm’s due diligence. The Mentor Group, Inc. discussed the fairness opinion with the board, evaluation techniques, and similar companies – both private and public. The Mentor Group, Inc. (“Mentor”) believes the valuation to be fair to Public Shareholders. The resolutions to approve the AIRO transaction were voted on and unanimously adopted by the Kernel Board. The Forward Purchase Agreement was discussed and ratified by the Kernel Board.
On March 2, 2023, following push back from AIRO with regards to the minimum cash amount, Kernel proposed a $50 million minimum cash amount provided that certain monies would count toward the $50 million, as further provided for in the Business Combination Agreement.
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On March 3, 2023, after Kernel and Nelson Mullins completed due diligence, the Business Combination Agreement was signed.
After the signing of the Business Combination Agreement, Mr. Michael Peterson met with the AIRO group in New Mexico, toured the facilities with Mr. Uczekaj and reported back at the Board Meeting on March 28, 2023.
On March 28, 2023, Mr. Ajjarapu met with Mr. Burns and Mr. Uczekaj in Lakeland, FL as they were in attendance at an air show.
Between January 10, 2023 and April 4, 2023, the companies worked on drafting the proxy statement/prospectus for approval of the Business Combination.
Satisfaction of 80% Test
Pursuant to Nasdaq listing rules, the target business or businesses that Kernel acquires must collectively have a fair market value equal to at least 80% of the balance of the funds in the Trust Account (less any deferred underwriting commissions and taxes payable on interest earned) at the time of the execution of a definitive agreement for Kernel’s initial business combination (such requirement, the “80% test”). As of the date of the execution of the Business Combination Agreement, the balance of the funds in the Trust Account was approximately $77.6 million (excluding deferred underwriting commissions) and 80% thereof represents approximately $62.1 million. The Kernel Board determined that AIRO’s enterprise value was $770 million, thus satisfying the 80% test.
In addition, as discussed below, there was a valuation analysis performed by Mentor in connection with the Business Combination for the benefit of the Kernel Board. Mentor presented a range of fair market value for AIRO on an enterprise value basis and concluded that the shares being issued by Kernel to the equity holders of AIRO, valued at the $10.00 per share, was fair from a financial point of view to the public shareholders of Kernel. The opinion as to the fairness of the Business Combination consideration to be paid by Kernel (the “Opinion”) was addressed exclusively to the Kernel Board, for the exclusive use of the Kernel Board, and is subject to various assumptions, limitations and restrictions as set forth in the Opinion. For information purposes only, a copy of the Opinion is attached as Annex F to this proxy statement, and any description of the Opinion or the conclusions reached contained herein is necessarily qualified in its entirety by reference to the text of that Mentor Opinion. The Opinion is not a recommendation to any person as to how to vote on any matter presented in this proxy statement.
Anticipated Accounting Treatment
The Business Combination will be accounted for as a reverse recapitalization, in accordance with GAAP. Under this method of accounting, although Kernel will issue shares for outstanding equity interests of AIRO in the Business Combination, Kernel will be treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination will be treated as the equivalent of AIRO issuing stock for the net assets of Kernel, accompanied by a recapitalization. The net assets of Kernel will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of AIRO.
Opinion of The Mentor Group
As discussed herein, the Kernel Board engaged The Mentor Group, Inc. (“Mentor”) in connection with the Business Combination Agreement to provide to the Kernel Board a fairness opinion related thereto. Such engagement was entered into pursuant to the terms of an engagement letter dated as of January 18, 2023.
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Mentor is an internationally recognized independent valuation consulting firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions and valuations for corporate and other purposes. Kernel selected Mentor to provide a fairness opinion on the basis of Mentor’s reputation, its experience in the preparation of delivery of fairness opinions in connection with business combination transactions of other companies in the investment management industry and a cost structure that was appropriate for a company of Kernel’s size and for the size of the Business Combination. Neither Kernel, AIRO, nor any of their respective affiliates have or have had during the past two years any material relationship with Mentor, or its affiliates, and no relationship with Mentor, or its affiliates, not related to the Business Combination as currently contemplated between Kernel, AIRO, New AIRO, or any of their respective affiliates.
On March 1, 2023, the Kernel Board held a video meeting with several representatives from Nelson Mullins, Kernel’s counsel, and several representatives from Mentor in which Mentor provided a final presentation regarding the Transaction and delivered its opinion letter (the “Opinion”) to the Kernel Board on March 6, 2023 stating that, as of the date of the Opinion and subject to and based on the assumptions made, procedures followed, matters considered, limitations of the review undertaken and qualifications contained in such Opinion, the purchase price to be paid by Kernel to the equity holders of AIRO in the Transaction for AIRO as provided in the Business Combination Agreement is fair from a financial point of view to the public shareholders of Kernel. The summary of the Opinion in this proxy statement is qualified in its entirety by reference to the full text of the Opinion, which is attached to this proxy statement as Annex F and includes the definition of the Transaction, and sets forth the assumptions made, procedures followed, matters considered, qualifications and limitations on the review undertaken by Mentor in connection with arriving at and delivering the Opinion.
The Opinion was furnished solely to be utilized by the Kernel Board as only one input to consider in its process of analyzing the Business Combination and it did not constitute a recommendation to the Kernel Board (or any member thereof), any shareholder of Kernel or any other person as to how such person should vote or invest in Kernel or otherwise act with respect to the Transactions or in any other manner.
In arriving at its Opinion, Mentor looked solely at the enterprise value of AIRO as a going concern and on a standalone basis immediately prior to the date of the Opinion and did not consider any impact on value (positive or negative) of the consummation of the Transaction on the value of AIRO. Mentor performed the reviews, analyses and inquiries as it, in its professional judgment and experience, deemed necessary and appropriate under the circumstances and based on the nature of the Business Combination Agreement. Mentor’s activities, included, without limitation:
| 1) | reviewed a draft dated March 3, 2023 of the Business Combination Agreement (the “Agreement”); | |
| 2) | reviewed the as filed proof of the Form S-1 Registration Statement regarding the Merger dated August 12, 2022; | |
| 3) | reviewed certain financial information of AIRO Group Holdings provided by the Company; | |
| 4) | reviewed AIRO’s Advanced Air Solutions Forecast Investor Presentation dated November 2, 2022; | |
| 5) | reviewed AIRO’s Advanced Air Solutions Company Presentation Investor Presentation dated November 2, 2022; | |
| 6) | reviewed AIRO’s Advanced Air Solutions Company Presentation Investor Presentation dated November 2, 2022; | |
| 7) | reviewed the JAUNT Journey eVTOL Overview dated October 14, 2022; | |
| 8) | reviewed Raymond James’ The AIRO Group Illustrative Valuation Overview dated February 2022; | |
| 9) | compared the financial and operating performance of the Company with that of other public companies that we deemed to be relevant; | |
| 10) | considered publicly available financial terms of certain transactions that we deemed to be relevant; and, | |
| 11) | conducted such other financial studies, analyses and inquiries and considered such other information and factors as we deemed appropriate. |
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In rendering its Opinion, Mentor assumed and relied upon the accuracy and completeness of the most recent financial statements, forecasts and other information provided to it by Kernel and AIRO, and Mentor further relied upon the assurances of such companies’ management that they were, in each case, unaware of any facts or circumstances that would make the information provided to Mentor incomplete or misleading. Mentor relied upon and assumed, without independent verification, that:
| (a) | the representations and warranties of all parties to the Agreement identified and all other related documents and instruments that are referred to therein are true and correct, |
| (b) | each party to the Agreement and other related documents and instruments will fully and timely perform all of the covenants and agreements required to be performed by such party, |
| (c) | all conditions to the consummation of the Merger will be satisfied without waiver thereof, and |
| (d) | the Merger will be consummated in a timely manner in accordance with the terms described in the Agreement and other related documents and instruments. We have relied upon and assumed, without independent verification, that: |
| (i) | the Merger will be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and |
| (ii) | all governmental, regulatory, and other consents and approvals necessary for the consummation of the Merger will be obtained and that no delay, limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have an effect on the Merger or the Company that would be material to our analyses or the Opinion. |
In arriving at its Opinion, Mentor did not perform any independent appraisal or physical inspection of the assets of AIRO. Mentor’s analysis does not constitute an examination, review or compilation of prospective financial statements in accordance with standards established by the American Institute of Certified Public Accountants (“AICPA”). Mentor did not express an opinion or any other form of assurance on the reasonableness of the underlying assumptions or whether any of the prospective financial statements, if used, are presented in conformity with AICPA presentation guidelines. Furthermore, they noted there will usually be differences between prospective and actual results because events and circumstances frequently do not occur as expected and those differences may be material.
The Opinion was predicated on the assumption that the final executed form of the Business Combination Agreement would not differ in any material respect from the draft of the Agreement they examined, that the conditions to the Transactions as set forth in the draft of the Agreement would be satisfied, and that the Transactions would be consummated on a timely basis in the manner contemplated by the Agreement.
In performing its analyses, Mentor considered business, economic, market and other conditions as they existed on, and could be evaluated as of, the date of its Opinion. Mentor noted that no company or business used in Mentor’s analyses for comparative purposes is identical to AIRO, and an evaluation of the results of those analyses is not entirely mathematical and is subject to assumptions and estimates. The estimates contained in the financial projections and the implied reference range values indicated by Mentor’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of Kernel or AIRO. Much of the information used in, and accordingly the results of, Mentor’s analyses are inherently subject to substantial uncertainty. As a result, Mentor did not and does not assume any responsibility if the future results are materially different from those forecasts.
Mentor’s Opinion was only one of many factors considered by the Kernel Board in evaluating the proposed Mergers. Neither Mentor’s Opinion nor its analyses were determinative of the transaction consideration or of the views of the Kernel Board, or Kernel’s management with respect to any determinations made regarding the Transactions or the consideration with respect thereto. The type and amount of consideration payable as the Transactions consideration were determined through negotiation between Kernel and AIRO, and the decision to enter into the Business Combination Agreement was solely that of the Kernel Board.
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Financial Analyses
In preparing its Opinion, Mentor performed a variety of analyses, including those described herein. The summary of Mentor’s analyses is not a complete description of the analyses underlying Mentor’s Opinion. The preparation of such an opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither Mentor’s Opinion nor its underlying analyses is readily susceptible to partial analysis or summary description. Mentor arrived at its Opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, Mentor made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all its analyses, and Mentor believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors, without considering all analyses, methodologies and factors, could create a misleading or incomplete view of the processes underlying Mentor’s analyses and Opinion.
For purposes of its analyses, Mentor reviewed a number of financial metrics, including enterprise value, which generally is the value as of a specified date of the relevant company’s outstanding equity securities (taking into account outstanding options and other securities convertible, exercisable or exchangeable into or for equity securities of the applicable acquisition target) plus the amount of its net debt (i.e., the amount of its outstanding indebtedness, non-convertible preferred stock, capital lease obligations and non-controlling interests less the amount of cash and cash equivalents on its balance sheet).
Mentor based the estimated range of enterprise values of AIRO using the Discounted Cash Flow (“DCF”) method, the Guideline Public Company method, and the Guideline Transaction Method, as described below.
Value Range. For purposes of its financial analyses, with Kernel’s consent, Mentor determined a range of values for AIRO as follows:
| (in $ Thousands) | ||||||||
| Valuation Method | Low | High | ||||||
| Income Approach | ||||||||
| DCF Method | $ | 842,727.0 | $ | 3,641,202.9 | ||||
| Market Approach | ||||||||
| Guideline Public Company Method | 72,145.0 | 733,518.1 | ||||||
| Guideline Transaction Method | $ | 330,083.1 | $ | 2,854,250.0 | ||||
Discounted Cash Flows Analysis
Mentor utilized a forecast of revenue and profitability for AIRO that was included in an investor presentation dated November 2, 2022. The forecast shows revenue, cost of sales, gross profit, operating expenses, and EBITDA for the four lines of business of AIRO and the AIRO Group Parent. The forecast spanned the years 2022 through 2029.
Mentor reviewed certain financial data for guideline public companies (GPCs) with publicly traded equity securities that Mentor deemed relevant based on the GPC’s operations that may in certain respects and based on Mentor’s professional judgment and experience, be considered similar to those of AIRO, including government defense companies, industrial contractors/providers and air transportation companies. No company used in the analyses as a comparison is directly comparable to AIRO. The companies we reviewed for our analysis are as follows:
| i) | Archer Aviation Inc. | |
| ii) | Blade Air Mobility, Inc. | |
| iii) | Eve Holding, Inc. | |
| iv) | Vertical Aerospace Ltd. | |
| v) | Joby Aviation, Inc. | |
| vi) | Lilium N.V. | |
| vii) | AeroVironment, Inc. | |
| viii) | Kratos Defense & Security Solutions, Inc. | |
| ix) | BWX Technologies, Inc. | |
| x) | Leonardo DRS, Inc. |
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Based on the financial data from the GPCs and industry information from Microbilt Corporation, Mentor determined appropriate industry levels of working capital and capital expenditures for application to the forecast of AIRO. Mentor estimated an industry-derived discount rate using the GPCs (the weighted average cost of capital, or “WACC”) for the Company, which was applied to the adjusted cash flows of AIRO to calculate the present value of the discrete cash flows for the years 2023 through 2029. Mentor applied two different discount rates to the forecast cash flows: i) the WACC that was determined directly from application of the capital asset pricing model (“CAPM”) and ii) the WACC plus an additional risk factor of 400 basis points. After applying the two selected discount rates to the discrete period forecast cash flows, Mentor summed the present values for all periods for the two selected discount rates.
Next, Mentor determined terminal values to add to the sum of the discrete period cash flows. Mentor determined a multiple of revenue based on consensus estimates of revenue for the GPCs for the year 2027, which multiple was applied to the 2027 revenue of AIRO, then discounted to present value by the two selected discount rates.
A multiple of EBITDA was determined using four transactions of companies deemed similar to AIRO. The selected EBITDA multiple was multiplied by the forecast 2029 EBITDA of AIRO then discounted to present value by the two selected discount rates. Lastly, the sum of the discrete period cash flows determined from the two selected discount rates was added to the appropriate terminal value determined from the revenue and EBITDA multiples, resulting in four estimates of enterprise value based upon the AIRO forecast and the industry-derived WACC.
Guideline Public Company Method
For each of the GPCs, Mentor calculated historical and forecast multiples of revenue, EBITDA and EBIT. For several of the early-stage pre-revenue GPCs, the historical were not available to calculate the historical multiples. The forecast multiples were calculated based on consensus estimates of revenue, EBITDA and EBIT for calendar years 2023 through 2027. For the historical and forecast multiples a variety of statistics were calculated and applied to the corresponding financial performance measure of AIRO. Given the early development of most of the GPCs, there were not enough multiples of historical or forecast profitability (EBITDA and EBIT) to be meaningful. Mentor therefore applied the first and third quartile revenue multiples for the years 2023 through 2027 to the forecast revenue of AIRO to determine a range of implied enterprise values for AIRO. The implied forecast enterprise value for each year was then discounted to present value using the industry-derived WACC.
Guideline Transacted Company Method
Mentor reviewed transactions of companies that Mentor deemed relevant based on the acquired companies’ operations that may in certain respects and based on Mentor’s professional judgment and experience, be considered similar to those of AIRO. As for the GPCs, Mentor calculated historical multiples of revenue, EBITDA and EBIT. A variety of statistics were calculated to determine appropriate multiples to apply to the corresponding financial performance measure of AIRO. In addition, regression analyses were performed on acquired company revenue and EBITDA to determine the low-end multiples of the range of multiples to apply to AIRO. For the upper-end revenue multiple of the range, Mentor selected the third quartile of the acquired company revenue multiples and for the upper-end EBITDA multiple Mentor selected the mean EBITDA multiple of the acquired company EBITDA multiples. Mentor applied the selected multiples to the 2027 forecast revenue and EBITDA of AIRO to determine a range of implied enterprise values for AIRO. The implied forecast enterprise value was then discounted to present value using the industry-derived WACC.
Value Conclusion
Having calculated nine ranges of implied enterprise value for AIRO using the three methodologies, Mentor applied weightings to five of the ranges based on Mentor’s judgement that AIRO would reach a long-term sustainable growth rate between the years 2027 and 2029. Mentor gave a total weighting of 40% to the implied enterprise values determined using the Income Approach and a total weighting of 60% to the implied enterprise values determined using the Market Approach. Mentor then summed the weighted values for both the low and high ranges of value to give a final range of enterprise value of AIRO. Lastly, Mentor determined implied multiples of revenue and EBITDA based on the concluded enterprise values using AIRO’s forecast 2027 revenue and EBITDA.
Fees and Scope of Engagement
Kernel has paid Mentor a fee of $90,000 in connection with delivery of its Opinion and has reimbursed Mentor for its reasonable expenses incurred in connection with the Kernel engagement and has agreed to indemnify Mentor, any controlling person of Mentor and each of their respective directors, officers, employees, agents and affiliates against specified liabilities, including liabilities under the federal securities laws.
The Opinion was delivered to the Kernel Board subject to the conditions, scope of engagement, limitations and understanding set forth in the Opinion and subject to the understanding that the obligations of Mentor in connection with the Business Combination Agreement are solely corporate obligations. Mentor was not asked to opine on, and the Opinion did not express any views with respect to, (i) any other terms of the Business Combination Agreement, (ii) Kernel’s underlying business decision to effect the Business Combination Agreement, (iii) the basic business decision to proceed with or effect the Business Combination Agreement, (iv) the merits of the Business Combination Agreement relative to any alternative transaction or business strategy that may be available to Kernel, (v) the amount or nature of the compensation to any officer, director or employee or any class of such persons relative to the compensation to be received by the holders of any class of securities, creditors or other constituencies of Kernel or AIRO in the Business Combination Agreement, or relative to or in comparison with the consideration payable in connection with the Transaction, (vi) the fairness of the Transaction to any particular group or class of securities (other than the equity securities of Kernel which were acquired upon the consummation of the Transaction), creditors, or other constituencies of Kernel, (vii) the solvency, creditworthiness or fair value of AIRO or any other participant in the Transaction under any applicable laws relating to bankruptcy, insolvency or similar matters, (viii) the procedural fairness of the Transaction or other possible measures of fairness, (ix) the independent fair value of AIRO (except as expressly set forth in the Opinion), (x) the fairness of the Forward Purchase Agreement, or (xi) the fairness of such valuation to Kernel or Kernel’s shareholders (independent from the Transaction), taken as a whole.
The Kernel Board considered a wide variety of factors in connection with its evaluation of the Business Combination. In light of the complexity of those factors, the Kernel Board, as a whole, did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it took into account in reaching its decision. Individual directors may have given different weight to different factors. This explanation of Kernel’s reasons for the Business Combination and all other information presented in this section is forward-looking. Therefore, you should read this explanation in light of the factors discussed under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factor Summary.”
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Projected Financial Information
Kernel and AIRO do not as a practice make public projections as to future revenues, earnings or other results. However, in connection with the Board’s evaluation of the Business Combination, and as part of Kernel’s due diligence process, in January 2023, AIRO’s management delivered financial projections to Kernel, including projections for revenue, cost of sales, gross profit, operating expenses and EBITDA. Between January 2023 and March 2, 2023, Kernel reviewed AIRO’s capitalization table, conducted other due diligence and held discussions with AIRO management and advisors in order to verify the fairness and accuracy of the projections for use. During this period, AIRO’s projections were revised, producing final projections that were the culmination of a collaborative effort between Kernel and AIRO management, which Kernel ultimately compiled and provided to AIRO for review and approval. Those projections for fiscal year 2023 through fiscal year 2026 were subsequently provided to potential investors. In the view of Kernel and AIRO’s management, the financial projections were prepared on a reasonable basis reflecting consultation with AIRO’s management’s currently available estimates and judgments, and presents, to the best of Kernel and AIRO’s management’s knowledge and belief, the expected course of action and the expected future financial performance of AIRO at the time. However, this information does not reflect statements of fact and should not be relied upon as being necessarily indicative of future results, and readers of this document are cautioned not to rely on the prospective financial information. AIRO’s financial projections reflect numerous estimates and assumptions made by Kernel and AIRO, with respect to industry performance and competition, general business, economic, market and financial conditions and matters specific to AIRO’s business, all of which are difficult to predict and many of which are beyond AIRO’s control, including, among others, risks and uncertainties set forth under “Risk Factors” contained elsewhere in this proxy statement/prospectus. In developing the financial projections, numerous material assumptions were made, with respect to AIRO’s business for the periods covered by the financial projections, including but not limited to gross margin improvements as a result of the add-on transaction, timing of the increase in our sales force, timing of our access to capital from the business combination.
Since the financial projections cover multiple years, such information by its nature becomes less reliable with each successive year. These financial projections are subjective in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience, events and business developments. The inclusion of financial projections should not be regarded as an indication that Kernel or AIRO, their boards of directors, or their respective affiliates, advisors or other representatives considered, or now considers, such financial projections necessarily to be predictive of actual future results or to support or fail to support your decision whether to vote for or against the Business Combination Proposal. Furthermore, the financial projections do not purport to be a complete description of the financial analyses performed or factors considered.
Kernel has included summary information from such financial projections in the tables below to give its shareholders access to certain previously non-public information because such information was considered by the Board for purposes of evaluating the Merger and potential investors for purposes of evaluating the investment. You are cautioned not to rely on the projections in making a decision regarding the transaction, as the projections are materially different than actual results. The combined entity will not refer back to the financial projections in future periodic reports filed under the Exchange Act.
The unaudited financial projections were not prepared with a view toward public disclosure, nor were they prepared with a view toward complying with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for the preparation and presentation of prospective financial information, or GAAP. Neither Kernel’s independent registered public accounting firm nor the independent registered public accounting firm of AIRO has audited, reviewed, compiled, or performed any procedures with respect to the accompanying financial projections for the purpose of its inclusion herein, and accordingly, neither of them expresses an opinion or provides any other form of assurance with respect thereto for the purpose of this proxy statement/prospectus. The report of the independent registered public accounting firm of AIRO included elsewhere in this proxy statement/prospectus relates to the historical financial information of AIRO. It does not extend to the financial projections and should not be read to do so. Furthermore, the financial projections do not take into account any circumstances or events occurring after the signing of the Merger Agreement and should not be relied upon as being necessarily indicative of future results, and readers of this proxy statement/prospectus are cautioned not to place undue reliance on the financial projections. The accompanying financial projections include financial measures that were not calculated in accordance with GAAP. Due to the forward-looking nature of these projections, specific quantifications of the amounts that would be required to reconcile such projections to GAAP measures are not available and our management believes that it is not feasible to provide accurate forecasted non-GAAP reconciliations. Non-GAAP measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to GAAP results.
The financial projections and related financial support were provided to the Kernel Board during the course of the diligence process between January 2023 and February, 2023, as they were being completed and finalized by AIRO.
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The Kernel Board discussed the competition and AIRO’s utilization of capital from the business combination to address the market conditions specific to the expansion of the business, market development initiatives directed at the consumer and opportunities to expand the commercial efforts to targeted markets. The final projections were discussed and approved by the Kernel board on March 1, 2023, where the Board also approved the business combination with AIRO.
The projections for AIRO’s Advanced Avionics division are based on established trends, taking into account the introduction of a large format display and additional functionality for a large installed base. In AIRO’s Training Division, the projections align with historic operating trends and also consider the purchase of additional training schools and aircraft. We have incorporated the anticipated growth in the commercial and military industry-wide training requirements. The projections for AIRO’s Uncrewed Air Systems division are based on established trends and industry growth projections. This includes the expected increase in commercial drone manufacturing and the growing governmental purchases of military drones, driven by the success of AIRO’s products in Ukraine and expanding demand in other NATO countries as well as domestically. Furthermore, the expansion and implementation of the AIRO_Link product globally contributes to these projections. As for AIRO’s Electric Air Mobility division, the projections primarily rely on service-related contracts awarded in advance of airframe manufacturing. These assumptions have been carefully considered and are deemed reasonable based on the industry trends and the Company’s strategic initiatives.
The projections treat non-cash compensation-based expenses as cash expenses. The projections were also based on estimates by our management with respect to tax assets and rates, capital expenditures, depreciation and amortization, changes in net working capital, and stock-based compensation.
Accordingly, there can be no assurance that the financial projections are indicative of the future performance of Kernel or AIRO or that actual results will not differ materially from those presented in the financial projections. Inclusion of the financial projections in this proxy statement/prospectus should not be regarded as a representation by any person that the results contained in the financial projections will be achieved.
Considering that the special meeting will be held months after the date the financial projections referenced above were prepared, as well as the uncertainties inherent in any forecasted projections, shareholders are cautioned not to place undue reliance on the financial projections.
The financial projections regarding AIRO’s anticipated future operations on which the Kernel Board relied, for fiscal year 2023 through fiscal year 2026, is as follows:
| In Millions $ | 2023E | 2024E | 2025E | 2026E | ||||||||||||
| Revenue | ||||||||||||||||
| Advanced Avionics | $ | 11.5 | $ | 18.1 | $ | 23.3 | $ | 27.7 | ||||||||
| Training | 12.6 | 58.0 | 153.5 | 200.2 | ||||||||||||
| Uncrewed Air Systems | 17.9 | 63.8 | 175.1 | 308.2 | ||||||||||||
| Electric Air Mobility | 0.6 | 1.5 | 7.0 | 14.0 | ||||||||||||
| Total Revenue | 42.6 | 141.4 | 358.9 | 550.1 | ||||||||||||
| EBITDA(1) | ||||||||||||||||
| Advanced Avionics | (3.0 | ) | 0.5 | 2.8 | 4.1 | |||||||||||
| Training | (2.0 | ) | 15.3 | 63.7 | 93.1 | |||||||||||
| Uncrewed Air Systems | 3.5 | 21.7 | 83.5 | 156.7 | ||||||||||||
| Electric Air Mobility | (28.0 | ) | (46.6 | ) | (63.1 | ) | (69.4 | ) | ||||||||
| Corporate, including synergies | 10.2 | 13.1 | 11.7 | 12.5 | ||||||||||||
| Total EBITDA | (19.3 | ) | 4.0 | 98.6 | 197.0 | |||||||||||
| (1) | EBITDA represents net income (loss) before interest expense, provision for income taxes, depreciation and amortization and includes the impact of stock-based compensation, which is treated as if it were a cash expense in calculating total operating expenses. |
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Certain Material U.S. Federal Income Tax Considerations of the Redemption
The following discussion, insofar as it relates to matters of United States federal tax law and regulations or legal conclusions with respect thereto, reflects the opinion of Nelson Mullins Riley & Scarborough LLP, counsel to Kernel, as to the material U.S. federal income tax consequences of the Business Combination. It is intended that the Domestication will constitute a tax-free reorganization within the meaning of Section 368(a)(l)(F) of the Code. Assuming that the Domestication so qualifies, U.S. Holders (as defined in such section) of Kernel Ordinary Shares will be subject to Section 367(b) of the Code and, as a result:
| ● | A U.S. Holder of Kernel Ordinary Shares whose Kernel Ordinary Shares have a fair market value of less than $50,000 on the date of the Domestication will not recognize any gain or loss and will not be required to include any part of Kernel’s earnings in income; | |
| ● | A U.S. Holder of Kernel Ordinary Shares whose Kernel Ordinary Shares have a fair market value of $50,000 or more, but who on the date of the Domestication owns (actually and constructively) less than 10% of the total combined voting power of all classes of Kernel Ordinary Shares entitled to vote will generally recognize gain (but not loss) on the exchange of Kernel Ordinary Shares for shares in the Company (a Delaware corporation) pursuant to the Domestication. As an alternative to recognizing gain, such U.S. Holders may file an election to include in income as a dividend the “all earnings and profits amounts,” (as defined in Treasury Regulation Section 1.367(b)-2(d)) attributable to their Kernel Ordinary Shares, provided certain other requirements are satisfied. Kernel does not expect to have significant cumulative earnings and profits, if any, on the date of the Domestication; and | |
| ● | A U.S. Holder of Kernel Ordinary Shares whose Kernel Ordinary Shares have a fair market value of $50,000 or more, and who on the date of the Domestication owns (actually and constructively) 10% or more of the total combined voting power of all classes of Kernel Ordinary Shares entitled to vote will generally be required to include in income as a dividend the “all earnings and profits amount,” (as defined in Treasury Regulation Section 1.367(b)-2(d))) attributable to its Kernel Ordinary Shares, provided certain other requirements are satisfied. Kernel does not expect to have significant cumulative earnings and profits, if any, on the date of the Domestication. |
Furthermore, even if the Domestication qualifies as a reorganization under Section 368(a) of the Code, a U.S. Holder of Kernel Ordinary Shares may still recognize gain (but not loss) upon the exchange of its Kernel Ordinary Shares for the common stock of the Delaware corporation pursuant to the Domestication under the “passive foreign investment company,” or PFIC, rules of the Code equal to the excess, if any, of the fair market value of the common stock of the Delaware corporation received in the Domestication and the U.S. Holder’s adjusted tax basis in the corresponding Kernel Ordinary Shares surrendered in exchange therefor. The tax on any such gain so recognized would be imposed at the rate applicable to ordinary income and an interest charge would apply. In such event, the U.S. Holder’s aggregate tax basis in the common stock of the Delaware corporation received in connection with the Domestication should be the same as the aggregate tax basis of Kernel Ordinary Shares surrendered in the transaction, increased by any amount included in the income of such U.S. Holder under the PFIC rules.
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Vote Required for Approval
The Business Combination (and consequently, the Business Combination Agreement and the transactions contemplated thereby, including the Business Combination) will be approved and adopted only if the holders of at least a majority of the outstanding Kernel Ordinary Shares vote “FOR” the Business Combination Proposal. Failure to vote by proxy or to vote in person at the Extraordinary General Meeting or an abstention from voting will have the same effect as a vote “AGAINST” the Business Combination Proposal.
The Business Combination Proposal is conditioned on the approval of the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal.
The Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal are conditioned on the approval of the Business Combination at the Extraordinary General Meeting.
As of the Record Date, Kernel’s Sponsor, directors and officers have agreed to vote any Kernel Ordinary Shares owned by them in favor of the Business Combination. As of the date hereof, the Sponsor, directors and officers have not purchased any Public Shares.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE
APPROVAL OF THE BUSINESS COMBINATION PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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ShAREHOLDER PROPOSAL NO. 2: THE DOMESTICATION PROPOSAL
Overview
As a condition to closing the Business Combination, the Kernel Board has unanimously approved, and Kernel shareholders are being asked to consider and vote upon a proposal to approve, a change of Kernel’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. To effect the Domestication, Kernel will file an application to deregister with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and file a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which Kernel will be domesticated and continue as a Delaware corporation.
In connection with the Domestication, (i) each issued and outstanding Class A Ordinary Share of Kernel will convert by operation of law, on a one-for-one basis, into one share of Kernel Class A common stock; (ii) each issued and outstanding Class B Ordinary Share of Kernel will convert by operation of law, on a one-for-one basis, into one share of Kernel Class B common stock; (iii) each issued and outstanding Public Warrant to purchase one Class A Ordinary Shares of Kernel will automatically convert by operation of law, on a one-for-one basis, into one Public Warrant to purchase one share of Kernel Class A common stock at an exercise price of $11.50 per share on the terms and conditions set forth in the warrant agreement; (iv) each issued and outstanding Private Placement Warrant to purchase one Class A Ordinary Share of Kernel will automatically convert by operation of law, on a one-for-one basis, into one Private Placement Warrant to purchase one share of Kernel Class A common stock at an exercise price of $11.50 per share on the terms and conditions set forth in the warrant agreement; and (v) the governing documents of Kernel will be amended and restated as described in this proxy statement/prospectus. Immediately following the Domestication, in connection with clauses (i), (ii) and (iii), (x) each share of Kernel Class B common stock shall convert automatically, on a one-for-one basis, into one share of Kernel Class A common stock; (y) the Kernel Class A common stock will be reclassified as Kernel common stock; and (z) each issued and outstanding Kernel Unit that has not been previously separated into the underlying Class A Ordinary Share and the underlying one-half of one Kernel Public Warrant prior to the Domestication will be cancelled and will entitle the holder thereof to one share of Kernel common stock and one-half of one Kernel Public Warrant, with each whole Public Warrant representing the right to purchase one share of Kernel common stock at an exercise price of $11.50 per share on the terms and subject to the conditions set forth in the Kernel warrant agreement. No fractional warrants will be issued upon the separation of Units and only whole warrants will trade. Accordingly, unless you hold at least two Units of Kernel, you will not be able to receive or trade a warrant when the Units are separated.
The Domestication Proposal, if approved, will approve a change of Kernel’s jurisdiction of incorporation from the Cayman Islands to the State of Delaware. Accordingly, while Kernel is currently incorporated as an exempted company under the Cayman Islands Companies Law, upon the Domestication, Kernel will be governed by the DGCL. We encourage shareholders to carefully consult the information set out below under “Comparison of Corporate Governance and Shareholder Rights.” Additionally, we note that if the Business Combination Proposal and Domestication Proposal are approved, then Kernel will also ask its shareholders to approve the ParentCo Charter Amendment Proposal which, if approved, will replace the Existing ParentCo Governing Documents with a new certificate of incorporation and bylaws of ParentCo. The Proposed ParentCo Governing Documents differ in certain material respects from the Existing Kernel Governing Documents and we encourage shareholders to carefully consult the information set out below under “Shareholder Proposal No. 3: The ParentCo Charter Amendment Proposal” the Existing Kernel Governing Documents, and the Proposed ParentCo Governing Documents, attached hereto as Annex B and Annex C.
Reasons for the Domestication
The Kernel Board believes that there are significant advantages to us that will arise as a result of a change of our domicile to Delaware. Further, the Kernel Board believes that any direct benefit that the DGCL provides to a corporation also indirectly benefits its shareholders, who are the owners of the corporation. The Kernel Board believes that there are several reasons why a reincorporation in Delaware is in the best interests of Kernel and its shareholders. As explained in more detail below, these reasons can be summarized as follows:
| ● | Prominence, Predictability, and Flexibility of Delaware Law. For many years Delaware has followed a policy of encouraging incorporation in its state and, in furtherance of that policy, has been a leader in adopting, construing, and implementing comprehensive, flexible corporate laws responsive to the legal and business needs of corporations organized under its laws. Many corporations have chosen Delaware initially as a state of incorporation or have subsequently changed corporate domicile to Delaware. Because of Delaware’s prominence as the state of incorporation for many major corporations, both the legislature and courts in Delaware have demonstrated the ability and a willingness to act quickly and effectively to meet changing business needs. The DGCL is frequently revised and updated to accommodate changing legal and business needs and is more comprehensive, widely used and interpreted than other state corporate laws. This favorable corporate and regulatory environment is attractive to businesses such as ours. |
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| ● | Well-Established Principles of Corporate Governance. There is substantial judicial precedent in the Delaware courts as to the legal principles applicable to measures that may be taken by a corporation and to the conduct of a company’s board of directors, such as under the business judgment rule and other standards. Because the judicial system is based largely on legal precedents, the abundance of Delaware case law provides clarity and predictability to many areas of corporate law. We believe such clarity would be advantageous to Kernel, its board of directors and management to make corporate decisions and take corporate actions with greater assurance as to the validity and consequences of those decisions and actions. Further, investors and securities professionals are generally more familiar with Delaware corporations, and the laws governing such corporations, increasing their level of comfort with Delaware corporations relative to other jurisdictions. The Delaware courts have developed considerable expertise in dealing with corporate issues, and a substantial body of case law has developed construing Delaware law and establishing public policies with respect to corporate legal affairs. Moreover, Delaware’s vast body of law on the fiduciary duties of directors provides appropriate protection for Kernel’s shareholders from possible abuses by directors and officers. | |
| ● | Increased Ability to Attract and Retain Qualified Directors. Reincorporation from the Cayman Islands to Delaware is attractive to directors, officers, and shareholders alike. Kernel’s incorporation in Delaware may make Kernel more attractive to future candidates for the Kernel Board, because many such candidates are already familiar with Delaware corporate law from their past business experience. To date, we have not experienced difficulty in retaining directors or officers, but directors of public companies are exposed to significant potential liability. Thus, candidates’ familiarity and comfort with Delaware laws — especially those relating to director indemnification (as discussed below) — draw such qualified candidates to Delaware corporations. The Kernel Board therefore believes that providing the benefits afforded directors by Delaware law will enable Kernel to compete more effectively with other public companies in the recruitment of talented and experienced directors and officers. The frequency of claims and litigation pursued against directors and officers has greatly expanded the risks facing directors and officers of corporations in carrying out their respective duties. The amount of time and money required to respond to such claims and to defend such litigation can be substantial. While both Cayman Islands Companies Law and Delaware law permit a corporation to include a provision in its governing documents to reduce or eliminate the monetary liability of directors for breaches of fiduciary duty in certain circumstances, we believe that, in general, Delaware law is more developed and provides more guidance than Cayman Islands Companies Law on matters regarding a company’s ability to limit director liability. As a result, we believe that the corporate environment afforded by Delaware will enable Kernel to compete more effectively with other public companies in attracting and retaining new directors. Moreover, Delaware’s vast body of law on the fiduciary duties of directors provides appropriate protection for our shareholders from possible abuses by directors and officers. |
Expected Accounting Treatment of the Domestication
There will be no accounting effect or change in the carrying amount of the consolidated assets and liabilities of Kernel as a result of the Domestication. The business, capitalization, assets and liabilities and financial statements of Kernel immediately following the Domestication will be the same as those of Kernel immediately prior to the Domestication.
Vote Required for Approval
The approval of the Domestication Proposal requires a special resolution under Cayman Islands Companies Law, being passed by at least two-thirds of shareholders as, being entitled to do so, vote in person or by proxy. In computing the majority when a poll is demanded regard shall be had to the number of votes to which each shareholder is entitled by the Existing Kernel Governing Documents. Abstentions and broker non-votes, while considered present for the purposes of establishing a quorum, will not count as votes cast at the Extraordinary General Meeting, and otherwise will have no effect on the proposal.
The Domestication Proposal is conditioned on the approval and adoption of each of the other Proposals.
The Initial Shareholders have agreed to vote all of their Ordinary Shares in favor of the Domestication Proposal.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE
APPROVAL OF THE DOMESTICATION PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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ShAREHOLDER PROPOSAL NO. 3: The PARENTCO Charter Amendment Proposal
Overview
In connection with the Business Combination, Kernel is asking its shareholders to approve by special resolution under Cayman Islands Companies Law the amendment and restatement of the Existing ParentCo Governing Documents by their deletion and replacement with the Proposed ParentCo Charter and Proposed ParentCo Bylaws, in the forms attached hereto as Annex B and Annex C, respectively. If the ParentCo Charter Amendment Proposal is approved, ParentCo will replace its current certificate of incorporation and bylaws with the Proposed ParentCo Charter and Proposed ParentCo Bylaws in the forms attached to this proxy statement/prospectus as Annex B and Annex C, respectively, which, in the judgment of the Kernel Board, is necessary to adequately address the needs of ParentCo and its shareholders following the Closing of the Business Combination.
Under the Business Combination Agreement, the approval of the ParentCo Charter Amendment Proposal is a condition to the consummation of the Business Combination and the effectiveness of the ParentCo Charter Amendment Proposal is also conditioned on the approval of each of the other Proposals presented at the Extraordinary General Meeting. Therefore, if the ParentCo Charter Amendment Proposal is not approved, the Business Combination will not be completed unless the condition is waived. Similarly, if the other Proposals are not each approved and if the Business Combination is not completed, the ParentCo Charter Amendment Proposal will have no effect, even if approved by the Kernel shareholders.
Proposed ParentCo Charter
The following table sets forth a summary of the principal differences between the Existing Kernel Governing Documents and the Proposed ParentCo Charter. This summary compares the governing documents that impact the rights of shareholders before and after giving effect to the Business Combination and related transactions. This summary is qualified by reference to the complete text of the Existing Kernel Governing Documents and the Proposed ParentCo Charter. All shareholders are encouraged to read the Proposed ParentCo Charter in its entirety for a more complete description of its terms.
| Existing Kernel Governing Documents | Proposed ParentCo Charter | |||
| Number of Authorized Shares | The Existing Kernel Governing Documents authorize 551,000,000 shares, consisting of 500,000,000 Class A Ordinary Shares, 50,000,000 Class B Ordinary Shares, and 1,000,000 preference shares, each having a par value of $0.0001. | The Proposed ParentCo Charter authorizes 310,000,000 shares, consisting of 300,000,000 shares of common stock and 10,000,000 shares of preferred stock, each having a par value of $0.0001. | ||
Classification of Shares
| The Existing Kernel Governing Documents authorize Class A Ordinary Shares, Class B Ordinary Shares and undesignated preferred stock.
| The Proposed ParentCo Charter authorizes shares of common stock and undesignated preferred stock. | ||
| Name | Kernel Group Holdings, Inc. | AIRO Group, Inc. | ||
| Duration of Existence | The Existing Kernel Governing Documents provide that if Kernel does not consummate the Business Combination and fails to complete an initial business combination within 24 months from the closing of the IPO or during any extension period (subject to the requirements of law), it will be required to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account to the Public Shareholders. | Perpetual. | ||
| Provisions Specific to a Blank Check Company | The Existing Kernel Governing Documents set forth various provisions related to our operations as a blank check company prior to the consummation of an initial business combination. | None. | ||
Composition of the Board
| The Existing Kernel Governing Documents provide that directors shall be divided into three classes: Class I, Class II and Class III. The Class I directors shall stand elected for a term expiring at Kernel’s first annual general meeting, the Class II directors shall stand elected for a term expiring at Kernel’s second annual general meeting and the Class III directors shall stand elected for a term expiring at Kernel’s third annual general meeting. Commencing at Kernel’s first annual general meeting, and at each annual general meeting thereafter, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual general meeting after their election. All directors shall hold office until the expiration of their respective terms of office and until their successors shall have been elected and qualified. | The Proposed ParentCo Charter provides that the directors, other than those who may be elected by the holders of any series of undesignated preferred stock, shall be classified, with respect to the terms for which they severally hold office, into three classes. The Board of Directors shall assign directors into classes at the time the classification becomes effective. The initial Class I Directors shall serve for a term expiring at the first annual meeting of stockholders to be held after the filing of the Proposed ParentCo Charter, the initial Class II Directors shall serve for a term expiring at the second annual meeting of stockholders held after the filing of the Proposed ParentCo Charter, and the initial Class III Directors shall serve for a term expiring at the third annual meeting of stockholders to be held after the filing of the Proposed ParentCo Charter. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Notwithstanding the foregoing, the directors elected to each class shall hold office until their successors are duly elected and qualified or until their earlier resignation, death or removal. Vacancies that occur during a year may be filled by the Board of Directors to fill the remainder of the full term of the departing director. Any increase or decrease in the number of directors shall be apportioned by the Board among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. | ||
| Removal of Directors | The Existing Kernel Governing Documents provide that prior to the closing of a Business Combination, Kernel may by ordinary resolution of the holders of the Class B Ordinary Shares remove any director. Prior to the closing of a Business Combination, holders of Class A Ordinary Shares have no right to vote on the appointment or removal of any director. | The Proposed ParentCo Charter provides that directors may only be removed for cause and only by the affirmative vote of holders of not less than two thirds (2/3) of the voting power of all then outstanding shares of capital stock entitled to vote in the election of directors, voting as a single class, subject to the rights of the holders of Preferred Stock to elect and remove directors. Written notice, including the alleged grounds for removal, must be given to the director at least 45 days prior to the annual or special meeting at which it is proposed to remove a director from office. | ||
| Special Meetings of Stockholders | No similar provision in the Existing Kernel Governing Documents. | The Proposed ParentCo Charter provides that only matters set forth in the notice of a special meeting of stockholders may be considered or acted on at the special meeting. | ||
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Proposed ParentCo Bylaws
In addition to the above summary of the Proposed ParentCo Charter, below is a summary of the Proposed ParentCo Bylaws. This summary is qualified by reference to the complete text of the Proposed ParentCo Bylaws. All shareholders are encouraged to read the Proposed ParentCo Bylaws in its entirety for a more complete description of its terms.
Pursuant to the Proposed ParentCo Bylaws, the registered office of ParentCo shall be located at either its principal place of business in the State of Delaware or the office of the corporation or individual acting as ParentCo’s registered agent in Delaware.
Except as otherwise provided by applicable law, the Proposed ParentCo Charter, or the Proposed ParentCo Bylaws, the presence, in person or by proxy, at a stockholders meeting of the holders of shares of outstanding capital stock of ParentCo representing a majority of the voting power of all outstanding shares of capital stock of ParentCo entitled to vote at such meeting shall constitute a quorum for the transaction of business at such meeting, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of shares representing a majority of the voting power of the outstanding shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. If a quorum shall not be present or represented by proxy at any meeting of the stockholders, the chairman of the meeting may adjourn the meeting from time to time until a quorum shall attend.
At any stockholders meeting, every stockholder entitled to vote may vote in person or by proxy. If authorized by the board, the voting by stockholders or proxy holders at any meeting conducted by remote communication may be effected by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which ParentCo can determine that the electronic transmission was authorized by the stockholder or proxy holder. The board, in its discretion, or the chairman of the meeting of stockholders, in such person’s discretion, may require that any votes cast at such meeting shall be cast by written ballot.
At all meetings of stockholders at which a quorum is present, the election of directors shall be determined by a plurality of the votes cast by the stockholders present in person or represented by proxy at the meeting and entitled to vote thereon. All other matters presented to the stockholders at a meeting at which a quorum is present shall be determined by the vote of a majority of the votes cast by the stockholders present in person or represented by proxy at the meeting and entitled to vote thereon, unless the matter is one upon which, by applicable law, the Proposed ParentCo Charter, the Proposed ParentCo Bylaws, or applicable stock exchange rules, a different vote is required, in which case such provision shall govern and control the decision of such matter.
The Proposed ParentCo Bylaws provide that stockholders seeking to bring business before ParentCo’s annual meeting of stockholders, or to nominate candidates for election as directors at ParentCo’s annual meeting of stockholders, must provide timely notice of their intent in writing. To be timely, a stockholder’s notice will need to be received by the company secretary at ParentCo’s principal executive offices not later than the close of business on the 90th day nor earlier than the opening of business on the 120th day prior to the anniversary date of the immediately preceding annual meeting of stockholders. Pursuant to Rule 14-8 of the Exchange Act, proposals seeking inclusion in ParentCo’s annual proxy statement must comply with the notice periods contained therein. Pursuant to Rule 14a-19 of the Exchange Act, stockholders seeking to solicit proxies in support of nominees, other than ParentCo’s nominees must comply with certain notice periods contained therein. The Proposed ParentCo Bylaws also specify certain requirements as to the form and content of a stockholders’ meeting. These provisions may preclude ParentCo’s stockholders from bringing matters before ParentCo’s annual meeting of stockholders or from making nominations for directors at ParentCo’s annual meeting of stockholders.
The Proposed ParentCo Bylaws may be adopted, amended, altered or repealed by the stockholders of ParentCo, provided, however, that in addition to any vote of the holders of any class or series of capital stock of ParentCo required by applicable law or the Proposed ParentCo Charter, the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of capital stock of ParentCo entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders to adopt, amend, alter or repeal the Proposed ParentCo Bylaws.
Reasons for the Amendments to the Existing ParentCo Governing Documents
In the judgment of the Kernel Board, the Proposed ParentCo Governing Documents are necessary to address the needs of ParentCo and its stockholders following the Closing of the Business Combination. In particular:
| ● | The greater number of authorized shares of capital stock is necessary for ParentCo to have sufficient shares to complete the Business Combination. Additionally, the Kernel Board believes that it is important for ParentCo to have available for issuance a number of authorized shares sufficient to support growth and to provide flexibility for future corporate needs. The Kernel Board believes that these additional shares will provide ParentCo with needed flexibility to issue shares in the future in a timely manner and under favorable circumstances without incurring the risk, delay and potential expense incident to obtaining stockholder approval for a particular issuance. |
| ● | The classification of directors and removal of directors only for cause and only upon the affirmative vote of two-thirds (2/3) of the voting power of all then outstanding shares of capital stock entitled to vote generally in the election of directors are intended to encourage experience and leadership stability on the Post-Closing Board. The Kernel Board believes that providing for a classified board of directors will assure desirable continuity in leadership and policy following the Business Combination. |
Vote Required for Approval
The ParentCo Charter Amendment Proposal will be approved and adopted in its entirety only if the holders of at least a majority of the outstanding Kernel Ordinary Shares vote “FOR” the ParentCo Charter Amendment Proposal and each of the Business Combination Proposal, the Domestication Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal are also approved at the Extraordinary General Meeting. Failure to vote by proxy or to vote virtually at the Extraordinary General Meeting or an abstention from voting will have the same effect as a vote “AGAINST” the ParentCo Charter Amendment Proposal.
The approval and adoption of the ParentCo Charter Amendment Proposal is conditioned on the approval of the Business Combination Proposal, the Domestication Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal at the Extraordinary General Meeting.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE “FOR”
THE APPROVAL OF THE PARENTCO CHARTER AMENDMENT PROPOSAL AND THE PROPOSED PARENTCO CHARTER.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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SHAREHOLDER PROPOSAL NO. 4: The Nasdaq Proposal
Overview
In connection with the Business Combination and pursuant to the Business Combination Agreement, we intend to effect (subject to customary terms and conditions, including the Closing) the issuance of:
| ● | an aggregate of approximately 95,934,699 shares of ParentCo common stock at Closing | |
| ● | up to 33,000,000 shares of ParentCo common stock as earnout shares; | |
| ● | up to 23,987,500 ParentCo warrants to purchase up to 23,987,500 shares of ParentCo common stock; | |
| ● | ParentCo warrants, converted from the AIRO Warrants, to purchase up to 266,230 shares of ParentCo common stock; and | |
| ● | options to purchase up to 1,435,615 shares of ParentCo Common Stock. |
For further information, please see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal,” as well as the annexes to this proxy statement/prospectus.
Why Kernel Needs Shareholder Approval
We are seeking shareholder approval of the stock issuances described above in order to comply with Nasdaq Listing Rule 5635(a), (b) and (d).
Under Nasdaq Listing Rule 5635(a), shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in connection with the acquisition of another company if such securities are not issued in a public offering for cash and: (i) the common stock has or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such common stock (or securities convertible into or exercisable for common stock); or (ii) the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock or securities.
Under Nasdaq Listing Rule 5635(b), shareholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a “change of control” of the registrant. Although Nasdaq has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b), Nasdaq has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control.
Under Nasdaq Listing Rule 5635(d), shareholder approval is required for a transaction other than a public offering involving the sale, issuance or potential issuance by an issuer of common stock (or securities convertible into or exercisable for common stock) at a price that is less than the greater of book or market value of the stock if the number of shares of common stock to be issued is or may be equal to 20% or more of the common stock, or 20% or more of the voting power, outstanding before the issuance.
Shareholder approval of the Nasdaq Proposal is also a condition to the closing under the Business Combination Agreement.
Effect of Proposal on Current Shareholders
If the Nasdaq Proposal is adopted, we will issue 95,934,699 shares of ParentCo common stock as Merger Consideration at the closing of the Business Combination, up to 33,000,000 shares of ParentCo common stock as earn-out shares in the future upon satisfaction of certain conditions set forth in the Business Combination Agreement, warrants to purchase 24,253,730 shares of ParentCo common stock, and options to purchase 1,435,615 shares of ParentCo common stock pursuant to the terms of the AIRO Group Holdings, Inc. Option Plan. For further information, please see the section entitled “Shareholder Proposal No. 1: The Business Combination Proposal – Merger Consideration”.
The ParentCo common stock issued as Merger Consideration at Closing will dilute those Kernel shareholders who become ParentCo stockholders at the First Merger. Further, the issuance of earn-out shares in the future upon satisfaction of the conditions to receive such shares, and the exercise of the warrants or options, may result in further dilution to ParentCo stockholders in the future.
Vote Required for Approval
Approval of the Nasdaq Proposal requires the affirmative vote in person (which would include presence at a virtual meeting) or by proxy of holders of a majority of the outstanding Kernel Class A Ordinary Shares and Class B Ordinary Shares present at the Extraordinary General Meeting and entitled to vote, voting together as a single class. Failure to vote by proxy or to vote in person (which would include presence at a virtual meeting) at the Extraordinary General Meeting and broker non-votes will have no effect on the Nasdaq Proposal so long as a quorum is present. Abstentions will have the same effect as a vote “AGAINST” the Nasdaq Proposal.
The Nasdaq Proposal is conditioned on the approval of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal at the Extraordinary General Meeting.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE NASDAQ PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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SHAREHOLDER PROPOSAL NO. 5: THE INCENTIVE PLAN PROPOSAL
General
Assuming the Business Combination Proposal and the Nasdaq Proposal are approved, shareholders are being asked to approve the 2024 Stock Option and Incentive Plan (the “2024 Plan”). Up to 8,000,000 shares of ParentCo common stock (“ParentCo Common Stock”) will initially be reserved for issuance under the 2024 Plan, and additional shares will become available for issuance under the 2024 Plan each year as described below under “Aggregate Share Limit.” The Kernel Board has approved the 2024 Plan, subject to shareholder approval at the Extraordinary General Meeting.
The Kernel Board believes that stock-based awards focus employees on the objective of creating shareholder value and promoting the success of ParentCo, and that incentive compensation plans like the proposed 2024 Plan are an important attraction, retention and motivation tool for participants in the plan. Therefore, the Kernel Board recommends that our shareholders approve the 2024 Plan.
Summary Description of the 2024 Stock Option and Incentive Plan. The principal terms of the 2024 Plan are summarized below. The following summary is qualified in its entirety by the full text of the 2024 Plan, which appears as Annex D to this proxy statement/prospectus.
Purpose. The purpose of the 2024 Plan is to promote the success of ParentCo by providing an additional means for ParentCo to attract, motivate, retain and reward selected employees and other eligible persons through the grant of awards. Equity-based awards are also intended to further align the interests of award recipients and stockholders.
Administration. The ParentCo Board or its compensation committee will administer the 2024 Plan. The ParentCo Board or the compensation committee thereof may delegate different levels of authority to different committees or persons with administrative and grant authority under the 2024 Plan. (The appropriate acting body, be it the ParentCo Board or the compensation committee is referred to in this proposal as the “Administrator”).
The Administrator has broad authority under the 2024 Plan, including, without limitation, the authority:
| ● | to select eligible participants and determine the type(s) of award(s) that they are to receive; | |
| ● | to grant awards and determine the terms and conditions of awards, including the price (if any) to be paid for the shares or the award and, in the case of share-based awards, the number of shares to be offered or awarded; | |
| ● | to determine any applicable vesting and exercise conditions for awards (including any applicable performance and/or time-based vesting or exercisability conditions) and the extent to which such conditions have been satisfied, or determine that no delayed vesting or exercise is required, to determine the circumstances in which any performance-based goals (or the applicable measure of performance) will be adjusted and the nature and impact of any such adjustment, to establish the events (if any) on which exercisability or vesting may accelerate (including specified terminations of employment or service or other circumstances), and to accelerate or extend the vesting or exercisability or extend the term of any or all outstanding awards (subject in the case of options and stock appreciation rights to the maximum term of the award); | |
| ● | to cancel, modify, or waive ParentCo’s rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding awards, subject to any required consents; | |
| ● | subject to the other provisions of the 2024 Plan, to make certain adjustments to an outstanding award and to authorize the conversion, succession or substitution of an award; | |
| ● | to determine the method of payment of any purchase price for an award or shares of ParentCo’s common stock delivered under the 2024 Plan, as well as any tax-related items with respect to an award, which may be in the form of cash, check, or electronic funds transfer, by the delivery of already-owned shares of ParentCo’s common stock or by a reduction of the number of shares deliverable pursuant to the award, by services rendered by the recipient of the award, by notice and third party payment or cashless exercise on such terms as the Administrator may authorize, or any other form permitted by law; |
| ● | to modify the terms and conditions of any award, establish sub-plans and agreements and determine different terms and conditions that the Administrator deems necessary or advisable to comply with laws in the countries where ParentCo or one of its subsidiaries operates or where one or more eligible participants reside or provide services; | |
| ● | to approve the form of any award agreements used under the 2024 Plan; and | |
| ● | to construe and interpret the 2024 Plan, make rules for the administration of the 2024 Plan, and make all other determinations for the administration of the 2024 Plan. |
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Eligibility. Persons eligible to receive awards under the 2024 Plan include officers or employees of ParentCo or any of its subsidiaries, non-employee directors of ParentCo, and certain consultants and advisors to ParentCo or any of its subsidiaries. We estimate that, immediately following the Closing of the Business Combination, approximately 75 officers and employees of ParentCo and its subsidiaries (including all of ParentCo’s named executive officers), and each of the members of the ParentCo Board who are not employed by ParentCo or any of its subsidiaries (“Non-Employee Directors”), will be considered eligible under the 2024 Plan. In addition, we estimate that none of the individual consultants and advisors engaged by ParentCo and its subsidiaries will then be considered eligible under the 2024 Plan.
Aggregate Share Limit. The maximum number of shares of ParentCo Common Stock that may be issued or transferred pursuant to awards under the 2024 Plan is 8,000,000 shares the “Share Limit”).
In addition, the Share Limit shall automatically increase on January 1 of each calendar year during the term of the 2024 Plan, with the first such increase to occur on January 1, 2025, by an amount equal to the lesser of (i) three percent (3%) of the total number of shares of ParentCo Common Stock issued and outstanding on December 31 of the immediately preceding calendar year or (ii) such number of shares of ParentCo Common Stock as may be established by the Administrator.
Additional Share Limits. The following other limits are also contained in the 2024 Plan. These limits are in addition to, and not in lieu of, the Share Limit for the plan described above.
| ● | The maximum number of shares that may be delivered pursuant to options qualified as incentive stock options granted under the plan is the Share Limit. (For clarity, any shares issued in respect of incentive stock options granted under the plan will also count against the overall Share Limit above.) | |
| ● | Awards that are granted under the 2024 Plan during any one calendar year to any person who, on the grant date of the award, is a Non-Employee Director shall not exceed the number of shares that produce a grant date fair value for the award that, when combined with (i) the grant date fair value of any other awards granted under the 2024 Plan during that same calendar year to that individual in his or her capacity as a Non-Employee Director and (ii) the dollar amount of all other cash compensation payable by ParentCo to such Non-Employee Director for his or her services in such capacity during that same calendar year (regardless of whether deferred and excluding any interest or earnings on any portion of such amount that may be deferred), is $750,000; provided that this limit is $1,000,000 as to any new Non-Employee Director for the calendar year in which the non-employee director is first elected or appointed to the ParentCo Board. For purposes of this limit, the “grant date fair value” of an award means the value of the award as of the date of grant of the award and as determined in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation - Stock Compensation (“ASC 718”) or successor provision but excluding the impact of estimated forfeitures related to service-based vesting provisions. This limit does not apply to, and will be determined without taking into account, any award granted to an individual who, on the grant date of the award, is an officer or employee of ParentCo or one of its subsidiaries. This limit applies on an individual basis and not on an aggregate basis to all Non-Employee Directors as a group. |
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Types of Awards. The 2024 Plan authorizes stock options, stock appreciation rights, and other forms of awards granted or denominated in ParentCo’s common stock or units of ParentCo’s common stock, as well as cash bonus awards. The 2024 Plan retains flexibility to offer competitive incentives and to tailor benefits to specific needs and circumstances. Any award may be structured to be paid or settled in cash.
A stock option is the right to purchase shares of ParentCo’s common stock at a future date at a specified price per share (the “exercise price”). The per share exercise price of an option generally may not be less than the fair market value of a share of ParentCo’s common stock on the date of grant. The maximum term of an option is ten years from the date of grant. An option may either be an incentive stock option or a nonqualified stock option. Incentive stock option benefits are taxed differently from nonqualified stock options, as described under “U.S. Federal Income Tax Consequences of Awards Under the 2024 Plan” below. Incentive stock options are also subject to more restrictive terms and are limited in amount by the Code and the 2024 Plan. Incentive stock options may only be granted to employees of ParentCo or a subsidiary.
A stock appreciation right is the right to receive payment of an amount equal to the excess of the fair market value of share of ParentCo’s common stock on the date of exercise of the stock appreciation right over the base price of the stock appreciation right. The base price will be established by the Administrator at the time of grant of the stock appreciation right and generally may not be less than the fair market value of a share of ParentCo’s common stock on the date of grant. Stock appreciation rights may be granted in connection with other awards or independently. The maximum term of a stock appreciation right is ten years from the date of grant.
The other types of awards that may be granted under the 2024 Plan include, without limitation, stock bonuses, restricted stock, restricted stock units, performance stock, stock units or phantom stock (which are contractual rights to receive shares of stock, or cash based on the fair market value of a share of stock), dividend equivalents which represent the right to receive a payment based on the dividends paid on a share of stock over a stated period of time, or similar rights to purchase or acquire shares, and cash awards.
Any awards under the 2024 Plan (including awards of stock options and stock appreciation rights) may be fully-vested at grant or may be subject to time- and/or performance-based vesting requirements.
Dividend Equivalent Rights. The Administrator may grant dividend equivalent rights as a component of an award of restricted stock units or as a freestanding award. Dividend equivalent rights may be settled in cash or shares of ParentCo Common Stock, or a combination thereof. A dividend equivalent right granted as a component of an award of restricted stock units will provide that such dividend equivalent right shall be settled only upon settlement or payment of, or lapse of restrictions on, such other award, and that such dividend equivalent right shall expire or be forfeited or annulled under the same conditions as such other award.
Assumption and Termination of Awards. If an event occurs in which ParentCo does not survive (or does not survive as a public company in respect of its common stock), including, without limitation, a dissolution, merger, combination, consolidation, conversion, exchange of securities, or other reorganization, or a sale of all or substantially all of the business, stock or assets of ParentCo, awards then-outstanding under the 2024 Plan will not automatically become fully vested pursuant to the provisions of the 2024 Plan so long as such awards are assumed, substituted for or otherwise continued. However, if awards then-outstanding under the 2024 Plan are to be terminated in such circumstances (without being assumed or substituted for), such awards would generally become fully vested (with any performance goals applicable to the award being deemed met at the “target” performance level), subject to any exceptions that the Administrator may provide for in an applicable award agreement. The Administrator also has the discretion to establish other change in control provisions with respect to awards granted under the 2024 Plan. For example, the Administrator could provide for the acceleration of vesting or payment of an award in connection with a corporate event or in connection with a termination of the award holder’s employment.
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Transfer Restrictions. Subject to certain exceptions contained in Section 12(b) of the 2024 Plan, awards under the 2024 Plan generally are not transferable by the recipient other than by will or the laws of descent and distribution and are generally exercisable, during the recipient’s lifetime, only by the recipient. Any amounts payable or shares issuable pursuant to an award generally will be paid only to the recipient or the recipient’s beneficiary or representative. The Administrator has discretion, however, to establish written conditions and procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable federal and state securities laws and are not made for value (other than nominal consideration, settlement of marital property rights, or for interests in an entity in which more than 50% of the voting securities are held by the award recipient or by the recipient’s family members).
Adjustments. As is customary in incentive plans of this nature, each share limit and the number and kind of shares available under the 2024 Plan and any outstanding awards, as well as the exercise or purchase prices of awards, and performance targets under certain types of performance-based awards, are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends, or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property to the stockholders.
No Limit on Other Authority. The 2024 Plan does not limit the authority of the ParentCo Board or any committee to grant awards or authorize any other compensation, with or without reference to ParentCo’s common stock, under any other plan or authority.
Termination of or Changes to the 2024 Plan. The ParentCo Board may amend or terminate the 2024 Plan at any time and in any manner. Stockholder approval for an amendment will be required only to the extent then required by applicable law or deemed necessary or advisable by the ParentCo Board. Unless terminated earlier by the ParentCo Board and subject to any extension that may be approved by stockholders, the authority to grant new awards under the 2024 Plan will terminate on the tenth anniversary of its establishment. Outstanding awards, as well as the Administrator’s authority with respect thereto, generally will continue following the expiration or termination of the plan. Generally speaking, outstanding awards may be amended by the Administrator (except for a repricing), but the consent of the award holder is required if the amendment (or any plan amendment) materially and adversely affects the holder.
U.S. Federal Income Tax Consequences of Awards under the 2024 Plan
The following is a summary of some of the material federal income tax consequences to participants in the 2024 Plan under current federal tax laws. This summary deals with the general tax principles that apply and is provided only for general information. Certain types of taxes, such as state, local or international income taxes, are not discussed. Tax laws are complex and subject to change and may vary depending on individual circumstances and from locality to locality. The summary does not discuss all aspects of income taxation that may be relevant to a participant in light of his or her personal investment circumstances and, among other considerations, does not describe the deferred compensation provisions of Section 409A of the Code to the extent an award is subject to and does not satisfy those rules. This summarized tax information is not tax advice.
With respect to nonqualified stock options, ParentCo is generally entitled to deduct and the participant recognizes taxable income in an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of exercise. With respect to incentive stock options, ParentCo is generally not entitled to a deduction nor does the participant recognize income at the time of exercise, although the participant may be subject to the U.S. federal alternative minimum tax.
The current federal income tax consequences of other awards authorized under the 2024 Plan generally follow certain basic patterns: nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid (if any) only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); restricted stock units, bonuses, stock appreciation rights, cash and stock-based performance awards, dividend equivalents, stock units, and other types of awards are generally subject to tax at the time of payment; and compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, ParentCo will generally have a corresponding deduction at the time the participant recognizes income.
If an award is accelerated under the 2024 Plan in connection with a “change in control” (as this term is used under the Code), ParentCo may not be permitted to deduct the portion of the compensation attributable to the acceleration (“parachute payments”) if it exceeds certain threshold limits under the Code (and certain related excise taxes may be triggered). Furthermore, under Section 162(m) of the Code, the aggregate compensation in excess of $1,000,000 payable to current or former named executive officers (including amounts attributable to equity-based and other incentive awards) may not be deductible by ParentCo in certain circumstances.
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Specific Benefits under the 2024 Plan
ParentCo has not approved any awards that are conditioned upon stockholder approval of the 2024 Plan. ParentCo is not currently considering any other specific award grants under the 2024 Plan.
Vote Required for Approval of the 2024 Plan
The approval of this proposal to adopt the 2024 Plan requires the affirmative vote of the holders of a majority of the Kernel Class A and B Ordinary Shares cast by the stockholders represented “in person” or by proxy and entitled to vote thereon at the Extraordinary General Meeting, voting together as a single class, assuming that a quorum is present. Abstentions will have no effect on the Incentive Plan Proposal. Broker non-votes will have no effect with respect to the approval of Incentive Plan Proposal.
The Incentive Plan Proposal is conditioned on the approval of the Business Combination, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, and the NTA Proposal.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE INCENTIVE PLAN PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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SHAREHOLDER PROPOSAL NO. 6: THE EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
General
Assuming the Business Combination Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal and the Incentive Plan Proposal are approved, stockholders are being asked to approve the Employee Stock Purchase Plan (the “ESPP”). The Kernel Board has approved the ESPP, subject to stockholder approval at the Extraordinary General Meeting.
The purpose of the ESPP is to enable eligible employees of ParentCo and certain of its subsidiaries to use payroll deductions to purchase shares of ParentCo’s common stock (“ParentCo Common Stock”) and thereby enhance the sense of participation in the affairs of ParentCo. The Kernel Board believes that providing eligible employees with the opportunity to acquire an ownership interest in ParentCo has been, and will continue to be, essential to ParentCo’s ability to attract and retain the highest quality and highest performing employees. The Kernel Board also believes that the ownership of shares of ParentCo Common Stock by ParentCo’s employees motivates those employees to contribute to the achievement of ParentCo’s corporate objectives and ParentCo’s success. The ESPP includes two components: a Code Section 423 Component (the “423 Component”) and a non-Code Section 423 Component (the “Non-423 Component”). It is intended for the 423 Component to constitute an “employee stock purchase plan” within the meaning of Section 423(b) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and the 423 Component shall be interpreted in accordance with that intent. The 423 Component will provide potential additional tax benefits to employees, in addition to the general plan benefit of enabling them to share in the ownership of ParentCo. Under the Non-423 Component, which does not qualify as an “employee stock purchase plan” within the meaning of Section 423(b) of the Code, options will be granted pursuant to rules, procedures or sub-plans adopted by the Administrator designed to comply with appliable laws to achieve tax, and other objectives for eligible employees. Except as otherwise provided herein or by the Administrator, the Non-423 Component will operate and be administered in the same manner as the 423 Component.
The initial maximum aggregate number of shares of ParentCo Common Stock that may be purchased under the ESPP will be 4,000,000, which shall increase January 1, 2025 and each January 1 thereafter until the ESPP terminates, by the least of (i) 4,000,000 shares of ParentCo Common Stock, (ii) 1.5% of the number of shares of ParentCo Common Stock issued and outstanding on the immediately preceding December 31, and (iii) such lesser number of shares of ParentCo Common Stock as determined by the Administrator (collectively, the “ESPP Share Pool”). In 2024, the ESPP Share Pool represents approximately 4.5% of the total number of shares of ParentCo Common Stock outstanding as of the Closing of the Business Combination.
Summary of the ESPP
The following summary describes the material terms of the ESPP. This summary is not a complete description of all provisions of the ESPP and is qualified in its entirety by reference to the ESPP, in the form attached hereto as Annex E. As of the date of this proxy, no options to purchase shares of ParentCo Common Stock have been granted under the ESPP.
Purposes
The purposes of the ESPP are to attract, retain and reward eligible employees, to incentivize them to generate stockholder value, to enable them to participate in ParentCo’s growth and to align their interests with the interests of ParentCo’s stockholders. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code.
Administration
The ESPP will be administered by the person or persons appointed by the ParentCo Board, which will have the authority to interpret the ESPP, determine eligibility under the ESPP, prescribe forms, rules and procedures relating to the ESPP, and otherwise do all things necessary or appropriate to carry out the purposes of the ESPP. As used in this summary, the term “Administrator” refers to the person or persons appointed by the ParentCo Board to administer the ESPP.
Shares subject to the ESPP
Subject to adjustment as described below, no shares of ParentCo Common Stock are currently available for purchase pursuant to the exercise of options under the ESPP. Shares to be delivered upon exercise of options under the ESPP may be authorized but unissued stock, treasury stock, or stock acquired in an open-market transaction. If any option granted under the ESPP expires or terminates for any reason without having been exercised in full or ceases for any reason to be exercisable in whole or in part, the unpurchased shares subject to such option will again be available for purchase under the ESPP.
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Eligibility
All individuals classified as employees on the payroll records of ParentCo or its subsidiaries are eligible to participate in any one or more of the offerings under the ESPP, provided that, unless otherwise determined by the Administrator, as of the first day of the applicable offering (the “Offering Date”) they are customarily employed by ParentCo or one of its subsidiaries for more than 20 hours a week and have been employed for such period as determined by the Administrator in advance of an offering, with such period not to exceed two years.
General terms of participation
The ESPP allows eligible employees to purchase shares of ParentCo Common Stock during specified offering periods set by the Administrator, with such offering periods not to exceed 27 months. During each offering period, eligible employees will be granted an option to purchase shares of ParentCo Common Stock on the last business day of the offering period. Each participant may authorize payroll deductions or contributions at a minimum of 1 percent up to a maximum of 15 percent of such participant’s compensation for each pay period or such other maximum as may be specified by the Administrator in advance of an offering. A participant may purchase a maximum number of shares of ParentCo Common Stock with respect to any offering period (or such lesser number as the Administrator may prescribe) equal to the lesser of (a) a number of shares of ParentCo Common Stock determined by dividing such participant’s accumulated payroll deductions or contributions on such offering’s exercise date by the per-share purchase price, (b) the number of shares of ParentCo Common Stock determined by dividing $25,000 by the fair market value of the ParentCo Common Stock on the offering date for such offering; or (c) such other lesser maximum number of shares as shall have been established by the Administrator in advance of the offering. Each participant’s option shall be exercisable only to the extent of such participant’s accumulated payroll deductions or contributions on the exercise date.
The purchase price of each share of ParentCo Common Stock issued pursuant to the exercise of an option under the ESPP on an exercise date will be 85% (or such greater percentage as specified by the Administrator) of the lesser of: (a) the fair market value of a share of ParentCo Common Stock date the option is granted, which will be the first day of the offering period, and (b) the fair market value of a share of ParentCo Common Stock on the exercise date, which will the last business day of the offering period.
The Administrator has the discretion to change the commencement and exercise dates of offering periods, the purchase price, the maximum number of shares that may be purchased with respect to any offering period, the duration of any offering periods and other terms of the ESPP, in each case, without stockholder approval, except as required by law.
Adjustments
In the event of any change in ParentCo’s outstanding stock by reason of a stock dividend, stock split, reverse stock split, split-up, recapitalization, merger, consolidation, reorganization, or other capital change, the aggregate number and type of shares available for purchase under the ESPP, the maximum number and type of shares purchasable during an offering period, and the purchase price per share will be appropriately adjusted.
Corporate transactions
In the event of a sale of all or substantially all of the stock of ParentCo, a sale of all or substantially all of the assets of ParentCo, or a merger or similar transaction in which ParentCo is not the surviving corporation or that results in the acquisition of ParentCo by another person, the Administrator may provide that each outstanding option will be assumed or substituted for or will be cancelled and the balances of participants’ accounts returned, or that the option period will end before the date of the proposed corporate transaction.
Amendments and termination
The ParentCo Board has discretion to amend the ESPP to any extent and in any manner it may deem advisable, provided that any amendment that would be treated as the adoption of a new plan for purposes of Section 423 of the Code will require stockholder approval. The ParentCo Board may suspend or terminate the ESPP at any time.
Federal Income Tax Information
The following is a summary of some of the material federal income tax consequences to participants in the ESPP under current federal tax laws. This summary deals with the general tax principles that apply and is provided only for general information. Certain types of taxes, such as state and local income taxes, are not discussed. Tax laws are complex and subject to change and may vary depending on individual circumstances and from locality to locality. The summary does not discuss all aspects of income taxation that may be relevant to a participant in light of his or her personal investment circumstances. This summarized tax information is not tax advice.
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The 423 Component of the ESPP, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Section 423 of the Code. The ESPP is not subject to any provisions of the Employee Retirement Income Security Act of 1974.
Under the applicable Code provisions, no income derived from the 423 Component will be taxable to a participant until the sale or other disposition of the shares of ParentCo Common Stock purchased under the ESPP (the “ESPP shares”). Upon such sale or disposition, the participant will generally be subject to tax in an amount that depends upon the participant’s holding period with respect to the ESPP shares. If the ESPP shares are sold or disposed of more than two years from the first day of the offering period and more than one year from the date of purchase, or upon the participant’s death while owning the ESPP shares, the participant will recognize ordinary income measured as the lesser of (1) the excess of the fair market value of the ESPP shares at the time of such sale or disposition over the purchase price or (2) an amount equal to the excess of the fair market value of the ESPP shares as of the first day of the offering period over the purchase price. Any additional gain will be treated as long-term capital gain. If the ESPP shares held for the periods described above are sold and the sale price is less than the purchase price, there is no ordinary income and the participant has a long-term capital loss equal to the difference between the sale price and the purchase price. If shares are sold or otherwise disposed of before the expiration of the holding periods described above, other than following the participant’s death while owning the shares, the participant will recognize ordinary income generally measured as the excess of the fair market value of the ESPP shares on the date the ESPP shares are purchased over the purchase price. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, depending on the participant’s holding period with respect to the ESPP shares. ParentCo is not entitled to a deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income recognized upon a sale or disposition of shares prior to the expiration of the holding periods described above. ParentCo will treat any transfer of record ownership of shares as a disposition, unless ParentCo is notified to the contrary. In order to enable ParentCo to learn of dispositions prior to the expiration of the holding periods described above and ascertain the amount of the deductions to which ParentCo is entitled, participating employees will be required to notify ParentCo in writing of the date and terms of any disposition of shares purchased under the ESPP.
New Plan Benefits
The amounts of future stock purchases under the ESPP are not determinable because, under the terms of the ESPP, purchases are based upon elections made by participants. Future purchase prices are not determinable because they are based upon fair market value of shares of ParentCo Common Stock.
Required Vote
Approval of the ESPP requires the affirmative vote of the holders of a majority of the Kernel Class A and Class B Ordinary Shares cast by the stockholders represented present “in person” or represented by proxy and entitled to vote thereon at the Extraordinary General Meeting, voting together as a single class, assuming that a quorum is present. Abstentions and broker non-votes will not be counted as shares voting on such matter and accordingly will have no effect on the approval of this Employee Stock Purchase Plan Proposal.
The Employee Stock Purchase Plan Proposal is conditioned on the approval of the Business Combination Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Election of Directors Proposal, and the NTA Proposal.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE EMPLOYEE STOCK PURCHASE PLAN PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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SHAREHOLDER PROPOSAL NO. 7: THE ELECTION OF DIRECTORS PROPOSAL
Overview
Pursuant to the Business Combination Agreement, immediately after the Closing, the parties thereto shall take all necessary action to designate and appoint to the Post-Closing Board nine persons as follows: (i) seven persons designated prior to the Closing by AIRO, at least four of whom will be independent; and (ii) two persons designated prior to the Closing by Kernel. Initially, AIRO has designated Joseph D. Burns, John Uczekaj, and Dr. Chirinjeev Kathuria as directors, and John M. Belcher and Gregory D. Winfree as independent directors. Kernel has selected Surendra Ajjarapu and Donald Fell to serve as independent directors. In addition, following the Closing, the Post-Closing Board will appoint two additional independent directors to the ParentCo Board.
See “Shareholder Proposal No. 1 — The Business Combination Proposal.”
Information for each nominee is set forth in the sections entitled “Management After the Business Combination,” “Business of AIRO” and “Information About Kernel –Directors and Executive Officers.”
Vote Required for Approval
The election of directors under the Election of Directors Proposal requires passage by a simple majority of the holders of the Class B Ordinary Shares as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at the Extraordinary General Meeting. Prior to the closing of a business combination, holders of Class A Ordinary Shares have no right to vote on the appointment or removal of any director.
The Election of Directors Proposal is conditioned on the approval of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, and the NTA Proposal.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE ELECTION OF DIRECTORS PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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SHAREHOLDER PROPOSAL NO. 8: The NTA Proposal
Overview
As discussed elsewhere in this proxy statement/prospectus, Kernel is asking its shareholders to approve the NTA Proposal. The NTA Proposal is conditioned upon the approval of the Business Combination, the Domestication Proposal, the Nasdaq Proposal, the ParentCo Charter Amendment Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, and the Election of Directors Proposal. Therefore, if the Business Combination, the Domestication Proposal, the Nasdaq Proposal, the ParentCo Charter Amendment Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, or the Election of Directors Proposal is not approved, then the NTA Proposal will not be presented to Kernel’s shareholders. While the NTA Proposal is is conditioned upon the approval of the Business Combination, the NTA Proposal is not conditioned on the closing of the Business Combination. If the NTA Proposal and the Business Combination, the Domestication Proposal, the Nasdaq Proposal, the ParentCo Charter Amendment Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, and the Election of Directors Proposal are approved by the shareholders, the following amendments will be made to the current Kernel Amended and Restated Memorandum and Articles of Association, which shall be effective, if adopted and implemented by Kernel, prior to the consummation of the proposed Business Combination (the “NTA Amendments”):
Deleting and replacing Article 49.2(b) with the following: “provide Members with the opportunity to have their Shares repurchased by means of a tender offer for a per-Share repurchase price payable in cash, equal to the aggregate amount then on deposit in the Trust Account, calculated as of two business days prior to the consummation of such Business Combination, including interest earned on the Trust Account (net of taxes paid or payable, if any), divided by the number of then issued Public Shares. Such obligation to repurchase Shares is subject to the completion of the proposed Business Combination to which it relates.”
Deleting and replacing 49.4 with the following: “At a general meeting called for the purposes of approving a Business Combination pursuant to this Article, in the event that such Business Combination is approved by Ordinary Resolution, the Company shall be authorised to consummate such Business Combination.”
Deleting and replacing Article 49.5 with the following: “Any Member holding Public Shares who is not the Sponsor, a Founder, Officer or Director may, at least two business days’ prior to the initially scheduled vote on a Business Combination, elect to have their Public Shares redeemed for cash, in accordance with any applicable requirements provided for in the related proxy materials (the “IPO Redemption”), provided that no such Member acting together with any Affiliate of his or any other person with whom he is acting in concert or as a partnership, limited partnership, syndicate, or other group for the purposes of acquiring, holding, or disposing of Shares may exercise this redemption right with respect to more than 15 per cent of the Public Shares in the aggregate without the prior consent of the Company and provided further that any beneficial holder of Public Shares on whose behalf a redemption right is being exercised must identify itself to the Company in connection with any redemption election in order to validly redeem such Public Shares. If so demanded, the Company shall pay any such redeeming Member, regardless of whether he is voting for or against such proposed Business Combination, a per-Share redemption price payable in cash, equal to the aggregate amount then on deposit in the Trust Account calculated as of two business days prior to the consummation of the Business Combination, including interest earned on the Trust Account (such interest shall be net of taxes payable) and not previously released to the Company to pay its taxes, divided by the number of then issued Public Shares (such redemption price being referred to herein as the “Redemption Price”), but only in the event that the applicable proposed Business Combination is approved and consummated.”
Consequences if the NTA Proposal is Approved
If Kernel redeems its Public Shares in an amount in excess of the current redemption limitation and its securities do not meet Nasdaq’s continued listing requirements, Nasdaq may delist Kernel’s securities from trading on its exchange. If Nasdaq delists any of Kernel’s securities from trading on its exchange and it is not able to list such securities on another approved national securities exchange, Kernel expects that such securities could be quoted on an over-the-counter market. If this were to occur, Kernel or ParentCo could face significant material adverse consequences, including: (i) a limited availability of market quotations for Kernel’s securities, (ii) reduced liquidity for Kernel’s securities, (iii) a determination that Kernel’s Public Shares are “penny stocks” which will require brokers trading in Kernel’s Public Shares to adhere to more stringent rules, including being subject to the depository requirements of Rule 419 of the Securities Act, and possibly result in a reduced level of trading activity in the secondary trading market for Kernel’s securities, (iv) a decreased ability to issue additional securities or obtain additional financing in the future, and (v) a less attractive acquisition vehicle to a target business in connection with an initial business combination. The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Kernel’s public shares, units and warrants qualify as covered securities under such statute. If Kernel were no longer listed on Nasdaq, its securities would not qualify as covered securities under such statute and it would be subject to regulation in each state in which it offers its securities. See “Risk Factors — Nasdaq may delist Kernel’s securities from its exchange which could limit investors’ ability to make transactions in its securities and subject Kernel to additional trading restrictions” for more information.
Consequences if the NTA Proposal is Not Approved
Kernel shareholders are being asked to adopt the proposed NTA Amendments to the current Kernel Amended and Restated Memorandum and Articles of Association prior to the Closing, which, in the judgment of the Kernel Board, may facilitate the consummation of the Business Combination. The current Kernel Amended and Restated Memorandum and Articles of Association limit Kernel’s ability to consummate an initial business combination if Kernel would have less than $5,000,001 in net tangible assets prior to or upon consummation of such initial business combination. The purpose of such limitation was initially to ensure that the Kernel Ordinary Shares not deemed to be a “penny stock” pursuant to Rule 3a51-1 under the Exchange Act. Because the Kernel Ordinary Shares and the Pubco Ordinary Shares would not be deemed to be a “penny stock” pursuant to other applicable provisions of Rule 3a51-1 under the Exchange Act, Kernel is presenting the NTA Proposal to facilitate the consummation of the Business Combination.
If the NTA Proposal is not approved and there are significant requests for redemption such that Kernel’s net tangible assets would be less than $5,000,001 prior to and upon consummation of the Business Combination, the current Kernel Amended and Restated Memorandum and Articles of Association would prevent Kernel from being able to consummate the Business Combination even if all other conditions to Closing are met.
If the NTA Proposal is approved and the current Kernel Amended and Restated Memorandum and Articles of Association is amended to remove the net tangible asset requirement and the net tangible asset condition under the Business Combination Agreement is waived (and such condition was waived pursuant to the Third Amendment to the Business Combination Agreement, dated February 5, 2024), then it is possible that the Business Combination could be consummated even if Kernel’s net tangible assets would be less than $5,000,001 prior to and upon consummation of the Business Combination. If the Business Combination Proposal and the NTA Proposal are approved, all of the references in this proxy statement/prospectus to the “current Kernel Amended and Restated Memorandum and Articles of Association” shall be deemed to mean the current Kernel Amended and Restated Memorandum and Articles of Association as amended by the NTA Amendments contained in this NTA Proposal.
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Vote Required for Approval
The approval of the NTA Proposal requires a special resolution, being the affirmative vote in person by a least a two-thirds (2/3) majority of the issued and outstanding Kernel Ordinary Shares cast by the shareholders represented in person (which could include presence at a virtual meeting) or by proxy at the Extraordinary General Meeting and entitled to vote thereon, voting as a single class. Abstentions and broker non-votes, while considered present for the purposes of establishing a quorum, will not count as votes cast at the Extraordinary General Meeting, and otherwise will have no effect on the proposal.
The full text of the resolution to be passed is as follows:
“RESOLVED, as a special resolution, that subject to the approval of the Business Combination Proposal and the other Proposals presented to the shareholders and with effect prior to the consummation of the proposed Business Combination:
| (a) | Article 49.2(b) shall be deleted and replaced with the following: “provide Members with the opportunity to have their Shares repurchased by means of a tender offer for a per-Share repurchase price payable in cash, equal to the aggregate amount then on deposit in the Trust Account, calculated as of two business days prior to the consummation of such Business Combination, including interest earned on the Trust Account (net of taxes paid or payable, if any), divided by the number of then issued Public Shares. Such obligation to repurchase Shares is subject to the completion of the proposed Business Combination to which it relates.” |
| (b) | Article 49.4 shall be deleted and replaced with the following: “At a general meeting called for the purposes of approving a Business Combination pursuant to this Article, in the event that such Business Combination is approved by Ordinary Resolution, the Company shall be authorised to consummate such Business Combination.” |
| (c) | Article 49.5 shall be deleted and replaced with the following: “Any Member holding Public Shares who is not the Sponsor, a Founder, Officer or Director may, at least two business days’ prior to the initially scheduled vote on a Business Combination, elect to have their Public Shares redeemed for cash, in accordance with any applicable requirements provided for in the related proxy materials (the “IPO Redemption”), provided that no such Member acting together with any Affiliate of his or any other person with whom he is acting in concert or as a partnership, limited partnership, syndicate, or other group for the purposes of acquiring, holding, or disposing of Shares may exercise this redemption right with respect to more than 15 per cent of the Public Shares in the aggregate without the prior consent of the Company and provided further that any beneficial holder of Public Shares on whose behalf a redemption right is being exercised must identify itself to the Company in connection with any redemption election in order to validly redeem such Public Shares. If so demanded, the Company shall pay any such redeeming Member, regardless of whether he is voting for or against such proposed Business Combination, a per-Share redemption price payable in cash, equal to the aggregate amount then on deposit in the Trust Account calculated as of two business days prior to the consummation of the Business Combination, including interest earned on the Trust Account (such interest shall be net of taxes payable) and not previously released to the Company to pay its taxes, divided by the number of then issued Public Shares (such redemption price being referred to herein as the “Redemption Price”), but only in the event that the applicable proposed Business Combination is approved and consummated.” |
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE NTA PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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SHAREHOLDER PROPOSAL NO. 9: The Adjournment Proposal
Overview
The Adjournment Proposal, if adopted, will allow the Kernel Board to adjourn the Extraordinary General Meeting to a later date or dates to permit further solicitation of proxies. The Adjournment Proposal will only be presented to Kernel’s shareholders in the event that based upon the tabulated vote at the time of the Extraordinary General Meeting there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal, the Domestication Proposal, the ParentCo Charter Amendment Proposal, the Nasdaq Proposal, the Incentive Plan Proposal, the Employee Stock Purchase Plan Proposal, the Election of Directors Proposal, or the NTA Proposal. In no event will the Kernel Board adjourn the Extraordinary General Meeting or consummate the Business Combination beyond the date by which it may properly do so under the Existing Kernel Governing Documents and Cayman Islands Companies Law.
Consequences if the Adjournment Proposal is Not Approved
If the Adjournment Proposal is not approved by Kernel’s shareholders, the Kernel Board may not be able to adjourn the Extraordinary General Meeting to a later date in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal or any other proposal.
Vote Required for Approval
The approval of the Adjournment Proposal requires the affirmative vote in person (which would include presence at a virtual meeting) or by proxy of holders of a majority of the outstanding Kernel Ordinary Shares as of the Record Date, assuming that a quorum is present. Abstentions will have no effect on the Adjournment Proposal. Broker non-votes will have no effect with respect to the approval of the Adjournment Proposal.
Recommendation of the Kernel Board
THE KERNEL BOARD UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE ADJOURNMENT PROPOSAL.
The existence of financial and personal interests of one or more of the Sponsor’s or Kernel’s directors and officers may result in a conflict of interest on the part of each such director or officer between what such director or officer may believe is in the best interests of Kernel and its shareholders and what such director or officer may believe in the best interests of such director or officer in determining to recommend that shareholders vote for the proposals. See the section entitled “Interests of Kernel’s Directors and Officers and Others in the Business Combination” for a further discussion of these considerations.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Introduction
Kernel is providing the following unaudited pro forma combined financial information to aid you in your analysis of the financial aspects of the Business Combination. The following unaudited pro forma combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.”
Kernel is a blank check company incorporated as a Cayman Islands exempted company on November 10, 2020. Kernel incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses.
AIRO Group Holdings, Inc. (“AIRO”), a Delaware corporation, was incorporated on August 30, 2021, for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry to develop its business across four primary divisions: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility.
The unaudited pro forma condensed combined balance sheet as of March 31, 2024 combines the historical unaudited condensed balance sheet of Kernel as of March 31, 2024 with the historical unaudited condensed consolidated balance sheet of AIRO as of March 31, 2024 on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated on March 31, 2024.
Kernel and AIRO have the same fiscal years ending December 31. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2024 and for the year ended December 31, 2023 combine the historical statements of operations of Kernel and AIRO for such periods on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated on January 1, 2023, the beginning of the earliest period presented.
The unaudited pro forma condensed combined balance sheet as of March 31, 2024 and the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2024 and for the year ended December 31, 2023 are presented as if the following occurred:
| ● | the merger of Kernel Merger Sub, a wholly owned subsidiary of ParentCo, with and into Kernel, with Kernel surviving as a wholly owned subsidiary of ParentCo; | |
| ● | The merger of AIRO Merger Sub, a wholly owned subsidiary of ParentCo, with and into AIRO, with AIRO surviving as a wholly owned subsidiary of ParentCo; | |
| ● | the redesignation of Kernel’s outstanding 6,315,949 Class A Ordinary Shares (0 Class A Ordinary Shares assuming maximum redemptions) and 7,618,750 Class B Ordinary Shares as ParentCo common stock; | |
| ● | the issuance of 77,000,000 shares of ParentCo common stock to the stockholders of AIRO; |
| ● | all twelve extension deposits and $1.1 million in working capital deposits are made to the Trust Account totaling $4,550,000 and the Sponsor will receive 4,550,000 shares of ParentCo common stock in consideration for the extension loans upon completion of the Business Combination. |
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The historical financial information of Kernel was derived from the unaudited condensed financial statements of Kernel as of and for the three months ended March 31, 2024 and from the audited financial statements for the year ended December 31, 2023, included elsewhere in this registration statement. The historical financial information of AIRO was derived from the unaudited condensed consolidated financial statements of AIRO as of and for the three months ended March 31, 2024 and from the audited consolidated financial statements for the year ended December 31, 2023, included elsewhere in this registration statement. This information should be read together with Kernel’s and AIRO’s audited and unaudited consolidated financial statements and related notes, the sections entitled “Kernel’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “AIRO’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this registration statement.
Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented. AIRO included adjustments to recognize interest and contingent consideration expense related to the Aspen Management Carveout Plan and other agreements.
The unaudited pro forma combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination. The pro forma adjustments reflecting the consummation of the Business Combination are based on certain available information as of the date of these unaudited pro forma combined financial statements and certain assumptions and methodologies that Kernel believes are reasonable under the circumstances. The unaudited pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Kernel believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma combined financial information.
The pro forma combined financial statements have been presented for informational purposes only and are not necessarily indicative of what Kernel’s and AIRO’s financial position or results of operations actually would have been had the Transaction been completed as of the dates indicated. In addition, the pro forma data do not purport to project the future financial position or operating results of ParentCo. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
Accounting for the Business Combination
The Business Combination will be accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Kernel, who is the legal acquirer, will be treated as the “acquired” company for financial reporting purposes and AIRO will be treated as the accounting acquirer. AIRO has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances under the redemption scenarios:
| ● | AIRO’s existing stockholders will have more than 80% of the voting interest of ParentCo under all scenarios; |
| ● | AIRO’s senior management will comprise the senior management of ParentCo; |
| ● | the directors nominated by AIRO will represent the majority of the board of directors of ParentCo; and |
| ● | AIRO’s operations will comprise the ongoing operations of ParentCo. |
Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of a capital transaction in which AIRO is issuing stock for the net assets of Kernel. The net assets of Kernel will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of AIRO.
Basis of Pro Forma Presentation
Pursuant to the current Kernel Charter, Kernel’s public shareholders may demand that Kernel redeem their Class A Ordinary Shares for cash if the Business Combination is consummated, irrespective of whether they vote for or against the Business Combination. If a public shareholder properly demands redemption of their shares, Kernel will redeem each share for cash equal to the public shareholder’s pro rata portion of the Trust Account, calculated as of two business days prior to the anticipated consummation of the Business Combination.
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The unaudited pro forma combined financial information has been prepared assuming alternative levels of cash redemptions of Kernel’s Ordinary Shares:
● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
The Business Combination will not close under any scenario unless AIRO waives the Unencumbered Cash closing condition and the NTA Proposal is approved.
The table below shows the issued and outstanding shares under each of the Scenarios set forth above following the closing of the Business Combination, as well as potential sources of dilution:
| Scenarios | ||||||||||||||||||||||||
| 1 | 2 | 3 | ||||||||||||||||||||||
| Issued and Outstanding Share Basis | No Redemption | % Owned | 50% Redemption | % Owned | Maximum Redemption | % Owned | ||||||||||||||||||
| Kernel Public Shares | 509,341 | 0.6 | % | 254,671 | 0.3 | % | - | - | % | |||||||||||||||
| Kernel Founder Shares | 7,618,750 | 8.4 | % | 7,618,750 | 8.5 | % | 7,618,750 | 8.5 | % | |||||||||||||||
| AIRO shareholders (1) | 77,000,000 | 85.9 | % | 77,000,000 | 86.1 | % | 77,000,000 | 86.4 | % | |||||||||||||||
| Extension Shares (2) | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | |||||||||||||||
| Meteora Termination Shares (3) | 50,000 | 0.1 | % | 50,000 | 0.1 | % | 50,000 | 0.1 | % | |||||||||||||||
| Pro Forma common stock at March 31, 2024 | 89,628,091 | 100.0 | % | 89,373,421 | 100.0 | % | 89,118,750 | 100.0 | % | |||||||||||||||
| Potential sources of dilution: | ||||||||||||||||||||||||
| Public Warrants (4) | 15,237,500 | 17.0 | % | 15,237,500 | 17.0 | % | 15,237,500 | 17.1 | % | |||||||||||||||
| Private Warrants (5) | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | |||||||||||||||
| First Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Second Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Third Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| AIRO Warrants (7) | 266,230 | 0.3 | % | 266,230 | 0.3 | % | 266,230 | 0.3 | % | |||||||||||||||
| AIRO Options (8) | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | |||||||||||||||
| (1) | Does not reflect closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are not expected to be significant. |
| (2) | Assumes the issuance of 4.45 million shares of Class A common stock under the terms of the Extension Agreement and the Business Combination Agreement which also allows the same treatment for working capital costs. The Extension Agreement calls for an issuance of up to 2.7 million shares for the payment of extension payments, and Kernel estimates 1.75 million shares for working capital costs. | |
| (3) | Assumes the issuance of 50,000 shares of ParentCo common stock to an entity designated by Meteora upon closing of the Business Combination in consideration for termination of the Forward Purchase Agreement. |
| (4) | Assumes exercise of 15,237,500 Public Warrants (at a purchase price of $11.50 per Public Warrant) resulting in a cash inflow of $175,231,250 for ParentCo and 15,237,500 shares of ParentCo common stock issued to holders of Public Warrants. |
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| (5) | Assumes exercise of 8,750,000 Private Placement Warrants (at $11.50 per Private Placement Warrant) resulting in a cash inflow of $100,625,000 for ParentCo and 8,750,000 shares of ParentCo common stock issued to holders of Private Placement Warrants. |
| (6) | Assumes the earnout measurements will be met per the Business Combination Agreement: |
(i) In the event ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
| (7) | Assumes exercise of 266,230 AIRO Warrants (at $4.17 per AIRO Warrant) resulting in a cash inflow of $1,110,179 for ParentCo and 266,230 shares of ParentCo common stock issued to holders of AIRO Warrants.
| |
| (8) | Assumes exercise of 1,435,615 AIRO Options (at $2.13 per AIRO Option) resulting in a cash inflow of $3,057,860 for ParentCo and 1,435,615 shares of ParentCo common stock issued to holders of AIRO Options. |
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2024
(Dollars in thousands)
| Scenario 1 | Scenario 2 | Scenario 3 | |||||||||||||||||||||||||||||||||
Assuming No Redemptions into Cash | Assuming 50% Redemptions into Cash | Assuming Maximum Redemptions into Cash | |||||||||||||||||||||||||||||||||
| (A) | (B) | Pro Forma | Pro Forma | Pro Forma | |||||||||||||||||||||||||||||||
| AIRO | KRNL | Adjustments | Balance Sheet | Adjustments | Balance Sheet | Adjustments | Balance Sheet | ||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 8,129 | $ | 1 | $ | 5,564 | (1) | $ | - | $ | 2,782 | (1) | $ | - | $ | - | (1) | $ | - | ||||||||||||||||
| (15,361 | ) | (2) | (15,361 | ) | (2) | (15,361 | ) | (2) | |||||||||||||||||||||||||||
| (23,975 | ) | (5) | (23,975 | ) | (5) | (23,975 | ) | (5) | |||||||||||||||||||||||||||
| (4,450 | ) | (6) | (4,450 | ) | (6) | (4,450 | ) | (6) | |||||||||||||||||||||||||||
| 160 | (6) | 160 | (6) | 160 | (6) | ||||||||||||||||||||||||||||||
| 29,932 | (8) | 32,714 | (8) | 35,496 | (8) | ||||||||||||||||||||||||||||||
| Restricted cash | 2,525 | - | - | 2,525 | 2,525 | 2,525 | |||||||||||||||||||||||||||||
| Accounts receivable, net | 1,185 | - | - | 1,185 | 1,185 | 1,185 | |||||||||||||||||||||||||||||
| Related party receivables | 572 | - | 572 | 572 | 572 | ||||||||||||||||||||||||||||||
| Inventory | 3,022 | - | - | 3,022 | 3,022 | 3,022 | |||||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 1,195 | 91 | - | 1,286 | 1,286 | 1,286 | |||||||||||||||||||||||||||||
| Total current assets | 16,628 | 92 | (8,130 | ) | 8,590 | (8,130 | ) | 8,590 | (8,130 | ) | 8,590 | ||||||||||||||||||||||||
| Property and equipment, net | 9,878 | - | - | 9,878 | 9,878 | 9,878 | |||||||||||||||||||||||||||||
| Right-of-use operating lease assets | 241 | - | - | 241 | 241 | 241 | |||||||||||||||||||||||||||||
| Goodwill | 599,973 | - | - | 599,973 | 599,973 | 599,973 | |||||||||||||||||||||||||||||
| Intangible assets, net | 102,080 | - | - | 102,080 | 102,080 | 102,080 | |||||||||||||||||||||||||||||
| Other assets | 252 | - | - | 252 | 252 | 252 | |||||||||||||||||||||||||||||
| Investments held in Trust Account | - | 5,564 | (5,564 | ) | (1) | - | (5,564 | ) | (1) | - | (5,564 | ) | (1) | - | |||||||||||||||||||||
| Total assets | $ | 729,052 | $ | 5,656 | $ | (13,694 | ) | $ | 721,014 | $ | (13,694 | ) | $ | 721,014 | $ | (13,694 | ) | $ | 721,014 | ||||||||||||||||
| Liabilities and stockholders’ equity (deficit) | |||||||||||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||||||||||
| Accounts payable | $ | 17,209 | $ | 3,931 | $ | (9,977 | ) | (2) | $ | 41,095 | $ | (9,977 | ) | (2) | $ | 43,877 | $ | (9,977 | ) | (2) | $ | 46,659 | |||||||||||||
| 29,932 | (8) | 32,714 | (8) | 35,496 | (8) | ||||||||||||||||||||||||||||||
| Related party payables | 1,019 | - | (520 | ) | (5) | 499 | (520 | ) | (5) | 499 | (520 | ) | (5) | 499 | |||||||||||||||||||||
| Accrued expenses and other current liabilities | 7,446 | 34 | (1,656 | ) | (2) | 5,724 | (1,656 | ) | (2) | 5,724 | (1,656 | ) | (2) | 5,724 | |||||||||||||||||||||
| (100 | ) | (1) | (100 | ) | (1) | (100 | ) | (1) | |||||||||||||||||||||||||||
| Accrued expenses - related party | - | 320 | (320 | ) | (2) | - | (320 | ) | (2) | - | (320 | ) | (2) | - | |||||||||||||||||||||
| Operating lease liabilities, current | 239 | - | 239 | - | 239 | 239 | |||||||||||||||||||||||||||||
| Deferred revenue | 4,877 | - | - | 4,877 | - | 4,877 | - | 4,877 | |||||||||||||||||||||||||||
| Related party borrowings | 5,237 | 2,423 | (1,003 | ) | (5) | 4,234 | (1,003 | ) | (5) | 4,234 | (1,003 | ) | (5) | 4,234 | |||||||||||||||||||||
| 77 | (6) | 77 | (7) | 77 | (7) | ||||||||||||||||||||||||||||||
| (2,500 | ) | (6) | (2,500 | ) | (7) | (2,500 | ) | (7) | |||||||||||||||||||||||||||
| Revolving lines of credit | 1,045 | - | (1,045 | ) | (5) | - | (1,045 | ) | (5) | - | (1,045 | ) | (5) | - | |||||||||||||||||||||
| Current maturities of debt | 25,066 | 1,790 | (21,079 | ) | (5) | 3,987 | (21,079 | ) | (5) | 3,987 | (21,079 | ) | (5) | 3,987 | |||||||||||||||||||||
| (1,950 | ) | (6) | (1,950 | ) | (6) | (1,950 | ) | (6) | |||||||||||||||||||||||||||
| 160 | (6) | 160 | (6) | 160 | (6) | ||||||||||||||||||||||||||||||
| Due to seller | 18,331 | - | (6,831 | ) | (5) | 11,500 | (6,831 | ) | (5) | 11,500 | (6,831 | ) | (5) | 11,500 | |||||||||||||||||||||
| Total current liabilities | 80,469 | 8,498 | (16,812 | ) | 72,155 | (14,030 | ) | 74,937 | (11,248 | ) | 77,719 | ||||||||||||||||||||||||
| Long-term debt, net of current maturities | 500 | - | - | 500 | - | 500 | - | 500 | |||||||||||||||||||||||||||
| Deferred compensation | 9,904 | - | (9,904 | ) | (5) | - | (9,904 | ) | (5) | - | (9,904 | ) | (5) | - | |||||||||||||||||||||
| Deferred tax liability | 1,363 | - | 1,364 | 1,364 | 1,364 | ||||||||||||||||||||||||||||||
| Long-term deferred revenue | 18 | - | 18 | 18 | 18 | ||||||||||||||||||||||||||||||
| Operating lease liabilities, noncurrent | 8 | - | 8 | 8 | 8 | ||||||||||||||||||||||||||||||
| Other long-term liabilities | 50 | - | - | 50 | - | 50 | - | 50 | |||||||||||||||||||||||||||
| Contingent consideration | 45,382 | - | (45,382 | ) | (5) | - | (45,382 | ) | (5) | - | (45,382 | ) | (5) | - | |||||||||||||||||||||
| Warrant Liabilities | - | 959 | - | 959 | - | 959 | - | 959 | |||||||||||||||||||||||||||
| Total liabilities | 137,695 | 9,457 | (72,098 | ) | 75,054 | (69,316 | ) | 77,836 | (66,534 | ) | 80,618 | ||||||||||||||||||||||||
| Class A common stock subject to possible redemption | - | 5,464 | (5,464 | ) | (1) | - | (5,464 | ) | (1) | - | (5,464 | ) | (1) | - | |||||||||||||||||||||
| Stockholders’ equity (deficit) | |||||||||||||||||||||||||||||||||||
| KRNL Preference Shares, $0.0001 par value | - | - | - | ||||||||||||||||||||||||||||||||
| AIRO common stock, $0.000001 par value | - | - | - | ||||||||||||||||||||||||||||||||
| KRNL Class A ordinary shares, $0.0001 par value | - | - | 9 | (3) | 9 | 9 | (3) | 9 | 9 | (3) | 9 | ||||||||||||||||||||||||
| KRNL Class B ordinary shares, $0.0001 par value | 1 | (1 | ) | (3) | - | (1 | ) | (3) | - | (1 | ) | (3) | - | ||||||||||||||||||||||
| Additional paid-in capital | 764,268 | - | 5,564 | (1) | 909,569 | 2,782 | (1) | 906,787 | - | (1) | 904,005 | ||||||||||||||||||||||||
| (8 | ) | (3) | (8 | ) | (3) | (8 | ) | (3) | |||||||||||||||||||||||||||
| (9,266 | ) | (4) | (9,266 | ) | (4) | (9,266 | ) | (4) | |||||||||||||||||||||||||||
| 84,612 | (5) | 84,612 | (5) | 84,612 | (5) | ||||||||||||||||||||||||||||||
| 44,500 | (6) | 44,500 | (6) | 44,500 | (6) | ||||||||||||||||||||||||||||||
| 19,899 | (7) | 19,899 | (7) | 19,899 | (7) | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive loss | (3,142 | ) | - | - | (3,142 | ) | - | (3,142 | ) | - | (3,142 | ) | |||||||||||||||||||||||
| Retained earnings (accumulated deficit) | (169,769 | ) | (9,266 | ) | - | (260,476 | ) | - | (260,476 | ) | - | (260,476 | ) | ||||||||||||||||||||||
| (3,408 | ) | (2) | (3,408 | ) | (2) | (3,408 | ) | (2) | |||||||||||||||||||||||||||
| 9,266 | (4) | 9,266 | (4) | 9,266 | (4) | ||||||||||||||||||||||||||||||
| (22,823 | ) | (5) | (22,823 | ) | (5) | (22,823 | ) | (5) | |||||||||||||||||||||||||||
| (44,500 | ) | (6) | (44,500 | ) | (6) | (44,500 | ) | (6) | |||||||||||||||||||||||||||
| (77 | ) | (6) | (77 | ) | (6) | (77 | ) | (6) | |||||||||||||||||||||||||||
| (19,899 | ) | (7) | (19,899 | ) | (7) | (19,899 | ) | (7) | |||||||||||||||||||||||||||
| Total stockholders’ equity (deficit) | 591,357 | (9,265 | ) | 63,868 | 645,960 | 61,086 | 643,178 | 58,304 | 640,396 | ||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 729,052 | $ | 5,656 | $ | (13,694 | ) | $ | 721,014 | $ | (13,694 | ) | $ | 721,014 | $ | (13,694 | ) | $ | 721,014 | ||||||||||||||||
(A) Obtained from the unaudited condensed consolidated balance sheet of AIRO as of March 31, 2024.
(B) Obtained from the unaudited balance sheet of KRNL as of March 31, 2024.
| 123 |
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2023
(Dollars in thousands, except share and per share data)
| Transaction | Transaction | Transaction | |||||||||||||||||||||||||||||||||
| Accounting | Pro Forma | Accounting | Pro Forma | Accounting | Pro Forma | ||||||||||||||||||||||||||||||
| AIRO | KRNL | Adjustments | Combined | Adjustments | Combined | Adjustments | Combined | ||||||||||||||||||||||||||||
| Historical | Historical | (Assuming No | (Assuming No | (Assuming 50% | (Assuming 50% | (Assuming 100% | (Assuming 100% | ||||||||||||||||||||||||||||
| (A) | (B) | Redemptions) | Note 2 | Redemptions | Redemptions) | Note 2 | Redemptions) | Redemptions) | Note 2 | Redemptions) | |||||||||||||||||||||||||
| Revenue | $ | 43,254 | $ | - | $ | - | $ | 43,254 | $ | - | $ | 43,254 | $ | - | $ | 43,254 | |||||||||||||||||||
| Cost of Revenue | 18,340 | 18,340 | 18,340 | 18,340 | |||||||||||||||||||||||||||||||
| Gross Profit | 24,914 | - | 24,914 | 24,914 | 24,914 | ||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| General and administrative expenses | 17,601 | 2,449 | 20,732 | (ee) | 40,782 | 20,732 | (ee) | 40,782 | 20,732 | (ee) | 40,782 | ||||||||||||||||||||||||
| Administrative fees - related party | - | 120 | 120 | - | 120 | - | 120 | ||||||||||||||||||||||||||||
| Sales and marketing | 5,374 | 5,374 | 5,374 | 5,374 | |||||||||||||||||||||||||||||||
| Research and development | 11,871 | 11,871 | 11,871 | 11,871 | |||||||||||||||||||||||||||||||
| Total operating expenses | 34,846 | 2,569 | 20,732 | 58,147 | 20,732 | 58,147 | 20,732 | 58,147 | |||||||||||||||||||||||||||
| Loss from operations | (9,932 | ) | (2,569 | ) | (20,732 | ) | (33,233 | ) | (20,732 | ) | (33,233 | ) | (20,732 | ) | (33,233 | ) | |||||||||||||||||||
| Other income (expenses): | |||||||||||||||||||||||||||||||||||
| Interest expense, Net | (2,137 | ) | (1,420 | ) | - | (3,557 | ) | - | (3,557 | ) | - | (3,557 | ) | ||||||||||||||||||||||
| Change in fair value of assets / liabilities | - | (6,567 | ) | 6,567 | (ff) | - | 6,567 | (ff) | - | 6,567 | (ff) | - | |||||||||||||||||||||||
| Loss on extinguishment of debt | - | - | (51,319 | ) | (cc) | (51,319 | ) | (51,319 | ) | (cc) | (51,319 | ) | (51,319 | ) | (cc) | (51,319 | ) | ||||||||||||||||||
| Other income (expense), net | (18,093 | ) | 755 | (18,862 | ) | (dd) | (36,200 | ) | (18,862 | ) | (dd) | (36,200 | ) | (18,862 | ) | (dd) | (36,200 | ) | |||||||||||||||||
| Income from investments held in Trust Account | - | 2,260 | (2,260 | ) | (aa) | - | (2,260 | ) | (aa) | - | (2,260 | ) | (aa) | - | |||||||||||||||||||||
| Total other income (expense) | (20,230 | ) | (4,972 | ) | (65,874 | ) | (91,076 | ) | (65,874 | ) | (91,076 | ) | (65,874 | ) | (91,076 | ) | |||||||||||||||||||
| Loss before income tax expense | (30,162 | ) | (7,541 | ) | (86,606 | ) | (124,309 | ) | (86,606 | ) | (124,309 | ) | (86,606 | ) | (124,309 | ) | |||||||||||||||||||
| Income tax expense | (2,294 | ) | - | (2,294 | ) | (2,294 | ) | (2,294 | ) | ||||||||||||||||||||||||||
| Net loss | (32,456 | ) | (7,541 | ) | (86,606 | ) | (126,603 | ) | (86,606 | ) | (126,603 | ) | (86,606 | ) | (126,603 | ) | |||||||||||||||||||
| Deemed dividend | - | - | (206,600 | ) | (gg) | (206,600 | ) | (206,600 | ) | (gg) | (206,600 | ) | (206,600 | ) | (gg) | (206,600 | ) | ||||||||||||||||||
| Net loss attributable to common shareholders | $ | (32,456 | ) | $ | (7,541 | ) | $ | (293,206 | ) | $ | (333,203 | ) | $ | (293,206 | ) | $ | (333,203 | ) | $ | (293,206 | ) | $ | (333,203 | ) | |||||||||||
| Weighted average shares outstanding of Class A ordinary shares, basic and diluted | 27,858,276 | 12,726,377 | 89,628,091 | (bb) | 89,628,091 | 89,373,421 | (bb) | 89,373,421 | 89,118,750 | (bb) | 89,118,750 | ||||||||||||||||||||||||
| Basic and diluted net income per Class A ordinary share | $ | (1.17 | ) | $ | (0.37 | ) | $ | (1.41 | ) | $ | (1.42 | ) | $ | (1.42 | ) | ||||||||||||||||||||
| Weighted average shares outstanding of Class B ordinary shares, basic and diluted | 7,618,750 | (7,618,750 | ) | (bb) | (7,618,750 | ) | (bb) | (7,618,750 | ) | (bb) | |||||||||||||||||||||||||
| Basic and diluted net income (loss) per Class B ordinary share | $ | (0.37 | ) | ||||||||||||||||||||||||||||||||
(A) Obtained from the audited consolidated statement of operations for the year ended of AIRO as of December 31, 2023.
(B) Obtained from the audited statement of operations for the year ended of KRNL as of December 31, 2023.
| 124 |
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2024
(Dollars in thousands, except per share data)
| Transaction | Transaction | Transaction | ||||||||||||||||||||||||||||||||||||
| Accounting | Pro Forma | Accounting | Pro Forma | Accounting | Pro Forma | |||||||||||||||||||||||||||||||||
| AIRO | KRNL | Adjustments | Combined | Adjustments | Combined | Adjustments | Combined | |||||||||||||||||||||||||||||||
| Historical | Historical | (Assuming No | (Assuming No | (Assuming 50% | (Assuming 50% | (Assuming 100% | (Assuming 100% | |||||||||||||||||||||||||||||||
| (A) | (B) | Redemptions) | Note 2 | Redemptions | Redemptions) | Note 2 | Redemptions) | Redemptions) | Note 2 | Redemptions) | ||||||||||||||||||||||||||||
| Revenue | $ | 13,740 | $ | - | $ | - | $ | 13,740 | $ | - | $ | 13,740 | $ | - | $ | 13,740 | ||||||||||||||||||||||
| Cost of Revenue | 5,253 | 5,253 | 5,253 | 5,253 | ||||||||||||||||||||||||||||||||||
| Gross Profit | 8,487 | - | 8,487 | 8,487 | 8,487 | |||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| General and administrative | 4,543 | 428 | - | 4,971 | - | 4,971 | - | 4,971 | ||||||||||||||||||||||||||||||
| Administrative fees - related party | - | 30 | 30 | - | 30 | - | 30 | |||||||||||||||||||||||||||||||
| Sales and marketing | 1,250 | 1,250 | 1,250 | 1,250 | ||||||||||||||||||||||||||||||||||
| Research and development | 3,157 | 3,157 | 3,157 | 3,157 | ||||||||||||||||||||||||||||||||||
| Total operating expenses | 8,950 | 458 | - | 9,408 | - | 9,408 | - | 9,408 | ||||||||||||||||||||||||||||||
| Loss from operations | (463 | ) | (458 | ) | - | (921 | ) | - | (921 | ) | - | (921 | ) | |||||||||||||||||||||||||
| Other income (expenses): | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | (289 | ) | (204 | ) | - | (493 | ) | - | (493 | ) | - | (493 | ) | |||||||||||||||||||||||||
| Change in fair value of assets / liabilities | - | (480 | ) | 480 | (ff) | - | 480 | (ff) | - | 480 | (ff) | - | ||||||||||||||||||||||||||
| Other income (expense), net | (268 | ) | - | 200 | (hh) | (68 | ) | 200 | (hh) | (68 | ) | 200 | (hh) | (68 | ) | |||||||||||||||||||||||
| Income from investments held in Trust Account | - | 321 | (321 | ) | (aa) | - | (321 | ) | (aa) | - | (321 | ) | (aa) | - | ||||||||||||||||||||||||
| Total other income (expense) | (557 | ) | (363 | ) | 359 | (561 | ) | 359 | (561 | ) | 359 | (561 | ) | |||||||||||||||||||||||||
| Loss before income tax expense | (1,020 | ) | (821 | ) | 359 | (1,482 | ) | 359 | (1,482 | ) | 359 | (1,482 | ) | |||||||||||||||||||||||||
| Income tax expense | (990 | ) | - | (990 | ) | (990 | ) | (990 | ) | |||||||||||||||||||||||||||||
| Net loss | $ | (2,010 | ) | $ | (821 | ) | $ | 359 | $ | (2,472 | ) | $ | 359 | $ | (2,472 | ) | $ | 359 | $ | (2,472 | ) | |||||||||||||||||
| Weighted average shares outstanding of Class A ordinary shares, basic and diluted | 27,858,276 | 2,551,225 | 89,628,091 | (bb) | 89,628,091 | 89,373,421 | (bb) | 89,373,421 | 89,118,750 | (bb) | 89,118,750 | |||||||||||||||||||||||||||
| Basic and diluted net income per Class A ordinary share | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | |||||||||||||||||||||||
| Weighted average shares outstanding of Class B ordinary shares, basic and diluted | 7,618,750 | (7,618,750 | ) | (bb) | (7,618,750 | ) | (bb) | (7,618,750 | ) | (bb) | ||||||||||||||||||||||||||||
| Basic and diluted net income (loss) per Class B ordinary share | - | $ | (0.08 | ) | ||||||||||||||||||||||||||||||||||
(A) Obtained from the unaudited condensed consolidated statement of operations for the three months ended of AIRO as of March 31, 2024.
(B) Obtained from the unaudited statement of operations for the three months ended of KRNL as of March 31, 2024.
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
The Business Combination will be accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Kernel, who is the legal acquirer, will be treated as the “acquired” company for financial reporting purposes and AIRO will be treated as the accounting acquirer. This determination was primarily based on the following facts and circumstances: (i) AIRO’s existing stockholder will have more than 86.4% of the voting interest of ParentCo under both the no redemption and maximum redemption scenarios; (ii) AIRO’s senior management will comprise the senior management of ParentCo; (iii) the directors nominated by AIRO will represent a majority of the board of directors of ParentCo; and (iv) AIRO’s operations will comprise the ongoing operations of ParentCo. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of a capital transaction in which AIRO is issuing stock for the net assets of Kernel. The net assets of Kernel will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of AIRO. The unaudited pro forma combined balance sheet as of March 31, 2024 assumes the Business Combination occurred on March 31, 2024. The unaudited pro forma combined statements of operation for the year ended December 31, 2023 and for the three months ended March 31, 2024 present the pro forma effect of the Business Combination as if it had been completed on January 1, 2023, the beginning of the earliest period presented. These periods are presented on the basis of AIRO as the accounting acquirer.
The unaudited pro forma combined balance sheet as of March 31, 2024 has been prepared using, and should be read in conjunction with, the following:
● Kernel’s unaudited condensed balance sheet as of March 31, 2024 and the related notes for the period ended March 31, 2024, included elsewhere in this registration statement; and
● AIRO’s unaudited condensed consolidated balance sheet as of March 31, 2024 and the related notes for the period ended March 31, 2024, included elsewhere in this registration statement.
The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2024 and for the year ended December 31, 2023 have been prepared using, and should be read in conjunction, with the following:
● Kernel’s unaudited condensed statement of operations for the three months ended March 31, 2024, audited statement of operations for the year ended December 31, 2023, and the related notes included elsewhere in this registration statement; and
● AIRO’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2024, audited consolidated statement of operations for the year ended December 31, 2023, and the related notes included elsewhere in this registration statement
Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented. Significant assumptions include conversions of debt to equity as further described in the notes to the unaudited pro forma combined financial information. These conversion agreements have been executed but do not take effect until no later than two days prior to closing of the Business Combination. As part of the pro forma adjustments, AIRO included adjustments to recognize interest, contingent consideration expense, and additional sales and marketing expense related to the Aspen Management Carveout Plan.
| 126 |
The unaudited pro forma combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination. The pro forma adjustments reflecting the consummation of the Business Combination are based on certain available information as of the date of these unaudited pro forma combined financial statements and certain assumptions and methodologies that Kernel believes are reasonable under the circumstances. The unaudited pro forma adjustments, which are described in these notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Kernel believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma combined financial information.
The unaudited pro forma combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of ParentCo. They should be read in conjunction with the historical financial statements and notes thereto of Kernel and AIRO.
General Description of the Business Combination Agreement
On March 3, 2023, Kernel entered into the Business Combination Agreement (as amended by the First Amendment to the Business Combination Agreement, the Second Amendment to the Business Combination Agreement, the Third Amendment to the Business Combination Agreement and the Fourth Amendment to the Business Combination Agreement) by and among Kernel, Kernel Merger Sub, AIRO Merger Sub, ParentCo, AIRO, Sponsor, and Seller Representative, a copy of which is attached to this registration statement as Annex A. Pursuant to the Business Combination Agreement, on the Closing Date, Kernel Merger Sub will merge with and into Kernel (the “First Merger”), with Kernel surviving the First Merger as a wholly owned subsidiary of ParentCo, and immediately following the First Merger, AIRO Merger Sub will merge with and into AIRO (the “Second Merger”), with AIRO surviving the Second Merger as a wholly owned subsidiary of ParentCo. We refer to the post-Business Combination company and its consolidated subsidiaries following the Business Combination as “ParentCo.” The Business Combination will be accounted for as a reverse recapitalization.
Merger Consideration
As consideration for the Second Merger, the holders of AIRO’s common stock collectively shall be entitled to receive from ParentCo, in the aggregate, a number of shares of ParentCo common stock (with a per share value of $10.00) with an aggregate value equal to $770,000,000 minus (a) the amount, if any, by which the net working capital is less than negative $5,500,000 by more than $500,000, plus (b) the amount, if any, by which the net working capital is greater than negative $5,500,000 by more than $500,000 (but not less than zero), minus (c) 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), minus (d) the amount, if any, by which the target net debt of $75,000,000 is less than closing net debt, minus (e) the amount, if any, by which AIRO’s transaction expenses exceed $14,000,000 (such resulting amount, the “AIRO Merger Consideration”).
Earnout Shares
After the Closing, subject to the terms and conditions set forth in the Business Combination Agreement, the AIRO stockholders shall have the contingent right to receive up to 33,000,000 shares of ParentCo Common Stock (subject to adjustment for share splits, share dividends, combinations, recapitalizations and the like after the Closing, including to account for any equity securities into which such shares are exchanged or converted) (the “Earnout Shares”), as additional consideration based on ParentCo’s revenue performance, as follows:
(i) In the event ParentCo’s revenue for after the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
| 127 |
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
Both the number of Earnout Shares and the price per share is subject to adjustment to reflect the effect of any stock split, reverse stock split, stock dividend, reorganization, recapitalization, reclassification, combination, exchange of shares or other like change with respect to the common stock (i.e., dilutive activities).
The accounting for the Earnout Shares was first evaluated under ASC 718 to determine if the arrangement represents a share-based payment arrangement. Because the Earnout Shares are issued to all of AIRO’s Shareholders (before the merger) and there are no service conditions nor any requirement of the participants to provide goods or services, we determined that the Earnout Shares are not within the scope of ASC 718. In reaching this conclusion, Kernel focused on the fact that the Earnout Shares are not provided to any holder of options or unvested stock but rather the arrangement is provided only to vested equity holders.
Next, Kernel determined that the Earnout Shares represent a freestanding equity-linked financial instrument to be evaluated under ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815-40. Based upon the analysis, Kernel concluded that the Earnout Shares should not be classified as a liability under ASC 480.
Under ASC 815-40, an entity must first evaluate whether an equity-linked instrument is considered indexed to the reporting entity’s stock. This analysis, which is performed under ASC 815-40-15, is a two-step test that includes evaluation of both exercise contingencies and settlement provisions. The Earnout Share arrangement contains contingencies – future revenue. The contingency is based on an observable market or an observable index other than one based on Kernel’s stock. With respect to settlement provisions, the number of Earnout Shares is adjusted only for dilutive activities, which are an input into the pricing of a fixed-for-fixed option on equity shares under ASC 815-40-15-7E(c). Specifically, it is noted that in the amended Business Combination Agreement, the quantity of Earnout Shares was fixed based on $10.00. It is important to note that, in absence of dilutive activities, there will be either zero or the applicable share amount issuable under the Earnout Share arrangement; therefore, the triggering events for issuance of shares is only an exercise contingency to be evaluated under step 1 of ASC 815-40-15.
Kernel next considered the equity classification conditions in ASC 815-40-25 and concluded that all of them were met. Therefore, the Earnout Share arrangement is appropriately classified in equity.
As the merger is accounted for as a reverse recapitalization, the fair value of the Earnout Share arrangement as of the merger date will be accounted for as an equity transaction (as a deemed dividend) as of the closing date of the merger.
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Warrants
Upon consummation of the Business Combination, there will be outstanding an aggregate of 15,237,500 Public Warrants and 8,750,000 Private Placement Warrants held by our Sponsor. Each of our outstanding whole warrants will be exercisable commencing 30 days following the Closing for one share of ParentCo common stock. Therefore, as of the date of this statement, if we assume that each outstanding whole warrant is exercised and one share of ParentCo common stock is issued as a result of such exercise, with payment to ParentCo of the exercise price of $11.50 per whole warrant for one whole share, ParentCo’s fully-diluted share capital would increase by a total of 23,987,500 shares, with approximately $275,856,250 million paid to ParentCo to exercise the warrants, assuming cash exercise.
Extension Share Award
Sponsor will be entitled to receive from ParentCo at Closing, as part of obtaining six (6) one-month extensions beyond the February 5, 2023 deadline to complete an initial business combination, additional shares of ParentCo common stock (collectively, an “Extension Share Award”). The Sponsor exercised five such one-month extensions through June 30, 2023, entitling the Sponsor to 1.5 million additional shares of ParentCo common stock at Closing. Through this filing, all the extensions were exercised, and a total of 1.8 million shares will be issued at Closing. Kernel is also estimating an additional $1.1 million of working capital costs that will have the same treatment and result in the issuance of an additional 1.1 million shares. The Sponsor as part of obtaining an additional six (6) one-month extensions to February 5, 2024 are entitled to 0.9 million additional shares for providing $0.9 million in extension payments. The unaudited combined pro forma information assumes that all unpaid extension payments will be deposited in the Trust Account and a total of 4.45 million shares will be issued to the Sponsor in settlement of the extension loans and working capital costs made to Kernel.
2. Adjustments to Unaudited Pro Forma Combined Financial Information
The unaudited pro forma combined financial information has been prepared to illustrate the effect of the Business Combination and has been prepared for informational purposes only.
The historical financial statements have been adjusted in the unaudited pro forma combined financial information to give pro forma effect to events that are directly attributable to the Business Combination. AIRO and Kernel have not had any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had ParentCo filed consolidated income tax returns during the periods presented.
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma combined statements of operations are based upon the number of ParentCo’s shares outstanding, assuming the Business Combination had been completed on January 1, 2023, the beginning of the earliest period presented.
Adjustments to Unaudited Pro Forma Combined Balance Sheet
(1) Reflects the transactions relating to the business combination and the release of funds as part of such agreement.
The Business Combination will not close under any scenario unless AIRO waives the Unencumbered Cash closing condition and the NTA Proposal is approved.
● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
| Assuming No Redemptions into Cash | Assuming 50% Redemptions into Cash | Assuming Maximum Redemptions into Cash | ||||||||||||||||||||||||||||||||||||||||
| Net Changes | Net Changes | Net Changes | ||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | Cash from trust | 5,564 | (i) | 5,564 | 2,782 | (i) | 2,782 | - | (i) | - | ||||||||||||||||||||||||||||||||
| Cash held in trust | Transfer of cash from trust | (5,564 | ) | (i) | (5,564 | ) | (5,564 | ) | (i) | (5,564 | ) | (5,564 | ) | (i) | (5,564 | ) | ||||||||||||||||||||||||||
| Accrued expenses and other current liabilities | Accrual for dissolution expenses | (100 | ) | (ii) | (100 | ) | (100 | ) | (ii) | (100 | ) | (100 | ) | (ii) | (100 | ) | ||||||||||||||||||||||||||
| KRNL Class A common stock subject to possible redemption | Transfer of common stock | (5,464 | ) | (iii) | (5,464 | ) | (5,464 | ) | (iii) | (5,464 | ) | (5,464 | ) | (iii) | (5,464 | ) | ||||||||||||||||||||||||||
| Additional paid-in capital | Increase for transfer of common stock | 5,464 | (iii) | 5,564 | 2,682 | (iii) | 2,782 | - | (iii) | - | ||||||||||||||||||||||||||||||||
| Accrual for dissolution expenses | 100 | (ii) | 100 | (ii) | - | (ii) | ||||||||||||||||||||||||||||||||||||
| (i) To record the release of cash from the trust account for redeemed shares | 0 | % | 50 | % | 100 | % | ||||||||||||||||||||||||||||||||||||
| Total number of redeemable shares | 509,341 | Shares redeemed | - | 254,670 | 509,341 | |||||||||||||||||||||||||||||||||||||
| Price per redeemable share | $ | 10.73 | ||||||||||||||||||||||||||||||||||||||||
| Total cash in trust at March 31, 2024 | $ | 5,564 | $ | 5,564 | $ | 5,564 | ||||||||||||||||||||||||||||||||||||
| (ii) To record reversal accrual for dissolution expenses | $ | 100 | $ | 100 | $ | 100 | ||||||||||||||||||||||||||||||||||||
| (iii) To record the stock subject to redemption to additional paid-in capital | $ | 5,464 | $ | 2,682 | $ | - | ||||||||||||||||||||||||||||||||||||
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(2) Represents estimated direct and incremental transaction costs incurred by Kernel and AIRO related to the Business Combination. This includes the payment of $11.7 million in accounts payable and accrued expenses recognized by AIRO and $0.3 million in accrued expenses recognized by Kernel; a $1.9 million payment for advisory services for AIRO and a $1.5 million payment to the Sponsor for advisory services for Kernel. Total of $15.4 million.
(3) Reflects the recapitalization of ParentCo through the issuance of 77,000,000 shares ($770,000,000 divided by $10.00) of ParentCo common stock at par value of $0.0001. Because closing adjustments to the AIRO Merger Consideration required by the terms of the Business Combination Agreement are expected to be immaterial, they have not been included in the pro forma calculations. Below is the computation of the AIRO Merger Consideration calculation as if the Closing had occurred on March 31, 2024. This takes into account all closing adjustments to the AIRO Merger Consideration calculations, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000. The adjustments were calculated based on the March 31, 2024 balance sheet. The calculation is the same for Scenarios 1-3.
| Merger Consideration | $ | 770,000 | ||
| (a) Net Working Capital Adjustment Minus/Plus | (12,163 | ) | ||
| (b) Closing Net Debt Adjustment | 41,992 | |||
| (c) Transaction expenses in excess of $14 million | - | |||
| Potential Adjusted Merger Consideration | $ | 799,829 |
(a) Minus the amount, if any, by which the Target Net Working Capital ($5 million) Amount exceeds the Net Working Capital by more than $500,000 (“Net Working Capital Threshold”)
| Current Assets | $ | 5,974 | ||
| Less: Current Liabilities | 18,637 | |||
| Net Working Capital at Closing | (12,663 | ) | ||
| Less: Net Working Capital Threshold | 500 | |||
| Net Working Capital Adjustment | $ | (12,163 | ) |
(b) The amount, if any, by which the Company Net Debt exceeds $500,000 (“Net Debt Threshold”)
| All indebtedness of Target Company | $ | 43,662 | ||
| Less: Company Closing Cash | 10,654 | |||
| Net Debt at Closing | 33,008 | |||
| Company Net Debt Threshold | 75,000 | |||
| Less: Excess of Company Net Debt over Threshold (less $500,000) | - | |||
| Plus: Excess of Company Debt under Threshold | $ | 41,992 |
(c) The amount, if any by which the Company Transaction Expenses exceed $14,000,000 (“Company Transaction Expense Threshold”)
| Transaction Expenses at Closing | $ | 14,000 | ||
| Company Transaction Expense Threshold | 14,000 | |||
| Excess of Transaction Expenses over Threshold | $ | - |
(4) Reflects the elimination of the historical accumulated deficit of Kernel, the legal acquirer, in the amount of $9.3 million.
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(5) The following is a detail of footnote (5) entry (in thousands) which is the same in all scenarios:
| Net Changes | ||||||||||
| Cash | Record 10% payment of Aspen Carve-out | (280 | ) | (23,975 | ) | |||||
| Record payment of shareholder promissory notes | (2,589 | ) | ||||||||
| Record payment of Sky Watch promissory notes | (6,831 | ) | ||||||||
| Record 10% payment of Carter Aviation debt | (4,954 | ) | ||||||||
| Record 10% payment of Aspen notes | (1,944 | ) | ||||||||
| Royalty payment | (520 | ) | ||||||||
| Payment of Coastal Defense notes payable | (1,002 | ) | ||||||||
| Pay portion of deferred compensation | (3,157 | ) | ||||||||
| Payment of Muncy Bank and First Citizens Community Bank debt | (1,651 | ) | ||||||||
| Payment of line of credit | (1,047 | ) | ||||||||
| Due to seller | Record payment of shareholder promissory notes | (6,831 | ) | (6,831 | ) | |||||
| Contingent consideration | ||||||||||
| Recording of shareholder promissory notes due to now being deemed probable | 5,120 | (45,382 | ) | |||||||
| Recording of Carter Aviation debt due to now being deemed probable | 13,536 | |||||||||
| Recording of Aspen Carve-out | 2,803 | |||||||||
| Record 10% payment of Aspen Carve-out | (280 | ) | ||||||||
| Convert 90% of Aspen Carve-out to equity | (2,523 | ) | ||||||||
| Convert shareholder promissory notes to equity | (11,928 | ) | ||||||||
| Convert 90% of Carter Aviation debt to equity | (44,567 | ) | ||||||||
| Record payment of shareholder promissory notes | (2,589 | ) | ||||||||
| Record 10% payment of Carter Aviation debt | (4,954 | ) | ||||||||
| Related party payable | Royalty payment | (520 | ) | (520 | ) | |||||
| Revolving lines of credit | Payment of line of credit | (1,045 | ) | (1,045 | ) | |||||
| Related party borrowings | Payment of Coastal Defense notes payable | (1,003 | ) | (1,003 | ) | |||||
| Current maturities of debt | Record debt fair value adjustment | 14 | (21,079 | ) | ||||||
| Convert 90% of Aspen notes | (17,497 | ) | ||||||||
| Payment of 10% of Aspen notes | (1,944 | ) | ||||||||
| Payment of Muncy Bank and First Citizens Community Bank debt | (1,652 | ) | ||||||||
| Deferred compensation | Convert accrued compensation to equity | (6,747 | ) | (9,904 | ) | |||||
| Pay accrued compensation | (3,157 | ) | ||||||||
| Additional paid-in capital | Convert shareholder promissory notes to equity | 11,928 | 84,612 | |||||||
| Convert 90% of Carter Aviation debt to equity | 44,567 | |||||||||
| Convert 90% NGA fee | 1,350 | |||||||||
| Convert 90% of Aspen notes | 17,497 | |||||||||
| Convert 90% of Aspen Carve-out to equity | 2,523 | |||||||||
| Convert 90% of accrued compensation to equity | 6,747 | |||||||||
| Accumulated deficit | ||||||||||
| Recording of promissory notes due to now being deemed probable | (5,120 | ) | (22,823 | ) | ||||||
| Recording of Carter Aviation debt due to now being deemed probable | (13,536 | ) | ||||||||
| Recording of Aspen Carve-out | (2,803 | ) | ||||||||
| Record debt fair value adjustment | (14 | ) | ||||||||
| Expense NGA fee | (1,350 | ) |
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(6) Reflects the Extension Loans with Sponsor of $2.7 million that was transferred to the Trust Account to be distributed to the Kernel Public Shareholders. In addition to the $2.7 million of Extension Loans, Kernel entered into an additional $1.75 million of loans to fund D&O insurance and other operating costs. Upon completion of the Business Combination, 4.45 million extension shares will be issued in settlement of the Extension Loans.
In accordance with the Business Combination Agreement, any such deposits whether for an Extension or working capital, will be payable upon the Closing. The settlement of the Extension Loans for shares of new issue ParentCo common stock represents a debt extinguishment. As such, the adjustment included a loss on extinguishment of debt of $44.5 million based on the extension share valuation.
The per share value was determined using the valuation of the shares being exchanged for ParentCo shares, pursuant to which “Per Share Price” means Ten and No/100 Dollars ($10.00). The AIRO Merger Consideration is $770 million divided by 77 million shares equals $10.00. Since the new issuance of the shares would occur on the closing date the “Per Share Price” would be the same for issuances of shares to the target company and Sponsor. See calculations below (in thousands except share and per share data):
| Amount of | Number of Shares Per loan | Total Extension | Per Share | Total Extension Share | ||||||||||||||||
| Loan | Dollar | Shares | Value | Valuation | ||||||||||||||||
| First Extension February 3, 2023 | $ | 300 | 1 | 300 | $ | 10.00 | $ | 3,000 | ||||||||||||
| Second Extension March 3, 2023 | 300 | 1 | 300 | $ | 10.00 | 3,000 | ||||||||||||||
| Third Extension April 3, 2023 | 300 | 1 | 300 | $ | 10.00 | 3,000 | ||||||||||||||
| Fourth Extension May 3, 2023 | 300 | 1 | 300 | $ | 10.00 | 3,000 | ||||||||||||||
| Fifth Extension June 3, 2023 | 300 | 1 | 300 | $ | 10.00 | 3,000 | ||||||||||||||
| Sixth Extension July 3, 2023 | 300 | 1 | 300 | $ | 10.00 | 3,000 | ||||||||||||||
| Estimated working capital loans | 1,750 | 1 | 1,750 | $ | 10.00 | 17,500 | ||||||||||||||
| First Extension August 3, 2023 | 150 | 1 | 150 | $ | 10.00 | 1,500 | ||||||||||||||
| Second Extension September 3, 2023 | 150 | 1 | 150 | $ | 10.00 | 1,500 | ||||||||||||||
| Third Extension October 3, 2023 | 150 | 1 | 150 | $ | 10.00 | 1,500 | ||||||||||||||
| Fourth Extension November 3, 2023 | 150 | 1 | 150 | $ | 10.00 | 1,500 | ||||||||||||||
| Fifth Extension December 3, 2023 | 150 | 1 | 150 | $ | 10.00 | 1,500 | ||||||||||||||
| Sixth Extension January 3, 2024 | 150 | 1 | 150 | $ | 10.00 | 1,500 | ||||||||||||||
| $ | 4,450 | 4,450 | $ | 44,500 | ||||||||||||||||
As of December 31, 2023, Kernel received $4.2 million in total Extension Loan proceeds, of which $1.5 million is expected to be used to fund working capital amounts.
In March 2024, Kernel received $0.25 million in additional Extension Loan proceeds for a total of $4.45 million.
A portion of the Extension Loans ($1.95 million) were received under Subscription Agreements.
(7) Reflects the $6.7 million of expense for debt premiums, $2.0 million related to the Management Carveout Plan payable in stock at the Closing of the transaction, $10.7 million related to the modification of the Restricted Stock Awards which will become probable at the Closing of the transaction, and $0.5 million related to the termination of the Meteora agreement payable in stock at the Closing of the transaction. These debt premiums are made up of $3.0 million related party notes and $3.7 million premiums on the Bridge Loans. Total is $19.9 million.
(8) Reflects the amount of negative cash recategorized to accounts payable.
Adjustments to the Unaudited Pro Forma Combined Statements of Operations (in thousands, except share and per share data)
The pro forma adjustments included in the unaudited pro forma combined statements of operations for the year ended December 31, 2023 and the three months ended March 31, 2024 are as follows:
(aa) Represents the elimination of historical interest income earned on the Trust Account.
(bb) Represents the conversion of 509,341 Class A Ordinary Shares in Scenario 1 (Scenarios 2 – 254,671 and Scenario 3 – no shares) and 7,618,750 Class B Ordinary Shares into shares of ParentCo common stock, the issuance of 77,000,000 shares of ParentCo common stock, the issuance of 4,450,000 Extension shares, inclusive of 1,750,000 shares related to funding working capital amounts expected prior to closing as detailed in (7) above and the issuance of 50,000 Meteora Termination Shares. (The number of shares of ParentCo common stock to be issued in the Business Combination are subject to closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14 million, that are expected to be immaterial.)
(cc) Record $6.7 million of expense for debt premiums payable in stock at the closing of the transaction, $44.5 million related to the extension shares as detailed in (7) above and $0.1 million related to the amortization of Kernel’s Subscription Agreement to fair value. Total is $51.3 million.
(dd) Record a $13.8 million fair value charge related to contingent consideration and a $5.1 million charge for contingent promissory notes to the Merger Entities. Total is $18.9 million. Contingent consideration amounts include $49.5 million related to Jaunt but for which only $35.8 million had been recorded as of December 31, 2023. Contingent promissory notes totaled $14.5 million but for which only $9.4 had been recorded as of December 31, 2023.
(ee) Record estimated direct and incremental transaction costs of $3.3 million for AIRO and $1.5 million for Kernel, $2.0 million related to the stock portion of the Management Carveout Plan, $10.7 million related to the modification of the Restricted Stock Awards which will become probable at the Closing of the transaction $0.9 million related to the cash portion of the Management Carveout Plan, $0.5 million related to the termination of the Meteora agreement payable in stock at the Closing of the transaction and $1.9 million attributable to future allowable services or to be payable to the former Aspen Avionics shareholders as part of the Business Combination. Total is $20.7 million. Amounts payable under the Management Carveout Plan, Restricted Stock Awards and Aspen Avionics agreements had not been deemed probable as of December 31, 2023 and thus had not been recorded as of December 31, 2023.
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(ff) Adjustment is the reversal of $6.6 million and $0.5 million derivative charge recorded during the year December 31, 2023 and the three months ended March 31, 2024, respectively.
(gg) Represents issuance date fair value of the Earnout Shares to be awarded to each of the AIRO stockholders, which are expected to be treated as dividend distributions and recorded in additional paid-in capital. Earnout Shares shall be awarded to the AIRO Stockholders upon the achievement of certain revenue targets pursuant to the terms of the Business Combination Agreement, as amended. The issuance date fair value of the Earnout Shares was determined using a Monte Carlo Simulation approach. The Company estimated the issuance of the corresponding Earnout Shares for each simulated revenue path. The fair value is then determined by averaging the issuances across all simulated paths.
(hh) Adjustment is the reversal of $0.2 million of fair value charges recorded during the three months ended March 31, 2024 as amounts would have been recorded in 2023 assuming a January 1, 2023 Closing as part of adjustment (dd) above.
3. Net loss per Share
Represents the net loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2023, the beginning of the earliest period presented. As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable relating to the Business Combination have been outstanding for the entire period presented. When assuming maximum redemption, this calculation is adjusted to eliminate such shares for the entire period.
The unaudited pro forma combined statements of operations have been prepared under each of the Scenarios set forth below following the closing of the Business Combination (in thousands, except share and per share data):
| For the Three Months Ended March 31, 2024 | ||||||||||||
| Pro Forma Combined (Assuming No Redemptions) | Pro Forma Combined (Assuming 50% Redemptions Scenario) | Pro Forma Combined (Assuming Maximum Redemptions Scenario) | ||||||||||
| Pro forma net loss | $ | (2,472 | ) | (2,472 | ) | $ | (2,472 | ) | ||||
| Basic and diluted weighted average shares | 89,628,091 | 89,373,421 | 89,118,750 | |||||||||
| Net loss per share – basic and diluted | $ | (0.03 | ) | (0.03 | ) | $ | (0.03 | ) | ||||
| For the Year Ended December 31, 2023 | ||||||||||||
| Pro Forma Combined (Assuming No Redemptions) | Pro Forma Combined (Assuming 50% Redemptions Scenario) | Pro Forma Combined (Assuming Maximum Redemptions Scenario) | ||||||||||
| Pro forma net loss | $ | (126,603 | ) | (126,603 | ) | $ | (126,603 | ) | ||||
| Basic and diluted weighted average shares | 89,628,091 | 89,373,421 | 89,118,750 | |||||||||
| Net loss per share – basic and diluted | $ | (1.41 | ) | (1.42 | ) | $ | (1.42 | ) | ||||
| Stockholder | Pro Forma Combined (Assuming No Redemptions Scenario) | Pro Forma Combined (Assuming 50% Redemptions Scenario) | Pro Forma Combined (Assuming Maximum Redemptions Scenario) | |||||||||
| Shares issued to AIRO owners | 77,000,000 | 77,000,000 | 77,000,000 | |||||||||
| Kernel Public Shareholders | 509,341 | 254,671 | - | |||||||||
| Kernel Class B Shares | 7,618,750 | 7,618,750 | 7,618,750 | |||||||||
| Extension Shares | 4,450,000 | 4,450,000 | 4,450,000 | |||||||||
| Meteora Termination Shares | 50,000 | 50,000 | 50,000 | |||||||||
| 89,628,091 | 89,373,421 | 89,118,750 | ||||||||||
The table above presents the trust value per share to a Public Shareholder that elects not to redeem across a range of redemptions scenarios. For purposes of calculating the redemption scenarios, the trust value date as of December 31, 2023 is used because such date is the date the redemption requests in connection with the Extension Meeting - Second were effectuated. The Business Combination will not close under any scenario unless AIRO waives the Unencumbered Cash closing condition and the NTA Proposal is approved.
● Scenario 1: Assuming No Redemptions: This presentation assumes that no Kernel Public Shareholders exercise redemption rights with respect to their Public Shares of 509,341 which were outstanding as of the date of this filing. Public Shares are based on a total of 30,475,000 redeemable Public Shares pursuant to the Kernel Charter less the 22,848,122 Public Shares redeemed in February 2023, 1,310,929 Public Shares redeemed in August 2023 and 5,806,608 Public Shares redeemed in February 2024.
● Scenario 2: Assuming 50% Redemptions: This presentation assumes that 50% of Kernel Public Shareholders holding 254,670 Public Shares will exercise their redemption rights for approximately $2.8 million of funds in Kernel’s Trust Account.
● Scenario 3: Assuming Maximum Redemptions: This presentation assumes that 100% of Kernel public shareholders holding 509,341 Public Shares will exercise their redemption rights for approximately $5.5 million of funds in Kernel’s Trust Account.
At the Business Combination, there is one class of stock, ParentCo common stock (Class B common stock converts to Class A common stock immediately following the Domestication, and all Class A common stock converts to Kernel common stock, which in turn will be exchanged for ParentCo Common Stock at Closing). Private Placement Warrants to purchase 8,750,000 shares of common stock and Public Warrants to purchase 15,237,500 shares of common stock were not used in the computation of basic and diluted weighted average shares outstanding, because the effect of inclusion would be anti-dilutive due to the excess of the strike price of $11.50 as compared to the Business Combination Agreement price of $10.00 per share.
Amounts do not reflect closing adjustments to the AIRO Merger Consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are expected to be immaterial.
This information is only a summary and should be read together with the selected historical financial information summary included elsewhere in this registration statement and the audited and unaudited financial statements of Kernel and AIRO and related notes that are included elsewhere in this registration statement.
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Overview
Kernel is a blank check company incorporated as a Cayman Islands exempted company on November 10, 2020 for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities.
Significant Activities Since Inception
The registration statement for Kernel’s IPO was declared effective on February 2, 2021. On February 5, 2021, Kernel consummated its Initial Public Offering of 30,475,000 units (the “Units” and, with respect to the Class A Ordinary Shares included in the Units being offered, the “Public Shares”), at $10.00 per Unit, including 3,975,000 Over-Allotment Units, at $10.00 per Unit, generating gross proceeds of approximately $304.8 million, and incurring offering costs of approximately $17.4 million, of which approximately $10.7 million was for deferred underwriting commissions.
Simultaneously with the closing of the IPO, Kernel consummated the private placement of 8,750,000 warrants (each, a “Private Placement Warrant” and collectively, the “Private Placement Warrants”), at a price of $1.00 per Private Placement Warrant with Kernel’s original sponsor, Kernel Capital Holdings, LLC, generating gross proceeds of approximately $8.8 million.
Upon the closing of the IPO and the Private Placement, approximately $304.8 million ($10.00 per Unit) of the net proceeds of the IPO and certain of the proceeds of the Private Placement were placed in a trust account (“Trust Account”) with Continental Stock Transfer & Trust Company, established for the benefit of Kernel’s Public Shareholders.
On December 28, 2022, Kernel entered into a purchase agreement (the “Purchase Agreement”) with Kernel Capital Holdings, LLC, the previous sponsor, which held 7,493,750 Founder Shares and 8,750,000 Private Placement Warrants, and VKSS Capital, LLC (the “Sponsor”), Kernel’s new sponsor, pursuant to which Kernel Capital Holdings, LLC transferred to VKSS Capital, LLC all of its Founder Shares and Private Placement Warrants. At the time of the purchase, Kernel’s prior board of directors and executive officers resigned and were replaced by appointees of Sponsor. In addition, certain of Kernel’s new executive officers have beneficial interests in the Sponsor.
On February 3, 2023, Kernel held an extraordinary general meeting of shareholders, at which shareholders voted upon, among other items, a proposal (the “Extension Amendment Proposal”) to amend Kernel’s Amended and Restated Memorandum and Articles of Association (the “Charter Amendment”) to extend the date by which Kernel must consummate an initial business combination from February 5, 2023 by up to six (6) one-month Extensions (defined below) to August 5, 2023 (the “Extension Meeting”). At the Extension Meeting, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Charter Amendment.
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting, a total of 200 Kernel shareholders elected to redeem an aggregate of 22,848,122 Public Shares. Following the payment of redemptions, Kernel had approximately $77.6 million left in its Trust Account.
On August 3, 2023, Kernel held an extraordinary general meeting of shareholders, at which shareholders voted upon, among other items, a proposal (the “Second Extension Amendment Proposal”) to amend Kernel’s Amended and Restated Memorandum and Articles of Association (the “Second Charter Amendment”) to extend the date by which Kernel must consummate an initial business combination from August 5, 2023 by up to six (6) one-month Extensions to February 5, 2024 (the “Extension Meeting - Second”). At the Extension Meeting - Second, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Second Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Second Charter Amendment.
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting - Second, holders of 1,310,929 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.44 per share, for an aggregate of approximately $13.7 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $65.9 million.
On February 1, 2024, Kernel held an extraordinary general meeting of its shareholders (the “Extension Meeting - Third”). At the Extension Meeting - Third, the Company’s shareholders entitled to vote at the meeting cast their votes and approved a proposal (the “Third Extension Amendment Proposal”) to amend the Kernel’s Amended and Restated Memorandum and Articles of Association (the “Third Charter Amendment”) to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A Ordinary Shares included as part of the Units sold in Kernel’s IPO. The Third Charter Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”), unless the closing of Kernel’s initial business combination shall have occurred. At the Extension Meeting - Third, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Third Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Third Charter Amendment.
In connection with the approval of the Third Extension Amendment Proposal and the Third Trust Amendment Proposal at the Extension Meeting - Third, holders of 5,806,608 of the Kernel’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account will have a balance of approximately $5.5 million.
On February 5, 2024, Kernel received a notice from the staff of the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, unless Kernel timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”), Kernel’s securities would be subject to suspension and delisting from The Nasdaq Capital Market at the opening of business on February 14, 2024, due to Kernel’s non-compliance with Nasdaq IM-5101-2, which requires that a special purpose acquisition company must complete one or more business combinations within 36 months of the effectiveness of its IPO registration statement. Since Kernel’s registration statement for its initial public offering became effective on February 2, 2021, it was required by this rule to complete its initial business combination by no later than February 2, 2024. Kernel timely requested a hearing before the Panel to request sufficient time to complete the Business Combination with AIRO Group Holdings. The hearing request will result in a stay of any suspension or delisting action pending the hearing. The hearing took place on April 11, 2024. On April 19, 2024, the Panel issued written notice of its decision to grant the Company’s request for an exception to its listing deficiencies until July 1, 2024 in view of the Company’s substantial steps toward closing its previously announced initial business combination with AIRO Group Holdings and its plan for achieving compliance with Nasdaq listing rules upon closing of the transaction for listing on The Nasdaq Capital Market. On June 20, 2024, the Company requested that the Panel extend the deadline to regain compliance from July 1, 2024 to August 5, 2024, and on June 20, 2024, the request was granted. There can be no assurance that Kernel will be able to satisfy Nasdaq’s continued listing requirements, regain compliance with Nasdaq IM-5101-2, and maintain compliance with other Nasdaq listing requirements.
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Effecting a Business Combination
Kernel is not presently engaged in, and will not engage in, any operations until after the Business Combination. Kernel intends to effect the Business Combination using cash held in the Trust Account.
On February 3, 2023, at 10:00 a.m. ET, Kernel held an extraordinary general meeting of its shareholders (the “Extension Meeting”). At the Extension Meeting, Kernel’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 Kernel may extend the date on which Continental must liquidate the Trust Account if Kernel has not completed its initial business combination to the procedures in an amendment to Kernel’s Amended and Restated Memorandum and Articles of Association which was also approved by Kernel’s shareholders at the Extension Meeting.
Kernel’s shareholders approved the Amendment to the Amended and Restated Memorandum and Articles of Association of Kernel (the “Extension Amendment”) at the February 3, 2023 Extension Meeting, changing the structure and cost of the Company’s right to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A Ordinary Shares included as part of the Units sold in Kernel’s initial public offering.
The Extension Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2023 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”) 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. To obtain each 1-month extension, Kernel, the Sponsor or any of their affiliates or designees must deposit into Kernel’s Trust Account with Continental by the deadline applicable prior to the extension the lesser of (x) $300,000 or (y) $0.06 per share for each of Kernel’s publicly held shares outstanding as of the deadline prior to the extension (after giving effect to redemptions in connection with the approval of the Charter Amendment by Kernel’s shareholders with respect to the first such extension).
In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Extension Meeting, holders of 22,848,122 of Kernel’s Class A Ordinary Shares exercised their right to redeem those shares for cash at an approximate price of $10.14 per share, for an aggregate of approximately $231.9 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $77.6 million before any extension payment.
On February 5, 2023, Kernel timely deposited an aggregate of $300,000 into the Trust Account, representing $0.04 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from February 5, 2023 to March 5, 2023.
On March 5, 2023, Kernel timely deposited an aggregate of $300,000 into the Trust Account, representing $0.04 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from March 5, 2023 to April 5, 2023.
On April 3, 2023, Kernel timely deposited an aggregate of $300,000 into the Trust Account, representing $0.04 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from April 5, 2023 to May 5, 2023.
On May 5, 2023, Kernel timely deposited an aggregate of $300,000 into the Trust Account, representing $0.04 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from May 5, 2023 to June 5, 2023.
On June 5, 2023, Kernel timely deposited an aggregate of $300,000 into the Trust Account, representing $0.04 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from June 5, 2023 to July 5, 2023.
On July 5, 2023, Kernel timely deposited an aggregate of $300,000 into the Trust Account, representing $0.04 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from July 5, 2023 to August 5, 2023.
On August 3, 2023, the Company held an extraordinary general meeting of its shareholders (the “Extension Meeting - Second”). At the Extension Meeting - Second, the Company’s shareholders entitled to vote at the meeting cast their votes and approved a proposal (the “Second Extension Amendment Proposal”) to amend the Company’s Amended and Restated Memorandum and Articles of Association (the “Second Charter Amendment”) 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% of the Company’s Class A Ordinary Shares included as part of the Units sold in the Company’s IPO. The Second Charter Amendment allows the Company to extend the Termination Date by up to six (6) one-month extensions to February 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”). To obtain each 1-month Extension, the Company, its Sponsor or any of their affiliates or designees must deposit into the Company’s Trust Fund the lesser of (x) $150,000 or (y) $0.04 per share for each of the Company’s publicly held shares outstanding as of the deadline prior to the Extension (after giving effect to redemptions in connection with the approval of the Second Charter Amendment by the Company’s shareholders with respect to the first such Extension), unless the closing of the Company’s initial business combination shall have occurred (the “Extension Payment”), in exchange for a non-interest bearing, unsecured promissory note payable upon consummation of a business combination.
At the Extension Meeting - Second, the Company’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Second Trust Amendment Proposal”), to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial business combination to the procedures in the Second Charter Amendment.
In connection with the approval of the Second Extension Amendment Proposal and the Second Trust Amendment Proposal at the Extension Meeting - Second, holders of 1,310,929 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.44 per share, for an aggregate of approximately $13.7 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $65.9 million before the Extension Payment.
On August 5, 2023, Kernel timely deposited an aggregate of $150,000 into the Trust Account, representing $0.02 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from August 5, 2023 to September 5, 2023.
On September 5, 2023, Kernel timely deposited an aggregate of $150,000 into the Trust Account, representing $0.02 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from September 5, 2023 to October 5, 2023.
On October 5, 2023, Kernel timely deposited an aggregate of $150,000 into the Trust Account, representing $0.02 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from October 5, 2023 to November 5, 2023.
On November 6, 2023, Kernel timely deposited an aggregate of $150,000 into the Trust Account, representing $0.02 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from November 5, 2023 to December 5, 2023.
On November 1, 2023 and November 6, 2023, the Kernel entered into loan agreements with two investors and the Sponsor (the “November Loan Agreements”). Pursuant to the November Loan Agreements, the investors loaned the Sponsor a total of $250,000, which will in turn be loaned by the Sponsor to Kernel, to cover a portion of the extension fees with any remaining balance to be used for Kernel’s working capital. The Loan Agreements accrue 8% interest per annum and shall be repaid upon closing the initial Business Combination. Kernel intends to pay all principal under the Loan Agreements and shall not be responsible for the payment of any interest on the loans.
On December 4, 2023, Kernel timely deposited an aggregate of $150,000 into the Trust Account, representing $0.02 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from December 5, 2023 to January 5, 2024.
On January 4, 2024, Kernel timely deposited an aggregate of $150,000 into the Trust Account, representing $0.02 per Public Share remaining outstanding after the redemptions, to further extend the period of time it has to consummate its initial business combination by one month from January 5, 2024 to February 5, 2024.
On February 1, 2024, Kernel held an extraordinary general meeting of its shareholders (the “Extension Meeting - Third”). At the Extension Meeting - Third, the Company’s shareholders entitled to vote at the meeting cast their votes and approved a proposal (the “Third Extension Amendment Proposal”) to amend the Kernel’s Amended and Restated Memorandum and Articles of Association (the “Third Charter Amendment”) to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A Ordinary Shares included as part of the Units sold in Kernel’s IPO. The Third Charter Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”), unless the closing of Kernel’s initial business combination shall have occurred. At the Extension Meeting - Third, Kernel’s shareholders also approved a proposal to amend the Trust Agreement, as defined below (the “Third Trust Amendment Proposal”) to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Third Charter Amendment.
In connection with the approval of the Third Extension Amendment Proposal and the Third Trust Amendment Proposal at the Extension Meeting - Third, holders of 5,806,608 of the Kernel’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account will have a balance of approximately $5.5 million.
On February 5, 2024, the Company further extended the period of time it has to consummate its initial business combination by one month from February 4, 2024 to March 5, 2024.
On March 5, 2024, the Company further extended the period of time it has to consummate its initial business combination by one month from March 4, 2024 to April 5, 2024.
On April 5, 2024, the Company further extended the period of time it has to consummate its initial business combination by one month from April 5, 2024 to May 5, 2024.
On May 3, 2024, the Company further extended the period of time it has to consummate its initial business combination by one month from May 5, 2024 to June 5, 2024.
On June 3, 2024, the Company further extended the period of time it has to consummate its initial business combination by one month from June 5, 2024 to July 5, 2024.
On July 3, 2023, the Company further extended the period of time it has to consummate its initial business combination by one month from July 5, 2024 to August 5, 2024.
Selection of a Target Business and Structuring of the Initial Business Combination
Under the Nasdaq rules, an initial business combination must occur with one or more target businesses that together have a fair market value of at least 80% of Kernel’s assets held in the Trust Account (excluding taxes payable on the income earned on the Trust Account count) at the time of the agreement to enter into the initial business combination. The fair market value of the target or targets will be determined by the Kernel Board based upon one or more standards generally accepted by the financial community, such as discounted cash flow valuation or value of comparable businesses. Subject to this requirement, Kernel’s management has had virtually unrestricted flexibility in identifying and selecting one or more prospective target businesses, although Kernel was not permitted to effectuate an initial business combination with another blank check company or a similar company with nominal operations. In any case, Kernel determined that it would only complete an initial business combination in which it legally acquired 50% or more of the outstanding voting securities of the target or were otherwise not required to register as an investment company under the Investment Company Act.
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Redemption Rights for Holders of Public Shares
Kernel will provide Public Shareholders with the opportunity to redeem all or a portion of their Class A Ordinary Shares upon the completion of the initial business combination at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account calculated as of two business days prior to the completion of the initial business combination, including interest earned on the funds held in the trust account and not previously released to Kernel to pay Kernel’s taxes, if any, divided by the number of then outstanding Public Shares, subject to the limitations described herein. The amount in the trust account is initially $10.00 per Public Share. The per-share amount Kernel will distribute to investors who properly redeem their shares will not be reduced by the deferred underwriting commissions Kernel will pay to the underwriters.
The redemption rights will include the requirement that a beneficial holder must identify itself in order to validly redeem its shares. Kernel’s Sponsor, directors and each member of Kernel’s management have entered into the Kernel Support Agreement with Kernel, pursuant to which they have agreed to waive their redemption rights with respect to any Founder Shares and any Public Shares held by them in connection with (i) the completion of Kernel’s initial business combination and (ii) a shareholder vote to approve an amendment to the Existing Kernel Governing Documents that would affect the substance or timing of Kernel’s obligation to allow redemption in connection with Kernel’s initial business combination or to redeem 100% of Kernel’s Public Shares if Kernel has not completed an initial business combination within the period to consummate the initial business combination. However, unless the NTA Proposal is approved, Kernel will only redeem the Public Shares so long as (after such redemption) Kernel’s net tangible assets will be at least $5,000,001 either immediately prior to or upon consummation of its initial business combination and after payment of deferred underwriters’ fees and commissions. If this optional redemption right is exercised with respect to an excessive number of Public Shares such that Kernel cannot satisfy the net tangible asset requirement, and the NTA Proposal is not approved, Kernel would not proceed with the amendment or the related redemption of Kernel’s Public Shares at such time. There will be no redemption rights or liquidating distributions with respect to Kernel’s warrants, which will expire worthless if Kernel fails to complete Kernel’s initial business combination prior to the Termination Date.
All costs and expenses associated with implementing Kernel’s plan of dissolution, as well as payments to any creditors, will be funded from amounts remaining out of the approximately $500,000 of proceeds held outside the trust account, although Kernel cannot assure that there will be sufficient funds for such purpose. Kernel will depend on sufficient interest being earned on the proceeds held in the trust account to pay any tax obligations Kernel may owe. However, if those funds are not sufficient to cover the costs and expenses associated with implementing Kernel’s plan of dissolution, to the extent that there is any interest accrued in the trust account not required to pay taxes on interest income earned on the trust account balance, Kernel may request the trustee to release to Kernel an additional amount of up to $100,000 of such accrued interest to pay taxes, and these costs and expenses.
Submission of Kernel’s Initial Business Combination to a Shareholder Vote
Kernel is providing its Public Shareholders with redemption rights upon consummation of the Business Combination. Public Shareholders electing to exercise their redemption rights will be entitled to receive the cash amount specified above, provided that such shareholders follow the specific procedures for redemption set forth in this proxy statement/prospectus relating to the shareholder vote on a business combination. Unlike many other blank check companies, Kernel’s Public Shareholders are not required to vote against the Business Combination in order to exercise their redemption rights. If the Business Combination is not completed, then Public Shareholders electing to exercise their redemption rights will not be entitled to receive such payments.
The holders of the Founder Shares and Class A Ordinary Shares underlying the Private Placement Warrants have agreed to vote such Kernel Ordinary Shares owned by them in favor of the Business Combination. In addition, the Sponsor and Kernel’s officers and directors have agreed to waive their redemption rights with respect to any capital stock they may hold in connection with the consummation of the Business Combination.
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Limitation on Redemption Rights
Notwithstanding the foregoing, the Existing Kernel Governing Documents 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 Exchange Act), will be restricted from seeking redemptions with respect to more than 15% of the shares sold in the IPO.
Employees
Kernel currently has two executive officers. These individuals are not obligated to devote any specific number of hours to Kernel’s matters, but they intend to devote as much of their time as they deem necessary to Kernel’s affairs until Kernel has completed the Business Combination. Kernel does not intend to have any full-time employees prior to the completion of the Business Combination.
Directors and Executive Officers
Our executive officers and directors are as follows:
| Name | Age | Position | ||
| Surendra Ajjarapu | 53 | Chairman and Chief Executive Officer | ||
| Howard Doss | 70 | Chief Financial Officer | ||
| Michael Peterson | 61 | Director | ||
| Donald Fell | 78 | Director | ||
| Venkatesh Srinivas | 56 | Director | ||
| Siva Srinivasan | 49 | Director |
Surendra Ajjarapu
Surendra Ajjarapu has served as Chief Executive Officer and Chairman of Kernel since December 2023. In addition to his involvement with Kernel, Mr. Ajjarapu has served as Chief Executive Officer and Chairman of PowerUp Acquisitions Corp. (Nasdaq: PWUP), a special purpose acquisition company since August 2023. Mr. Ajjarapu also served as Chief Executive Officer and Chairman of Semper Paratus Acquisition Corporation (Nasdaq: LSGT), a special purpose acquisition company, from June 2023 until the completion of its initial business combination in February 2024. Mr. Ajjarapu now serves as a director of the post-combination company Tevogen Bio Holdings Inc. (Nasdaq: TVGN). Mr. Ajjarapu also serves as Chief Executive Officer and Chairman of OceanTech Acquisitions I Corp. (Nasdaq: OTEC), a special purpose acquisition company, since March 2023. Mr. Ajjarapu currently serves Trxade Health, Inc. (Nasdaq: MEDS), a health services information technology company, as Chairman of the Board, Chief Executive Officer and Secretary and has served in these roles since its acquisition of Trxade Group, Inc., a Nevada corporation (“Trxade Nevada”) on January 8, 2014, and as the Chairman of the Board, Chief Executive Officer and Secretary of Trxade Nevada since its inception in 2013. Mr. Ajjarapu is also currently serving as a director of the merged company, Ocean Biomedical Inc. (Nasdaq: OCEA) (f.k.a Aesther Healthcare Acquisition Corp.), a biopharmaceutical company. Since March 2018, Mr. Ajjarapu has served as Executive Chairman of the Board of Kano Energy Corp., a company involved in the development of renewable natural gas sites in the United States. Mr. Ajjarapu was a Founder and served as Chief Executive Officer and Chairman of the Board of Sansur Renewable Energy, Inc., a company involved in developing wind power sites in the Midwest of the United States, from March 2009 to December 2012. Mr. Ajjarapu was also a Founder, President and Director of Aemetis, Inc., a biofuels company (Nasdaq: AMTX), and a Founder, Chairman and Chief Executive Officer of International Biofuels, a subsidiary of Aemetis, Inc., from January 2006 to March 2009. Mr. Ajjarapu was Co-Founder, Chief Operations Officer, and Director of Global Information Technology, Inc., an IT outsourcing and systems design company, headquartered in Tampa, Florida with major operations in India. Mr. Ajjarapu graduated from South Dakota State University with a M.S. in Environmental Engineering, and from the University of South Florida with an M.B.A., specializing in International Finance and Management. Mr. Ajjarapu is also a graduate of the Venture Capital and Private Equity program at Harvard University.
Howard Doss
Howard Doss has served as Chief Financial Officer of Kernel since December 2022. Mr. Doss is a seasoned chief financial officer and accountant. Mr. Doss has served as Chief Financial Officer of PowerUp Acquisitions Corp. (Nasdaq: PWUP), a special purpose acquisition company since August 2023. Beginning in 2021, he served as Chief Financial Officer of Aesther Healthcare Acquisition Corp., a special purpose acquisition company until it consummated its initial business combination in February 2023. He has also served as chief financial officer of TRxADE HEALTH, INC., an online marketplace for health traded on Nasdaq under the symbol “MEDS.” Mr. Doss has served in a variety of capacities with accounting and investment firms. He joined the staff of Seidman & Seidman (BDO Seidman, Dallas) in 1977 and in 1980 he joined the investment firm Van Kampen Investments, opening the firm’s southeast office in Tampa, Florida in 1982. He remained with the firm until 1996 when he joined Franklin Templeton. After working for the Principal Financial Group office in Tampa, Florida, Mr. Doss was City Executive for U.S. Trust in Sarasota, Florida, responsible for high net worth individuals. He retired from that position in 2009. He served as CFO and Director for Sansur Renewable Energy an alternative energy development company, from 2010 to 2012. Mr. Doss has also served as President of STARadio Corp. since 2005. Mr. Doss is a member of the America Institute of CPA’s. He is a graduate of Illinois Wesleyan University.
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Kernel’s executive officers are supported by a seasoned group of independent directors composed of executives and entrepreneurs with a unique combination of experiences in wholesale and retail, logistics and distribution, brands and technology development, and business transformation, which includes Michael Peterson, Donald Fell, Venkatesh Srinivasan and Siva Saravanan, with Mr. Ajjarapu also serving as members of the Kernel Board.
Michael Peterson
Michael Peterson has served as a director of Kernel since December 2022. Mr. Peterson has served as a director of PowerUp Acquisitions Corp. (Nasdaq: PWUP), a special purpose acquisition company, since August 2023. Mr. Peterson served as a director of Semper Paratus Acquisition Corporation (Nasdaq: LSGT), a special purpose acquisition company from June 2023 until the completion of its initial business combination in February 2024. Mr. Peterson also serves as a director of OceanTech Acquisitions I Corp. (Nasdaq: OTEC), a special purpose acquisition company since March 2023. Mr. Peterson has been serving as President, Chief Executive Officer and as a member of the Board of Directors of Lafayette Energy Corp. in April 2022. Beginning in September 2021, Mr. Peterson served as a member of the Board of Directors, Audit Committee (Chair), Compensation Committee and Nominating and Corporate Governance Committee of Aesther Healthcare Acquisition Corp. (Nasdaq: AEHA), a special purpose acquisition company, that consummated its initial business combination in February 2023. Mr. Peterson is currently serving as a director of the merged company, Ocean Biomedical, Inc. (Nasdaq: OCEA) (f.k.a Aesther Healthcare Acquisition Corp.). Mr. Peterson has served as the president of Nevo Motors, Inc. since December 2020, which was established to commercialize a range extender generator technology for the heavy-duty electric vehicle market but is currently non-operational. Since May 2022, Mr. Peterson has served as a member of the Board of Directors and as the Chairperson of the Audit Committee of Trio Petroleum Corp., an oil and gas exploration and development company which is in the process of going public. Since February 2021, Mr. Peterson has served on the board of directors and as the Chairman of the Audit Committee of Indonesia Energy Corporation Limited (NYSE American: INDO). Mr. Peterson previously served as the president of the Taipei Taiwan Mission of The Church of Jesus Christ of Latter-day Saints, in Taipei, Taiwan from June 2018 to June 2021. Mr. Peterson served as an independent member of the Board of Directors of TRxADE HEALTH, INC (formerly Trxade Group, Inc.) from August 2016 to May 2021 (Nasdaq: MEDS). Mr. Peterson served as the Chief Executive Officer of PEDEVCO Corp. (NYSE American:PED), a public company engaged primarily in the acquisition, exploration, development and production of oil and natural gas shale plays in the US from May 2016 to May 2018. Mr. Peterson served as Chief Financial Officer of PEDEVCO between July 2012 and May 2016, and as Executive Vice President of Pacific Energy Development (PEDEVCO’s predecessor) from July 2012 to October 2014, and as PEDEVCO’s President from October 2014 to May 2018. Mr. Peterson joined Pacific Energy Development as its Executive Vice President in September 2011, assumed the additional office of Chief Financial Officer in June 2012, and served as a member of its board of directors from July 2012 to September 2013. Mr. Peterson formerly served as Interim President and CEO (from June 2009 to December 2011) and as director (from May 2008 to December 2011) of Pacific Energy Development, as a director (from May 2006 to July 2012) of Aemetis, Inc. (formerly AE Biofuels Inc.), a Cupertino, California-based global advanced biofuels and renewable commodity chemicals company (Nasdaq:AMTX), and as Chairman and Chief Executive Officer of Nevo Energy, Inc. (NEVE) (formerly Solargen Energy, Inc.), a Cupertino, California-based developer of utility-scale solar farms which he helped form in December 2008 (from December 2008 to July 2012). From 2005 to 2006, Mr. Peterson served as a managing partner of American Institutional Partners, a venture investment fund based in Salt Lake City. From 2000 to 2004, he served as a First Vice President at Merrill Lynch, where he helped establish a new private client services division to work exclusively with high-net-worth investors. From September 1989 to January 2000, Mr. Peterson was employed by Goldman Sachs & Co. in a variety of positions and roles, including as a Vice President. Mr. Peterson received his MBA at the Marriott School of Management and a BS in statistics/computer science from Brigham Young University.
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Donald Fell
Donald Fell has served as a director of Kernel since December 2022. Mr. Fell brings along a wealth of experience in the field of economics and business to Kernel. Mr. Fell has served as a director of PowerUp Acquisitions Corp. (Nasdaq: PWUP), a special purpose acquisition company, since August 2023. Mr. Fell served as a director of Semper Paratus Acquisition Corporation (Nasdaq: LSGT), a special purpose acquisition company from June 2023 until the completion of its initial business combination in February 2024. Mr. Fell also as a director of OceanTech Acquisitions I Corp. (Nasdaq: OTEC), a special purpose acquisition company since March 2023. Mr. Fell served as an independent director of Aesther Healthcare Acquisition Corp., a special purpose acquisition company, from 2021 until it consummated its initial business combination in February 2023. Mr. Fell has served as an independent director of TRxADE HEALTH, INC (Nasdaq: MEDS) since January 2014, as well as a director of Trxade Nevada since December 2013. He is presently Professor and Institute Director for the Davis, California-based Foundation for Teaching Economics and adjunct professor of economics for the University of Colorado, Colorado Springs. Mr. Fell held positions with the University of South Florida as a member of the Executive MBA faculty, Director of Executive and Professional Education and Senior Fellow of the Public Policy Institute from 1995 to 2012. Mr. Fell was also a visiting professor at the University of LaRochelle, France, and an adjunct professor of economics at both Illinois State University and The Ohio State University. Mr. Fell holds undergraduate and graduate degrees in economics from Indiana State University and his all but dissertation (ABD) in economics from Illinois State University. Through his work with the Foundation for Teaching Economics and the University of Colorado, Colorado Springs he has overseen graduate institutes on economic policy and environmental economics in 44 states, throughout Canada, the Islands and Eastern Europe.
Venkatesh Srinivasan
Venkatesh Srinivasan has a tremendous amount of experience in the pharmaceutical industry and currently serves as President of Micro Labs USA and previously served as President of Rising Pharma, USA and as President and CEO of Ascend Laboratories, USA where he grew the business, building a new team and strengthening processes and systems. In addition, Mr. Srinivasan served as a Director at Pfizer India. Mr. Srinivasan served as an independent director of Aesther Healthcare Acquisition Corp., a special purpose acquisition company, from 2021 until it consummated its initial business combination in February 2023.
Siva Saravanan
Siva Saravanan has more than 20 years of experience steering digital strategies and technology solutions for businesses. Mr. Saravanan is the Chief Digital Officer at Wavestone US, helping Fortune 1000 business and technology leaders accelerate digital transformation. Prior to joining Wavestone US, Mr. Saravanan was Chief Information Officer and SVP of Business Operations at Reviver, an exciting IoT start-up that creates connected digital license plates to enable true autonomous driving. He designed customer digital experiences, unified commerce, supply chain, field service operations and the digital agenda for Reviver. Mr. Saravanan was also VP for IT Digital Transformation and Program Delivery at Aristocrat Technologies. While at Aristocrat Technologies, he led the transformation of business systems for a leading high-tech gaming manufacturer. Mr. Saravanan spent many years at Verifone as a Senior Director supporting technology operations in 40+ countries and also taking on delivery responsibilities. At Verifone, he built a world-class global integrated supply chain network for agility and efficiency. Mr. Saravanan holds a M.S. in Systems Engineering from Tennessee State University and B.S. in Mechanical Engineering from Annamalai University in Chidambaram, India. He is also on the Advisory Board of NishTech Inc., a digital commerce company and the Advisory Council of George Washington University School of Business Digital Program. Mr. Saravanan is a member of Forbes Technology Council contributing regularly. Mr. Saravanan served as an independent director of Aesther Healthcare Acquisition Corp., a special purpose acquisition company, from 2021 until it consummated its initial business combination in February 2023.
Facilities
Kernel maintains its principal executive offices at 515 Madison Avenue, 8th Floor, Suite 8133, New York, New York 10022. The cost for this space is included in the $10,000 monthly charge to the Sponsor, which includes certain administrative and support services, which commenced on the date that Kernel’s securities were first listed on Nasdaq through the earlier of consummation of the initial Business Combination or its liquidation, pursuant to a letter agreement between Kernel and the Sponsor.
Legal Proceedings
To the knowledge of Kernel’s management, there are no legal proceedings pending against Kernel.
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Kernel’s MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to the “Company,” “Kernel Group Holdings, Inc..,” “Kernel,” “our,” “us” or “we” refer to Kernel Group Holdings, Inc. The following discussion and analysis of Kernel’s financial condition and results of operations should be read in conjunction with the audited financial statements and the notes related thereto of Kernel contained elsewhere in this proxy statement/prospectus. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Overview
Kernel is a blank check company incorporated as a Cayman Islands exempted company on November 10, 2020. Kernel was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). Kernel is an emerging growth company and, as such, Kernel is subject to all of the risks associated with emerging growth companies.
Kernel’s original sponsor was Kernel Capital Holdings, LLC, a Delaware limited liability company (the “Original Sponsor”). The registration statement for Kernel’s Initial Public Offering was declared effective on February 2, 2021. On February 5, 2021, Kernel consummated its Initial Public Offering of 30,475,000 units (the “Units” and, with respect to the Class A Ordinary Shares included in the Units being offered, the “Public Shares”), including 3,975,000 additional Units to cover the underwriters’ over-allotment (the “Over-Allotment Units”), at $10.00 per Unit, generating gross proceeds of approximately $304.8 million, and incurring offering costs of approximately $17.4 million, of which approximately $10.7 million was for deferred underwriting commissions.
Simultaneously with the closing of the Initial Public Offering, Kernel consummated the private placement (“Private Placement”) of 8,750,000 warrants (each, a “Private Placement Warrant” and collectively, the “Private Placement Warrants”), at a price of $1.00 per Private Placement Warrant with the Original Sponsor, generating gross proceeds of approximately $8.8 million.
On December 28, 2022 (the “Effective Date”), Kernel 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 7,618,500 Class B Ordinary Shares, par value $0.0001 per share and 8,750,000 Private Placement Warrants, each of which is exercisable to purchase one Class A ordinary share, par value $0.0001 per share, for an aggregate purchase price of $1.00 payable at the time Kernel effects the initial Business Combination. Upon the closing of the initial Business Combination, New Sponsor shall also convey 2,000,000 Class B Ordinary Shares to the equity holders of the Original Sponsor, as of the Effective Date, pro rata based on the equity holders’ underlying interest in Kernel’s Class B Ordinary Shares as of the Effective Date.
Upon the closing of the Initial Public Offering and the Private Placement, approximately $304.8 million ($10.00 per Unit) of the net proceeds of the Initial Public Offering and certain of the proceeds of the Private Placement were placed in a trust account (“Trust Account”) with Continental Stock Transfer & Trust Company acting as trustee and invested only in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended, or the Investment Company Act, having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations, as determined by us, until the earlier of (i) the completion of a Business Combination and (ii) the distribution of the Trust Account as described below.
Kernel’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. Kernel’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 Kernel signs a definitive agreement in connection with the initial Business Combination. However, Kernel 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.
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If Kernel is unable to complete a Business Combination within the Combination Period, Kernel 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 Kernel to pay Kernel’s taxes that were paid by Kernel or are payable by Kernel, if any (less up to $100,000 of interest to pay dissolution expenses), divided by the number of the then-outstanding Public Shares, which redemption will completely extinguish Public Shareholders’ rights as shareholders (including the right to receive further liquidation distributions, if any); and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders and the Kernel board of directors, liquidate and dissolve, subject in the case of clauses (ii) and (iii) to Kernel’s obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law.
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 Kernel’s right to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A ordinary shares included as part of the units sold in Kernel’s initial public offering that closed on February 5, 2021 (the “IPO”) which is currently February 5, 2023 unless extended. The Charter Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2023 (each of which Kernel refers to as an “Extension”, and such later date, the “Extended Deadline”) 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. To obtain each 1-month extension, Kernel, its Sponsor or any of their affiliates or designees must deposit into Kernel’s Trust Fund with Continental by the deadline applicable prior to the extension the lesser of (x) $300,000 or (y) $0.06 per share for each of Kernel’s publicly held shares outstanding as of the deadline prior to the extension (after giving effect to redemptions in connection with the approval of the Charter Amendment by Kernel’s shareholders with respect to the first such extension). In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the Shareholders Meeting, holders of 22,848,122 of Kernel’s Class A ordinary shares (the “Public Shares”) exercised their right to redeem those shares for cash at an approximate price of $10.15 per share, for an aggregate of approximately $231.9 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $74.7 million before the Extension Payment.
The shareholders of Kernel approved the Amendment to the Amended and Restated Memorandum and Articles of Association of Kernel (the “August Charter Amendment”) at the August 3, 2023 shareholders meeting, changing the structure and cost of Kernel’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. To effect each Extension, Kernel, its sponsor or any of their affiliates or designees must deposit into Kernel’s Trust Account with Continental an Extension Payment (after giving effect to redemptions in connection with the approval of the August Extension Charter Amendment) the lesser of (x) $150,000 or (y) $0.04 per share for each of Kernel’s Public Shares outstanding as of the applicable Extended Deadline, unless the closing of Kernel’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 Kernel’s Trust Agreement with Continental was amended to conform the procedures in the Trust Agreement by which Kernel may extend the date on which Continental must liquidate the Trust Account if Kernel 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 Second Extension Amendment Proposal and the Second Trust Amendment Proposal at the August 3, 2023 shareholders meeting, holders of 1,310,929 of Kernel’s Class A ordinary shares exercised their rights to redeem those shares for cash at an approximate price of $10.42 per share, for an aggregate of approximately $13.6 million. Following the payment of the redemptions, the year ended December 31, 2023 showed the Trust Account with a balance of $67,819,662 inclusive of extension payments.
On each of February 9, 2023, March 7, 2023, April 4, 2023, May 9, 2023, June 6, 2023, and July 5, 2023 Kernel deposited $300,000, and on each of August 3, 2023, September 5, 2023, October 5, 2023, November 6, 2023, and December 5, 2023 Kernel deposited $150,000 into the Trust Account to extend the date to consummate a Business Combination through March 5, 2023, April 5, 2023, May 5, 2023, June 5, 2023, July 5, 2023, August 5, 2023, September 5, 2023, October 5, 2023, November 5, 2023, December 5, 2023, respectively. As of December 31, 2023, cash deposited into the Trust Account in relation to the extensions amounted to $2,550,000.
On February 1, 2024, Kernel held the Extension Meeting - Third. At the Extension Meeting - Third, the Company’s shareholders entitled to vote at the meeting cast their votes and approved the Third Extension Amendment Proposal to amend the Kernel’s Amended and Restated Memorandum and Articles of Association (the “Third Charter Amendment”) to extend the date (the “Termination Date”) by which Kernel must (i) consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Kernel 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% of Kernel’s Class A Ordinary Shares included as part of the Units sold in Kernel’s IPO. The Third Charter Amendment allows Kernel to extend the Termination Date by up to six (6) one-month extensions to August 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”), unless the closing of Kernel’s initial business combination shall have occurred. At the Extension Meeting - Third, Kernel’s shareholders also approved the Third Trust Amendment Proposal to conform the procedures in the Trust Agreement by which the Company may extend the date on which the Trust Account must be liquidated if the Company has not completed its initial Business Combination to the procedures in the Third Charter Amendment.
In connection with the approval of the Third Extension Amendment Proposal and the Third Trust Amendment Proposal at the Extension Meeting - Third, holders of 5,806,608 of the Kernel’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account will have a balance of approximately $5.5 million.
On each of February 3, 2024, March 5, 2024, April 5, 2024, May 3, 2024, June 3, 2024, and July 3, 2024, Kernel extended the date to consummate a Business Combination through March 5, 2024, April 5, 2024, May 5, 2024, June 5, 2024, July 5, 2024, and August 5, 2024, respectively.
Proposed Business Combination
On March 3, 2023, Kernel entered into a business combination agreement by and among Kernel, 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”), and (as may be amended from time to time, including that certain First Amendment to the Business Combination Agreement, dated August 29, 2023, that certain Second Amendment to the Business Combination Agreement, dated January 16, 2024, that certain Third Amendment to the Business Combination Agreement, dated February 5, 2024, and that certain Fourth Amendment to the Business Combination Agreement, dated June 24, 2024, the “Business Combination Agreement”), pursuant to which, among other things, Kernel will change Kernel’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 per share, shall convert into a share of Class B common stock, par value $0.0001 per share, and each Class A ordinary share, par value $0.0001 per share, shall convert into a share of Class A common stock, par value $0.0001 per share. Further, each share of Class B common stock and each share of Class A common stock that is then issued and outstanding shall convert automatically, on a one-for-one basis, into one share of Kernel common stock (the “Kernel Common Stock”).
Following the Domestication, the parties will effect the merger of Kernel Merger Sub with and into Kernel, with Kernel 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”).
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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, up to an additional 33,000,000 shares of ParentCo common stock, as additional consideration based on ParentCo’s achievement of certain revenue thresholds, as follows: (i) if ParentCo’s revenue for the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares; (ii) if ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, then ParentCo shall issue to each of the AIRO stockholders such stockholder’s pro rata share of 11,000,000 Earnout Shares; and (iii) if ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, then ParentCo shall issue to each of the stockholders of AIRO Group Holdings such stockholder’s pro rata share of 11,000,000 Earnout Shares.
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, Inc., 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, fifty percent (50%) of any net cash proceeds of any capital investment raise and/or convertible debt raise conducted by Kernel 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 (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).
Nasdaq Delisting Notice
On July 7, 2023, Kernel received a notice (the “Nasdaq Notice”) from the Listing Qualifications Department of Nasdaq stating that, as of June 29, 2023, Kernel had failed to hold an annual meeting of shareholders within 12 months after its fiscal year ended December 31, 2021, as required by Nasdaq Listing Rule 5620(a) (the “Rule”) and therefore was not in compliance with the Rule. As a result, Nasdaq has advised Kernel that its securities would be subject to delisting unless Kernel timely requests a hearing before an independent Hearings Panel (the “Panel”). Accordingly, Kernel timely requested a hearing. The hearing request will stay the suspension of Kernel’s securities and the termination of registration of the securities with Nasdaq as required by the rules of the Securities and Exchange Commission pending the Panel’s decision and, therefore, Nasdaq’s notice has no immediate effect on the listing of Kernel’s Ordinary Shares, units or warrants on Nasdaq. The time and place of any hearing before the Panel will be determined by the Panel. There can be no assurance that the Panel will grant Kernel’s request for continued listing.
On September 1, 2023, Kernel received a letter (the “Nasdaq letter”) from the Listing Qualifications Department of Nasdaq stating that Kernel regained compliance under the Rule upon holding its annual meeting of shareholders on August 31, 2023.
On February 5, 2024 the Company received a notice (the “February 5, 2024 Nasdaq Notice”) from the Listing Qualifications Department of Nasdaq stating that the Company is not in compliance with Nasdaq IM-5101-2, which requires that a special purpose acquisition company complete one or more Business Combinations within 36 months of the effectiveness of its initial public offering registration statement. The letter stated that unless the Company requests a hearing before the Nasdaq Hearings Panel (the “Panel”), trading of the Company’s securities on the Nasdaq Capital Market would be suspended at the opening of business on February 14, 2024. The Company requested a hearing before the Panel to request sufficient time to complete the previously disclosed proposed Business Combination with AIRO Group Holdings. The hearing request made pursuant to the Nasdaq Notice resulted in a stay of any suspension or delisting action, pending the hearing. However, there can be no assurance that the Company will be able to satisfy Nasdaq’s continued listing requirements, regain compliance with Nasdaq IM-5101-2, and maintain compliance with other Nasdaq listing requirements
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Liquidity, Capital Resources, and Going Concern
For the year ended December 31, 2023, net cash used in operating activities of $1,457,659, which was due to the Company net loss of $7,541,436, income from investments held in Trust Account of $2,260,223, gain on waiver of deferred underwriting commissions of $755,346, partially offset by an unrealized loss on changes in the fair value of warrant liabilities of $305,396, unrealized loss on fair value of derivative liabilities related to the forward purchase agreement of $6,261,728, amortization of debt discount of $1,415,773, and changes in working capital of $1,116,449.
For the year ended December 31, 2022, net cash used in operating activities was $311,850, which was due to unrealized loss on changes in the fair value of warrant liabilities of $12,299,146, income from investments held in Trust Account of $4,469,702, partially offset by our net income of $15,656,029, and changes in working capital of $800,969.
For the year ended December 31, 2023, net cash provided by investing activities of $243,675,328 included the proceeds from cash proceeds from the Trust Account of $246,225,328 to pay redeeming shareholders, partially offset by the investment of Advances to Trust Account of $2,550,000 in connection with the Extension Payments.
There were no cash flows from investing activities for the year ended December 31, 2022.
For the year ended December 31, 2023, net cash used in financing activities of $242,309,960 included payments to redeeming shareholders of $246,225,328, partially offset by proceeds from related party promissory notes of $2,215,368, and convertible promissory notes of $1,700,000.
For the year ended December 31, 2022, net cash used in financing activities was $70,000, which was a result of payment of offering costs.
As of December 31, 2023, we had $804 in our operating bank account and a working capital deficit of $7,822,239.
The Company’s liquidity needs to date have been satisfied through a contribution of $25,000 from Original Sponsor to cover for certain expenses in exchange for the issuance of the Founder Shares, the loan of $77,000 from the Original Sponsor under the Note, certain portion of the proceeds from the consummation of the Private Placement not held in the Trust Account, the Promissory Note of $2,500,000, and Convertible Promissory Note of $1,700,000. The Company repaid $77,000 of the loan from the Original Sponsor in February 2021. In addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans. If the Company completes a Business Combination, the Company may repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans.
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,” the Company have determined that the liquidity condition, the date of the mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after August 5, 2024. The financial statements do not include any adjustment that might be necessary if the Company are unable to continue as a going concern. The Company’s management plans to complete a Business Combination prior to the mandatory liquidation date.
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Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on Kernel’s financial position, results of Kernel’s operations and/or search for a target company, the specific impact is not readily determinable as of the date of the financial statements. The 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.
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 financial statements and the specific impact on Kernel’s financial condition, results of operations, and cash flows is also not determinable as of the date of these financial statements.
Results of Operations
Kernel’s entire activity since inception up to March 31, 2024 was in preparation for Kernel’s formation and the Initial Public Offering, and since the closing of the Initial Public Offering, the search for an initial Business Combination. Kernel will not be generating any operating revenues until the closing and completion of Kernel’s initial Business Combination, at the earliest.
For the three months ended March 31, 2024, Kernel had a net loss of $820,553, which consisted of $427,852 in general and administrative expenses and $30,000 of related party administrative fees, an unrealized loss of $479,750 resulting from the change in fair value of warrant liabilities, and $204,028 in amortization of debt discount, partially offset by $321,077 of income from investments held in the Trust Account.
For the three months ended March 31, 2023, Kernel had net loss of approximately $2.7 million, which consisted of a non-operating loss of approximately $2.7 million resulting from the unrealized loss from change in fair value of warrant liabilities, amortization of debt discount of $32,404, interest expense of $1,830, $919,365 in general and administrative expenses and $30,000 of related party administrative fees partially offset by $959,464 of income from investments held in the Trust Account.
For the year ended December 31, 2023, Kernel had a net loss of $7,541,436, which consisted of $2,449,228 in general and administrative expenses and $120,000 of related party administrative fees, an unrealized loss of $305,396 resulting from the change in fair value of warrant liabilities, an unrealized loss on fair value of derivative liabilities related to the forward purchase agreement of $6,261,728, $1,415,773 in amortization of debt discount, $4,880 in interest expense, partially offset by $2,260,223 of income from investments held in the Trust Account, and $755,346 gain resulting from a waiver of deferred underwriting commissions.
For the year ended December 31, 2022, Kernel had net income of $15,656,029, which consisted of $4,469,702 of income from investments held in Trust Account and an unrealized gain of $12,299,146 resulting from the change in fair value of warrant liabilities, partially offset by $992,819 in general and administrative expenses and $120,000 related party administrative fees.
Related Party Transactions
Founder Shares
On November 19, 2020, the Original Sponsor paid an aggregate of $25,000 for certain expenses on behalf of us in exchange for issuance of 5,750,000 Class B Ordinary Shares (the “Founder Shares”). On January 11, 2021, Kernel effected a 1 for 1.25 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 5,750,000 to 7,187,500 shares, and the Original Sponsor transferred an aggregate of 75,000 Founder Shares to the independent directors and an aggregate of 50,000 Founder Shares to the Former Advisors. On February 2, 2021, Kernel effected a 1 for 1.06 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 7,187,500 to 7,618,750 shares and resulted in the Original Sponsor holding 7,493,750 Founder Shares. The Original Sponsor agreed to forfeit up to an aggregate of 993,750 Founder Shares to the extent that the option to purchase additional Units was not exercised in full by the underwriters or was reduced, so that the Founder Shares would represent 20% of Kernel’s issued and outstanding shares after the Initial Public Offering. On February 5, 2021, the underwriter fully exercised its over-allotment option; thus, these 993,750 Founder Shares are no longer subject to forfeiture.
The Sponsor agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of (A) one year after the completion of the initial Business Combination and (B) subsequent to the initial Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the initial Business Combination, or (y) the date on which Kernel completes a liquidation, merger, share exchange, reorganization or other similar transaction that results in all of the Public Shareholders having the right to exchange their Ordinary Shares for cash, securities or other property.
On December 28, 2022, we 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 7,618,500 Class B Ordinary Shares, par value $0.0001 per share and 8,750,000 Private Placement Warrants, each of which is exercisable to purchase one Class A ordinary share, par value $0.0001 per share, for an aggregate purchase price of $1.00 payable at the time we effect the initial Business Combination. Upon the closing of the initial Business Combination, New Sponsor shall also convey 2,000,000 Class B Ordinary Shares to the equity holders of the Original Sponsor, as of December 28, 2022, pro rata based on the equity holders’ underlying interest in our Class B Ordinary Shares as of December 28, 2022.
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Private Placement Warrants
Simultaneously with the closing of the Initial Public Offering, Kernel consummated the Private Placement of 8,750,000 Private Placement Warrants, at a price of $1.00 per Private Placement Warrant with the Original Sponsor, generating gross proceeds of approximately $8.8 million.
On December 28, 2022, the Original Sponsor transferred all Private Placement Warrants to the New Sponsor.
Each whole Private Placement Warrant is exercisable for one whole Class A ordinary share at a price of $11.50 per share. A portion of the proceeds from the sale of the Private Placement Warrants to the Sponsor was added to the proceeds from the Initial Public Offering held in the Trust Account. If Kernel does not complete a Business Combination within the Combination Period, the Private Placement Warrants will expire worthless. The Private Placement Warrants will be non-redeemable for cash and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.
The Sponsor and Kernel’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of their Private Placement Warrants until 30 days after the completion of the initial Business Combination.
Related Party Loans
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of Kernel’s officers and directors may, but are not obligated to, loan Kernel funds as may be required (“Working Capital Loans”). If Kernel completes a Business Combination, Kernel may repay the Working Capital Loans out of the proceeds of the Trust Account released to us. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, Kernel may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1.5 million of such Working Capital Loans may be convertible into warrants of the post Business Combination entity at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. As of December 31, 2023 and December 31, 2022, Kernel had no borrowings under the Working Capital Loans.
During the for the year ended December 31, 2023, Kernel entered into loan agreements with eleven investors and the Sponsor (the “Loan Agreements”). Pursuant to the Loan Agreements, the investors loaned the Sponsor a total of $2,500,000, which will in turn be loaned by the Sponsor to Kernel, to cover a portion of the extension fees with any remaining balance to be used for Kernel’s working capital. The Loan Agreements accrue 8% interest per annum and shall be repaid upon closing the initial Business Combination. Kernel intends to pay all principal under the Loan Agreement and shall not be responsible for the payment of any interest on the loans. As of December 31, 2023, the total amount drawn on the Loan Agreements was $2,215,368.
Forward Purchase Agreement
In February 2023, Kernel entered into a forward purchase agreement (the “Forward Purchase Agreement”) pursuant to which Meteora Special Opportunity Fund I, LP, Meteora Capital Partners, LP, Meteora Select Trading Opportunities Master, LP (collectively the “Seller”), intends, but is not obligated, to purchase from the Company up to a maximum of 7,700,000 Class A ordinary shares (the “Forward Purchase Shares”) from holders (other than the Company or its affiliates) who have elected to redeem such shares in connection with the Business Combination. Purchases by Seller will be made through brokers in the open market after the redemption deadline in connection with the Business Combination at a price no higher than the redemption price to be paid by Kernel in connection with the Business Combination.
The Seller will determine in its sole discretion the specific number of Forward Purchase Shares (up to 7,700,000) that it will purchase, if any, and the obligation of Kernel to sell the Forward Purchase Shares is subject to the approval of the Seller’s manager following notice to the Seller that Kernel intends to enter into an agreement for a Business Combination.
The Forward Purchase Agreement also provides that the Seller is entitled to registration rights with respect to the Forward Purchase Shares. The proceeds from the sale of the Forward Purchase Shares may be used as part of the consideration to the Company in an initial Business Combination, expenses in connection with an initial Business Combination or for working capital in the post-Business Combination company. These purchases are required to be made regardless of whether any Class A ordinary shares are redeemed by the Public Shareholders and are intended to provide the Company with a minimum funding level for an initial Business Combination. The Forward Purchase Shares will be issued only in connection with the closing of an initial Business Combination.
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Kernel accounts for the Forward Purchase Agreement in accordance with the guidance contained in ASC 480-10, Distinguishing Liabilities from Equity - Preferred Stock Subject to Mandatory Redemption. Such guidance provides that because the Forward Purchase Agreement does not meet the criteria for equity treatment thereunder, the agreement must be recorded as a liability. Accordingly, Kernel classifies the Forward Purchase Agreement as an asset or liability at its fair value. This asset or liability is subject to re-measurement at each balance sheet date. With each such remeasurement, the asset or liability will be adjusted to fair value, with the change in fair value recognized in the Company’s consolidated statements of operations.
On November 27, 2023, Kernel, Seller, and AIRO entered into a mutual termination agreement (the “Mutual Termination Agreement”) to terminate the Forward Purchase Agreement. In consideration of the termination of the FPA, ParentCo agreed to issue 50,000 shares of common stock to an entity designated by Seller at the time of the closing of the Business Combination, which shares will have certain demand and piggyback registration rights. At the termination date Kernel assessed the fair value of the derivative liability - forward purchase agreement and determined the change in fair value to be immaterial. The derivative liability - forward purchase agreement was extinguished as a result of the Mutual Termination Agreement, and upon the derecognition of the liability, a reduction of $6.3 million was recorded as a gain to accumulated deficit.
Pursuant to the Mutual Termination Agreement, in the event that the closing of the Business Combination does not occur or Kernel otherwise fails to make the payment of the 50,000 shares, Kernel shall pay or cause to be paid a break-up fee equal to (i) all of Seller’s actual out-of-pocket reasonable and documented fees, costs and expenses relating to the transaction in an amount not to exceed $50,000, plus (ii) $500,000, payable by Kernel to the Seller, and (iii) reimbursement of reasonable and documented attorney fees and other reasonable out-of-pocket expenses related thereto actually incurred by Seller or its affiliates in connection with the transaction not to exceed $50,000.
Kernel considered the guidance under ASC 815, Derivatives and Hedging, and determined the consideration shares payment pursuant to the Mutual Termination Agreement described above met the scope exception within ASC 815-10-15-74. As such, the equity-classified contract was accounted for within equity at fair value as determined on the settlement date. The measurement date fair value of $53,100 was determined using Kernel’s share price on the settlement date, the number of shares pursuant to the Mutual Termination Agreement, and probability weighted for Kernel’s expected percentage of completing its Business Combination.
Administrative Services Agreement
Commencing on the date that Kernel’s securities were first listed on Nasdaq through the earlier of consummation of the initial Business Combination or its liquidation, Kernel agreed to pay the Sponsor $10,000 per month for office space, administrative and support services. For the three months ended March 31, 2024 and 2023, the Company incurred $30,000 for such services. As of March 31, 2024 and December 31, 2023, $320,000 and $290,000 were outstanding, respectively, and included in accrued expenses – related party as reflected in the accompanying condensed consolidated balance sheets.
For the years ended December 31, 2023 and 2022, the Company incurred $120,000 and $120,000 for such services, respectively. As of December 31, 2023 and 2022, $290,000 and $170,000 were outstanding, respectively, and included in accrued expenses – related party as reflected in the accompanying consolidated balance sheets.
Commitments and Contractual Obligations
Registration and Shareholder Rights
The holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans (and any Class A ordinary shares issuable upon the exercise of the Private Placement Warrants) were entitled to registration rights pursuant to a registration and shareholder rights agreement signed upon the effective date of the Initial Public Offering. The holders of these securities were entitled to make up to three demands, excluding short form demands, that Kernel register such securities. In addition, the holders will be entitled to certain demand and “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of the initial Business Combination. Kernel will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
Kernel granted the underwriters a 45-day option from the final date of the prospectus relating to the Initial Public Offering to purchase up to 3,975,000 additional Units at the Initial Public Offering price less the underwriting discounts and commissions. On February 5, 2021, the underwriter fully exercised its over-allotment option.
The underwriters were entitled to an underwriting discount of $0.20 per unit, approximately $6.1 million in the aggregate, paid upon the closing of the Initial Public Offering. In addition, $0.35 per unit, or approximately $10.7 million in the aggregate will be payable to the underwriters for deferred underwriting commissions. On May 24, 2023, the underwriters agreed to waive their rights to their portion of the fee payable by Kernel for deferred underwriting commissions, with respect to any potential business combination of Kernel. Of the total $10,666,250 waived fee, $9,910,904 was recorded as a reduction to accumulated deficit and $755,346 was recorded as a gain on the waiver of deferred underwriting commissions by underwriter in the statements of operations, following a manner consistent with the original allocation of the deferred underwriting fees.
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Critical Accounting Estimates
Derivative Warrant Liabilities
Kernel does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Kernel evaluates all of Kernel’s financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives and Hedging” (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
The warrants issued in connection with the Initial Public Offering and the Private Placement Warrants are recognized as derivative liabilities in accordance with ASC 815. Accordingly, Kernel recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised. The fair value of warrants issued in connection with the Private Placement has been measured by using the market value of the Public Warrants. The fair value of the warrants issued in connection with the Initial Public Offering was initially measured using a Monte-Carlo simulation and subsequently has been measured based on the market price at each measurement date when separately listed and traded. The determination of the fair value of the derivative liability may be subject to change as more current information becomes available and accordingly the actual results could differ significantly. Derivative liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities.
Class A Ordinary Shares Subject to Possible Redemption
Kernel accounts for its Class A Ordinary Shares subject to possible redemption in accordance with the guidance in ASC Topic 480, “Distinguishing Liabilities from Equity.” Class A Ordinary Shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. Conditionally redeemable Class A Ordinary Shares (including Class A Ordinary Shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within Kernel’s control) are classified as temporary equity. At all other times, Class A Ordinary Shares are classified as shareholders’ equity. Kernel’s Class A Ordinary Shares feature certain redemption rights that are considered to be outside of its control and subject to the occurrence of uncertain future events. Accordingly, as of Initial Public Offering, Kernel had 30,475,000 Class A Ordinary Shares subject to possible redemption, that are presented as temporary equity, outside of the shareholders’ equity (deficit) section of its balance sheets. In the six months ended June 30, 2023, 22,848,122 Class A Ordinary Shares were redeemed by shareholders.
Kernel recognizes changes in redemption value immediately as they occur and adjusts the carrying value of the Class A Ordinary Shares subject to possible redemption to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the security. Effective with the closing of the Initial Public Offering, Kernel recognized the accretion from initial book value to redemption amount, which resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.
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Financial Instruments – Credit Losses
In January 2023, the Company adopted the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires an entity to utilize a new impairment model known as the current expected credit loss (CECL) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized costs, loans, and available-for-sale debt securities. The adoption of this standard did not have a material effect on the Company’s operating results or financial position as the only securities to which this standard applies are the U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or investments in money market funds that invest in U.S. government securities and generally have a readily determinable fair value, which the Company deemed to have no credit losses.
Net (Loss) Income per Ordinary Share
Kernel comply’s with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Kernel has two classes of shares, which are referred to as Class A ordinary shares and Class B ordinary shares. Income and losses are shared pro rata between the two classes of shares. This presentation assumes a Business Combination as the most likely outcome. Net (loss) income per ordinary share is calculated by dividing the net (loss) income by the weighted average number of ordinary shares outstanding for the respective period.
The calculation of diluted net (loss) income per ordinary share does not consider the effect of the warrants underlying the Units sold in the Initial Public Offering and the Private Placement Warrants to purchase 23,987,500 Class A ordinary shares in calculation of diluted income (loss) per share, because their exercise is contingent upon future events and their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted net (loss) income per share is the same as basic net (loss) income per share for the three months ended March 31, 2024 and 2023. Accretion associated with the redeemable Class A ordinary shares is excluded from earnings per share as the redemption value approximates fair value.
Kernel has considered the effect of Class B ordinary shares that were excluded from the weighted average number as they were contingent on the exercise of over-allotment option by the underwriters. Since the contingency was satisfied, Kernel has included these shares in the weighted average number as of the beginning of the interim period to determine the dilutive impact of these shares.
Recent Accounting Pronouncements
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” The ASU amends ASC 820 to clarify that a contractual sales restriction is not considered in measuring an equity security at fair value and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The ASU applies to both holders and issuers of equity and equity-linked securities measured at fair value. The amendments in this ASU are effective for the Company in fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company adopted this standard on January 1, 2024 and the impact was not material to the unaudited condensed consolidated financial statements.
The Company’s management does not believe that any other recently issued, but not yet effective, accounting standards updates, if currently adopted, would have a material effect on the Company’s consolidated financial statements.
Off-Balance Sheet Arrangements
As of December 31, 2023, Kernel did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. Kernel qualifies as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. Kernel is electing to delay the adoption of new or revised accounting standards, and as a result, it may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, the financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Additionally, Kernel is in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” it chooses to rely on such exemptions it may not be required to, among other things, (i) provide an auditor’s attestation report on its system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of Kernel’s Initial Public Offering or until Kernel is no longer an “emerging growth company,” whichever is earlier.
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Formation of AIRO Group Holdings, Inc.
AIRO is a multi-faceted air mobility, autonomy and aerospace platform with differentiated technologies and capabilities that dynamically address high-growth market trends across the entire aviation and aerospace ecosystem.
After several years of preparation, the founders of AIRO formed AIRO Group, Inc., n/k/a Old AGI, Inc., a Delaware corporation (“Legacy AIRO”), for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry, including those that are discussed below. AIRO was formed on August 30, 2021, and Legacy AIRO became a wholly owned subsidiary of AIRO through a reorganization effective as of October 5, 2021. AIRO then entered into a series of transactions to develop its business across four primary divisions: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility.
Advanced Avionics Division. AIRO’S Advanced Avionics Division is anchored by its wholly-owned subsidiary, Aspen Avionics, Inc. (“Aspen”). Aspen develops, manufactures, and sells avionics and electronic global position system (“GPS”) sensors for the general aviation (“GA”) systems, unmanned aerial systems (“UAS”), and eVTOL market segments. Aspen was formed on November 18, 2005. AIRO acquired Aspen on April 1, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Aspen, Legacy AIRO, AIRO, Aspen Merger Sub, Inc. and John Uczekaj as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of 2,575,758 shares of AIRO’s Common Stock.
Training Division. AIRO’S Training Division consists of two wholly owned subsidiaries, Coastal Defense Inc. (“CDI”) and Agile Defense, LLC (“Agile Defense”), which provide training and advisory services to the U.S. military and the private aerospace industry. Specifically, CDI provides close air support (“CAS”), intelligence surveillance and reconnaissance (“ISR”), unmanned ground systems, and target simulation services using fixed-wing aircraft with ground targeting focus to military customers. Agile Defense is a premier provider of advisory services to the U.S. military and the private aerospace industry based on the extensive experience of its founders and personnel. It has expertise in the areas of certification and regulatory compliance, high performance communications, modernization programs, quality management and safety and security, and missile defense. CDI was formed on October 26, 2004. AIRO acquired CDI on April 26, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among CDI, AIRO, Legacy AIRO, Coastal Merger Sub, Inc. and Jeffrey Parker as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $10.10 million and 1,818,182 shares of AIRO’s Common Stock. The promissory note bears no interest and was originally payable within five days of the closing of the Business Combination. On October 17, 2023, the parties signed a Promissory Note Termination Agreement whereby approximately ninety percent of the promissory note principal shall be converted into shares of AIRO’s Common Stock immediately prior to the closing of the Business Combination, with the remaining principal of $1,010,164 paid at closing of the Business Combination. Agile Defense was formed on May 4, 2006. AIRO acquired Agile Defense on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Agile Defense, Legacy AIRO, AIRO, Agile Defense Merger Sub, LLC and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $2.32 million. The promissory note bears no interest and is payable within five days of the closing of the Business Combination. On October 2, 2023, the parties signed a Promissory Note Termination Agreement whereby six of the seven note holders agreed to convert approximately ninety percent of the promissory note principal owed them into shares of AIRO’s Common Stock immediately prior to the closing of the Business Combination, with the remaining principal paid at closing of the Business Combination. Total principal of $807,524 pursuant to the original promissory note and remaining principal of $151,693 pursuant to the Promissory Note Termination Agreement shall be paid at closing of the Business Combination.
Uncrewed Air Systems Division. AIRO’s Uncrewed Air Systems Division consists of two wholly-owned subsidiaries, Sky-Watch A/S (“Sky-Watch”) and AIRO Drone, LLC (“AIRO Drone”), which provide drones, drone platforms and services used for civilian, commercial, and military applications. Specifically, Sky-Watch develops, manufactures, and sells mini unmanned aircraft systems (“mUAS”) for the defense and security segment of the aerospace industry, and AIRO Drone manufactures and customizes a variety of small unmanned aircraft systems (“sUAS”), operates drones in an AI-based commercial inspection service known as drones as a service (“DaaS”), and builds and operates a worldwide drone datacom network (“AIRO-NET”). Sky-Watch, a Danish company, was formed on December 1, 2009. AIRO acquired Sky-Watch on March 28, 2022, pursuant to the terms and conditions of an Equity Purchase Agreement by and among Sky-Watch, Legacy AIRO, AIRO, Dangroup ApS and Mekan I/S v/Per Pedersen & Claus Bo Jensen, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $12.88 million, 890,909 shares of AIRO’s Common Stock and earnout payments of up to $15.5 million based on the achievement of certain performance metrics for calendar years 2022 through 2024. The promissory note bears no interest and was originally payable on the earlier of August 31, 2022 or five days following the closing of the Business Combination. The parties have since amended the promissory note, which is now payable within five business days following the date that AIRO, or a successor of AIRO, closes one or more financing transactions with an aggregate value of at least $35,000,000. AIRO Drone, an Illinois limited liability company, was formed on August 22, 2018. AIRO acquired AIRO Drone on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among AIRO Drone, Legacy AIRO, AIRO, AIRO Drone Merger Sub, LLC and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $2.09 million. The promissory note bears no interest and is payable within five days of the closing of the Business Combination. On October 2, 2023, the parties signed a Promissory Note Termination Agreement whereby nine of the ten note holders agreed to convert approximately ninety percent of the promissory note principal owed them into shares of AIRO’s Common Stock immediately prior to the closing of the Business Combination, with the remaining principal paid at closing of the Business Combination. Total principal of $448,934 pursuant to the original promissory note and remaining principal of $163,695 pursuant to the Promissory Note Termination Agreement shall be paid at closing of the Business Combination.
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Electric Air Mobility Division. AIRO’s Electric Air Mobility Division is anchored by its wholly owned subsidiary, Jaunt Air Mobility, LLC (“Jaunt”). Jaunt is a transformative aerospace company building the next generation of aircraft to meet the growing demands for faster, more affordable, and environmentally more sustainable travel over urban areas. Jaunt, a Delaware limited liability company, was formed on April 9, 2019. AIRO acquired Jaunt on March 10, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Jaunt, Legacy AIRO, AIRO, Jaunt Merger Sub, LLC and Martin Peryea as member representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of 5,343,124 shares of AIRO’s Common Stock.
Business Overview
AIRO leverages decades of industry expertise across the drone services, aviation, and avionics markets to offer a sector-leading enterprise providing best-in-class aerospace, UAM, and autonomy technologies and services. AIRO has brought together a complementary portfolio of well-positioned companies with differentiated and innovative technologies, which AIRO believes positions AIRO as the new mid-market aerospace & defense sector champion. AIRO’s six wholly owned subsidiaries are organized across four complimentary strategic divisions, each with a diverse set of partners and customers and each representing a large and fast-growing market segment: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility.
AIRO provides a diversified product portfolio, ranging from established and mature product offerings to innovative drone and eVTOL solutions, with a balanced customer mix, both military and civil. By leveraging its international footprint, comprehensive regulatory license portfolio, diverse customer base and design, and manufacturing and operational expertise, AIRO believes it will successfully pursue opportunities worldwide and focus on high-growth markets. AIRO management also believes AIRO will benefit from synergies across its divisions and leverage further growth opportunities through new customer segments, expanded geographic coverage, and an extended product and service portfolio.
Advanced Avionics Division. Advanced avionics are the highly critical electronic systems used in aircraft and include communications, navigation, monitoring, flight-control systems, artificial intelligence, collision-avoidance systems, radar and electro-optics. Aspen develops, manufactures, and sells avionics and electronic GPS sensors for the GA, UAS, and eVTOL market segments. Aspen’s customers are located worldwide ranging from individual operators to dealers and large original equipment manufacturers (“OEMs”). Aspen’s advanced avionics products are focused on GA aftermarket and OEM display and integration and Connected Panel solutions. Aspen’s products have also been installed on legacy military aircraft including older generation jets and helicopters. Currently, Aspen supplies displays as an OEM option on Robinson helicopters. Aspen also supplies Connected Panel solutions for Pilatus and Honeywell that are installed in A300 Cargo aircraft. Aspen’s GPS sensors are sold for installation on GA and UAS/eVTOL platforms.
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Training Division. AIRO’s Training Division provides professional training and consulting services for clients within the aerospace and defense sector including customer specific solutions, adversary air (“ADAIR”), aircraft leasing, ab initio pilot training, and training or aviation consulting services. AIRO’s subsidiary, CDI, provides CAS, ISR, unmanned ground systems, and target simulation services using fixed-wing aircraft with ground targeting focus to military customers. CDI provides manned, piloted fixed-wing aircraft, suitable payload, surveillance and reconnaissance equipment, ground liaison officers and Joint Terminal Attack Controller instructors, and a certified aircrew to provide full joint theatre ISR and simulated ground strike training, which can include live munition deployment. CDI also provides unmanned automobile systems used for air or ground strike training. AIRO’s subsidiary, Agile Defense, provides prime and subcontract combat ADAIR services to the U.S. military, selected North Atlantic Treaty Organization (“NATO”) countries, and other international allies of the U.S., as well as supplemental and supporting services with training solutions focused on professional pilots in both the commercial and military sectors. Agile Defense also offers customers high-end, advisory and consulting solutions in the aerospace industry, drawing on its deep expertise in the areas of certification and regulatory compliance, high performance communications, modernization programs, quality management and safety and security, and missile defense.
Uncrewed Air Systems Division. AIRO’s Uncrewed Air Systems Division provides unmanned aerial vehicle (“UAV”) platforms and services used for civilian, commercial, and military applications including reconnaissance, surveillance, inspection, weather analysis and healthcare. AIRO’s subsidiary, Sky-Watch, has been focused on UAS and has developed and brought to market both multirotor and fixed-wing UAS. Further, Sky-Watch develops, manufactures, and sells mUAS for the defense and security segment of the aerospace industry. Its solutions target the front line of net-centric warfare concepts, interoperability trends, and force multiplier initiatives and its mUAS solutions are designed to increase speed and precision in operational decision-making through a new dimension and scale of mUAS-enabled situational awareness. Sky-Watch’s current mUAS solutions are operative in European Union (“EU”) and NATO countries, and both solutions have been tested and deployed in international markets in the Europe, Middle East, and Africa
(“EMEA”) region and the Asia-Pacific (“APAC”) region. AIRO’s subsidiary, AIRO Drone, manufacture and customize a variety of small sUAS, operating DaaS, and building and operating AIRO-NET. AIRO management believes AIRO Drone’s extensive background in design, engineering, and manufacturing drones (AIRO Drone was the first company in the U.S. to certify and fly an FAA N-Numbered small drone), its broad FAA, TCCA, EASA and operational experience, as well as its expertise in datacom networks, radios, and aircraft communications gives AIRO a very unique opportunity to build and grow an entirely new, low-risk product line for commercial drone operations.
Electric Air Mobility Division. AIRO’s Electric Air Mobility Division is developing urban transport systems that move passengers and cargo by air in urban and suburban areas. Jaunt’s electric aircraft is expected to be used for fixed route flights, on-demand trips, and military operations. Passenger transport encompasses urban transport systems that move people by air, including air taxis. The Jaunt Journey air taxi is a combination of a helicopter and a fixed-wing aircraft, with what AIRO believes are the best attributes of both rotary and fixed-wing aircraft configurations. AIRO management believes the Jaunt Journey air taxi provides a quieter configuration, a higher level of safety, and a lower operational cost than some of its competitors. The patented slowed-rotor compound (“SRC”) technology has flown on multiple Jaunt demonstrator aircraft, with over 300 piloted flight hours and 1,000 takeoffs and landings, to validate the core technology. Cargo transport refers to electric and hybrid-electric vertical takeoff and landing (“VTOL”) aircraft that offer new forms of cargo transport. While Jaunt’s primary focus is on passenger transport, it is actively pursuing the application of its aircraft in the cargo transport market as well as for military transport and intends to more fully develop that segment of AIRO’s Electric Air Mobility Division.
Market Opportunity Overview
AIRO believes recent technological, sector, geopolitical, financial, environmental, and social evolutions support the development of a new market leader. The aerospace and defense market is primed for significant growth as a result of the emergence of new technologies such as 5G, artificial intelligence, advanced autonomous vehicles, and advanced avionics. Advanced geolocation capabilities of 5G can provide high-resolution accuracy for drone navigation and UAM, helping to alleviate perceived market concerns and provide growth opportunities. The rise of UAM and air taxies, remote medical delivery services, and military aviation training support highlight some of these opportunities.
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In AIRO’s experience, the aerospace and military defense market encompasses a number of large market participants, and a substantial number of small companies, many with advanced technologies. AIRO believes that the small companies often lack access to capital necessary to advance their emerging technologies. AIRO believes the large companies are not structured and organized in a way to nimbly exploit new disruptive technologies and, as a result, may struggle to advance the industry with solutions that are simpler, more effective and oftentimes less expensive. AIRO’s management team believes the aerospace industry is at an inflection point where a well-capitalized, mid-tier company that also has experience identifying, acquiring, integrating, and growing smaller, advanced technology companies will have a strategic advantage in its market.
AIRO’s goal is to leverage technologies that span data systems, resupply-package delivery, military and civil aerospace training, military and commercial manned and unmanned aircraft systems, and avionics technologies. AIRO believes that AIRO will transform the aerospace industry due to the diversified offering of capabilities that will position AIRO to be a formidable mid-tier, full-spectrum aerospace company that offers end-to-end solutions for the industry.
AIRO believes that recent events in Europe and other areas will stimulate increased interest in military defense, surveillance, and preparedness by many nations, with corresponding increases in budgets and willingness to adopt new technologies and methods, for many years to come. AIRO believes AIRO is well positioned to become a significant supplier of equipment, technology, and services in this growing market segment.
Advanced Avionics Division. The increasing need to upgrade existing avionics systems, including flight control, communication, navigation, and monitoring systems, and to make them more technologically advanced is expected to drive the growth of the aerospace avionics market. Increasing air traffic and the subsequent rise in demand for advanced aircraft are key drivers that will fuel global aerospace-avionics market growth. Aerospace avionics is an amalgamation of systems designed to work in harmony to manage numerous aircraft operations, both on-ground and in-flight.
Several global regions, including the APAC and Middle East regions, are witnessing a considerable rise in passenger and cargo traffic, thereby adding significant impetus to the aerospace-avionics market demand. This surge has given rise to proliferation in demand for newer travel routes and cost-effective aviation services, resulting in an increase in both the numbers of routes and flights flown by commercial low-cost carriers.
Furthermore, aerospace avionics OEMs are poised to experience tremendous growth in the coming years due to the burgeoning number of new aircraft orders from charter and scheduled-service airlines. Emerging economies, including India and China, will continue to be pivotal drivers, fueling the demand for new aircraft with higher growth of their local low-cost carriers as their emerging middle classes transition into regular flying customers.
Training Division. The training market segment includes customer-specific needs, aircraft leasing, and training and aviation consulting services. The overall demand for military flight training is expected to remain constant as higher defense spending offsets simulator competition. AIRO will address and service customer needs in four distinct lines of business within the training division, as follows:
| ● | CAS services for the military. |
| ● | ADAIR pilot training and services for the military. |
| ● | Commercial pilot training geared toward individuals seeking professional careers in aviation, with a training curriculum that will provide ab initio training (initial flight training through multi-engine jet training). |
| ● | Consulting services to businesses and entities in all aspects of professional and commercial aviation. |
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Key drivers include outsourcing of military training, technological advancement and massive shortages of air transportation pilots. The commercial aviation industry alone faces a monumental task in providing crews and mechanics to fly and maintain existing aircraft and routes1 as discussed in Boeing’s Pilot and Technician Outlook 2021-2040.
Uncrewed Air Systems Division. AIRO believes AIRO is positioned to serve the growing markets of both sUAS and medium unmanned aircraft systems (“meUAS”) as well as the DaaS market, both internationally and domestic.
AIRO believes that the U.S. military’s transformation into a smaller, more agile force that operates via a network of observation, communication, and precision targeting technologies will continue to accelerate the acceptance and use of sUAS and meUAS military operations around the world. AIRO currently has four sUAS platforms: (1) the MAGPIE; (2) the Sentinel; (3) the Heidrun; and (4) the Huginn.
| ● | The MAGPIE is a fixed-wing commercial utility UAV with a configurable sensor platform. The MAGPIE was the first FAA-certified commercial drone in the U.S. The drone has fully autonomous takeoff and landing capability, which does not require a catapult or recovery system, and allows for up to 90 minutes of flight-time endurance at speeds up to 60 knots. |
1BOEING CO., PILOT AND TECHNICIAN OUTLOOK 2021-2040, at 2 (2021), available at https://www.boeing.com/resources/boeingdotcom/market/assets/downloads/BMO_2021_Report_PTO_R4_091321AQ-A.PDF.
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Figure 1. MAGPIE.
| ● | The Sentinel is a multirotor vehicle that can operate in either a free-flight or tethered mode of operation. In tethered mode, the drone can operate up to 350 feet and has an unlimited flight time. The Sentinel can be programmed for either pre-planned or autonomous flight, can launch and recover in small areas, and can carry a variety of sensor payloads with connected thought cloud-based technology and applications. |
Figure 2. Sentinel.
| ● | The Heidrun is a fully autonomous, fixed-wing, mini drone for low altitude reconnaissance and target acquisition. The Heidrun is ideal for collecting immediate data from any mission-critical area without exposing the operator to any danger. |
Figure 3. Heidrun.
| ● | The Huginn is a VTOL UAV tailored for dismounted operations. The Huginn is launched within minutes and provides a better overview while enabling instant situational awareness. The Huginn X1 comes as a backpack deployment patrol kit. |
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Figure 4. Huginn X1.
These systems provide critical observation and communications capabilities serving the increasing demand for actionable intelligence, while reducing risk to individual “warfighters.” Using sUAS and meUAS can provide real-time observation and communication capabilities directly to the small units who control them and to commanders.
As the industry further matures, AIRO believes aircraft and their components and subsystems will become more commoditized, and more industry growth will develop in the areas of services and service-derivative revenue. AIRO has observed that service opportunities are now moving up-market, with larger companies exploring the benefits of drone technology, and how to prudently apply drones to their operations within the construct of their need for credible providers with suitable assurances of safety, professionalism, training and certification, IT security, and application of advanced analytics to drone-derived data. This aligns well with AIRO’s strategy, which emphasizes the provision of multiple types of value-added solutions to user and industry needs, in addition to drone operations. Industrial/commercial users of drone services need actionable information and decision support tools, rather than “raw” drone-collected data. Customers prefer their information to be processed, managed and delivered securely and in accordance with their specific company-wide IT systems and procedures. AIRO believes its model provides the value-added advanced analytics, IT security, cloud-based IT system interface, drone operator safety and security processes, training, and AIRO-NET communication system access that customers will demand.
Total World Market
Goldman Sachs estimates a worldwide market opportunity for drones of $100 billion.2 According to industry analysts, the commercial drone market worldwide revenue was over $2.60 billion in 2016, and estimates range from $10–$13 billion in global commercial revenue by 2025, with continued growth expected (See Figure 5).
2GOLDMAN SACHS, Drones: Reporting for Work (Mar. 2016), https://www.goldmansachs.com/insights/technology-driving-innovation/drones/.
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Source: Statista Research & Analysis3
Figure 5. Projected Uncrewed Air Systems Global Revenue.
Commercial use of drones is gaining steady momentum as multiple industries are working with drones as part of their daily regular business functions. The market for commercial and civilian drones grew at a CAGR of 19% between 2015 and 2020, compared with 5% CAGR on the military side. Sophisticated drones could soon be doing thousands of everyday tasks including fertilizing crop fields on an automated basis, monitoring traffic incidents, surveying hard-to-reach places, and transporting various types of cargo. According to the Association for Unmanned Vehicle Systems International’s 2013 report, the impact of commercial drones in the U.S. could result in more than $82 billion in economic impact and an additional 100,000 jobs in the U.S. by 2025.4
Total U.S. Market
According to industry research group Drone Industry Insights, the U.S. commercial drone market is one of the largest national drone markets in the world and, together with the Chinese drone market, accounts for more than two-thirds of the global drone market size. Regionally, however, revenue from the Asian drone market surpassed that of the North American drone market in 2019. The Asian drone market is expected to maintain its dominance as the leading regional market with a considerable margin in 2025.5 After legalizing drones in 2018, India’s drone market is expected to be one of the fastest growing in the world and the third largest by 2024.6
Drone Communication Services. It is AIRO’s intent to become the dominant infrastructure service provider for drone communications. As discussed above, communication services will become the key enabler for Beyond Visual Line of Sight (“BVLOS”) operations in controlled and managed airspace environments. AIRO intends to capture at least 50% of the drone communications market. AIRO is designing financial models to quantify revenue and cost. Its projected horizon for implementing the drone communication services component of its business is currently between 18 and 24 months following completion of the Business Combination.
3STATISTA, Projected Commercial Drone Revenue Worldwide from 2016 to 2025 (2022), https://perma.cc/VC4L-SUVP.
4ASS’N FOR UNMANNED VEHICLE SYS. INT’L, THE ECONOMIC IMPACT OF UNMANNED AIRCRAFT SYSTEMS INTEGRATION IN THE U.S. 2-3 (Mar. 2013), https://perma.cc/R4QE-6XBA.
5Lukas Schroth, The Drone Market Size 2020-2025: 5 Key Takeaways, Drone Industry Insights (June 22, 2020), https://droneii.com/the-drone-market-size-2020-2025-5-key-takeaways.
6RESEARCH & MARKETS, Global $43 Bn Commercial & Private Drone Market to 2024, GLOBE NEWSWIRE (Dec. 18, 2019), https://perma.cc/5W9A-BYK5.
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Electric Air Mobility Division. UAM is an emerging form of air transportation service that uses advanced air vehicles (“AAVs”) to provide passenger transportation and logistics services in low-altitude airspace within or around an urban area. In a 2021 industry report, Morgan Stanley estimates that the global UAM market is expected to be approximately $1.00 trillion to $4.40 trillion by 2040.7 Half of the world’s population lives in cities today, and the United Nations predicts that by 2050, 70% of the population will live in cities. This migration has led to unprecedented traffic congestion, with a noticeable inability to scale ground infrastructure. Additional studies of the UAM market by several organizations (Goldman Sachs,8 KPMG,9 and Deloitte10) also show significant market potential and substantial aircraft demand in the market. The largest segment of the urban air addressable market is shared mobility and passenger transportation, while cargo logistics and military and defense are also expected to provide a substantial market opportunity.11
The increasing public consensus that the adoption of sustainability initiatives is critical to preserve the environment and reduce emissions has accelerated the implementation of government regulations, created additional federal and state incentives, started to meaningfully influence consumer behavior, and has led to an increased focus by corporations on their emissions standards and targets. This in turn has created greater interest in aircraft electrification.
Passenger-grade AAVs have the potential to provide an alternate, fast, safe, efficient and environmentally friendly means of transportation, particularly for short- to medium-distance travel. Passenger-grade AAVs are expected to be used in a wide variety of scenarios, including shuttle service (to and from airports and other high traffic locations), regional inter-city transportation, intra-city transportation in high traffic conditions, daily commuting, sightseeing, search and rescue, and emergency and disaster response12.
Population growth and urbanization are powerful megatrends that are stretching ground-based transportation infrastructure to its limits. 55% of the world’s 7.63 billion people lived in urban areas in 2018. The top 33 megacities alone were home to more than 529 million inhabitants, and the UN predicts that by 2050 the world’s urban population will grow by an additional 2.50 billion people.13 AIRO expects these trends to continue post-COVID-19 pandemic. Transportation is the lifeblood of urban areas, and population growth combined with increased urbanization will continue to push existing infrastructure to the brink.
Expanding ground-based networks to address congestion and move people cost-effectively through cities has become increasingly difficult. The cost of transportation infrastructure has consistently outpaced inflation over the past fifty years, putting an ever-increasing strain on national, regional and municipal budgets. New light rail lines cost more than $100 million per mile in the U.S. and routinely exceed twice that number. Moving beneath the surface to expand subway networks is even more expensive, with new subway lines typically costing nearly $1 billion per mile or more.14 AIRO believes these ground-based networks cannot scale efficiently and the costs are prohibitive. AIRO believes that cities need a new, sustainable mobility solution.
7MORGAN STANLEY RESEARCH, “eVTOL/Urban AIR Mobility TAM Update: A Slow Take-Off, But Sky’s the Limit,” May 6, 2021, available at https://advisor.morganstanley.com/the-busot-group/documents/field/b/bu/busot-group/Electric%20Vehicles.pdf.
8GOLDMAN SACHS, “The Future of Mobility,” June 4, 2019, available at https://www.goldmansachs.com/insights/pages/gs-research/future-of-mobility/report.pdf.
9KPMG, “Getting Mobility Off the Ground,” 2019, available at https://assets.kpmg/content/dam/kpmg/ie/pdf/2019/10/ie-urban-air-mobility.pdf.
10Aijaz Hussain, David Silver, Advanced Air Mobility, DELOITTE INSIGHTS (Jan. 26, 2021), https://www2.deloitte.com/us/en/insights/industry/aerospace-defense/advanced-air-mobility.html.
11Hussain & Silver, supra note 10.
12EHang, The Future of Transportation: White Paper on Urban Air Mobility Systems (Jan. 15, 2020), https://www.ehang.com/app/en/EHang%20White%20Paper%20on%20Urban%20Air%20Mobility%20Systems.pdf.
13U.N. DEP’T OF ECONOMIC & SOC. AFFAIRS, WORLD URBANIZATION PROSPECTS: THE 2018 REVISION (2019).
14Alon Levy, Why It’s So Expensive to Build Urban Rail in the U.S., BLOOMBERG (Jan. 26, 2018), https://www.bloomberg.com/news/articles/2018-01-26/the-u-s-gets-less-subway-for-its-money-than-its-peers.
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The key drivers for the future growth of the passenger UAM market include:
| ● | Increasing traffic congestion; |
| ● | Advancement of technologies in aviation and batteries; |
| ● | Increasing public acceptance of UAM; | |
| ● | Developing telecommunication and ground infrastructure; and |
| ● | Increasing public awareness of environmental protection. |
AAVs are ideal for delivery of medium-distance logistics and have the potential to be used in long-haul transportation. The logistics UAM market is at a nascent stage, with several companies having successfully completed their first pilot delivery programs, including Matternet Inc., UPS Flight Forward Inc., and Zipline International Inc. With rising labor costs related to ground transportation and the continued advancement in AAV technology, AIRO expects that logistics solutions based on AAVs will become more popular in the future.
The key drivers for the cargo transport UAM market include:
| ● | Growing prevalence of e-commerce; |
| ● | Unmet logistics demands in remote areas; |
| ● | Technological upgrades in key components and control systems; |
| ● | Increasing traffic congestion; and |
| ● | Developing telecommunication and ground infrastructure support. |
Impact of COVID-19. While COVID-19 has not had a negative impact on the value of AIRO’s suite of patented technologies, the activities in the Uncrewed Air Systems Division and Training Division that focus on sales, marketing and manufacturing have been negatively impacted as some customers experienced budget reallocations and program postponements on otherwise approved procurements. It has been difficult to conduct critical customer demonstrations, deliver equipment, and train customers due to national quarantine regulations in many countries where AIRO’s customers are located. New customer acquisition has also suffered due to cancelled and postponed customer meetings, both international and domestic. AIRO has experienced a significant negative effect on lead times and accessibility to critical UAV system components, which has delayed and prevented both deliveries and demonstration activities and negatively impacted its ability to acquire aircraft. AIRO’s Advanced Avionics Division has also experienced supply chain issues, similar to its market segment, primarily driven by lower orders, as customers reduce their purchases, and lower production rates due to unpredictable employee absences due to infections. Moreover, recently the division has experienced reduced parts deliveries due to infections at suppliers’ facilities, which often leads to price premiums and larger minimum order requirements. AIRO’s Electric Air Mobility Division has been the least impacted, with the exception of slower coordination between AIRO and its supply base. AIRO’s Electric Air Mobility Division has not experienced, and AIRO does not anticipate that it will experience, a material impact on future growth outlook due to COVID-19.
Products and Services
Advanced Avionics : Current Products. AIRO’s Advanced Avionics Division develops, manufactures, and sells avionics and electronic GPS sensors for GA, UAS, and eVTOL market segments. Aspen’s customers are located worldwide ranging from individual operators to dealers and large OEMs.
Aspen’s avionics products are focused on GA aftermarket, OEM display and integration, and Connected Panel solutions. Aspen’s avionics have also been installed on legacy military aircraft including older generation jets and helicopters. Currently Aspen supplies displays as an OEM option on Robinson helicopters. Aspen also supplies Connected Panel solutions for Pilatus and Honeywell that are installed in A300 Cargo aircraft. Aspen’s GPS sensors are sold for installation on GA and UAS/eVTOL platforms.
Aspen’s Evolution Flight Display System line of products includes glass panel primary flight displays (“PFDs”) and multi-function displays (“MFDs”) and is a preferred retrofit solution for legacy GA aircraft. It is designed as a low-cost modular platform to supply a range of features from basic PFD to sophisticated MFD capabilities. AIRO estimates that there are over 15,000 GA aircraft flying with Aspen displays. AIRO’s strategy is to provide a robust hardware platform with low acquisition and install costs that feature open system interfaces and ability to interface to legacy and new technology avionics in GA aircraft. The platform was designed to affordably update to new technologies minimizing installation costs to upgrade. AIRO’s Advanced Avionics Division is currently developing its next generation display system focused on large-screen glass applications for GA and eVTOL platforms.
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Figure 6. The next generation of Evolution Flight Display System display, featuring glass panels, PFD, and MFD.
Aspen’s Connected Panel product is a smart bridge between installed avionics systems and aviation applications and provides tablet connectivity to avionics panels. Aspen was one of the first to market with this capability and secured programs with Pilatus on both the Pilatus PC12 turboprop and the PC24 business jet. Additionally, Aspen has offered a version of its Connected Panel solution on A300 Freighter aircraft. The Connected Panel platform is designed to be extendable to many potential applications including datalink, data recording, fourth generation broadband cellular networks (“4G”), and 5G applications.
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Figure 7. Connected Panel provides two-way communications between panel avionics and personal smart devices.
Aspen’s NexNav GPS products offer solutions for manned and unmanned aircraft applications. The NexNav products are certified on over 600 different aircraft makes/model and are also installed on many UAS/eVTOL platforms.
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Figure 8. Global Navigation Satellite System solutions: (1) Trig TN70 GNSSU (left); (2) Genesys 42-015002 GNSSU (center); (3) IS&S 9B-87010 GNSSU (right).
Advanced Avionics : New Products in Development. Aspen is developing a new line of large format avionics displays for the larger GA aircraft and the emerging eVTOL market. The product line is currently under development and will be integrated into AIRO’s EAM division platforms. It is being bid to supply several third-party eVTOL platforms and AIRO believes that the new displays will widen its customer base by expanding its market. The emerging eVTOL market is expected to create opportunities for AIRO’s Advanced Avionics Division. AIRO believes the market may create demand not only for its display products, but also for the existing GA class III, defined as an aircraft greater than 6,000 lbs. and not used for commuter applications. Over the next 10 years AIRO expects to broaden its advanced avionics offerings to include flight controls and integrated navigation into its next generation integrated display avionics to adapt to anticipated eVTOL and OEM opportunities.
Aspen continues to upgrade its line of Connected Panel products to provide 5G connectivity and enhance data recording capabilities. Regulatory bodies have called to expand the need for lightweight low cost data recorders. Both TCCA and EASA have moved toward requiring them on GA aircraft. Aspen’s Connected Panel line of products is being developed to add 5G capabilities and crash resistant technologies to enter this market. Current products designed for the air transport market are heavy (a significant consideration for payload restricted aircraft including eVTOL) and expensive. AIRO believes Aspen’s less expensive and materially lighter products differentiate AIRO from its competition and will fuel growth for its advanced avionics line of products.
Training. AIRO’s Training Division provides CAS, ISR, unmanned ground systems, and target simulation services using fixed-wing aircraft with ground targeting focus to military customers. CDI provides manned, piloted fixed-wing aircraft, suitable payload, surveillance and reconnaissance equipment, ground liaison officers and Joint Terminal Attack Controller instructors, and a certified aircrew to provide full joint theatre ISR and simulated ground strike training, which can include live munition deployment. CDI also provides unmanned automobile systems used for air or ground strike training, which include automated vehicles of various types and capabilities customized to meet training mission demands.
CDI employs highly trained special operations veterans, and its personnel have years of real-world experience on the battlefield and in the global war on terror. CDI’s personnel have collectively planned and executed hundreds of missions, which include air support, unmanned systems, full motion video systems (ROVER, MVR), and infiltration and exfiltration techniques. CDI’s personnel develop, integrate, and evaluate new equipment, and modify existing equipment to fit customized military orders and mission training. These customizations include, without limitation, aircraft, surveillance, and automobile equipment.
CDI is an approved participant under certain multiple awards, indefinite-delivery/indefinite-quantity contracts (the “Contracts”) issued by the U.S. military. The approved Contract participants such as CDI bid on task orders as they are issued by the U.S. military pursuant to those Contracts. The U.S. military chooses winning bids based on such factors as cost, certainty of fulfilling the requirements of a specific task order, safety records, and other factors. CDI is a current participant under two such Contracts. The first is for Combat Air Force CAS services. The CAS Contract was awarded in 2019 and expected to be completed in 2024, with a combined not-to-exceed aggregate award of $6.4 billion across all task orders and participants. The second is for terminal attack controller trainer (“TACT”) services. The TACT Contract was awarded in 2019 and expected to be completed in 2024, with a combined not-to-exceed aggregate award of $249 million across all task orders and participants. In addition to the Contracts, CDI also bids quarterly on individual contracts and purchase orders to provide ISR support services, including a current contract award through Q2 2023. AIRO’s current fleet of aircraft in its Training Division works at almost maximum capacity at present, before accounting for additional Contracts or task orders. AIRO requires additional aircraft and related equipment in order to bid and complete future task orders and to expand into ADAIR services, which AIRO expects will drive important revenue and profit growth.
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AIRO’s Training Division also provides aircraft leasing, training and aviation consulting services to defense civilian and commercial industries and serves the defense, civil and military training markets primarily in the U.S. Historically, Agile Defense has provided advisory services to the U.S. military and the private aerospace industry. Many of Agile Defense’s consulting projects have been classified engagements where they have been trusted to define, design, and implement solutions to protect critical assets. Expertise in the areas of certification and regulatory compliance, high performance communications, modernization programs, quality management, safety and security, and missile defense have provided significant benefits to Agile Defense’s clients. AIRO expects that the primary customers of Agile Defense will be the branches of the U.S. military requiring ADAIR and CAS training services. There is a large foreign military demand for contracted services currently being provided by a few of AIRO’s competitors. AIRO believes these foreign contracts will be available to Agile Defense upon acquisition of suitable aircraft.
Figure 9. Close Air Support.
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Figure 10. Adversary Air.
Figure 11. Commercial Training.
Uncrewed Air Systems. AIRO’s Uncrewed Air Systems Division focuses on UAVs, operating with various degrees of autonomy, either under remote control by a human operator or autonomously via auto pilot. UAVs are used for civilian, commercial, and military applications. Military applications include reconnaissance, surveillance, and defense services. Civilian and commercial applications include inspection, survey, mapping and photography, archaeology, weather analysis, conservation, healthcare, search and rescue and construction applications.
Sky-Watch, AIRO’s international drone company, provides and develops a complete suite of UAV products, technology, and system integration for worldwide defense, security and civil use. Its products serve the defense and military market with a focus on mini and small tactical UAVs. Sky-Watch has focused on UAS and has developed and brought to market both multirotor and fixed-wing UAS. Sky-Watch’s current mUAS solutions are operative in EU and NATO countries, and both solutions have been tested and deployed in international markets in the EMEA and APAC regions.
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Figure 12. The Heidrun is a fully autonomous, fixed-wing, mini drone for low altitude reconnaissance and target acquisition.
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Figure 13. Antenna Tracker companion to Heidrun platform.
Figure 14. The Heidrun can be rapidly deployed in the field for low-altitude drone reconnaissance or surveillance.
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Figure 15. The live video Heidrun payload option (left) is a dual-channel EO/IR stabilized camera. The still camera mapping payload option (right) combines an APS-C size Exmor™ CMOS image sensor with a BIONZ X™ processor to produce high-precision 24 MP images.
Figure 16. The Huginn X1.V3 is designed for tactical operations as surveillance and reconnaissance missions.
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Figure 17. With the Automated Hand Launch and Retrieval feature, Huginn X1.V3 can be launched and retrieved from hand and highlights the fast response time to establish “eye in the sky” view.
Figure 18. Sky-Watch Drone Manager V2.0.0 offers a tablet-user interactive experience.
Based on Sky-Watch’s sales experience, AIRO believes military commanders and security officers understand that UAS assets improve situational awareness and thus strengthen efficiency and quality in decision making whether it be in the battlespace or in any other intelligence, surveillance, or reconnaissance task. But it also understands that the mUAS procurement process is a highly politically influenced activity in most national defense and security markets. Although AIRO believes the value propositions of Sky-Watch’s mUAS solutions are strong, and the low cost of ownership of open architecture, open source and commercial off-the-shelf (“COTS”)-based mUAS solutions available are in stark contrast to the legacy systems currently deployed, national industrial defense politics and system inertia, from time to time, may prevent, prolong, or limit sales opportunities and related revenue streams. Sky-Watch is currently in the market entry phase of its development and growth, which is a phase where predictability of and performance levels in revenue generation and operational results may thus be compromised and/or fluctuate significantly.
AIRO Drone, AIRO’s domestic drone company, provides operational DaaS services and designs and integrates sensor platforms as well as ground-based and aerial subsystems. Its products serve the industrial inspection, civil engineering, insurance, construction, energy, transportation, agriculture, and security markets. Its current line of products and services consist of drone procurement and sales, DaaS and the development of AIRO-NET. The drones consist of a tethered drone system, a fixed-wing aircraft, a unique reseller relationship with Airgility, Inc. for their GPS-denied small drone line, and a large array of sensor and custom data derivation from drone operations. AIRO’s DaaS service line is an AI-based service model to be performed for companies to inspect properties and operations that were previously performed by manpower and manned aviation, such as helicopter, models. The data gathered from inspections is then delivered to the customer platform of choice such as IBM Bluemix, Microsoft Azure, or Amazon Web Services. Finally, AIRO-NET is a unique drone data Virtual Private Network (“VPN”) that will provide real-time secured command and control, and streaming data (such as electro-optical/infrared video) directly to the operator and customer. This type of service is a recurring business model and is currently performed, quite unstandardized, by most individual operators.
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Figure 19. Drone hardware (sUAS) products.
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Figure 20. Drones as a Service (DaaS) applications.
Figure 21. AIRO-NET Total IoT applications.
Electric Air Mobility. AIRO’s EAM company, Jaunt, is a development-stage, aerospace company and currently has no products available for sale, license, or use. Jaunt’s advanced technology is protected by a valuable portfolio of patents with additional patents in the process of being granted. Analyzed by Randolph Square IP (“RSIP”), Jaunt’s patent portfolio RSIP Score is 134%. The RSIP Score is the ratio of the portfolio to cohort grades and provides a comparison to companies innovating in the same space. Anything over 100% indicates that the subject portfolio contains above-average assets. Jaunt also has the trade secrets and proprietary intellectual property associated with the development of SRC technology, including the extensive experience and flight test data from the demonstrator aircraft.
The Jaunt Journey air taxi is a combination of a helicopter and fixed-wing eVTOL aircraft, with what AIRO believes to include the best attributes of both rotary and fixed-wing. AIRO believes Jaunt’s eVTOL aircraft provides the highest level of safety, the quietest configuration, and the lowest operational cost. The patented SRC technology has flown on multiple Jaunt demonstrator aircraft, with over 300 piloted flight hours and 1,000 takeoffs and landings, to validate the core technology.
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Jaunt plans to certify under existing CAR 529 Transport Category Rotorcraft airworthiness rules. In contrast to the Part 23 Small Airplane Normal Category rules being pursued by other AAM companies, this provides a clear path to eVTOL certification with safety standards equivalent to commercial airliners. Jaunt will certify through TCCA, capitalizing on TCCA’s bilateral agreements with the FAA and EASA to obtain world-wide approval and access to the global market.
Jaunt’s eVTOL aircraft will be certified as a single pilot IFR (instrument flight rules) and comply with Category Enhanced of EASA SC-VTOL-01 by:
| ● | using System Safety Assessment processes (ARP 4761 with ARP 4754A) that are industry standard for Commercial Transport Aircraft (ED79A), |
| ● | designing flight critical systems to meet the requirements of a probability of catastrophic failure of less than 10-9 per flight hour (less than once every billion flight hours), |
| ● | developing robust software design processes to meet Development Assurance Level A for functions that could exhibit catastrophic failures, |
| ● | meeting requirements for bird strike, fatigue and damage tolerance, lightning strike, fire protection, and designing and incorporating elements for crashworthiness right from the conceptual stage. |
This approach puts the design of Jaunt’s eVTOL aircraft in line with the commercial airliners in terms of safety and robustness.
AIRO also believes that Jaunt benefits from its innovative supplier cost sharing strategy, whereby suppliers are deferring the cost of their non-recurring engineering (“NRE”), reducing Jaunt’s initial funding requirements.
Aircraft sales will be through direct sales and leasing, similar to the current aircraft market. Jaunt intends to establish an in-house sales and marketing team to sell to the global air mobility markets. In addition to focusing on traditional aircraft buyers, Jaunt intends to sell to emerging AAM operators.
Since 2021, Jaunt has signed multiple non-binding letters of intent (each, an “LOI”) and other nonbinding agreements with flight operators for acquisition of its Jaunt Journey air taxis. On December 21, 2021, Flapper Tecnologia S.A. (“Flapper”) and Jaunt signed an LOI pursuant to which Flapper intends to acquire up to 25 aircraft. On the same date, Walle Mobility, Inc. (“Walle”) and Jaunt signed an LOI pursuant to which Walle intends to acquire 20 aircraft. On April 8, 2022, Jaunt signed a LOI with Vertiko Mobilite, Inc. (“Vertiko”) pursuant to which Vertiko intends to acquire 73 aircraft. On August 19, 2022, Jaunt signed an LOI with MintAir Co., LTD (“MintAir”) pursuant to which MintAir intends to acquire ten aircraft, with an option to purchase an additional 30 units. On January 12, 2023, Jaunt signed an LOI with REDWINGS S.A. DE C.V. to acquire ten aircraft, with an option to purchase an additional ten units. On March 28, 2023, Jaunt signed a Memorandum of Understanding with Fly Blade (India) Private Limited (“BLADE India”), pursuant to which BLADE India intends to acquire 150 aircraft, with an option to purchase an additional 100 units. Jaunt continues to pursue additional letters of intent with similarly situated operators.
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Figure 22. The Jaunt Journey aircraft is a leader in slowed rotor compound (SRC) technology.
Figure 23. Jaunt’s patented technology slows the rotor once aloft, thereby reducing drag and associated vibration.
Supply Chain
Our products currently in production are closely coordinated with our supply chain. We base our production forecasts on our current order book and existing supplier agreements to ensure we can satisfy our production plans. We have several suppliers for our materials, and most of them are large companies with access to the global supply chain. Our suppliers have the ability to support our requested demand. In addition, while some suppliers view our demand as a small percentage of their total output, they confirm that even with their existing available capacity, they can satisfy our needs.
We are actively exploring opportunities to enter into master supply agreements with some of our key suppliers where appropriate. This strategy will strengthen our supply base and allow us to leverage our expected volume growth to achieve more favorable pricing for our materials.
AIRO is not dependent on any particular geographical region for its materials, and this diversity of suppliers ensures that it can meet its demand from alternative sources in the event of uncertainty in any particular global region.
Facilities and Office Space
AIRO is headquartered in New Mexico, where its primary manufacturing plant is located at 5001 Indian School Road NE, Albuquerque, New Mexico 87110. AIRO’s executive offices are located in Phoenix, Arizona at 20860 N. Tatum Blvd., Suite 300. The Phoenix office space is leased pursuant to a one-year lease agreement between Aspen and Regus Management Group LLC at a fixed amount of $1,814 per month through October 31, 2024.
AIRO’s manufacturing plant is approximately 18,000 square feet. The facility is generally a modern facility with potential growth in adjacent building on site as well as adjacent to the facility. The property on which the manufacturing plant is located also contains office space, which is primarily used by Aspen employees. As such, Aspen is the named lessee to the two-year lease agreement pursuant to which AIRO rents its manufacturing plant (the “Plant Lease”). Under the Plant Lease, the current monthly rent is $20,868.35. The Plant Lease expires on December 31, 2024, subject to AIRO’s option to renew the lease for a two-year period and its right to terminate the lease with 270 days’ advance notice. AIRO also has hangar space leased at Double Eagle Airport in Albuquerque which houses flight test engineering and GA aircraft that support the flight test and certification of Avionics. This is a month-to-month lease for $2,971 per month.
In addition to the Plant Lease, some of AIRO’s portfolio companies rent office-related space pursuant to the arrangements described below.
Sky-Watch leases the property at Østre Alle 6F, 9530 Støvring, Denmark for DKK 836,100 per year (or roughly $119,291 USD) through September 30, 2024. Sky-Watch uses the leased property for administrative, production, and inventory-storage purposes.
Jaunt rents coworking office space at 2626 Cole Avenue, Suite 300, Dallas, Texas 75204 on a month-to-month basis pursuant to a Service Agreement with Meridian Business Centers – Management Partners, LP. In exchange for Jaunt’s monthly payment of $325, the Service Agreement entitles Jaunt to shared and private use of office and conference-meeting spaces and equips Jaunt with a mailing address and local phone number. Jaunt employees conduct nearly all of their work remotely, so the co-working space available for use under the Service Agreement is both adequate and cost-effective for Jaunt’s business needs.
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AIRO Drone, CDI, and Agile Defense neither own nor lease any real property or office space and have not entered into any coworking arrangements. The work conducted for these entities is accomplished remotely and does not require established office space.
AIRO expects that its engineering and manufacturing facilities will expand to meet the design and production of its products. In particular the Electric Air Mobility Division and the Advanced Avionics Division will expand its facilities to meet the engineering and production requirements of the business.
The Electric Air Mobility Division will be expanding to lease Engineering and Manufacturing facilities in Quebec Canada to support the design and manufacturing of the Jaunt Journey aircraft. Jaunt is planning on leasing an office facility in Montreal, Quebec, to house engineering design and development Canadian funding is contingent with Jaunt’s plans to employ Canadians in the development of the Jaunt Journey. The facility will house Management, Finance, Human Resources, Supply Chain, Contracts, Legal, Quality, and Engineering for R&D. Space will be added as needed during this period of time and these costs are reflect in the financial plan. Jaunt intends to also lease existing final assembly facilities located at the Mirabel Airport in Quebec, Canada starting in 2024. The capital expenditures needed to meet these rates are budgeted into Jaunt’s aircraft development program. The manufacturing floor space required at full rate production is approximately 500,000 square feet.
The Advanced Avionics Division will expand its facilities to support growth the design and production of electronics and mechanical assemblies and product to support all divisions within AIRO as well as planned growth in the division itself. This will include additional office space for engineering, finance, sales, supply chain and manufacturing as well as addition floor space for production for internal manufacturing supporting other AIRO divisions and organic growth in Avionics. The division will be looking to expand its aircraft hangar facilities on airport to support additional flight test supporting all divisions. AIRO will be looking at its Albuquerque and Phoenix facilities to expand or consolidate based on local incentives, centers of talent availability in high skilled positions in engineering and production and airport use for flight test.
Plan of Operations
AIRO’s strategy is to achieve large growth in market share, and revenue, through organic development, innovation of new products and services, and strategic and complementary acquisitions, supported by its core tenets of safety first, environmental responsibility, and superior performance for its customers. AIRO’s business model and development strategies are discussed in “Business—Growth Strategies.”
Management anticipates that significant additional expenditures will be necessary to develop and expand AIRO’s business before significant positive operating cash flows can be achieved. AIRO’s ability to continue as a going concern is dependent on its ability to raise additional capital and to ultimately attain sustainable revenues and profitable operations. AIRO expects its capital expenditures to continue to be significant in the foreseeable future as it expands its development, certification, production, and commercial launch, and that its level of capital expenditures will be considerably affected by consumer demand for its services.
As discussed earlier, AIRO’s business consists of 4 divisions: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility. Each division’s level of maturity, cash balance, and needs are unique. Because AIRO has a limited operating history and is entering new industries in the Electric Air Mobility and Uncrewed Air Systems Divisions, it has no historical data to rely on in assessing the demand for its services in those divisions. Its other divisions, Advanced Avionics and Training, have solid contracts and/or historical data that AIRO believes allows it to predict each division’s cash needs and market-growth opportunity with some certainty notwithstanding unforeseen macroeconomic and world events.
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Advanced Avionics Division. AIRO’s Advanced Avionics Division is revenue-generating. Pending its ability to meet its sales plan, AIRO believes that the Advanced Avionics Division will have sufficient cash to fund its current operations. AIRO intends to utilize a portion of the proceeds from the Business Combination to inject additional funds into the Advanced Avionics Division in order to scale operations and to support the production and design of Advanced Avionics products, which will in turn support the growth plans of the other three divisions. The Advanced Avionics Division also intends to release a new set of large-screen display, Connected Panel, and GPS sensor products. The funding generated through this offering will be used to scale production capabilities by expanding current facilities and hiring 15-20 engineers and 10-20 production resources over the next 12-18 months. The additional engineers will be tasked with completing and certifying the next generation of large-screen display for the Electric Air Mobility Division, supporting cockpit upgrades for the Training Division, and developing sensor technologies for the Uncrewed Air Systems Division. Production will be expanded to support each division’s production needs and to accelerate the development and introduction of new products.
Electric Air Mobility Division. AIRO’s Electric Air Mobility Division is pre-revenue and lacks sufficient cash to fund its plan of operations. Within the Electric Air Mobility Division, Jaunt will use the capital proceeds from this Business Combination to expand its business operations and to fund the Electric Air Mobility Division’s eVTOL aircraft development program over the next 12 months. These funds will be applied to the design and fabrication of the Division’s eVTOL demonstrator as well as the establishment of a design center to support R&D activities for major aircraft systems and key technologies. The majority of the capital raised will be used to hire key engineering and program management personnel.
The Electric Air Mobility Division will employ a strategic staffing plan that focuses not only on the required skillsets but also on the global resourcing of talent. Proceeds from the Business Combination will be used to hire approximately 100 people over the next 12 months for engineering, design, and manufacturing. The Electric Air Mobility Division will also utilize third-party engineering resources and is working with risk-sharing suppliers and other AIRO Divisions to co-develop aircraft, communications, data-management, and cyber-security systems, and to provide support for these systems throughout their life cycles. Some of the funds raised will be applied to systems-testing activities in collaboration with AIRO’s suppliers and Advanced Avionics Division.
Management believes that the Electric Air Mobility Division will be capable of raising enough money through this offering to continue its proposed operations over the next 12 months. The Electric Air Mobility Division’s capital requirements will be determined by the following key factors:
| ● | the level of R&D and engineering expenses incurred for the first phase of the Division’s aircraft development program; |
| ● | capital expenditures needed to develop the Division’s eVTOL demonstrator aircraft; |
| ● | capital expenditures needed to launch the Division’s aircraft manufacturing facilities; |
| ● | general and administrative expenses as the Division builds out its design and engineering facilities in the U.S. and Canada, and; |
| ● | sales, marketing, and distribution expenses as the Division builds, brands, and markets sits eVTOL aircraft. |
Uncrewed Air Systems Division. AIRO’s Uncrewed Air Systems Division is revenue generating through its development and sales of drones, the operations of DaaS, and the operation of AIRO-NET, a 5G drone, UAM, and GA communications and data mesh network. However, AIRO does not believe that the drone sales and the DaaS and AIRO-NET operations will provide sufficient funds for the continued operations of the Uncrewed Air Systems Division. Additional financing from the Business Combination or other source will likely be needed to support the Uncrewed Air System Division’s operations. Funding will be used for additional design, sales, and production resources for drones in both the military and non-military markets. The Uncrewed Air Systems Division will make use of the production and engineering capabilities of the Advanced Avionics Division to minimize additional resources, which management believes should lower the Uncrewed Air Systems Division’s costs. AIRO believes that within 12 months demand for products in this Division will be strong enough to drive future revenues that allow this Division to generate the cash needed for operations.
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AIRO will prioritize acquisitions for the Uncrewed Air Systems Division to meet the anticipated growth in demand for products and services in this Division. Using proceeds from the Business Combination and future capital financing from public and/or private sources, AIRO will focus acquisitions for the Uncrewed Air Systems Division in the areas of drone vehicles, AI, and networking service. In particular, AIRO believes that the AI market and network services from its AIRO-NET data-centric mesh network will present opportunities to acquire early-stage and startup companies that will be a catalyst for the Uncrewed Air System Division’s growth.
Training Division. AIRO’s Training Division generates current revenue through its U.S. DoD contracts. Near-term future revenues will come from commercial pilot training. Longer-term training revenue will come from eVTOL commercial pilot training. The Training Division’s ability to fulfill future contracts is stunted by the need for capital purchases of aircraft, support equipment, and a currently operating FAR part 141 Flight School. The Training Division does not have sufficient revenue to fund the additional capital purchases that are needed to generate the necessary cash for continued operations. Funds raised through the Business Combination and/or other capital-raising sources would be used to acquire the aircraft and support equipment that is necessary to meet the additional demand under the DoD contracts and to generate revenue and cash to fund the Training Division’s internal operations.
As a result, the Training Division’s future capital requirements may be uncertain, and actual capital requirements may be different from those currently anticipated. AIRO may seek equity or debt financing to finance a portion of the Training Division’s capital expenditures. Such financing might not be available in a timely manner, on terms that are acceptable to AIRO, or at all.
AIRO’s ability to obtain the financing needed to execute its business plan and the business plans of its four Divisions is subject to a number of factors, including general market conditions and investor acceptance of AIRO’s industry and business model. In addition, AIRO’s future capital needs and other business reasons could require AIRO to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or equity-linked securities could dilute AIRO’s stockholders. In addition, such dilution may arise from the acquisition of or investment in companies in exchange, fully or in part, for newly issued shares, the granting of options to AIRO’s business partners, or the exercise of stock options by AIRO employees in the context of existing or future share-option programs or the issuance of shares to employees in the context of existing or future employee-participation programs. If AIRO cannot raise additional funds as it needs or desires, its operations and prospects could be negatively affected.
Management is focused on implementing plans to improve operations with the goal of sustaining operations for the next twelve months and beyond. These steps include: (i) raising additional capital and/or obtaining financing; (ii) pursuing strategic acquisitions and partnerships that complement AIRO’s business model and will provide it with access to additional consumers; (iii) continuing to develop AIRO’s existing business products while focusing R&D efforts on innovative technologies; (iv) executing material sales and training contracts; and (v) controlling overhead expenses and exploiting cost synergies across its four divisions. There can be no assurance that AIRO can successfully accomplish these steps, and it is uncertain whether AIRO will achieve profitability and obtain additional financing. There can be no assurance that any additional financing will be available to AIRO on satisfactory terms and conditions, if at all.
Growth Strategies
AIRO’s growth strategy and subsequent opportunities are anchored by a bold and focused vision for its future with compelling goals and objectives on how to achieve the vision. AIRO’s vision is to become the number one mid-tiered aerospace company, leading every market it serves, by providing innovative and value-based aerial platforms, solutions and services to its customers, while providing compelling benefit to humanity, its employees and investors.
Growth through Acquisition and Partnering. Within each of AIRO’s divisions, there are several opportunities to increase market share and revenue.
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Aggregation and acquisition is a key component of AIRO’s growth and opportunity capture strategy. As an example, the Uncrewed Air Systems Division’s market is ripe for aggregation and consolidation. Most drone solution and services companies today are small businesses, with limited capital and resources for business development, expansion, or post-service analytics, not to mention the level of operational, training, and safety processes required by most major company clients. There are few if any companies that provide end-to-end solutions for this large client base. There is a clear opportunity for consolidating selected smaller entities into AIRO where it will have the organizational structure and discipline, with the resources to centralize business development, IT, analytics, training, safety, and operational processes, and to effectively pursue and serve Fortune 1,000 clients. Where opportunities are advantageous to AIRO, it will aggressively pursue strategic business acquisitions. AIRO has compiled and evaluated a list of priority strategic acquisition targets that may be pursued post public funding. Current targets will focus on the Uncrewed Air Systems and Training Divisions. As an example, within the Training Division, AIRO anticipates the need for a regulated Maintenance, Repair and Overhaul (“MRO”) capability to expand its Part 145 operations, which both has tremendous growth opportunities and will be critical for the development and implementation of its Electric Air Mobility Division goals. In support of AIRO’s plans to build out its commercial and civilian pilot training offerings, Boeing predicts a need for over 600,000 airframe and powerplant mechanics and maintenance personnel over the next 18 years. That number does not include potential additional demand for airframe and powerplant mechanics in the GA, charter, or UAM sectors.15
Utilizing the above strategy will immediately expand AIRO’s footprint and opportunities in new and existing areas, increasing its revenue, customer base, and market share and improving brand recognition.
Another of AIRO’s growth strategies is to leverage marketing, partnering, and teaming agreements with compatible service providers to expand the products and services it offers in a cost-effective way. AIRO currently has formal agreements with private, public and governmental organizations that have and will continue to provide avenues to increase direct revenue, increase its brand awareness, and the opportunity to serve new customers. AIRO might have limited access to some of these customers without the partnering relationships. Current examples span all AIRO’s divisions and include global engineering firms, major air carriers, large defense contractors and governmental agencies, and, in some cases, competitors. AIRO’s Advanced Avionics Division is a supplier and partner of avionics technology to a strong competitor of its own EAM manufacturer (Jaunt). Partnering relationships are common in training and specifically in the defense sector due to the limited number of authorized contractors by the DoD, and demand exceeding the capacity of any one of the authorized contractors.
Innovation and Offering of New Products and Services. To achieve its mission and objective, AIRO realizes it will lead by providing innovative products and solutions as well as focus on services and solutions within its existing portfolio. The development and implementation of AIRO-NET is a key driver in AIRO’s growth and opportunities plan.
The next major leap in the widespread adoption of drones in the market will require BVLOS operations. Large-scale BVLOS drone operations will require support infrastructure capabilities that do not currently exist. The key to this adoption and growth is enabling drones to conduct truly unmanned flights with no pilot needed for flight operations from takeoff to landing. The autonomous, long-range flight will require a suitable communication infrastructure for successful operation—a critical link enabling autonomous operations of drones within and outside of controlled airspace. Of particular importance is the need for a suitable communication system optimized for the specialized requirements of low altitude, lightweight BVLOS drone operations
AIRO-NET is a communication system geared to the specific needs of BVLOS drone operations, integrating existing data transport providers where available, supplemented by drone-specific infrastructure to provide truly seamless, secure communications to BVLOS drones at all times. AIRO-NET is essentially a VPN for all of the communications requirements for any BVLOS drone operation, for use by both AIRO Drone’s DaaS operations and other BVLOS drone operators.
Several derivative services are also enabled by AIRO-NET and represent significant growth areas as the system evolves. For example, the addition of sensors to the AIRO-NET communications package installed on large numbers of drones can be leveraged to produce environmental data that is valuable to other types of users. By leveraging the AIRO-NET data transport capability and offering service rate discounts to users who agree to host the additional sensors, AIRO-NET can use drones as flying and very mobile Internet-of-Things remote-sensor platforms. Utilizing a subscription services model, AIRO-NET’s derivative services, Internet-of-Things sensor packages, and payloads offer significant revenue growth in their own right, separate from the mission of BVLOS drone communications. Data is rapidly becoming recognized as a critical asset in many businesses today. The value of data has long been recognized as valued in high-tech companies. Several well-known companies such as Google and Facebook have built their business model around the harvesting and provisioning of data and information.
15BOEING Co., supra note 1.
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In the Training Division, the adoption of and implementation of virtual reality (“VR”) training aids and simulation technologies are opportunities that can add significant value to AIRO and provide time and cost savings to its customers. VR platforms can be utilized by all of AIRO’s current divisions, including platforms from EAM aircraft to commercial and military aircraft.
Organic Growth and Associated Opportunities. AIRO will grow its existing business lines within each division. Substantial investment will be made in sales and marketing, analytics, and communications focused on the expansion of its footprint into current and specialized markets and applications domestically and internationally. Current budgets in the divisional financials include investments required and resources needed to achieve identified organic growth targets. Mechanisms are in place and specific opportunities already exist to increase AIRO’s sales and market presence in the EMEA region for all lines of business. Opportunities to expand its presence in Latin and South America and Asia will be analyzed and implemented based on value and timing to AIRO.
AIRO’s Competition
AIRO operates in highly competitive markets that are sensitive to technological advances. In each of AIRO’s market segments, some of its competitors are larger and can maintain higher levels of expenditures for R&D. In each of its markets, AIRO concentrates on the opportunities that it believes suit its resources, overall technological capabilities, and objectives. Principal competitive factors in these markets are product quality and reliability; technological capabilities, including reliable, resilient, and innovative cyber capabilities; service; past performance; ability to develop and implement complex, integrated solutions; ability to meet delivery schedules; the effectiveness of third-party sales channels in international markets; and cost-effectiveness. AIRO frequently “partners” or is involved in subcontracting and teaming relationships with companies that are, from time to time, competitors on other programs.
Advanced Avionics Division. AIRO has several competitors in the advanced avionics market. Those major competitors include companies such as Honeywell International Inc. (HON), Avidyne Corporation, Collins Aerospace, Dynon Avionics, Inc., uAvionix Corporation, L3Harris Technologies, Inc. (LHX), and Garmin Ltd. (GRMN). In the display and integrated avionics segment, the primary competitor is Garmin, which has the largest market share in the aftermarket segment. Garmin, Honeywell, and Collins Aerospace are the leaders in the OEM segment. As the eVTOL market emerges, AIRO expects new market competitors as well as the existing competitors in the avionics segment. AIRO’s primary competitors in the Connected Panel market include Honeywell, Garmin, and Teledyne. In the GPS market space, the NexNav system has few direct competitors. NexNav products include licensing, Circuit Card Assemblies (“CCA”), and Line Replaceable Units or boxes (“LRU”). Competitors include Honeywell’s wholly owned division, Bendix/King, CMC Electronics Inc./Esterline Technologies Corp., FreeFlight Systems Inc./Trig Avionics Ltd., and uAvionix Corporation. FreeFlight and Trig Avionics also license AIRO’s design. Other manufacturers of GPS components such as Garmin, Honeywell, and Collins Aerospace do not sell standalone GPS devices in AIRO’s markets and typically provide that functionality embedded in an integrated product.
Training Division. AIRO’s Training Division is part of an industry segment that is highly concentrated with several well capitalized competitors including, without limitation, Draken International, Inc., Top Aces Inc., Airborne Tactical Advantage Company, LLC (“ATAC”), and Tactical Air Defense Services Inc. (“TacAir”). AIRO also competes with simulation training.
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| ● | Draken. Large inventory of domestic and foreign-built aircraft including A4 Skyhawk, L-159G Alca, Aermacci MB 339, MiG 21, L-39 Albatros, F1 Mirage, and Atlas Cheetah. Newest aircraft Czech L159 Alca. A current contractor with the U.S. Air Force (“USAF”) and the U.S. Navy (“Navy”). |
| ● | Top Aces. A Canadian-based company with an inventory of domestic and foreign-built aircraft including A4 Skyhawk and Dornier Alpha Jet. Set to acquire F-16 Falcons through its acquisition of Advanced Training Systems International in Mesa, Arizona. |
| ● | ATAC. Large inventory of foreign-built fighter jets including F21 Kfir, MK-58 Hawker, L-39 Albatros, and F1 Mirage. The newest aircraft was operational in 1968. Current Contractor with the USAF and the Navy. |
| ● | TacAir. Medium inventory of domestic built F-5 Freedom Fighters. Also operates customer-owned domestic and foreign-built aircraft including F-16 Falcon and SU-27. |
Uncrewed Air Systems Division. AIRO anticipates the defense market for sUAS continues to evolve in response to changing technologies, shifting customer needs and expectations, and the potential introduction of new products. AIRO believes that a number of established domestic and international defense contractors have developed or are developing sUAS that continue to compete, or will compete, directly with its products. Some of these contractors have significantly greater financial and other resources than AIRO possesses. AIRO’s current principal sUAS competitors include Elbit Systems Ltd., Teledyne Technologies, Inc., L3 Technologies, Inc., and Lockheed Martin Corporation (LMT). The U.S. defense market for meUAS has been addressed primarily by Boeing’s ScanEagle and Textron Inc.’s Shadow UAS. AIRO’s current principal meUAS competitors include those competing with AIRO for the U.S. Army’s Future Tactical UAS Program: Martin UAV, LLC and Northrop Grumman Corporation’s V-Bat, Textron Inc.’s Aerosonde, and L3Harris Technologies, Inc.’s FVR-90. International meUAS competitors include Elbit Systems Ltd. and Israel Aircraft Industries International, Inc. AIRO does not view large UAS such as Northrop Grumman Corporation’s Global Hawk or General Atomics, Inc.’s Predator and its derivatives as direct competitors to the sUAS because they perform different missions, do not typically deliver their information directly to front-line ground forces, and are not hand launched and controlled. However, AIRO cannot be certain that these platforms will not become direct competitors in the future. Potential competition from consumer-focused drone manufacturers is emerging as their capabilities increase and their prices remain low relative to existing defense solutions, which is resulting in some level of military consideration even if such drones do not meet traditional military performance or security specifications. Such potential competitors include Skydio Inc. and Shield AI, Inc.
The market for commercial UAS products and services is in an early stage of development, but is evolving rapidly, generating a great deal of interest as government regulations evolve to accommodate commercial UAS operations in the U.S. National Airspace System (“NAS”) and in the airspace systems of other countries. Given the breadth of applications and the diversity of industries that could benefit from UAS technology, a growing number of potential competitors in this market include consumer drone manufacturers such as Dà-Jiāng Innovation, who seek to enhance their systems’ capabilities over time; other sUAS manufacturers, including large aerospace companies such as Lockheed Martin Corporation, and drone and aerial surveying and mapping service providers such as PrecisionHawk, Inc., Sentera LLC, and SlantRange, Inc.; ground-based surveying and mapping service providers; satellite imagery providers; and specialty system manufacturers, software as a service and other service providers aiming to address specific market segments. The emerging non-military market is attracting numerous additional competitors and significant venture capital funding given perceived lower barriers to entry and a much more fragmented marketplace as compared to the military market. Potential additional competitors include start-up companies providing low-cost solutions.
Electric Air Mobility Division. Unlike its competitors, AIRO anticipates utilizing existing certification rules for its aircraft configuration, which AIRO believes will give it a clearer path to commercial service. The Jaunt Journey air taxi is certifying at the highest level of commercial transport, allowing it to fly under existing rotorcraft rules and to utilize existing aviation infrastructure.
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AIRO’s main sources of competition in its Electric Air Mobility Division fall into three categories:
| ● | companies, including other eVTOL manufacturers and UAM service providers, that have entered, or plan to enter, the commercial electric vehicle market, such as publicly traded competitors Archer Aviation Inc. (ACHR), Eve UAM, LLC (an Embraer S.A. (ERJ) company), Joby Aviation, Inc. (JOBY), Lilium N.V. (LILM), and Vertical Aerospace Ltd. (EVTL); |
| ● | incumbent aircraft charter services that have served a similar market for years with hydro-carbon-based combustion engines; |
| ● | ground vehicle transportation, including personal vehicles and asset-light businesses such as Uber Technologies, Inc. (UBER) and Lyft, Inc. (LYFT), whose businesses AIRO expects some amount of competitive overlap with despite its belief that the traditional ground vehicle will be largely complementary to AIRO’s EAM offerings. |
AIRO believes the principal competitive factors in its market include, but are not limited to:
| ● | certification approach and timeline; |
| ● | cost; |
| ● | customer experience; |
| ● | integrated business model; |
| ● | manufacturing efficiency; |
| ● | product quality, reliability, and safety; |
| ● | product performance; |
| ● | service capabilities; |
| ● | supplier partnerships and cost sharing; and |
| ● | technological innovation. |
Because of its focus on eVTOL aircraft design for safety and commercialization, AIRO believes that it is able to compete favorably across these factors.
Research and Development
AIRO benefits from the intellectual experience and capacity of visionary leadership and a robust R&D culture linked directly to its operating business model. AIRO intends to leverage this to continue its thought and innovation leadership among industries, government, military, academic, aviation, and other market segments.
Business survival and evolution of best systems demand comprehensive self-assessment and disruption analysis to be a true leader in the industry. Accordingly, AIRO will characterize its company and its people as an “innovation and invention machine.”
To this end, AIRO intends to promote company-wide experimentation, partnering and client/customer collaboration to assimilate and harness best ideas. It will induce R&D through big data collection, an internal architecture for participation and an enablement process to absorb external innovation resources extensively and assimilate them into its indigenous business. AIRO’s R&D process is matrixed internally with operating divisions and engineering efforts. It involves management and oversight from idea conception to prototyping, to commercialization and sales; then cycles to improve products and services continuously.
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Additionally, AIRO will partner with appropriate industry leaders, scientific and technology communities, academia, government entities and others to foster simultaneous research, design, development, and maintenance of both new and existing products. A key focus area will include synchronizing with NASA and DoD Small Business and Innovation Research (“SBIR”) and Small Business Technology Transfer (“STTR”) programs.
AIRO recognizes that R&D cannot be “moated” solely in its own separate area and still propel AIRO forward. Therefore, it has blurred the boundary between two types of R&D activities, either conducted in new development or in transforming routine or periodic alterations into significant improvement during the R&D process. To imbed this process, AIRO will also avoid separating activities by type as classified in the traditional accounting standards (Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”) defines “Research and Development” (FASB-ASC, 2018)) and integrate activities corresponding the contribution to significant improvement with those evolving from routine or periodic alterations.
AIRO’s R&D will focus in five areas that correspond to government and industry needs: (1) Advanced Avionics and Sensors, Displays and Integrations; (2) EAM System; (3) UAS and sUAS Critical Systems; (4) Drone Command, Control, and Communication Systems; and (5) U.S. and Global Standards.
Advanced Avionics and Sensors, Displays and Integration. AIRO will design and engineer advanced systems that include but are not limited to:
| ● | Detect-and-avoid obstacles (airborne or ground) that could enable manned and unmanned BVLOS operations in the NAS; |
| ● | Connectivity and health monitoring between ground-based and flight-based systems; |
| ● | Sensor payloads for specific missions; and |
| ● | Use of advanced light field and near-eye optics for displays. |
EAM Systems. AIRO will design and engineer safe, efficient, low-carbon, reliable and functional platforms and systems for passengers through stringent flight testing and evaluation. This includes, but is not limited to the research, development or analysis of:
| ● | efficient energy management system, flight control computers, and fly-by-wire systems with industry partners to enable the development of its all-electric aircraft; |
| ● | high-fidelity virtual-reality (VR) flight simulator with an industry partner to support aircraft testing and pilot training; and |
| ● | robotic automation technologies for thermoplastic airframe manufacturing to accelerate the mass production of electric air mobility aircraft and reduce production costs. |
UAS and sUAS Critical Systems. AIRO will design and engineer safe, efficient, low-carbon-emission, reliable and functional platforms and systems for multi-mission roles through stringent flight testing and evaluation. This includes, but is not limited to the research, development or analysis of:
| ● | Sense and Avoid systems and standards necessary to comply with the Code of Federal Regulations that apply to operating and flight rules (14 C.F.R. pt. 91); |
| ● | De-risk of operations by AI-enhanced on-board autonomy and decision-making for collision avoidance, mapping and path-planning, particularly in confined and largely inaccessible areas; |
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| ● | Enabling the scale of UAS missions and services by minimizing UAS training lead-time via on-board AI/algorithm modification and hardware modularity to enhance flight safety and performance across broader applications; |
| ● | The integration of VR and augmented reality; |
| ● | Robotics for autonomous loading and unloading; |
| ● | Disposable and recyclable drones; |
| ● | Partner to design leading-edge vertiports and operations; and |
| ● | Explore use of quantum computing in flight planning, scheduling and logistics. |
Drone Command, Control and Communications Systems. AIRO will develop a global Command, Control and Communications network for safe, efficient and seamless air platform interoperability termed, “AIRO-NET;” through which it will:
| ● | Explore operation, data exchange requirements and the supporting framework to enable multiple beyond visual line-of-sight drone operations at low altitudes (under 400 feet above ground level (“AGL”) in airspace where FAA air traffic services are not provided; |
| ● | Demonstrate and prove the feasibility of using a small radio or communications link in sUAS, UAS, and UAM airframes, while evaluating the operating compatibility with existing avionics equipment; |
| ● | Develop secure Command and Control links with interference mitigation among satellite, drone-to-drone, and drone-to-controllers; |
| ● | Design command centers for BVLOS Drone and AAM missions and services; and |
| ● | Absorb, assimilate and develop best services, roles and responsibilities, information architecture, data exchange protocols, software functions, infrastructure, and performance requirements systems for a drone “traffic management” ecosystem for uncontrolled operations complementary to FAA’s Air Traffic Management (“ATM”) system. |
US and Global Standards. AIRO’s goal is to be a leader of standard setting in the new aerosphere, such that it will support the development of regulations, policies, procedures, guidance, and standards for manned and unmanned aircraft operations, including but not limited to function allocation, control station requirements, pilot training and certification requirements. To accomplish that goal, AIRO will:
| ● | Provide information from flight tests, modeling and simulation, technology evaluations, risk assessments, and data gathering and analysis to provide the FAA and other global authorities with critical information in areas such as Detect and Avoid, UAS communications, Human Factors, System Safety, and Certification; |
| ● | Support the FAA and industry with ongoing participation with GAMA and ASTM in the development of standards for UAS and electric aircraft systems; and |
| ● | Address human factors, maintenance and safety concerns that are unique to manned and unmanned aircraft. |
In these and other efforts, AIRO will extend its influence and thought leadership within technical and scientific communities, attract top talent, provide a leading platform for innovation, provide onramps for profitable growth and increase stockholder value.
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Intellectual Property and Brand Protection
AIRO’s success depends in part upon its ability to protect its core technology and intellectual property. To establish and protect its proprietary rights, AIRO relies on a combination of intellectual-property rights (e.g., patents, trademarks, copyrights, and trade secrets including know-how and expertise) and contracts (e.g., license agreements, confidentiality and non-disclosure agreements with third parties, and employee and contractor disclosure and invention assignment agreements).
AIRO owns or has exclusive rights to patents, trademarks, copyrights, trade secrets, and other intellectual property rights in the U.S. and abroad that support AIRO and the respective brands, products and services of each of its four divisions. AIRO has 41 issued patents worldwide (of which 30 are U.S. patents) and 5 pending patent applications worldwide (of which 2 are U.S. patent applications). Without accounting for any potential patent term adjustments or extensions or other forms of exclusivity with respect to AIRO’s U.S. issued patents, 2 expire between 2023 and 2025, 12 expire between 2026 and 2030, and 16 expire between 2031 and 2040. Any patents issuing from the pending U.S. applications will begin to expire in 2041. With respect to AIRO’s European patents, 2 European patents are expected to expire between 2026 and 2030, and 1 European patent is expected to expire in 2032. Any patent issuing from the pending European patent application is expected to expire in 2036. With respect to AIRO’s Brazilian patents, one is expected to expire in 2027 and two are expected to expire between 2032 and 2036. With respect to AIRO’s Chinese patents, three are expected to expire between 2026 and 2030 and two are expected to expire between 2031 and 2040. Any patent issuing from the pending Chinese patent application is expected to expire in 2030. Any patent issuing from the pending Mexican patent application is expected to expire in 2029.
Of the above referenced patents and applications, approximately 22 of the issued U.S. patents are related to electronic flight display technologies. Approximately 8 of the issued U.S. patents and the pending U.S. patent applications are related to vertical take-off and landing aircraft technologies. AIRO also has 7 U.S. trademark registrations and 3 pending U.S. trademark applications. AIRO’s various portfolio companies regularly file for patent and trademark protection, and AIRO has also acquired intellectual property by way of corporate acquisition.
AIRO believes that its differentiated and balanced portfolio of intellectual property rights in the aerospace, defense and drone technologies spaces, its diversified product portfolio, ranging from established and mature product offerings to innovative drone and eVTOL solutions, and the brand reputation of its companies, provide it with a competitive advantage.
In the future, AIRO intends to continue to seek intellectual property protection for its new products, technologies and designs, and exercise its rights to exclusively use these valuable assets.
Employees and Human Capital Management
As of March 31, 2024, AIRO had 129 full-time employees across its platform, including 67 in the Uncrewed Air Systems Division, 36 in the Advanced Avionics Division, 9 in the Training Division, 9 in the Electric Air Mobility Division, and 8 additional executives. AIRO’s human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating existing and new employees, advisors and consultants. AIRO anticipates additional hiring activity across its four divisions as it continues to scale its operations.
Thirty-one employees based in Denmark in the Uncrewed Air Systems Division are covered by a collective bargaining agreement with the Danish Industry union. Apart from such employees, no other employees are currently covered by collective bargaining agreements or represented by labor unions.
AIRO anticipates increased hiring activity across its divisions as it continues to scale operations. In particular, Jaunt anticipates substantial hiring activity, although it will also augment staffing using third-party service providers. AIRO intends to hire operational management and engineering staff for R&D. It anticipates increasing staff to approximately three hundred people by 2025.
Government Regulation
AIRO is subject to various local, state, federal and international laws and regulations relating to the development, manufacturing, sale and distribution of its products, systems and services, and it is AIRO’s policy to comply with the applicable laws in each jurisdiction in which it conducts business. Regulations include but are not limited to those related to import and export controls, corruption, bribery, environment, government procurement, wireless communications, competition, product safety, workplace health and safety, employment, labor and data privacy.
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Drones
Due to the fact that it contracts with the DoD and other agencies of the U.S. government, AIRO’s Uncrewed Air Systems Division is subject to extensive federal regulations, including the Federal Acquisition Regulations, Defense Federal Acquisitions Regulations, Truth in Negotiations Act, Foreign Corrupt Practices Act, False Claims Act and the regulations promulgated under the DoD Industrial Security Manual, which establishes the security guidelines for classified programs and facilities as well as individual security clearances. The federal government audits and reviews contractors’ performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. Like most government contractors, the Uncrewed Air Systems Division’s contracts are audited and reviewed on a continual basis by federal agencies, including the Defense Contract Management Agency (“DCMA”) and the Defense Contract Audit Agency (“DCAA”).
Certain of these regulations impose substantial penalties for violations, including suspension or debarment from government contracting or subcontracting for a period of time. AIRO management monitors all of its government contracts and contractual efforts to minimize the possibility of any violation of these regulations.
In addition, the Uncrewed Air Systems Division is subject to industry-specific regulations due to the nature of the products and services it provides. For example, certain aspects of its business are subject to further regulation by additional U.S. government authorities, including: (i) the FAA, which regulates airspace for all air vehicles in the NAS; (ii) the National Telecommunications and Information Administration and the Federal Communications Commission, which regulate the wireless communications upon which its UAS depend in the U.S.; and (iii) the Defense Trade Controls of the U.S. Department of State that administers the International Traffic in Arms Regulations, which regulate the export of controlled technical data, defense articles and defense services.
On June 21, 2016, the FAA released its final rules that allow routine use of certain sUAS in the NAS. The FAA rules, which went into effect in August 2016, provide safety rules for sUAS (under 55 pounds) conducting non-recreational operations. The rules limit flights to visual-line-of-sight daylight operation, unless the UAS has anti-collision lights in which case twilight operation is permitted. The final rule also addresses height and speed restrictions, operator certification, optional use of a visual observer, aircraft registration and marking and operational limits, including prohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS. Current FAA regulations require drone operators to register their systems with the FAA and secure operating licenses for their drones as per the Part 107 specifications. These regulations continue to evolve to accommodate the integration of UAS into the NAS for commercial applications, including HAPS UAS.
In December 2019, the FAA proposed rules requiring the remote identification of UAS. Remote identification, which provides for a UAS in flight to provide identification that can be received by other parties, is designed to enhance safety and security by allowing the FAA and other agencies to identify a UAS that appears to be flying unsafely or in an area in which flight is not permitted. The public comment period for the proposed rules expired on March 2, 2020. On April 21, 2021, the final rule for remote identification of UAS went into effect. On the same day, the final rule for operation of sUAS over people also went into effect. This rule permits routine operations of small, unmanned aircraft over people, moving vehicles, and at night under certain conditions. The final rule also makes changes to the recurrent testing framework and expands the list of persons who may request the presentation of a remote pilot certificate. Additionally, in February 2020, the FAA issued a public request for comment on its proposed policy for the creation of a new type certification of certain UAS as a special class of aircraft under FAA regulations. Currently the Part 107 Rules allow for the operation of sUAS without the need for FAA airworthiness certification as long as the UAS meets certain specified criteria and certain flight rules are followed; larger UAS and operations of sUAS outside the scope of the Part 107 Rules require a waiver from the FAA. The FAA’s proposed policy proposes a new special class of UAS for which airworthiness certification can be obtained, however, the proposed policy only applies to the procedures for the type certification of the new class of UAS, not the criteria that will be needed for the UAS or the flight operations to be followed to operate. Further rulemaking by the FAA is anticipated regarding the particular criteria for the airworthiness certification standards under the new special class proposed by the new policy. The comment period for the FAA’s proposed policy expired on March 4, 2020.
While it is currently anticipated that the enactment of remote identification, operation of sUAS over people, and a new airworthiness certification process for a newly created special class of UAS will help formalize the process for manufacturing and obtaining airworthiness certification for UAS within the newly created class and accelerate the development of commercial UAS in the U.S., it is uncertain whether the FAA’s actions, if any, will have such effects. Additionally, it is unclear when, if ever, the FAA will implement final rules regarding remote UAS identification and whether they will differ from the proposed rules. It is also unclear when, if at all, the FAA will create a new class of UAS and what the final rules regarding the certification of such UAS will look like. AIRO cannot be certain as to how its business will be affected by the FAA’s proposals until the final rules for such matters are issued by the FAA.
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Furthermore, AIRO’s non-U.S. operations are subject to the laws and regulations of foreign jurisdictions, which may include regulations that are more stringent than those imposed by the U.S. government on its U.S. operations.
The defense and security mUAS segment, most often represented by government clients, has, in AIRO’s opinion, the best possibility to utilize mUAS systems, as both armed forces and security agencies often times have access to restricted airspace in which to train, build capabilities, and operate. Nevertheless, the extent to which the mUAS market—defense, security and civilian professional—can be accessed, expanded, and commercially exploited is tied to clients’ ability to fly in non-restricted airspace and, moreover, the ability to fly BVLOS. National and international regulation, such as the Unmanned Aircraft System Traffic Management initiative implemented by the FAA and NASA in the U.S. or the “U-Space” initiative implemented by the EASA to address UAS traffic management in the EU, is still underway, as is standardization of operator certification and platform (airworthiness) certification. Until these standards, certifications, and traffic management are effectively clarified and ratified systematically and internationally, certain clients of the targeted customer segment may be hesitant, or even prevented, in acquiring and utilizing AIRO’s mUAS solutions. Accordingly, the nature of and the speed with these regulations are completed and implemented pose a risk for both AIRO’s financial performance and condition, timing of growth and (short-term) growth potential.
Government Contracting Process
AIRO’s Uncrewed Air Systems Division sells the significant majority of its small and medium UAS and TMS products and services as the prime contractor under contracts with the U.S. government. Certain important aspects of its government contracts are described below.
Bidding Process
Most of the Uncrewed Air Systems Division’s current government contracts were awarded through a competitive bidding process. The U.S. government awards competitive-bid contracts based on proposal evaluation criteria established by the procuring agency. Competitive-bid contracts are awarded after a formal bid and proposal competition among providers. Interested contractors prepare a bid and proposal in response to the agency’s request for proposal or request for information. A bid and proposal are usually prepared in a short time period in response to a deadline and requires the extensive involvement of numerous technical and administrative personnel. Following award, competitive-bid contracts may be challenged by unsuccessful bidders.
Funding
The funding of U.S. government programs is subject to congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis, even though a program may continue for many years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations.
The U.S. military funds its contracts for full-rate production UAS, either through operational need statements or as programs of record. Operational need statements require allocations of discretionary spending or reallocations of funding from other government programs. AIRO defines a program of record as a program that, after undergoing extensive DoD review and product testing, is included in the five-year government budget cycle, meaning that funding is allocated for purchases under these contracts during the five-year cycle, absent affirmative action by the customer or Congress to change the budgeted amount. Despite being included in the five-year budget cycle, funding for these programs is subject to annual approval.
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Material Government Contract Provisions
All contracts with the U.S. government contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts, including rights that allow the government to:
| ● | terminate existing contracts for convenience, in whole or in part, when it is in the interest of the government to do so; |
| ● | terminate contracts for default upon the occurrence of certain enumerated events; |
| ● | unilaterally modify contracts with regard to certain performance requirements; | |
| ● | cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become unavailable; |
| ● | potentially obtain rights in, or ownership to, intellectual property associated with products and systems developed or delivered by a contractor as a result of its performance of the contract; |
| ● | adjust contract costs and fees on the basis of audits completed by its agencies; |
| ● | suspend or debar a contractor from doing business with the U.S. government; and |
| ● | control or prohibit the export of certain items. |
Generally, government contracts are subject to oversight audits by government representatives. Compensation, if any, in the event of a termination for default is limited to payment for work completed at the time of termination. In the event of a termination for convenience, the contractor may receive the contract price for completed work, as well as its costs of performance of terminated work including an allowance for profit and reasonable termination settlement costs.
Government Contract Categories
There are three primary types of government contracts in the commercial drones industry, each of which involves a different payment methodology and level of risk related to the cost of performance. These basic types of contracts are typically referred to as fixed-price contracts, cost reimbursable contracts, including cost-plus-fixed fee, cost-plus-award fee, and cost-plus-incentive fee, and time-and-materials contracts.
In some cases, depending on the urgency of the project and the complexity of the contract negotiation, one of AIRO’s Uncrewed Air Systems Division subsidiaries will enter into a Letter Contract prior to finalizing the terms of a definitive fixed-price, cost reimbursable or time-and-materials definitive contract. A Letter Contract is a written preliminary contractual instrument that provides limited initial funding and authorizes the contractor to begin immediately manufacturing supplies or performing services while negotiating the definitive terms of the procurement.
Fixed-Price. These contracts are not subject to adjustment by reason of costs incurred in the performance of the contract. With this type of contract, the contractor assumes the risk that it will not be able to perform at a cost below the fixed price, except for costs incurred because of contract changes ordered by the customer. Upon the U.S. government’s termination of a fixed-price contract, generally the contractor would be entitled to payment for items delivered to and accepted by the U.S. government and, if the termination is at the U.S. government’s convenience, for payment of fair compensation for work performed plus the costs of settling and paying claims by any terminated subcontractors, other settlement expenses and a reasonable allowance for profit on the costs incurred.
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Cost Reimbursable. Cost reimbursable contracts include cost-plus-fixed fee contracts, cost-plus-award fee contracts and cost-plus-incentive fee contracts, each of which are described below. Under each type of contract, the contractor assumes the risk that it may not be able to recover costs if they are not allowable under the contract terms or applicable regulations, or if the costs exceed the contract funding.
| ● | Cost-plus-fixed fee contracts are cost reimbursable contracts that provide for payment of a negotiated fee that is fixed at the inception of the contract. This fixed fee does not vary with actual cost of the contract, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type poses less risk of loss than a fixed-price contract, but a contractor’s ability to win future contracts from the procuring agency may be adversely affected if it fails to perform within the maximum cost set forth in the contract. |
| ● | A cost-plus-award fee contract is a cost reimbursable contract that provides for a fee consisting of a base amount, which may be zero, fixed at inception of the contract and an award amount, based upon the government’s satisfaction with the performance under the contract. With this type of contract, the contractor assumes the risk that it may not receive the award fee, or only a portion of it, if it does not perform satisfactorily. |
| ● | A cost-plus-incentive fee contract is a cost reimbursable contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. |
AIRO’s Uncrewed Air Systems Division typically experiences lower profit margins and lower risk under cost reimbursable contracts than under fixed-price contracts. Upon the termination of a cost reimbursable contract, generally the contractor would be entitled to reimbursement of its allowable costs and, if the termination is at the U.S. government’s convenience, a total fee proportionate to the percentage of work completed under the contract.
Time-and-Materials. Under a time-and-materials contract, compensation is based on a fixed hourly rate established for specified labor or skill categories. Contractors are paid at the established hourly rates for the hours it expends performing the work specified in the contract. Labor costs, overhead, general and administrative costs and profit are included in the fixed hourly rate. Materials, subcontractors, travel and other direct costs are reimbursed at actual costs plus an amount for material handling. Contractors make critical pricing assumptions and decisions when developing and proposing time-and-materials labor rates, risking reduced profitability if actual costs exceed the costs incorporated into the fixed hourly labor rate. One variation of a standard time-and-materials contract is a time-and-materials, award fee contract. Under this type of contract, a positive or negative incentive can be earned based on achievement against specific performance metrics.
Electric Air Mobility
A transport category type certification is the highest level in safety provided by the Civil Aviation Authorities. Jaunt intends to certify under CAR 529, single pilot IFR (instrument flight rules) and comply with Category Enhanced of EASA SC-VTOL-01 by:
| ● | using System Safety Assessment processes (Aerospace Recommended Practice (ARP) 4761 with ARP 4754A) that are industry standard for commercial transport aircraft (Exposure Draft (ED) 79A); |
| ● | designing flight critical systems to meet the requirements of a probability of catastrophic failure of less than 10-9 per flight hour (less than once every billion flight hours); |
| ● | developing robust software design processes to meet Development Assurance Level A for functions that could exhibit catastrophic failures; and |
| ● | meeting requirements for bird strike, fatigue and damage tolerance, lightning strike, fire protection, and designing and incorporating elements for crashworthiness right from conceptual stage. |
AIRO believes that this approach puts the design of the Jaunt Journey air taxi in line with the commercial transport category aircraft and rotorcraft in terms of safety and robustness. AIRO also believes it provides Jaunt with a clear, low risk path to certification by using existing VTOL regulations, thereby removing any guesswork from the certification approach.
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Government Regulations and Compliance
In the near-term, the efforts of the Electric Air Mobility Division will focus on obtaining FAA certification of its aircraft and engaging with key decision makers in the cities in the U.S. in which it anticipates its aircraft and UAM service will initially operate. Its aircraft will be required to comply with regulations governing aircraft design, production and airworthiness. In the U.S., this primarily includes regulations put forth by the FAA and the DOT. Outside the U.S., similar requirements are generally administered by the national civil aviation and transportation authorities of each country.
Producing the Aircraft
Production certification is the FAA’s approval for aircraft manufacturers to be able to manufacture aircraft under an FAA approved type design. To obtain production certification from the FAA, the manufacturer must demonstrate that its organization and its personnel, facilities, and quality system can produce the aircraft such that they conform to the approved design. Jaunt is working to develop the systems and processes it will need to obtain FAA production certification with the goal of obtaining such certification shortly following completion of the aircraft type certificate.
Operating the Aircraft
Airworthiness certification from the FAA signifies that an aircraft meets its approved type design and is in a condition for safe operation in the NAS. As is the industry standard, each of the aircraft manufactured by Jaunt will need to be issued an airworthiness certificate. AIRO expects that the airworthiness certificates issued to Jaunt’s aircraft will be a Standard Airworthiness certificate in the Normal Category, as such terms are defined by the FAA.
Operating the UAM Service
The DOT and the FAA have regulatory authority over air transportation operations in the U.S. To operate its UAM in air taxi service, Jaunt will be required to hold an FAA Air Carrier Certificate and operate under Part 135 of the FARs and register as an air taxi operator at the DOT. In addition, takeoff and landing locations (e.g., airports and heliports) typically require state and local approval for zoning and land use and their ongoing use are subject to regulations by local authorities. AIRO expects that as Jaunt builds out its UAM service there will be additional local, state and federal laws, regulations and other requirements that will cover its operations. Therefore, Jaunt has already begun and will continue to grow its engagement and collaboration with the cities in which it intends to operate its service in an effort to ensure that it operates in a safe and sustainable manner.
Regulatory Approvals Relating to Passenger-grade AAVs
Jaunt operates in a new and rapidly evolving industry, which is subject to extensive legal and regulatory requirements. While regulations governing this industry are evolving, currently in the jurisdictions where Jaunt sells and plans to sell its products, the commercial use of its passenger-grade AAVs, and in some cases its non-passenger-grade AAVs, is subject to an uncertain or lengthy approval process. In order for customers to use Jaunt’s passenger-grade AAVs, Jaunt is working on obtaining, or working closely with customers to obtain, relevant approvals and permits in the jurisdictions where it sells and plans to sell its products. AIRO is unable to estimate the average length of time required to obtain the applicable regulatory approvals due to the nascent nature of AAV-related regulations and the lack of relevant precedents. For example, AIRO is not aware of any operator having been granted all required approvals for the commercial operations of passenger-grade AAVs in China or the U.S. See “Risk Factors—Risks Relating to Our Business and Industry.” In the jurisdictions where Jaunt sells and plans to sell its products, the commercial use of its passenger-grade AAVs, and in some cases of its non-passenger-grade AAVs, is subject to an uncertain or lengthy approval process. AIRO cannot predict when regulations will change, and any new regulations may impose onerous requirements and restrictions with which Jaunt, its AAVs and its potential customers may be unable to comply. As a result, Jaunt may be limited in, or completely restricted from, growing its business in the foreseeable future.
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Advanced Avionics
Aspen designs and manufactures equipment under worldwide aviation regulatory agency approvals. These include but are not limited to FAA, EASA, TCCA, and ENAC (Brazil) regulations. These govern the design test, certification, installation, and manufacturing of Aspen’s equipment.
The FAA regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the U.S. Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for the various types of aircraft and equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. Aircraft operators must maintain logs concerning the utilization and condition of aircraft engines, life-limited engine parts and airframes. In addition, the FAA requires that various maintenance routines be performed on aircraft engines, some engine parts, and airframes at regular intervals based on cycles or flight time. Engine maintenance must also be performed upon the occurrence of certain events, such as foreign object damage in an aircraft engine or the replacement of life-limited engine parts. Such maintenance usually requires that an aircraft engine be taken out of service. Aspen’s operations may in the future be subject to new and more stringent regulatory requirements. In that regard, Aspen closely monitors the FAA and industry trade groups in an attempt to understand how possible future regulations might impact it. AIRO’s businesses that sell defense products directly to the U.S. government or for use in systems delivered to the U.S. government can be subject to various laws and regulations that govern pricing and other factors.
Import/Export Regulations. Aspen sells products and solutions to customers all over the world and is required to comply with U.S. Export Administration Regulations and economic and trade sanctions programs limiting or banning sales into certain countries. Countries outside of the U.S. have implemented similar controls and sanction regulations. Together these controls and regulations may impose licensing requirements on exports of certain technology and software from the U.S. and may impact Aspen’s ability to transact business in certain countries or with certain customers. Aspen has developed compliance programs and training to prevent violations of these programs and regulations, and regularly monitors changes in the law and regulations and create strategies to deal with changes. Changes in the law may restrict or further restrict Aspen’s ability to sell products and solutions.
Anti-Corruption Regulations. Because Aspen has significant international operations, it must comply with complex regulations, including U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to governmental officials, and anticompetition regulations. Aspen has compliance policies, programs and training to prevent non-compliance with such anti-corruption regulations in the U.S. and outside the U.S. Aspen monitors pending and proposed legislation and regulatory changes that may impact its business and develops strategies to address the changes and incorporate them into existing compliance programs.
Environmental Regulations. Aspen’s facilities and operations are subject to numerous domestic and international laws and regulations designed to protect the environment, particularly with regard to waste and emissions. The applicable environmental laws and regulations are common within the industries and markets in which Aspen operates and serves. Aspen believes that it has complied with these requirements and that such compliance has not had a material adverse effect on its financial condition, results of operations, cash flows or equity. Aspen has installed waste treatment facilities and pollution control equipment to satisfy legal requirements and to achieve its waste minimization and prevention goals.
Electronic products are subject to governmental environmental regulation in a number of jurisdictions, such as domestic and international requirements requiring end-of-life management and/or restricting materials in products delivered to customers, including the European Union’s Directive 2012/19/EU on Waste Electrical and Electronic Equipment and Directive 2011/65/EU on the Restriction of the use of certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), as amended. Other jurisdictions have adopted similar legislation. Such requirements typically are not applicable to most equipment produced by Aspen. Aspen believes that it has complied with such rules and regulations, where applicable, with respect to its existing products sold into such jurisdictions. Aspen intends to comply with such rules and regulations with respect to its future products.
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Wireless Communications Regulations. Wireless communications, whether radio, satellite or telecommunications, are also subject to governmental regulation. Equipment produced in Aspen’s Communication Systems and Space and Airborne Systems segments, in particular, is subject to domestic and international requirements to avoid interference among users of radio and television frequencies and to permit interconnection of telecommunications equipment. Aspen is also required to comply with technical operating and licensing requirements that pertain to its wireless licenses and operations. Aspen believes that it has complied with such rules and regulations and licenses with respect to its existing products and services, and it intends to comply with such rules and regulations and licenses with respect to its future products and services. Governmental reallocation of the frequency spectrum could impact Aspen’s business, financial condition, and results of operations.
Environmental Regulation
Operations in all of AIRO’s divisions are subject to extensive, and frequently changing, federal, state and local environmental laws and substantial related regulation by government agencies, including the Environmental Protection Agency. Among other matters, these regulatory authorities impose requirements that regulate the operation, handling, transportation and disposal of hazardous materials; protect the health and safety of workers; and require AIRO to obtain and maintain licenses and permits in connection with its operations. This extensive regulatory framework imposes significant compliance burdens and risks on AIRO. Notwithstanding these burdens, AIRO believes that it is in material compliance with all federal, state and local environmental laws and regulations governing its operations. There has been no material adverse effect to AIRO’s consolidated financial statements nor competitive positions as a result of these environmental regulations.
Other Regulation
AIRO is also subject to a variety of other regulations including work-related and community safety laws. The Occupational Safety and Health Act of 1970 mandates general requirements for safe workplaces for all employees and established the Occupational Safety and Health Administration (“OSHA”) in the Department of Labor. In particular, OSHA provides special procedures and measures for the handling of certain hazardous and toxic substances. In addition, specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. Requirements under state law, in some circumstances, may mandate additional measures for facilities handling materials specified as extremely dangerous. AIRO believes that its operations are in material compliance with OSHA’s health and safety requirements.
Legal Proceedings
From time to time, AIRO may become involved in legal proceedings arising in the ordinary course of its business. AIRO is not currently a party to any legal proceedings that would individually or taken together have a material adverse effect on its business, financial condition, results of operations, or cash flows. Regardless of outcome, litigation can have an adverse impact on operations due to defense and settlement costs, diversion of management resources, negative publicity, reputational harm, and other factors.
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AIRO’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations of AIRO Group Holdings, Inc. should be read together with AIRO’s audited consolidated financial statements as of and for the year ended December 31, 2023, together with related notes thereto, and AIRO’s unaudited condensed consolidated financial statements as of March 31, 2024 and for the three-month periods ended March 31, 2024 and 2023, together with related notes thereto, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. The discussion and analysis should also be read together with the unaudited condensed combined pro forma financial information of AIRO and its subsidiaries as of March 31, 2024, for the three months ended March 31, 2024, and for the year ended December 31, 2023.
In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. AIRO’s actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus. AIRO cautions investors not to place undue reliance on the forward-looking statements contained in this section. These statements speak only as of the date of this prospectus, and AIRO undertakes no obligation to update or revise the statements, except as may be required by law.
Formation
After several years of preparation, the founders of AIRO formed AIRO Group, Inc., n/k/a Old AGI, Inc., a Delaware corporation (“Legacy AIRO”), for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry, including those that are discussed below. AIRO was formed on August 30, 2021, and Legacy AIRO became a wholly owned subsidiary of AIRO through a reorganization effective as of October 5, 2021. AIRO then entered into a series of transactions to develop its business across four divisions: (a) Advanced Avionics; (b) Training; (c) Uncrewed Air Systems; and (d) Electric Air Mobility.
Business Combinations
During the year ended December 31, 2022, AIRO completed its “Put Together Transaction” to acquire six companies which are now organized into AIRO’s four primary divisions, each with a diverse set of partners and customers and each representing a large and fast growing market segment: (i) Advanced Avionics, through AIRO’s subsidiary Aspen; (ii) Training, through its subsidiaries Agile Defense and CDI; (iii) Uncrewed Air Systems, through its subsidiaries AIRO Drone and Sky-Watch; and (iv) Electric Air Mobility, through its subsidiary Jaunt. Aspen, Agile Defense, CDI, AIRO Drone, Sky-Watch, and Jaunt are collectively referred to herein as the “Acquired Companies.” With these acquisitions, AIRO brought together decades of industry-leading experience to provide prominent products and services that it believes are uniquely capable of addressing a wide spectrum of aerospace markets.
AIRO acquired Agile Defense on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Agile Defense, Legacy AIRO, AIRO, Agile Defense Merger Sub, LLC, and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $2.3 million. The promissory note bears no interest and is payable within five days of the closing of the Business Combination. On October 2, 2023, the parties signed a Promissory Note Termination Agreement whereby six of the seven note holders agreed to convert approximately ninety percent of the promissory note principal owed them into shares of AIRO’s Common Stock immediately prior to the closing of the Business Combination, with the remaining principal paid at closing of the Business Combination. Total principal of $0.8 million pursuant to the original promissory note and remaining principal of $0.2 million pursuant to the Promissory Note Termination Agreement shall be paid at closing of the Business Combination.
AIRO acquired AIRO Drone on February 25, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among AIRO Drone, Legacy AIRO, AIRO, AIRO Drone Merger Sub, LLC and Joseph Burns as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $2.1 million. The promissory note bears no interest and is payable within five days of the closing of the Business Combination. On October 2, 2023, the parties signed a Promissory Note Termination Agreement whereby nine of the ten note holders agreed to convert approximately ninety percent of the promissory note principal owed them into shares of AIRO’s Common Stock immediately prior to the closing of the Business Combination, with the remaining principal paid at closing of the Business Combination. Total principal of $448.9 million pursuant to the original promissory note and remaining principal of $0.2 million pursuant to the Promissory Note Termination Agreement shall be paid at closing of the Business Combination.
AIRO acquired Jaunt on March 10, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Jaunt, Legacy AIRO, AIRO, Jaunt Merger Sub, LLC and Martin Peryea as member representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of 5.3 million shares of AIRO’s Common Stock.
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AIRO acquired Sky-Watch on March 28, 2022, pursuant to the terms and conditions of an Equity Purchase Agreement by and among Sky-Watch, Legacy AIRO, AIRO, Dangroup ApS and Mekan I/S v/Per Pedersen & Claus Bo Jensen, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $12.88 million, 0.9 million shares of AIRO’s Common Stock and an earnout of up to $15.5 million based on performance commencing on the closing date through fiscal years 2022, 2023 and 2024.
AIRO acquired Aspen on April 1, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Aspen, Legacy AIRO, AIRO, Aspen Merger Sub, Inc. and John Uczekaj as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of 2.6 million shares of AIRO’s Common Stock.
AIRO acquired CDI on April 26, 2022, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among CDI, Legacy AIRO, AIRO, Coastal Merger Sub, Inc. and Jeffrey Parker as target representative, dated as of October 6, 2021, as amended, in exchange for consideration in the form of a promissory note in the amount of $10.10 million and 1.8 million shares of AIRO’s Common Stock. The promissory note bears no interest and was originally payable within five days of the closing of the Business Combination. On October 17, 2023, the parties signed a Promissory Note Termination Agreement whereby approximately ninety percent of the promissory note principal shall be converted into shares of AIRO’s Common Stock immediately prior to the closing of the Business Combination, with the remaining principal of $1.0 million paid at closing of the Business Combination.
Divisional Business Overview
| 1. | Advanced Avionics Division |
Aspen Overview
AIRO’s Advanced Avionics Division is anchored by its wholly owned subsidiary, Aspen, which AIRO acquired on April 1, 2022. Aspen was founded in 2005 by two entrepreneurs in Albuquerque, New Mexico and was funded by a mix of venture capital and family/individual investors prior to merging with AIRO. Today, Aspen is based in Albuquerque, New Mexico, with an office in Phoenix, Arizona. Aspen develops, manufactures, and sells avionics and electronic GPS sensors for the GA, UAS, and eVTOL market segments. Aspen’s customers are located worldwide, ranging from individual operators, dealers, and large OEMs.
Aspen’s avionics products are focused on GA aftermarket and OEM display and integration and Connected Panel solutions. Aspen’s avionics have also been installed on legacy military aircraft including older generation jets and helicopters. Currently, Aspen supplies displays as an OEM option on Robinson helicopters. Aspen also supplies Connected Panel solutions for Pilatus and Honeywell that are installed in A300 Cargo aircraft. Aspen’s GPS sensors are sold for installation on GA and UAS/eVTOL platforms.
Aspen’s Evolution Flight Display System line of products is a preferred retrofit solution for legacy GA aircraft. It is designed as a low-cost modular platform to supply a range of features from basic PFD to sophisticated MFD capabilities. Aspen estimates that there are over 15,000 GA aircraft flying with Aspen displays. Aspen’s strategy is to provide a robust hardware platform with low acquisition and install costs that feature open system interfaces and ability to interface to legacy and new technology avionics in GA aircraft. The platform was designed to affordably update to new technologies minimizing installation costs to upgrade. Aspen is currently developing its next generation display system focused on large screen glass applications for GA and eVTOL platforms.
Aspen’s Connected Panel product was first introduced in 2011 to provide tablet connectivity to avionics panels. At that time, Aspen was the first to market with this capability and landed programs with Pilatus on both the Pilatus PC12 turboprop and the PC24 business jet. Additionally, Aspen previously entered into an agreement with a major avionics manufacturer to provide a version of its Connected Panel solution on A300 Freighter aircraft. The Connected Panel platform is designed to be extendable to many potential applications including datalink, data recording and 4G/5G applications.
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In 2015, Aspen acquired the GPS commercial aerospace market segment of Accord’s GPS business. Aspen’s GPS products are certified on over 600 different aircraft makes/model. It is also installed on many UAS/eVTOL platforms. The acquisition provided not only GPS technologies but access to low-cost engineering resources.
Key Factors Affecting Aspen’s Operating Results
Expansion and Sales of Current Product Lines
Aspen’s current line of products supplies a steady stream of revenue from its dealer network and OEM contracts. All major avionics manufacturers provide quarterly revenue information based on domestic and international aftermarket and OEM sales. While historically Aspen’s performance often mirrors that of the industry metrics, there are quarter-to-quarter variations in Aspen’s historic financial performance based on Aspen-related supply chain issues, product introduction schedules, and competitive products entering the market, which management expects will continue. Like the overall avionics industry, Aspen is impacted by fluctuations in demand due to changes in the overall economy. Macroeconomic factors that affect negative stock market performance and volatility often drive demand softness. Conversely, factors that affect positive performance and less volatility often drive demand strength.
A significant portion of aftermarket sales is made through a worldwide network of dealers. Currently, Aspen has 650 dealers, of which more than 250 are located outside of the U.S. Aspen’s sales team works closely with dealers and individual operators in conjunction with its marketing operations to drive demand into the dealer network. This effort consists of brand marketing, focused marketing on specific target audiences, sponsorships, and special pricing initiatives throughout the calendar year to coincide with industry shows. Aspen’s participation in industry shows and events creates direct sales opportunities for continued expansion of sales.
Historically, throughout the calendar year, Aspen would introduce updates to existing products to add functionality, including interfaces to new avionics introduced by other manufacturers to generate demand driven by new aircraft technology advancements in the market, and will continue to do so.
Aspen is extending the use of the GA Display line of products into legacy military aircraft for training exercises. It is currently installed in some versions of legacy jet fighters but recently is being tested on an F5 aircraft in preparation for a bid on military training aircraft. This market is expanding, and management believes this platform has a unique form factor and price point that is very attractive to this segment.
Development of Next Generation Avionics and GPS Solutions
Aspen is developing a new line of large format avionics displays for the larger GA aircraft and the emerging eVTOL market. The product line is being bid on several eVTOL platforms. Management believes the new displays will widen Aspen’s customer base by expanding the market of interest. The emerging eVTOL market is creating opportunities for all parts of Aspen’s business as the market will create demand not only for Aspen’s display products but also for the existing GA class III, generally defined as aircraft greater than 6,000 pounds, and not used for commuter applications. Over the next 10 years, management expects to broaden Aspen’s avionics offerings to include flight controls and integrated navigation into its next generation integrated display avionics to adapt to anticipated eVTOL and OEM opportunities.
Aspen continues to upgrade its line of Connected Panel products to provide 5G connectivity and enhance data recording capabilities. There are continued calls by regulatory bodies to expand the need for lightweight low cost data recorders. Both the TCCA and EASA have moved toward requiring them on GA aircraft. Aspen’s Connected Panel line of products is being developed to add 5G capabilities and crash-resistant technologies to enter this market. Aspen believes this will fuel growth for its Advanced Avionics line of products since current products designed for the air transport market are heavy and costly.
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Competition
Aspen has several competitors. Its major competitors include companies such as Honeywell International Inc. (HON) (“Honeywell”), Avidyne Corporation, Collins Aerospace, Dynon Avionics, Inc., uAvionix Corporation, L3Harris Technologies, Inc. (LHX), and Garmin Ltd. (GRMN) (“Garmin”). In the display and integrated avionics segment, Aspen’s primary competitor is Garmin since it has the largest market share in the aftermarket segment. In the OEM segment, Garmin, Honeywell, and Collins Aerospace are the leaders. As the eVTOL market emerges, Aspen expects new market competitors as well as the existing competitors in the avionics segment.
Aspen’s primary competitors in the Connected Panel market include Honeywell, Garmin, and Teledyne Technologies.
In the GPS market space, the NexNav system has few direct competitors. NexNav products include licensing, CCA, and LRU. Competitors include Honeywell’s wholly owned division, Bendix/King, CMC Electronics Inc./Esterline Technologies Corp., FreeFlight Systems Inc. (“FreeFlight”)/Trig Avionics Ltd. (“Trig”), and uAvionix Corporation. In the case of FreeFlight and Trig, they also license Aspen’s design. Other manufacturers of GPS components such as Garmin, Honeywell, and Collins Aerospace do not sell standalone GPS devices in the avionics markets, and typically provide that functionality embedded in an integrated product.
Government Regulation
Aspen designs and manufactures avionics equipment under worldwide aviation regulatory agency approvals. These include but are not limited to FAA, EASA, TCCA, and the National Civil Aviation–Agency - Brazil (“ANAC”) regulations. These regulations govern the design test, certification, installation, and manufacturing of Aspen’s avionics equipment.
Customers
Aspen sells advanced avionics products through a dealer network or to OEM customers. Both the Connected Panel and GPS product lines are primarily sold to OEM customers although there are instances of purchase through the dealer network for specific installations.
Because of the nature of its business, Aspen’s top avionics customer base varies from year to year. Certain dealers may in any one year be a top customer for Aspen, depending on the dealer’s customers’ demand for Aspen’s equipment. For example, this could occur if a dealer (typically a smaller dealer) negotiates an upgrade of a fleet of aircraft that would also include Aspen’s avionics products. Then the following year that dealer may not have a large contract. This has occurred historically and management expects that it will continue. OEM customers such as Pilatus Aircraft Ltd, Robinson Helicopter Co., Genesys Aerosystems Group, Inc., FreeFlight Systems Inc. (now part of Moog, Inc.), Trig Avionics Ltd., Bae Systems plc, and Joby Aviation, Inc. (JOBY) have historically been Aspen’s top customers year to year, and it expects that they will remain its top customers in the coming years. The following dealers/customers are on the top Aspen customer list due to the size of the dealership and their consistent level of business with Aspen historically, and Aspen expects this business to continue: Sarasota Avionics, Trans Maldivian Airways, Gulf Coast Avionics, and Lancaster Avionics. The rest of Aspen’s customers are spread amongst many smaller and mid-sized dealers.
| 2. | Training Division |
Agile Defense Overview
AIRO’s Training Division includes wholly owned subsidiary Agile Defense, LLC, which AIRO believes is positioned to become a premier provider of advisory services to the U.S. military and the private aerospace industry due to the extensive experience of the founders and personnel of Agile Defense. Agile Defense has expertise in the areas of certification and regulatory compliance, high performance communications, modernization programs, quality management, safety and security, and missile defense, which AIRO expects will offer significant benefit to its customers. Agile Defense offers a significant depth of defense experience, comprehensive analysis, and innovative solutions from concept to operational status.
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The Training Division will provide prime and subcontract combat ADAIR services to the U.S. military, selected NATO countries, and other international U.S. allies. The Training Division will also provide supplemental and supporting services with training solutions focused on professional pilots in both the commercial and military sectors and will offer high-end advisory and consulting solutions to the aerospace industry.
Key Factors Affecting Agile Defense’s Operating Results
Demand for Military Flight Training
The overall demand for military flight training continues to grow. There is an acute shortage of available pilots in several branches of the U.S. military that is likely to continue. In particular, according to the U.S. Congressional Research Service, the USAF is currently 1,650 pilots short. As a result of this shortage, the USAF cannot afford to take current pilots out of combat rotations for adversarial training missions. The USAF is also suffering from the use of outdated training platforms. The currently-contracted aggressor squadrons are using older, less competitive aircraft for training missions. Unfulfilled training requirements are also impacting the combat readiness of the USAF’s current pilots. The same problems exist within the other branches of the U.S. military that require and depend on well-trained combat-ready pilots. AIRO believes there are potential positive impacts going forward, with increased need for aircraft due to pandemic-induced delays in ongoing military training contracts, and a resumption of the pre-pandemic commercial transport pilot shortage.
Agile Defense is in the process of acquiring platforms for CAS and ADAIR missions to support the current and projected increase in training requirements. Foreign-aligned military training engagements also present potential for revenue. Agile Defense believes it will be able to realize these revenue opportunities once it has acquired the necessary aircraft to support both domestic and foreign training missions.
Airframe/Aircraft Availability
For the past several years, Agile Defense has worked to acquire Generation Four fighters from multiple countries. Agile Defense has invested significant amounts of time developing stringent requirements to ensure the desired platform sought by the USAF, balanced against the cost of acquisition and reasonable operational cost and expenses, which would ultimately result in favorable profitability and return. Currently, AIRO’s Training Division has secured two contracts for contract close air support aircraft and is in negotiations with several potential sellers and/or lessors to acquire the Generation Four aircraft desired by the USAF. Opportunities globally for acquiring Generation Four aircraft have been more limited because uncertainty related to the war in Ukraine has prompted governments to hold onto aircraft. However, with the recent increase of inflationary pressures worldwide, the market for these aircraft has opened up again as governments try to dispose of expensive unused assets.
Funding
A lack of funding has restricted Agile Defense’s ability to independently finance or lease potential aircraft. Agile Defense believes that the funding challenge is critical but temporary and expects the Business Combination to provide the necessary funding to independently finance or lease potential aircraft.
Competition
Agile Defense has four major, well-funded competitors that currently provide contracted ADAIR services to the U.S. military: Airborne Tactical Advantage Company, LLC, Draken International, Inc., Top Aces Inc., and Tactical Air Defense Services Inc. The fleets of these companies mostly consist of older Generation One, Generation Two, and Generation Three aircraft. Within the last 12 months, Draken and Top Aces have acquired fleets of F-16 fighters.
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Agile Defense does not believe its competitors pose a threat to the successful implementation of its business plan for the following reasons:
| ● | Operational and Cost Advantages. Agile Defense believes its current Generation Four platform of choice for ADAIR mission (the Saab JAS 39 Gripen aircraft) offers significant operational efficiencies over other Generation Four aircraft and superior operational cost advantages. Agile Defense will not be burdened with the costs and expenses of operating and maintaining disparate aircraft platforms. The Generation Four fighter platforms that Agile Defense will deploy are highly desired by the U.S. military and NATO countries. |
| ● | Capacity. The available hours needed to support the U.S. military requirements for ADAIR and CAS services exceeds the capacity of Agile Defense and all of its competitors combined. Agile Defense believes that the number of hours required by the U.S. military will continue to grow. |
| ● | Cooperation. Due to the demand and limited capacity, as well as the limited availability of aircraft and pilots, crews and other personnel, formal and informal agreements exist between Agile Defense and its competitors as subcontracts to the prime contractor for services. |
| ● | High Barrier of Entry. The acquisition, operational, and maintenance costs, as well as experienced military leadership and staff requirements, are high barriers to entry in the industry that many aviation-oriented companies are unable to overcome. |
Customers
AIRO’s Training Division customers will primarily be the branches of the U.S. military that require ADAIR and CAS training services. There is also a large foreign military demand for these contracted services currently being provided by a few of Agile Defense’s competitors. These foreign contracts could also be available to AIRO upon acquisition of suitable aircraft.
Coastal Defense Overview
AIRO’s Training Division also includes wholly owned subsidiary, CDI, which provides CAS, ISR, unmanned ground systems, and target simulation services using fixed-wing aircraft with ground targeting focus to military customers. CDI provides manned, piloted fixed-wing aircraft, suitable payload, surveillance and reconnaissance equipment, ground liaison officers and Joint Terminal Attack Controller instructors, and a certified aircrew to provide full joint theatre ISR and simulated ground strike training, which can include live munition deployment. CDI also provides unmanned automobile systems used for air or ground strike training. These include automated vehicles of various types and capabilities customized to meet training mission demands.
CDI has serviced the U.S. military for over 17 years. It employs highly trained special operations veterans, and its personnel have years of real-world experience on the battlefield and in the global war on terror. CDI’s personnel have collectively planned and executed hundreds of missions, which include air support, unmanned systems, full motion video systems (ROVER, MVR), and infiltration and exfiltration techniques. CDI’s personnel develop, integrate, and evaluate new equipment and modify existing equipment to fit customized military orders and mission training. These customizations include, without limitation, aircraft, surveillance, and automobile equipment.
The Training Division will provide prime and subcontract combat ADAIR services to the U.S. military, selected NATO countries, and other international U.S. allies. The Training Division will also provide supplemental and supporting services with training solutions focused on professional pilots in both the commercial and military sectors and will offer high-end advisory and consulting solutions to the aerospace industry.
Recent Developments
CDI is an approved participant under certain multiple awards, indefinite-delivery/indefinite-quantity contracts (the “Contracts”) issued by the U.S. military. The approved Contract participants such as CDI bid on task orders as they are issued by the U.S. military pursuant to those Contracts. The U.S. military chooses winning bids based on such factors as cost, certainty of fulfilling the requirements of a specific task order, safety records, and other factors. AIRO’s current fleet of aircraft in its Training Division works at almost maximum capacity at present in fulfilling its current awards under its contracts for CAS, TACT and ISR support services, before accounting for additional Contracts or task orders. CDI believes additional aircraft and related equipment are required in order to bid and complete future task orders and to expand into ADAIR, which CDI expects will drive significant revenue and profit growth.
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Key Factors Affecting CDI’s Operating Results
Aircraft and Equipment Acquisition
CDI aims to utilize its aircraft at maximum capacity and to own and maintain the proper number of aircraft to meet the needs of its customers. In order to successfully and timely leverage the substantial anticipated growth due to the Contracts, CDI estimates capital requirements to be $20 million to $25 million to expand CDI’s fleet of aircraft and accompanying equipment to serve CAS and ISR task orders. This estimate is based on historical aircraft and equipment purchases. CDI has 11 aircraft that can be utilized for its training activities, but it has been experiencing an increased difficulty in obtaining additional aircraft due to the Ukrainian conflict and instability in other areas of the world. Potential seller countries have been holding onto aircraft while they see how the Ukrainian conflict unfolds. Recently, however, the supply of aircraft has increased again, driven by rises in inflation and seller countries’ desire to sell off unused assets.
A related challenge to having a fleet ready to meet demand is policy changes regarding aircraft transfers to the U.S. Purchased aircraft often need to be disassembled, imported into the U.S., and appropriately modified to meet customer needs. This requires significant capital and lead time to put an aircraft into operation. Delays in obtaining the aircraft could adversely impact financial results and growth plans due to missed task order bidding opportunities.
Competition
CDI competes in a sector that is highly concentrated by several well capitalized competitors including, without limitation, Draken International Inc., Top Aces Inc., Air USA, Inc., Airborne Tactical Advantage Company, LLC, Tactical Air Defense Services Inc., and Blue Air Training Corp. These competitors are also approved providers under the Contracts and are able to subcontract to companies that were not approved under the Contracts. CDI also competes with simulation training. CDI has maintained an excellent safety and performance record and expects to reduce or eliminate the gap in capitalization and fleet size between CDI and its competitors due to the capital investment expected to occur as a result of the Business Combination.
Releasing and Bidding Task Orders
While the U.S. military named CDI an approved provider under the Contracts with a limited number of competitors, the U.S. military periodically releases task orders requesting specific services pursuant to a bid process. The U.S. military chooses winning bids based on such factors as cost, certainty of fulfilling the needs of a specific task order, safety records, and other preferred factors. In the experience of CDI management, a material factor in determining a contractor’s ability to fulfill the needs of a specific task order is the contractor’s possession of the type and quantity of aircraft that fit the specifications of that task order when the contractor submits its bid. CDI believes that there is enough work under the Contracts to realize significant profits from aircraft acquisition; however, the bid process structure favors well-capitalized contractors due to the timing of cash-flow and the required capital investment.
Recent Developments – Training Division
In November 2023, AIRO signed non-binding letters of intent to acquire two flight training schools. The parties have undertaken due diligence to determine whether a binding purchase agreement will be negotiated. The total anticipated purchase price for the acquisitions is expected to range from $5.1 million to $7.7 million, which would be paid in a combination of cash and the issuance of equity.
| 3. | Uncrewed Air Systems Division |
AIRO Drone Overview
AIRO’s Uncrewed Air Systems Division includes wholly owned subsidiary AIRO Drone, LLC, which is a transformative aerospace company formed in 2018. AIRO acquired AIRO Drone on February 25, 2022. AIRO Drone manufactures and customizes a variety of sUAS, more commonly known as “drones.” AIRO Drone operates drones in an AI-based commercial inspection service known as DaaS, and builds and operates a worldwide drone datacom network known as “AIRO-NET.” AIRO Drone believes its extensive background in design, engineering, and manufacturing drones (AIRO Drone was the first company in the U.S. to certify and fly an FAA N-Numbered small drone), its extensive FAA, TCCA, EASA and operational experience, as well as its expertise in datacom networks, radios, and aircraft communications gives it a very unique opportunity to build and significantly grow an entirely new, low-risk product line for commercial drone operations.
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Key Factors Affecting AIRO Drone’s Operating Results
Expansion and Sales of Current Product and Services Lines
AIRO Drone’s current line of products and services consists of drones, DaaS and AIRO-NET.
Early drone industry growth centered largely on sales of drone aircraft and accessories, with recreational and hobby users making up a large proportion of buyers. As the industry has matured, aircraft and their components and subsystems have become largely commoditized, and industry growth is rapidly shifting to services and service-derivative revenue. Service opportunities are now moving up-market, with larger companies exploring the benefits of drone technology and how to prudently apply drones to their operations based on their need for credible providers, with suitable assurances of safety, professionalism, training and certification, IT security, and application of advanced analytics to drone-derived data. AIRO Drone’s growth strategy leverages that trend, with a strong focus on how Fortune 1,000 and similar companies will use drones and data-rich analysis to perform inspections, with complete end-to-end solutions.
The drones business consists of a tethered drone system, a fixed-wing aircraft, a unique reseller relationship with Airgility, Inc. for its GPS-denied small drone line, and a large array of sensors and custom data derivation from the operating drones. AIRO Drone can provide needed datacom support capabilities for the rapidly emerging BVLOS market segment.
DaaS is an AI-based service model allowing customers to perform property inspections and operations that were previously performed by manpower and manned aviation (such as helicopters). The data gathered from inspections is then delivered to the customer’s platform of choice, such as IBM Bluemix, MS-Azure, or AWS. AIRO Drone expects to harness the fast-growing drone services market through a combination of direct services offerings, aggregation of services capacity, service capabilities, market reach, and the sale of custom designed, manufactured, and certified drones.
AIRO-NET is a unique drone data VPN that provides standardized real-time secured command and control, as well as streaming data (such as electro-optical/infrared video) directly to the operator and customer. This type of service is currently performed without standardization by most individual operators. Further, through AIRO-NET, AIRO Drone will provide other real-time data such as geo-referenced mapping and weather information to other commercial providers.
Service Growth through Aggregation
AIRO Drone’s growth strategy for DaaS revenue depends on increasing its current commercial drone solutions portfolio through a combination of expanded marketing, partnering with compatible service providers with common marketing and analytics and, where advantageous, strategic acquisition of businesses with complementary value-added services. AIRO Drone also expects significant growth as the FAA and other stakeholders finalize requirements for BVLOS operations. AIRO Drone plans to make substantial investments in sales and marketing, analytics, and communications, focused on expansion of its footprint into specialized markets and applications domestically and internationally.
The drone services industry is well-positioned for consolidation. Typical drone services companies today are small businesses, with limited capital and resources for business development, expansion, or post-service analytics, not to mention the level of operational, training, and safety processes required by most major company clients. There are few, if any, companies that provide end-to-end data and information solutions for the client. There is a clear opportunity to consolidate selected smaller entities into a larger services organization, with the resources to centralize business development, IT, analytics, training, safety and operational processes, and to effectively pursue and serve Fortune 1,000 clients. AIRO Drone currently has relationships with multiple providers who produce revenue in specialized industries and/or capability areas, in some cases providing services under its service agreements with large companies. Expanding that base will immediately expand AIRO Drone’s footprint in new areas, increasing revenue, customer base, and market share, and improving brand recognition.
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Value-Added Services
Boston Consulting Group predicts that, by 2050, over 48% of the commercial drone market will come from value-added services (see Figure 24)16, such as end-to-end, provider-managed turnkey service programs, data processing and analysis, and data management and security. This aligns well with the Uncrewed Air Systems Division growth strategy, which emphasizes the provision of multiple types of value-added services addressing common user and industry needs, in addition to simple drone operations. Industrial or other commercial users of drone services need actionable information and decision support tools, rather than “raw” drone-collected data. They also require such information to be managed and delivered securely and in accordance with company-wide IT systems and procedures. AIRO Drone’s value-added services offerings include advanced analytics, IT security and cloud-based interfaces with various corporate IT systems, drone operator safety and security processes, training, and its proprietary AIRO-NET communication system, which is under development.
Source: Boston Consulting Group
Figure 24—Distribution of Revenues by Product Type
AIRO-NET
AIRO-NET is a communication system being developed by AIRO Drone that focuses on the specific needs of BVLOS drone operations, integrating existing data transport providers where available, supplemented by drone-specific infrastructure to provide truly seamless, secure communications to BVLOS drones at all times. AIRO-NET is essentially a VPN for all the communications requirements for any BVLOS drone operation, for use by both AIRO Drone’s DaaS operations and other BVLOS drone operators. AIRO-NET revenue is also derived from a number of derivative services, such as data collected from onboard drone sensors and non-drone users of its communication capabilities. Gartner predicts that companies selling drone data communications services for guiding drones and relaying the data they collect, a derivative value-added service of AIRO-NET, can represent $23 billion of the $50 billion total market. Gartner predicts that AIRO-NET will enter service in Year 2 with a modest industry-wide equipage of 2,000 drone platforms and grow to over 25,000 platforms by the end of Year 5. By comparison, FAA projections predict a fleet size of commercial, non-model drones between 583,000 and 1,028,000 sUAS units by 2023 when AIRO-NET enters service, with 729,000 sUAS units likely. AIRO Drone’s projected equipage represents only a 0.28% penetration of that market. The same projection anticipates 835,000 commercial drones by 2025, compared to AIRO’s expected equipage of 11,045 drones with AIRO-NET, or a market penetration of 1.3%.
16 Francesco Castellano, Commercial Drones are Revolutionizing Business Operations (Oct 3, 2017), available at https://www.toptal.com/finance/market-research-analysts/drone-market.
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Certifications
AIRO Drone currently operates and plans on continuing to operate under US FAR Part 107 and will obtain a US FAR Part 135 Operating Certificate to be utilized by it and by its affiliates for unmanned (cargo delivery) and manned on-demand and scheduled operations. AIRO Drone’s risk of not achieving certification is very low as it already operates under the current guidelines, has extensive experience in US FAR Part 135, has completed 121 manned operations, utilize 100% licensed pilots, has an established FAA-recognized Safety Management System, and continually monitors and interfaces with the FAA for changes and expansions to the rules.
Sky-Watch Overview
AIRO’s Uncrewed Air Systems Division includes Sky-Watch A/S, its wholly owned subsidiary, which develops, manufactures, and sells mini unmanned aerial systems (“mUAS”) for the defense and security segment of the aerospace industry. AIRO acquired Sky-Watch on March 28, 2022. Sky-Watch solutions target the front line of net-centric warfare concepts, interoperability trends, and force multiplier initiatives. The Sky-Watch mUAS solutions are designed to increase speed and precision in operational decision-making through a new dimension and scale of mUAS-enabled situational awareness. Sky-Watch anticipates significant proliferation in the utilization and deployment of mUAS and sensor technology in the lower and sub-tactical levels of the defense and security force segment of the aerospace industry and believes it is positioned to be a driving force in shaping and facilitating this new multidomain dimension in defense, security and battlespace management.
The current mUAS defense market in the western hemisphere is dominated by a few aging proprietary mUAS platforms struggling with structural and forward-looking growth barriers such as high system costs (negatively impacting affordability), lagging rate of innovation and third-party integration challenges. Challenges regarding third-party integration include adopting third-party Commercial-Off-The-Shelf/Military-Off-The-Shelf system components for a fast-moving unmanned industry based on open architecture and open source software platforms as well as complying with the requirements of the mUAS defense market for interoperability, data analysis, and data dissemination. This market reality—an unavoidable shift from proprietary defense solutions toward open standards and broad third-party component system integration—is the window of opportunity and industry trend on which Sky-Watch’s mUAS business model is based.
Based in Denmark, since its inception in December 2009, Sky-Watch has focused on UAS and has developed and brought to market both multirotor and fixed-wing UAS. Sky-Watch’s mUAS solutions are operative in EU and NATO countries, and both solutions have been tested and deployed in international markets in the EMEA and APAC regions. Sky-Watch has over a decade of experience in working with a broad spectrum of the largest European and U.S.-based defense industry corporations on various UAS technologies.
Since inception, Sky-Watch’s focus has primarily been on technology and product development, which resulted in operating losses in all years through 2021. With the maturity of its product, Sky-Watch has seen an increased demand for its solutions from European markets, which resulted in it turning a profit in fiscal year 2022 and 2023. Sky-Watch anticipates this sales growth will continue in 2024 and continues to be presented with additional contract opportunities in Europe.
Key Factors Affecting Sky-Watch’s Operating Results
Development of the Mini UAS Defense & Security Market
Although vast global market potential remains largely unexploited, the concept of mUAS assets in defense and security, as well as in the civilian professional markets, has been known for years. Solid and clear industrial standards and industrial mUAS market leaders are nevertheless still absent. Sky-Watch believes that this standardization process, both industrially and technologically, will intensify over the next few years—especially in the mUAS system sphere of mechanical design concepts, sub-system hardware and other avionics, and system components. Sky-Watch also believes that the software aspect of mUAS operation will experience standardization in areas of flight control (both in the air element and in ground control), fueled in part by opensource flight control platforms and NATO standardization agreements concerning interoperability. Further, software trends concerning operational autonomy and reduced cognitive loads for the mUAS operator will standardize and simplify user interface in UAS control. As mUAS mechanical, hardware and software standardization intensifies and solutions mature to new levels, Sky-Watch believes the market’s focus will shift from a mix of operational mUAS functionality and operational ease toward software-based air/ground data analysis and dissemination and systems integration.
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Sky-Watch is aware of and experienced in navigating the above mUAS defense and security market trends and factors, but new and unforeseen competing technology may emerge with short notice, which may require it to redesign and upgrade its commercially released solutions or postpone already planned solution releases in order to remain competitive. Further, until industrial standards and a robust and diversified supply chain ecosystem are effectively established, throughout the mUAS market’s supply chain vertical, certain system components are covered by a relatively narrow spectrum of (trusted capital) suppliers with few or no substitution options for fast-track integration available. While Sky-Watch believes that it is agile and poised for growth in a rapidly evolving industry vertical, these aspects of the evolving mUAS defense and security market may impact sales cycles, R&D cycles, inventory valuation, ability to fully exploit operational economies of scale, sourcing, supply chain challenges, and other unforeseen challenges, any of which could impact financial predictability and performance, cash flows and operational results.
Competition
Due to the heavy capital requirements needed to develop robust and reliable defense-grade mUAS solutions, there are relatively few global competitors capable of challenging the high-cost legacy defense industry players. Most of those defense-grade open architecture competitors have completed substantial funding rounds relatively recently, which Sky-Watch expects will create additional competition to establish market leadership in the mUAS defense segment. As an EU-based company with broad geographical operational freedom to engage with clients globally, Sky-Watch is well-positioned to both capture market share and expand the market with its dual-use, non-ITAR, and battle proven mUAS solution. Competition may, however, move earlier and with stronger momentum and gain a substantial and strong foothold in the MUAV defense segment before Sky-Watch can harvest the results of the sales, marketing, and business development investments to be mobilized and deployed after successful completion of the Business Combination.
Government Regulation
Sky-Watch management believes that the defense and security mUAS segment, largely consisting of government clients, is most likely to utilize mUAS systems because both armed forces and security agencies often times have access to restricted airspace in which to train, build capabilities, and operate. Nevertheless, the extent to which the mUAS market, both defense, security and civilian professional, can be accessed, expanded, and commercially exploited is tied to clients’ ability to fly in non-restricted airspace and, moreover, the ability to fly BVLOS. National and international regulation, such as the Unmanned Aircraft System Traffic Management initiative implemented by the FAA and NASA in the U.S. or the “U-Space” initiative implemented by the EASA to address UAS traffic management in the EU, is still underway, as is standardization of operator certification, and platform (airworthiness) certification. Until these standards, certifications, and traffic management systems are effectively clarified and ratified systematically and internationally, certain clients of Sky-Watch’s targeted customer segment may be hesitant, or even prevented, in acquiring and utilizing Sky-Watch mUAS solutions. Accordingly, the nature of and the speed with these regulations are completed and implemented pose a risk for both financial performance and condition, timing of growth, and (short-term) growth potential.
Customers
Sky-Watch believes that, as mUAS end-users, all military commanders and security officers are aware that UAS assets improve situational awareness and thus strengthen efficiency and quality in decision making whether it be in the battlespace or in any other intelligence, surveillance, or reconnaissance task. But management’s experience has been that the mUAS procurement process is a highly politically influenced activity in most national defense and security markets. Sky-Watch believes that the value propositions of its mUAS solutions are strong, and that the low cost-of-ownership of open architecture, open source and commercial, off-the-shelf based mUAS solutions available stand in stark contrast to the legacy systems currently deployed. Nevertheless, national industrial defense politics and system inertia, from time to time may prevent, prolong, or limit sales opportunities and related revenue streams. Sky-Watch is currently in the market entry phase and thus its predictability of and performance levels in revenue generation and operational results may be compromised and/or experience significant fluctuations.
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| 4. | Electric Air Mobility Division |
Jaunt Overview
AIRO’s Electric Air Mobility Division is anchored by wholly owned subsidiary Jaunt Air Mobility. Formed on April 9, 2019 as a Delaware limited liability company, Jaunt Air Mobility is a transformative aerospace company that focuses on building the next generation of aircraft to meet the growing demands for faster, more affordable, and environmentally more sustainable travel over urban areas. AIRO acquired Jaunt on March 10, 2022. The Jaunt Journey air taxi is a combination of a helicopter and fixed-wing eVTOL aircraft, with what AIRO believes to include the best attributes of both rotary and fixed wing. Jaunt believes its eVTOL aircraft provides the highest level of safety, the quietest configuration, and the lowest operational cost. The patented SRC technology has flown on multiple Jaunt demonstrator aircraft, with over 300 piloted flight hours and 1,000 takeoffs and landings, to validate the core technology.
Jaunt plans to certify under existing CAR 529 Transport Category Rotorcraft airworthiness rules. In contrast to the Part 23 Small Airplane Normal Category rules being pursued by other AAM companies, this provides a clear path to eVTOL certification with safety standards equivalent to commercial airliners. Jaunt also believes that it benefits from its innovative supplier cost sharing strategy, whereby key suppliers are deferring the cost of their NRE, reducing Jaunt’s initial funding requirements.
Aircraft sales will be through direct sales and leasing, similar to the current aircraft market. Jaunt intends to establish an in-house sales and marketing team to sell to the global air-mobility markets. In addition to focusing on the traditional buyers of aircraft, Jaunt intends to sell to the emerging AAM operators.
Recent Developments
AFWERX HSVTOL Challenge
On February 1, 2022, the USAF and U.S. Special Operations Command selected Jaunt to receive a contract of $0.367 million, to develop two conceptual aircraft designs to meet notional performance attributes for the FY25 demonstrator and the FY30+ threshold system through the AFWERX High Speed Vertical Takeoff and Landing Concept Challenge program (the “Challenge”). Jaunt was one of the eleven companies, out of an initial field of 218, selected to advance to the next phase in the Challenge. Jaunt proposed a single engine hybrid aircraft, larger and faster than the Jaunt Journey air taxi, combining the speed and capabilities of a fixed-wing aircraft with VTOL through Jaunt’s highly efficient and patented SRC technology.
During the period of performance in Phase I, completed on June 30, 2022, Jaunt provided high-level conceptual designs and plans for three aircraft based on Jaunt’s original proposal. On October 13, 2022 Jaunt was again selected by the Air Force to proceed with a Phase 1A program award to continue the design and development of the high-speed concept aircraft. The contracted amount was $4M. The Air Force announced that the HSVTOL program is ending and that the Defense Advanced Research Projects Agency (DARPA) would continue the development of a high-speed vertical and takeoff landing aircraft. DARPA is working with U.S. Special Operations Command on the new Speed and Runway Independent Technologies, or SPRINT, program, which will aim to build an air platform that shows a combination of runway independence and high speed and mobility. Jaunt submitted a proposal to DARPA for consideration of a DARPA Phase 1 award but was not selected to receive such award.
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Customer Letters of Intent
On April 8, 2022, Jaunt signed a non-binding LOI with Vertiko Mobilité, Inc. to acquire 73 aircraft, with an option to acquire an additional 25 units.
On August 19, 2022, Jaunt signed a non-binding LOI with MintAir Co., LTD to acquire ten aircraft, with an option to purchase an additional 30 units.
On March 28, 2023, Jaunt signed a non-binding Memorandum of Understanding with Fly Blade (India) Private Limited to acquire 150 aircraft, with an option to purchase an additional 100 units.
On April 26, 2023, Jaunt signed a non-binding LOI with REDWINGS S.A. DE C.V. to acquire ten aircraft, with an option to purchase an additional ten units.
Canadian Operations
The Canadian government offers financial incentives to the aerospace industry and Canada has a large, highly skilled workforce. Jaunt previously announced plans to open design and manufacturing centers in Canada utilizing the extensive experience of the Electric Air Mobility Division’s leadership team in developing and certifying aircraft in Canada. Furthermore, Jaunt intends to certify the Jaunt Journey air-taxi through TCCA, capitalizing on TCCA’s bilateral agreements with the FAA and the EASA to obtain world-wide approval and access to the global AAM market.
Jaunt previously entered into discussions with the federal and the provincial government of Quebec to provide funding for its aircraft development program. These discussions have progressed positively, to date, and the Quebec’s Minister of Economy and Innovation has conditionally agreed to financially support the program. The funding mechanisms have not yet been determined but it is anticipated that they would include grants and/or tax rebates. Jaunt expects to receive an LOI or letter of support from the Quebec government upon an investment of at least $25 million into its operations, which is anticipated to occur at or shortly following the closing of the Business Combination. The Canadian federal government has indicated that it would also financially support the development program in an amount equivalent to the provincial government once the Quebec government finalizes its LOI.
Key Factors Affecting Jaunt’s Operating Results
Advanced Air Mobility Market Opportunities
Studies of the AAM market by several organizations (Goldman Sachs17, KPMG18, Deloitte19, and Morgan Stanley20) show significant market potential and substantial aircraft demand in the AAM market.
Jaunt’s first product will be the Jaunt Journey air taxi, but Jaunt believes that aircraft platform and the overall SRC technology are applicable to a broad range of applications including any mission that requires efficient VTOL capabilities and high cruise speeds. Jaunt plans to develop kits to allow the Jaunt Journey to fly additional mission sets such as cargo/package delivery, air ambulance, and law enforcement/military. These variants offer additional revenue streams from aircraft sales and support. Additionally, hybrid power options will extend the Jaunt Journey air taxis’ range and endurance beyond what is possible with current battery technology. Jaunt is exploring hybrid Jaunt air taxi configurations as well as other hybrid-electric aircraft configurations.
The AAM market will have multiple operators conducting daily flights of several eVTOL aircraft to transport commuters within a city or between cities. Jaunt expects MRO services will be essential to the success of this market with such a large fleet and that such services will provide another revenue stream once the aircraft enters service.
17 GOLDMAN SACHS, supra note 8.
18 KPMG, supra note 9.
19 Hussain & Silver, supra note 10.
20 MORGAN STANLEY, supra note 7.
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If these markets do not develop as expected, it could adversely impact Jaunt’s results and growth plans. The industry is highly competitive, and competitive pressures from existing and new companies could have a material adverse effect on its financial condition and results of operations.
Players in the AAM Market Space
There are a plethora of startups attempting to enter the AAM market. Most OEMs are proposing a unique aircraft design configuration that has critical implications on their ability to certify and field a commercial aircraft.
Other eVTOL companies are developing aircraft configurations that Jaunt believes are likely to encounter major certification challenges due to their unique and novel designs. Jaunt management has observed that the regulatory authorities (e.g., the U.S. Federal Aviation Administration (“FAA”)) and their aircraft certification rules are not traditionally suited for these types of revolutionary aircraft configurations. As a result, these OEMs may have challenges in meeting their commercial entry to service timelines and may need the regulatory authorities to make rule changes before they can be certified for commercial operations. The FAA recently confirmed to The Air Current21 that it will require eVTOL companies to follow “powered-lift” category rules. AIRO believes this will cause further delays in some of Jaunt’s competitors’ certification programs as they will have to re-establish their certification bases.
Unlike Jaunt’s competitors, Jaunt plans to take advantage of existing certification rules for its aircraft configuration, which management believes will give Jaunt an established path to commercial service. The Jaunt Journey air taxi is certifying at the highest level of commercial transport aircraft, allowing it to fly under existing rotorcraft rules and to utilize existing aviation infrastructure.
Supplier NRE Model
Jaunt believes it has overcome the typical high investment cost associated with manufacturing a new aircraft through a unique combination of purchase orders, supplier cost sharing, innovative technologies, and employing advanced manufacturing methods and data management systems. Jaunt is working with Tier 1 aerospace suppliers such as Bae Systems plc and CAE, Inc. who bring key enabling technologies to the eVTOL development program. Several are financially supporting the design and development of the Jaunt Journey by deferring the cost of their NRE.
The combination of supplier cost sharing, deposits, and Canadian government funding, if successfully implemented, reduces risk and required development capital. Jaunt’s program management plan is based upon minimal incremental funding to reach milestones, which continually increases valuation while further reducing risk. This allows management to monitor funding in a controlled manner with the dynamic flexibility to adapt to most market changes during the development timeline.
Patents
Jaunt’s advanced technology is protected by a valuable portfolio of patents with additional patents in the process of being granted. Analyzed by RSIP, Jaunt’s patent portfolio RSIP Score is 134%. The RSIP Score is the ratio of the portfolio to cohort grades and provides a comparison to companies innovating in the same space. An RSIP Score over 100% indicates that the subject portfolio contains above-average assets. Jaunt also has the trade secrets and proprietary intellectual property associated with the development of SRC technology, including the extensive experience and flight test data from the demonstrator aircraft.
21 Elan Head and Jon Ostrower, FAA changes course on eVTOL certification, THE AIR CURRENT (May 9, 2022), https://theaircurrent.com/ aircraft-development/faa-changes-course-on-evtol-certification/.
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Path to Certification
A transport category type certification is the highest level in safety provided by the Civil Aviation Authorities. Jaunt intends to certify under CAR 529, single pilot IFR (instrument flight rules) and comply with Category Enhanced of EASA SC-VTOL-01 by:
| ● | using System Safety Assessment processes (Aerospace Recommended Practice (ARP) 4761 with ARP 4754A) that are industry standard for commercial transport aircraft (Exposure Draft (ED) 79A); |
| ● | designing flight critical systems to meet the requirements of a probability of catastrophic failure of less than 10-9 per flight hour (less than once every billion flight hours); |
| ● | developing robust software design processes to meet Development Assurance Level A for functions that could exhibit catastrophic failures; and |
| ● | meeting requirements for bird strike, fatigue and damage tolerance, lightning strike, fire protection, and designing and incorporating elements for crashworthiness right from the conceptual stage. |
Jaunt believes that this approach puts the design of the Jaunt Journey air taxi in line with the commercial transport category aircraft and rotorcraft in terms of safety and robustness. Jaunt also believes it provides a clear, low risk path to certification by using existing VTOL regulations, removing any guesswork from the certification approach.
Key Components of Results of Operations
Revenue
Revenues consist primarily of product sales, fees for consulting services, licensing revenue, warranty sales and after sale services.
Cost of Revenue
Cost of revenue includes direct labor (including salary, benefits and taxes), material costs and indirect production costs. Indirect production costs include indirect labor, purchasing, quality and manufacturing leadership, consumables, freight, charges for inventory reserves and amortization of intangible assets.
Operating Expenses
Research and Development (R&D)
R&D expenses consist primarily of personnel expenses, including salaries, benefits, costs of consulting, equipment and materials, direct allocable overhead costs, including staff development cost, travel costs and technology costs, and amortization of intangible assets.
Sales and Marketing
Sales and marketing expenses include salary, benefits and taxes, commissions, travel, costs of leased airplanes, advertising, trade shows and amortization of intangible assets.
General and Administrative
General and administrative expenses include costs of executive leadership, the accounting and finance operations, travel, and support functions including human resources and information technology.
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Other Income (Expense)
Interest Expense, Net
Interest expense, net consists primarily of the interest expense from borrowings relating to revolving lines of credit with external banks and third-party notes. net of interest income earned on invested cash balances.
Change in Fair Value of Derivative Liabilities
AIRO had embedded derivative liabilities which were standalone liabilities and adjusted to fair value on a recurring basis. The adjustment to fair value, either upwards or downwards, that resulted from a fair value determination was recorded in the statements of operations in the period of the adjustments. During the year ended December 31, 2022, the derivative liability was derecognized as all of the notes issued prior to 2018 were converted to equity.
Loss on Extinguishment of Debt
The Advanced Avionics Division, Aspen business, converted certain notes and other liabilities to equity in anticipation of its merger transaction with AIRO and incurred a loss on extinguishment of debt in the year ended December 31, 2022.
Other Expense, Net
Other expense, net includes changes in fair value on contingent consideration obligations and foreign currency exchange adjustments based on the terms of payments related an earnout obligation.
Income Tax Benefit (Expense)
For the period ended March 31, 2024, the Company’s income tax expense was $1.0 million and the effective tax rate was 97%. For the year ended December 31, 2023, the Company’s income tax expense was $2.3 million and the effective tax rate was 7.6%. For the year ended December 31, 2022, the Company’s income tax benefit was $11.2 million and the effective tax rate was 30.5%. The income tax benefit in 2022 included the release of the accounting acquirer’s valuation allowance resulting from the available taxable temporary differences of the acquired entities.
Factors Affecting Comparability of Results
| 1. | Completion of Business Combinations |
During the year ended December 31, 2022, AIRO completed a reverse recapitalization, an asset acquisition, three acquisitions and a reverse acquisition such that Aspen was the accounting acquirer. As such, the year ended December 31, 2023 reflects activity of the Merger Entities for the full period which results in an increase in activity reported in the consolidated statement of operations compared to the year ended December 31, 2022 which includes Aspen Avionics for the entire period, Holdings (including the activity of Holdings, AIRO Drone, Agile Defense, Jaunt, and Sky-Watch) from April 1, 2022 to the end of the period ended December 31, 2022 and Coastal Defense from April 26, 2022 to the end of the period ended December 31, 2022.
AIRO has included $6.6 million in revenue and $24.2 million in net loss contributed by the Acquired Companies for the period of each respective closing date through December 31, 2022.
| 2. | COVID-19 Impact |
Although the COVID-19 pandemic slowed the coordination between AIRO and the companies it acquired, it did not materially impact AIRO’s performance. Going forward, management believes that the impact of the COVID-19 pandemic will differ division by division.
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Advanced Avionics: Aspen experienced considerable impact as a result of the COVID-19 pandemic consistent with others in its market segment. The primary impact was driven by both lower orders, as customers reduced their purchases, and reduced production rates caused by unpredictable absences in Aspen’s employee base due to infections. COVID-19 issues also impacted Aspen’s supply chain, with reduced deliveries of parts due to infections at its facilities.
The supply chain issues associated with availability of electronic parts created a shortfall of parts reducing Aspen’s manufacturing output. In many cases, as parts became unavailable from its suppliers, Aspen would engage with parts brokers for those parts. If located, those parts often could only be procured at a premium and, at times, such purchases were subject to large minimum order quantities. Further, additional costs were incurred to ensure the parts were not counterfeit. This activity created volatility in lead times and increased costs leading to volatile revenue and profitability from month to month from the onset of the pandemic through early 2023. However, these supply chain issues were fully resolved in early 2023 and Aspen is currently experiencing no such pandemic-related supply chain disruptions. Aspen has taken additional steps to ensure it has extra inventory on hand as well as implemented design changes to ensure there is no dependency on any one single product within its supply chain in the event that such disruptions reoccur in the future.
Training: The COVID-19 pandemic had an adverse effect on the business of Agile Defense and its ability to execute financial and operational plans and to realize financial performance. The pandemic postponed Agile Defense’s ability to conduct face-to-face negotiations and critical customer and supplier interactions due to quarantine and other related restrictions. Agile Defense leaders were unable to travel internationally to meet with foreign governmental and military officials on the potential acquisition of aircraft.
The COVID-19 pandemic also materially affected CDI’s growth outlook. The effect on past outlook was negative, delaying the performance of contracts and associated revenues. CDI believes the effect on future outlook is positive. Although CDI became an approved contractor under the Contracts in April and October 2019, significant performance under the Contracts has not yet occurred due to the pandemic-created delays in issuing task orders for bid. There is also risk that the U.S. military will reduce or otherwise amend the Contracts rather than concentrate them in the shortened time period. This delay has been advantageous to CDI because CDI has not yet acquired the aircraft necessary to bid and service some task order requirements. CDI is currently in contact with various parties to purchase aircraft expected to meet the needs of potential future task orders.
Uncrewed Air Systems: The COVID-19 pandemic had a negative effect on activities that focus on sales, marketing and service delivery, due to customer budget constraints and restrictions on in-person business activities, quarantine and travel restrictions, and other factors. AIRO Drone does not believe the COVID-19 pandemic will have a material negative impact on future growth because the timing of raising the investment funds is expected to occur after the effects of the COVID-19 pandemic have substantially decreased, which should allow for AIRO Drone’s business plan to be executed with the required funding and at a greatly reduced level of pandemic issues. In addition, AIRO believes that the post-pandemic business climate will see a significant shift in commerce trends, including increased demand for touchless, robotic delivery and e-commerce, leading to higher levels of commercial drone service market opportunity than were available pre-pandemic.
COVID-19 also had a material adverse effect on the business of Sky-Watch and its ability to execute financial and operational forecasts and realize financial performance. In terms of sales, marketing, and business development, COVID-19 has, on specific customer (government/defense) UAS programs, caused budget reallocations on otherwise approved UAS procurements; it has caused major customer budget postponements for planned UAS procurements involving Sky-Watch and it has seriously postponed the ability to conduct critical customer demonstrations, deliver equipment, and train customers due to national quarantine regulation in client countries. Furthermore, COVID-19 has prevented, delayed, and compromised Sky-Watch’s ability to effectively promote and support sales leads and opportunities as customer organizations, on many occasions, have been off-line or seriously understaffed during long periods of COVID-related lockdowns and other COVID ripple effects. In an operational / manufacturing aspect COVID-19 has had significant effect on lead times and accessibility to critical UAV system components, which has delayed and prevented both deliveries and demonstration activities. However, as of early 2023, these impacts have been substantially or fully diminished in all respects and management anticipates no further disruptions to its supply chain or other aspects of its business.
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Electric Air Mobility: Although the COVID-19 pandemic slowed the coordination between Jaunt and its supply base, it has not materially impacted Jaunt’s future growth outlook or the anticipated future growth of AIRO’s Electric Air Mobility Division.
| 3. | Bridge Financing |
Between May 2022 and July 5, 2024, AIRO raised $8.6 million in the form of unsecured promissory notes with no collateral and no guarantees.
Notes totaling $5.4 million accrue an interest charge equal to 100% of the principal amount, payable in shares of AIRO Common Stock immediately prior to Closing of the Business Combination, with 110% of the principal paid 190 days following Closing plus twelve percent interest per annum accruing from the Closing Date. Notes totaling $0.4 million carry the same terms, except the amount repaid at Closing is 100% of the principal.
Notes totaling $0.2 million accrue an interest charge equal to 115% of the principal amount, payable in shares of AIRO Common Stock immediately prior to Closing of the Business Combination, with the principal paid 190 days following Closing plus fifteen percent interest per annum accruing from the Closing Date.
Notes totaling $0.6 million accrue an interest charge equal to 50% of the principal amount, payable in shares of AIRO Common Stock immediately prior to Closing of the Business Combination, with the principal paid 190 days following Closing plus twelve percent interest per annum accruing from the Closing Date.
An additional note totaling $0.2 million accrues an interest charge equal to $50,000, payable in shares of AIRO Common Stock immediately prior to Closing of the Business Combination, with the principal due by July 31, 2024.
Notes totaling $1.6 million accrue an interest charge equal to, in the aggregate, 150% of the aggregate principal amount, payable in shares of AIRO Common Stock immediately prior to Closing of the Business Combination, with the principal due and payable on the earlier of (i) 190 days following Closing, and (ii) AIRO’s closing on a financing transaction of at least $10 million.
Notes totaling $0.2 million accrue an interest charge equal to 150% of the principal amount, payable in shares of AIRO Common Stock immediately prior to Closing of the Business Combination, with the principal paid 190 days following Closing plus twelve percent interest per annum accruing from the Closing Date.
AIRO Group Holdings, Inc. Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
| Years ended December 31, | Period over period change | |||||||||||||||
| (In thousands) | 2023 | 2022 | ($) | (%) | ||||||||||||
| Revenue | $ | 43,254 | $ | 17,081 | 26,173 | 153.2 | % | |||||||||
| Cost of revenue | 18,340 | 12,953 | 5,387 | 41.6 | % | |||||||||||
| Gross profit | 24,914 | 4,128 | 20,786 | 503.5 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 11,871 | 9,299 | 2,572 | 27.7 | % | |||||||||||
| Sales and marketing | 5,374 | 4,598 | 776 | 16.9 | % | |||||||||||
| General and administrative | 17,601 | 17,229 | 372 | 2.2 | % | |||||||||||
| Total operating expenses | 34,846 | 31,126 | 3,720 | 12.0 | % | |||||||||||
| Loss from operations | (9,932 | ) | (26,998 | ) | (17,066 | ) | 63.2 | % | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (2,137 | ) | (3,615 | ) | (1,478 | ) | (40.9 | )% | ||||||||
| Change in fair value of derivative liabilities | - | 666 | (666 | ) | (100 | )% | ||||||||||
| Loss on extinguishment of debt | - | (541 | ) | 541 | 100 | % | ||||||||||
| Other expense, net | (18,093 | ) | (6,274 | ) | 11,819 | 188.4 | % | |||||||||
| Total other expense | (20,230 | ) | (9,764 | ) | 10,466 | 107.2 | % | |||||||||
| Loss before income tax benefit (expense) | (30,162 | ) | (36,762 | ) | (6,600 | ) | (18.0 | )% | ||||||||
| Income tax benefit (expense) | (2,294 | ) | 11,211 | (13,505 | ) | (120.5 | )% | |||||||||
| Net loss | $ | (32,456 | ) | $ | (25,551 | ) | 6,905 | 27.0 | % | |||||||
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Comparison of the Three Months Ended March 31, 2024 and 2023
| Three months ended March 31, | Period over period change | |||||||||||||||
| 2024 | 2023 | ($) | (%) | |||||||||||||
| Revenue | $ | 13,740 | $ | 5,486 | 8,254 | 150.5 | % | |||||||||
| Cost of revenue | 5,253 | 3,297 | 1,956 | 59.3 | % | |||||||||||
| Gross profit | 8,487 | 2,189 | 6,298 | 287.7 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 3,157 | 3,279 | (122 | ) | (3.7 | )% | ||||||||||
| Sales and marketing | 1,250 | 1,127 | 123 | 10.9 | % | |||||||||||
| General and administrative | 4,543 | 5,080 | (537 | ) | (10.6 | )% | ||||||||||
| Total operating expenses | 8,950 | 9,486 | (536 | ) | (5.7 | )% | ||||||||||
| Loss from operations | (463 | ) | (7,297 | ) | 6,834 | 93.7 | % | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (289 | ) | (612 | ) | 323 | 52.8 | % | |||||||||
| Other expense, net | (268 | ) | (10,393 | ) | 10,125 | 97.4 | % | |||||||||
| Total other expense | (557 | ) | (11,005 | ) | 10,448 | 94.9 | % | |||||||||
| Loss before income tax expense | (1,020 | ) | (18,302 | ) | 17,282 | 94.4 | % | |||||||||
| Income tax expense | (990 | ) | - | (990 | ) | (100 | )% | |||||||||
| Net loss | $ | (2,010 | ) | $ | (18,302 | ) | 16,292 | 89.0 | % | |||||||
Revenue and Cost of Revenue
For the year ended December 31, 2023 compared to the year ended December 31, 2022, the $26.2 million increase in revenue is primarily due to a $24.2 million increase in the Uncrewed Air Systems division and a $3.2 million increase from the Training division, net of a $1.1 million decrease in the Advanced Avionics division. The results for the year ended December 31, 2022 includes the operations of these entities from the date of the reverse acquisition of Holdings and the date of the Coastal Defense acquisition through December 31, 2022 as compared to the 2023 results including the operations of these entities for the entire year ended December 31, 2023. For the year ended December 31, 2023 compared to the year ended December 31, 2022, cost of revenue increased by $5.4 million primarily due to an increase in drone shipments and training exercises performed net of a $3.7 million the decrease of Advanced Avionics. Cost of revenue as a percentage of revenue decreased significantly from 75.8% to 42.4% for the year ended December 31, 2023 as compared to the year ended December 31, 2022. This improvement in gross margin was primarily attributable to Sky-Watch and lower inventory provisions during the year ended December 31, 2023 as, during the year ended December 31, 2022, a $2.9 million inventory markdown was recorded for the Advanced Avionics division.
For the three months ended March 31, 2024 compared to the three months ended March 31, 2023, the $8.3 million increase in revenue and $2.0 million increase in cost of revenue is primarily due to an $8.5 million increase in sales and a $2.2 million increase in cost of sales in the Uncrewed Air Systems division. Gross margin increased by 22.0% due to leveraging partially fixed costs over higher volume within the Uncrewed Air System division.
Operating Expenses
Research and Development (R&D)
For the year ended December 31, 2023 compared to the year ended December 31, 2022, the $2.6 million increase in R&D is primarily due to incremental amortization of developed technology intangibles from the Electric Air Mobility division and increased R&D personnel costs within the Uncrewed Air System division. The results for the year ended December 31, 2022 included the operations of the Acquired Companies from the reverse acquisition date of Holdings through December 31, 2022 as compared to the 2023 results including the operations of these entities for the entire year ended December 31, 2023. For the three months ended March 31, 2024 compared to the three months ended March 31, 2023, R&D remained relatively flat.
Sales and Marketing
For the year ended December 31, 2023 compared to the year ended December 31, 2022, the $0.8 million increase in sales & marketing is primarily due to incremental intangible amortization related to the customer relationships from the Training and Uncrewed Air System divisions, net of a $0.6 million decrease in the Advanced Avionics division. The results for year ended December 31, 2022 include the operations of the Acquired Companies from the reverse acquisition date of Holdings and the date of the Coastal Defense acquisition through December 31, 2022 as compared to the 2023 results including the operations of these entities for the year ended December 31, 2023. For the three months ended March 31, 2024 compared to the three months ended March 31, 2023, sales and marketing remained relatively flat.
General and Administrative (G&A)
For the year ended December 31, 2023 compared to the year ended December 31, 2022, the $0.4 million increase in G&A is primarily due to a $2.1 million increase within the Uncrewed Air System and a $0.5 million increase within the Training division partially offset by a $1.1 million decrease within the Advanced Avionics division and a $0.9 million decrease within the Electric Air Mobility division.
For the three months ended March 31, 2024 compared to the three months ended March 31, 2023, the $0.5 million decrease in G&A is primarily due to a $0.4 million decrease in corporate costs, a $0.4 million decrease within the Training division, a $0.3 million decrease within the Electric Air Mobility division and a $0.2 million decrease within the Advanced Avionics division, partially offset by a $0.8 million increase within the Uncrewed Air System division.
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Interest Expense, Net
For the year ended December 31, 2023 compared to the year ended December 31, 2022, the $1.5 million decrease in interest expense, net is primarily due to the decrease in interest associated with the debt modified in conjunction with the Restructuring Plan.
For the three months ended March 31, 2024 compared to the three months ended March 31, 2023, the $0.3 million decrease in interest is primarily due to a $0.2 million decrease within the Electric Air Mobility division.
Change in Fair Value of Derivative Liabilities
A net benefit of $0.7 million for change in fair value of derivative liabilities was recognized in the year ended December 31, 2022, resulting from transactions in the Advanced Avionics division prior to the merger between the Accounting Acquirer and AIRO. A mark-to-market adjustment related to warrant liabilities resulted in a gain of $2.0 million, which was partially offset by an expense for the change in fair value of derivatives related to end-of-term payments on promissory notes of $1.3 million. These instruments were settled in the conversion of debt to equity to facilitate the merger between the Accounting Acquirer and AIRO.
Loss on Extinguishment of Debt
For the year ended December 31, 2022, a $0.5 million loss on extinguishment of debt was realized by the Accounting Acquirer from the conversion of promissory notes into equity.
Other Expense, Net
Other expense for the years ended December 31, 2023 and 2022 totaled $18.1 million and $6.3 million, respectively. Other expense for the three months ended March 31, 2024 and 2023 totaled $0.3 million and $10.4 million, respectively. Other expense is primarily the change in the fair value of the contingent consideration related to an obligation assumed from Jaunt that is contingent on future cash receipts of that entity, the change in the contingent promissory notes with some of the Merger Entities and the change in fair value of contingent consideration from an earnout obligation incurred in the acquisition of Sky-Watch.
Income Tax Expense
For the period ended March 31, 2024, the Company’s income tax expense was $1.0 million and the effective tax rate was 97%. For the year ended December 31, 2023, the Company’s income tax expense was $2.3 million and the effective tax rate was 7.6%. For the year ended December 31, 2022, the Company had $11.2 million in tax benefit which included the release of valuation allowances by the Accounting Acquiror.
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Liquidity and Capital Resources
As of March 31, 2024, the Company had cash and restricted cash of $10.7 million of which $2.5 million was either restricted or was designated to only being used for Sky-Watch operations and a working capital deficit of $63.8 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Over the next twelve months, AIRO will finance its operations with subsidiary revenues, subsidiary financing of operations, short-term debt financing, an equity raise and the proceeds from the Business Combination. Additionally, pursuant to the terms of their acquisition agreements, AIRO’s subsidiaries are obligated to provide financing as necessary for their operations. Debt at the subsidiary level will be refinanced and consolidated.
Pending the closing of the Business Combination, AIRO will continue to operate with nominal cash flow, as it has historically. Longer term, AIRO forecasts that, in order to pursue its growth strategies and business objectives, it will need approximately $14 million through the end of 2024 to finance its operations. AIRO does not anticipate changes in its priorities as a result of additional cash flow provided by the Business Combination. However, if AIRO is unable to obtain a sufficient amount of financing to support all of its operations, AIRO will prioritize deploying resources to the businesses that generate the most revenue and have the potential for the greatest long-term growth. Specifically, AIRO will focus on CDI, Aspen and Sky-Watch for short-term revenue production and Jaunt as the driver of long-term growth.
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operations for the year ended December 31, 2023 of $22.1 million was due to positive non-cash adjustments, primarily the change in fair value of contingent consideration and depreciation and amortization, and working capital adjustments, primarily from increases in deferred revenue and accounts payable, accrued expenses and other long-term liabilities, partially offset by a net loss of $32.5 million. Net cash used in operations for the year ended December 31, 2022 of $5.3 million was primarily due to a net loss of $25.6 million partially offset by non-cash adjustments and working capital adjustments.
Net cash used in operations for the three months ended March 31, 2024 totaled $3.0 million which was due to a net loss of $2.0 million and a change in working capital adjustments, primarily the change in deferred revenue, which was partially offset primarily by a positive non-cash adjustment of depreciation and amortization. Net cash provided by operations of $9.0 during the three months ended March 31, 2023 was primarily due to positive non-cash adjustments, primarily the change in fair value of contingent consideration and depreciation and amortization, and working capital adjustments, primarily from increases in deferred revenue and accounts payable, accrued expenses and other long- term liabilities, partially offset by a net loss of $18.3 million.
Net Cash Provided by (Used in) Investing Activities
Cash of $0.8 million, $0.2 million and $0.1 million was used in investing activities during the year ended December 31, 2023, the three months ended March 31, 2024 and the three months ended March 31, 2023, respectively, to purchase property and equipment and intangible assets. For the year ended December 31, 2022, there was approximately $0.9 million of cash provided by investing activities due primarily to the cash acquired in acquisitions of the Acquired Companies.
Net Cash Provided by (Used in) Financing Activities
For the year ended December 31, 2023, cash used in financing activities was $9.2 million primarily from payments on contingent consideration and amounts due to sellers and repayments on borrowings of $2.8 million partially offset by $2.8 million in cash proceeds received from borrowings.
For the year ended December 31, 2022, the three months ended March 31, 2024 and the three months ended March 31, 2023, cash provided by financing activities was $4.8 million, $1.0 million and $1.8 million, respectively, primarily from net borrowings.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, which are described in Note 1 “The Company and Summary of Significant Accounting Policies” to our condensed consolidated financial statements, the following accounting policies and specific estimates involve a greater degree of judgment and complexity. Accordingly, these are the policies and estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:
● the standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple
performance obligations;
● the fair value of assets acquired and liabilities assumed for business combinations;
● goodwill impairment;
● impairment of indefinite lived and long-lived assets;
● stock-based compensation; and
● the recognition, measurement and valuation of current and deferred income taxes and uncertain tax positions.
As described more fully below, these estimates bear the risk of change due to the inherent uncertainty of the estimate. We base our estimates and judgments on historical experience, industry benchmarking information, and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
These estimates may change, as new events occur and additional information is obtained, and such changes will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from these estimates and any such differences may be material to our consolidated financial statements.
Revenue Recognition
The Company recognizes revenue when, or as, it satisfies performance obligations by transferring promised products or services to its customers in an amount that reflects the consideration the Company expects to receive. The Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company accounts for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable.
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For certain sales, the Company has contracts with customers that include multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, by allocating the contract’s total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”) of each distinct good or service in the contract. The Company determines the SSP based on its overall pricing objectives, taking into consideration market conditions. Determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is recognized when control of the promised services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. The Company’s contracts do not include highly variable components. The timing of revenue recognition, billings, and cash collections can result in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities). The costs to obtain contracts, primarily commission expenses, are expensed when incurred.
Amounts that are invoiced are recorded in accounts receivable and revenues or deferred revenue, depending on whether the revenue recognition criteria have been met. A large portion of the Company’s sales result in partial prepayments prior to shipment from customers. Otherwise customer invoices generally have payment terms of net 30 days and do not have a significant financing component.
The Company’s revenues are derived from various sources: (i) avionics products consisting primarily of hardware with embedded firmware sold to an authorized dealer network and avionics and global navigation satellite system technologies (“GNSS”) products sold to original equipment manufacturers (“OEMs”), (ii) research and development (“R&D”) projects, (iii) sales-based royalties related to GNSS technology licensed to OEMs, (iv) consultation and training services related to aerial integration and close air support providing the latest tactics, technique, and procedures (“TTP”) to incorporate contract close air support/intelligence surveillance reconnaissance (“CCAS/ISR”) with video downlink systems into tactical operations, (v) technology and equipment sales (vi) mini unmanned aerial systems (“MUAS” or “commercial drones”) sales, including hardware, software, training, support and product service, and (vii) drone services, including surveys, imaging, security, and other drone applications.
Business Combinations and Asset Acquisitions
As part of the accounting for the business combinations that took place during fiscal year 2022, including the determination of goodwill and the valuation of the stock options and other share-based awards assumed, the main estimate involved was the fair value of the common stock at each acquisition date. Given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide: Valuation of Privately Held Company Equity Securities Issued as Compensation, our board of directors along with management exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock, including: the prices at which we or other holders sold our common and convertible preferred stock to outside investors in arms-length transactions; contemporaneous valuations performed by an unrelated third-party valuation firm; our operating and financial performance; the lack of marketability of our common stock; the valuation of comparable companies; the industry outlook; the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions; and the U.S. and global economic and capital market conditions and outlook.
The fair value of common stock was determined as of the various acquisition dates which resulted in the following per share values:
-$25.27 as of March 10, 2022 which was based on DCF of the AIRO Drone, Agile Defense, Holdings and Jaunt entities, and a DCF with market exit multiple based on guideline public companies
-$25.79 as of March 28, 2022 which was based on DCF of the AIRO Drone, Agile Defense, Holdings, Jaunt and Sky-Watch entities, and a DCF with market exit multiple based on guideline public companies
-$25.82 as of April 1, 2022 which was based on DCF of the AIRO Drone, Agile Defense, Holdings, Jaunt, Sky-Watch and Aspen entities, and a DCF with market exit multiple based on guideline public companies
-$24.68 as of April 26, 2022 which was based on DCF of the AIRO Drone, Agile Defense, Holdings, Jaunt, Sky-Watch, Aspen and Coastal Defense entities, and a DCF with market exit multiple based on guideline public companies.
Note that the decrease in share price as of April 26, 2022 versus previous dates was due to the incremental cash flows to the group from the Coastal Defense acquisition which did not fully offset the dilution effect of additional shares and other consideration paid for Coastal Defense.
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The determination of the value of the common stock at each acquisition date was calculated using both a DCF with a conventional terminal value (income approach), and a DCF with market derived exit multiple (hybrid income / market approach) and then assigned a weighting of 40% and 60%, respectively. The greater reliance on the DCF using the market exit multiple reflects the shorter-term projection time horizon reflected in the method as compared to the Gordon Growth method which has a significantly longer-term projection horizon of 14 years before calculating its terminal value. The shorter projection time horizon and the comparison with public companies provides greater reliability. Management has greater visibility on near term projections, and comparable public companies provide some observable inputs to the analysis. The DCF methods project future revenues, earnings, and resulting cash flow available to equity and financing debt holders. The cash flows are discounted at a WACC that reflects the risk profile and uncertainty of the projected cash flows.
A pure market approach was not applied due to the fact that comparable public companies were at later stages than the Company and served as better comparables for the Company at a future date than on the valuation date(s). In addition, due to the significant near-term changes in future revenues for some business lines within the Company (some of which are development stage pre-revenue) as well as significant changes in expected future operating margins, applying prevailing market multiples to the Company metrics on the valuation date(s) (for example, operating losses) would not provide a meaningful estimate of the Company’s value. Therefore, the DCF with market exit multiple was applied as a substitute for the market approach, and was more appropriate for the circumstances. This valuation method is frequently applied under similar circumstances.
Revenue and income projections utilized were consistent with projections on page 99, discounted using a WACC of 34% and a terminal growth rate of 4%. Projected cashflows for the Company as of the various dates included forecasts from entities that had made up the Company as of each given valuation date and were developed by division based on their markets, product features, acquisition candidates and economic and market dynamics. The forecasts incorporate and consider contractual orders (both commercial and military), letters of intent, historical performance where available and market data coupled with budgeted R&D investment and production resources to forecast both short and long-term revenues and profits. Assumptions made in the forecasts were also benchmarked against available market data by industry reporting services, and guideline public companies, for such variables as projected long-term EBITDA and EBIT margins. This benchmarking was applied to test reasonableness of assumptions, and to assist in determining the risk profile and appropriate discount rate to apply against projected cash flows. Because the Company’s portfolio companies include both established, revenue-producing businesses and high-growth emerging market businesses, the availability and reliance upon each of these factors in forecasting similarly differs by division, as follows:
● The Advanced Avionics division, which operates under the Aspen Avionics brand, has been operating for 18 years in an established revenue-producing market. As such, there is considerable economic, market and competitive data available, as well as data on historical market share based on product portfolios and segments served. This data is evaluated with the division’s current products and new product introductions and certifications to forecast revenue. Industry margin information and the division’s historical cost performance and expected cost performance is used in the development of profit forecasts.
● The Training division consists of military training and commercial training components, both of which operate in established revenue-producing markets. The military training component (Coastal Defense brand) bids task orders under various U.S. military contracts as further described on page 159. Forecasting is based on identifying current assets (aircraft/ground equipment) coupled with planned acquisition of assets to forecast the number of task orders it qualifies for and is likely to obtain. The commercial training component forecast is based on an acquisition model. It considers planned acquisitions of flight schools, anticipated leveraging of other AIRO expertise and uses industry demand metrics readily available from government and industry studies to forecast revenue and profit.
● The Uncrewed Air Systems division includes both established revenue-generating business and high-growth emerging businesses. The drone manufacturing component (Sky-Watch) is an established revenue-generating business located in Denmark. Forecasts are based on demand for Sky-Watch equipment as evidenced by current or anticipated future contractual arrangements for drone delivery, including the demand pipeline created by the conflict in Ukraine. Forecasts also include organic growth from new product releases scheduled for 2024, 2025 and 2026. The division’s other components, including US-based drone manufacturing and Drone as a Service (“DaaS”), are high-demand, emerging market growth segments. Forecasts are based on operational experience as well as an acquisition model of existing service providers.
● The Electric Air Mobility (Jaunt Air Mobility brand) division operates in a high growth, emerging markets segment – the Electric Vertical Take-Off and Landing (“eVTOL”) aircraft industry. Forecasts are based on market studies, including those by Goldman Sachs, KPMG and Deloitte referenced on page 156, direct feedback from potential customers, executed letters of intent, and data of identified competitors within the industry.
The market derived exit multiples in the hybrid income / market valuation approach were derived from a peer group of guideline public companies with elements of similarity to the Company as of the future exit date. Guideline public companies were selected based on discussions with management regarding competitors and a screening conducted in S&P Capital IQ. Seven public companies were identified in the eVTOL aircraft industry, and four public companies were identified in the defense industry with similar product and service lines to portions of the Company. Revenue and EBITDA multiples were selected for each category (eVTOL and Defense) and were weighted based on the relative revenue composition within the Company of each category. The revenue multiples derived a lower exit value, and were assigned a greater weight of 67% as compared to 33% for EBITDA multiples, due to anticipated fluctuation in operating margins beyond the exit date.
The fair value of the contingent consideration as of each acquisition date included an initial public offering probability which ranged from 46% to 67% with an incremental 5% at each acquisition date.
Following the effectiveness of the registration statement of which this prospectus forms a part, the fair value of our common stock will be based on the closing price as reported on the date of grant on the Nasdaq.
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Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. The Company manages its business primarily based upon four operating segments, Advanced Avionics, Uncrewed Air Systems, Electric Air Mobility and Training. Each of these operating segments represents a reportable segment. We have determined that each reportable segment represents a reporting unit and, in accordance with ASC 350, each reporting unit requires an allocation of goodwill. The Company will continue to reevaluate reportable and operating segments.
Goodwill is not amortized and is tested at the reporting unit level for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has selected October 1st as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment for these assets. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if an impairment test is necessary. Management may choose to proceed directly to the evaluation, bypassing the initial qualitative assessment. The impairment test involves comparing the fair value of the reporting unit to which goodwill is allocated to its net book value, including goodwill. A goodwill impairment loss would be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. No goodwill impairment charges have been recorded for any period presented.
When performing the annual impairment test in 2022, we used a qualitative assessment to determine if any facts or circumstances during the period could require a quantitative analysis. When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance, and other events relevant to the entity or reporting unit under evaluation to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and determined that since the date of the acquisitions that occurred earlier in fiscal 2022, there were no events or circumstances that rise to a level that would more-likely-than- not reduce the fair value of those reporting units below their carrying values; therefore, a quantitative goodwill impairment analysis was not required.
In 2023, due to the delays in financing, we performed a quantitative assessment on goodwill for all of our reporting units except Advanced Avionics as no goodwill had been allocated to this reporting unit. The fair value of the reporting units for which we performed quantitative impairment tests was estimated using an income approach, which incorporates the use of the discounted cash flow method. Projections used require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management.
The table below displays the fair value for each reporting unit tested in the 2023 annual impairment test. The Company determined that the fair value of the UAS and Training reporting units substantially exceed their respective carrying values. While the Electric Air Mobility reporting unit fair value was not substantially in excess of its carrying value, the fair value of the EAM reporting unit exceeded its carrying value by $12.3 million (2.3%) and our goodwill was not impaired.
| Uncrewed Air Systems | Electric Air Mobility | Training | ||||||||||
| Goodwill carrying value as of October 1, 2023 | $ | 109.9 million | $ | 451.4 million | $ | 36.5 million | ||||||
| Fair value of reporting unit as of October 1, 2023 | $ | 151.3 million | $ | 545.2 million | $ | 97.0 million | ||||||
| Carrying value of reporting unit as of October 1, 2023 | $ | 96.1 million | $ | 532.9 million | $ | 46.6 million | ||||||
Estimates and assumptions varied between each reporting unit depending on the facts and circumstances specific to that reporting unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. For the 2023 test, the WACC discount rate we used for our reporting units was 25.0% - 40.0% and the terminal value growth rate was 4.0%. The terminal value growth rate represents the expected long-term growth rate for our industry, which incorporates the type of services each reporting unit provides as well as the global economy. Projected revenue and EBITDA as of October 1, 2023 was different from the projections shown on page 99 as they were updated to incorporate funding delays, current market projections, updated cost estimates and expected production capabilities. Other factors influencing the revenue growth rates include the nature of the services the reporting unit provides for its clients, the geographic locations in which the reporting unit conducts business and the maturity of the reporting unit.
Specific to the EAM projections as of our October 1, 2023 testing date as compared to those disclosed on page 99 which were appropriate as of the date of the business combinations, projected revenues were primarily updated to reflect projected aircraft production from 2027 to 2028. The projected revenues for EAM between 2023 – 2026, as shown on page 99, were research and development service contracts that were expected to be awarded in advance of airframe manufacturing that was not directly related to the Jaunt Journey’s development. As of our October 1, 2023 testing date, no research and development revenues were assumed for the period 2024-2027 as the EAM unit has been informed that it was not selected for the DARPA program. Projected revenue in years 1 and 2 of commercialization as of October 1, 2023 totaled $1.6 billion as compared to initial revenue estimates of $1.4 billion for the same two-year period. Current projections were updated to include the assumed selling price of $2.4 million per unit which is in line with the negotiated pricing noted in nonbinding letters of intent, with assumed production levels of approximately 630 units over the same two-year period.
Revenue projections are based on increasing production quantities year-over-year that max out at approximately 3,000 units per year at a single facility, and a per-unit sales price that increases over time from $2.4 million to $2.9 million per unit, assuming a 1.5% escalation rate. The net impact of increasing production volume and increasing sales price results in mid-term revenue growth rates as of October 1, 2023 that are between 20%-55%, with annual revenues between $2 billion and $9 billion.
Projected EBITDAs as shown on page 99 included approximately $200 million of net research and development costs in years 2023 – 2026 leading up to the commercialization of the Jaunt Journey aircraft and are consistent with projected EBITDAs for 2024-2027 prior to commercialization as of October 1, 2023. Original projections assumed positive EBITDA of $0.04 billion during the two years post commercialization. EBITDA projections as of October 1, 2023 during the two years post commercialization are estimated to be $0.1 billion. The improvement in EBITDA upon commercialization in the October 1, 2023 projections compared to the earlier projections on page 99 is primarily attributable to an increase in anticipated gross margin from 12% to 15% based on more detailed factory production simulations. Manufacturing costs in the updated projections are based on a $105/hour manufacturing cost, assuming a starting production of 19,000 hours per unit and reaching an average of 3,200 hours per unit at the end of the second year. These assume a learning curve rate of 84% with efficiencies gained at each line within the single manufacturing site. Mid-term and long-term gross margins are expected to increase to 27% at maximum capacity when production hours will reach an average of 2,000 per unit. Operating costs have been relatively flat at 3% to 4% of revenue in the Company’s projections.
Mid-term and long-term EBITDA projections continue to be between $0.2 billion and $2.0 billion which equates to 18% to 23% of revenue at maximum capacity. Mid-term and long-term EBITDA growth rates incorporate economies of scale and synergies, however, changes between projections as of October 1, 2023 and earlier projections are not significant once maximum manufacturing conditions are reached. Note that while EBITDA projections have changed in the ramp-up of production, profitability post-commercialization has always been part of the Company’s projections. The Company anticipates profitability in the EAM reporting unit commencing in year 2 following commercialization.
As to the degree of uncertainty associated with our assumptions, the Company’s long-term projected revenue of $9 billion is reasonable given a sales price supported by non-binding letters of intent and a relatively small number of 3,000 units in comparison to an expected global market of between $1 trillion and $4.4 trillion by 2040, as noted within the 2021 Morgan Stanley industry report cited in the Amended Registration Statement on page 157. There is a higher degree of uncertainty in projected EBITDA as compared to projected revenue as projected EBITDA includes estimates as to future labor and material costs, efficiency rates as to the number of production hours required over time, and synergies. The most sensitive factor in our analysis was the WACC discount rate. As of October 1, 2023, a 35% WACC discount rate was applied to EAM which is fairly consistent but still more conservative than the 34% WACC discount rate used as of the acquisition date. The 100 basis-point increase was deemed appropriate due to the development stage of EAM, however, a larger increase was not deemed appropriate due to positive market changes including proof of concept in the market and observations of timing to certification by Transport Canada. As to the sensitivity of the WACC rate, another hypothetical 100-basis-point increase in the WACC discount rate would have yielded an estimated fair value for the EAM reporting unit below carrying value.
We believe the factors considered in the impairment analysis are reasonable, however, significant changes in any one of our assumptions could produce a different result and result in impairment charges that could be material to our consolidated financial statements. The fair value of the EAM reporting unit exceeded the carrying value as of the date of the most recent annual impairment test by $12.3 million or 2.3%. While the goodwill of this reporting unit is not currently impaired, there could be an impairment in the EAM reporting unit in the future as a result of changes in certain assumptions. For example, the EAM fair value could be adversely affected and may result in an impairment of goodwill if this reporting unit is not able to advance the development of our aircraft and other products, obtain regulatory approvals, and launch and commercialize our products at scale, if the estimated production costs are significantly higher than estimated or if the WACC discount rate is increased.
Intangible Assets
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of the acquired business to the respective net tangible and intangible assets. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed. The Company capitalizes third-party legal costs and filing fees, if any, associated with obtaining patents. Once the patent asset has been placed in service, the Company amortizes these costs over the shorter of the asset’s legal life, generally 20 years from the initial filing date, or its estimated economic life using the straight-line method.
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The estimated useful lives for the Company’s intangible assets are as follows:
| Estimated useful life | ||
| Developed technology | 8 to 13 years | |
| Tradenames - definite-lived | 4 to 8 years | |
| Customer relationships | 3 to 7 years | |
| Patents | up to 20 years |
In addition to the long-lived intangible assets, the Company also had $8.8 million of indefinite lived intangible assets which is primarily the $8.7 million tradename obtained in conjunction with the Jaunt acquisition as described in Note 2.
Impairment of Indefinite Lived Assets
Under ASC 350-30-35-18, an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. In testing for impairment, the Company defines its’ Asset Groups at the reporting unit level. Under ASC 360-10-35-26 when an asset group is a reporting unit, the asset group includes goodwill. When goodwill and indefinite lived intangibles are included in the long-lived asset group being tested for impairment, the indefinite-lived intangible assets are tested for impairment in accordance with ASC 350-30 first, then the long-lived assets (groups) are tested for impairment in accordance with ASC 360-10, and goodwill is tested for impairment at the reporting unit level in accordance with ASC 350-20 last.
ASC 350-30-35-18A specifies that an entity may first perform a qualitative assessment, as described in this paragraph and paragraphs 350-30-35-18B through 35-18F, to determine whether it is necessary to perform the quantitative impairment test.
When performing the annual impairment test in 2023 and 2022, we used a qualitative assessment to determine if any facts or circumstances during the period could require a quantitative analysis. When performing a qualitative assessment, we considered factors listed in ASC 350 which includes cost factors, financial performance, legal, regulatory, contractual, political, business, or other factors. Based on the Company’s review of these factors, there was no impairment of indefinite lived assets recorded during the years ended December 31, 2023 or 2022.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment in accordance with ASC 360 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. Our 2023 and 2022 evaluation was performed in accordance with ASC 360 and included considerations related to market price, use and condition of the asset, business climate, projections of losses and other factors. While each of these reporting units had an operating loss through October 1, 2023, they continue to project increases in operating performance. The Company has therefore determined that, given this fact pattern and other considerations as to the pending SPAC transaction and results increasing from previous projections, the financial performance does not indicate that it is more-likely-than-not that the long-lived assets in the remainder of the reporting units are impaired. There was no impairment recorded during the year ended December 31, 2023. During the year ended December 31, 2022, the Company wrote off $0.2 million of patent costs in the Advanced Avionics reporting unit.
Stock-based Compensation
The Company recognizes compensation expense for stock-based awards based on the grant-date estimated fair value of the awards. Options and restricted stock awards may be granted as time-based awards, performance-based awards or combinations of the time-based and performance-based awards. The Company expenses the fair value of its options to employees and non-employees on a straight-line basis over the associated service period for time-based awards, which is generally the vesting period. The performance-based awards begin their period of ratable vesting at the time that the Company determines that the achievement of the performance thresholds is probable. The Company accounts for forfeitures as they occur and does not estimate forfeitures at the time of grant. Ultimately, the actual expense recognized over the vesting period will be for only those options that vest.
The total stock-based compensation expense for the Plan during the year ended December 31, 2023 and 2022 was $1.8 million and $2.8 million, respectively. The total stock-based compensation expense for the Plan during the three months ended March 31, 2024 and 2023 was $0.3 million and $0.6 million, respectively. Stock based compensation expense was primarily attributable to the 0.6 million outstanding options acquired in conjunction with the Jaunt acquisition as described in Note 2 and 17 of the financial statements. The weighted-average grant date fair value of options awarded in the Holdings business combination was $21.92 per share. The decrease in stock-based compensation expense from 2022 to 2023 was the result of awards becoming fully expensed over the associated service period. Unamortized expense as of December 31, 2023 was $0.9 million and will be recognized over an estimated weighted-average period of 1.1 years.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability approach method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the condensed consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases, as well as for net operating losses and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more-likely-than-not to be realized.
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will more-likely-than-not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as income tax expense.
Off-Balance Sheet Arrangements
As of March 31, 2024 and December 31, 2023, AIRO has not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets. AIRO does not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
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Kernel
None of Kernel’s officers has received any cash compensation for services rendered to us. Commencing on the date of the IPO, we agreed to pay the Sponsor, a total of $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of the Business Combination or our liquidation, Kernel will cease paying these monthly fees. No compensation of any kind, including any finder’s fee, reimbursement, consulting fee or monies in respect of any payment of a loan, will be paid by Kernel to our Sponsor, officers or directors or any affiliate of our sponsor, officers or directors, prior to, or in connection with any services rendered in order to effectuate, the consummation of the Business Combination (regardless of the type of transaction that it is). However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Kernel’s audit committee reviews on a quarterly basis all payments that were made to Kernel’s Sponsor, officers or directors or our or their affiliates. Any such payments prior to the Business Combination will be made using funds held outside the trust account. Other than quarterly audit committee review of such payments, Kernel does not have any additional controls in place governing our reimbursement payments to our directors and executive officers for their out-of-pocket expenses incurred in connection with identifying and consummating the Business Combination.
After the completion of the Business Combination, none of the directors or members of our management team who remain with ParentCo will be paid consulting or management fees from ParentCo. Any compensation to be paid to ParentCo officers will be determined, or recommended to the ParentCo Board for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on the ParentCo Board.
Kernel has not taken any action to ensure that members of its management team maintain their positions with ParentCo after the consummation of the Business Combination, except that Surendra Ajjarapu and Donald Fell will serve as directors of ParentCo and be compensated in the same manner as all other directors of ParentCo. We do not believe that the ability of our management to remain with ParentCo after the consummation of the Business Combination will be a determining factor in our decision to proceed with the Business Combination. Kernel is not party to any agreements with its officers and directors that provide for benefits upon termination of employment.
AIRO
Overview
The following discussion contains forward-looking statements that are based on AIRO’s current plans and expectations regarding its future compensation programs. The actual amount and form of compensation that AIRO pays and the compensation policies and practices that it adopts in the future may differ materially from the currently planned programs that are summarized in this discussion.
AIRO is an “emerging growth company” within the meaning of the Securities Act and has elected to comply with the reduced compensation disclosure requirements available to such emerging growth companies. In accordance with such requirements, AIRO’s reporting obligations regarding executive compensation extend only to its named executive officers (“NEOs”) meaning its principal executive officer and next two highly compensated executive officers in respect of their service to AIRO or its subsidiaries at the end of the last completed fiscal year. AIRO’s NEOs shall become the NEOs of ParentCo as a result of the Business Combination. As of December 31, 2023, AIRO’s NEOs and their positions were:
| ● | Joseph D. Burns, Chief Executive Officer; |
| ● | John Uczekaj, President and Chief Operating Officer; and |
| ● | Dr. Chirinjeev Kathuria, Executive Chairman. |
In 2021, Joseph D. Burns became AIRO’s Chief Executive Officer and Dr. Chirinjeev Kathuria became its Executive Chairman. In 2022, John Uczekaj became its President and Chief Operating Officer. No arrangements for compensation to be paid to AIRO’s NEOs were made prior to 2024. Accordingly, AIRO has no compensation information to report in the summary table below.
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2023 Summary Compensation Table
The following table sets forth information concerning the compensation of our NEOs for the years ended December 31, 2023 and 2022.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
Joseph D. Burns | 2023 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| Chief Executive Officer | 2022 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
John Uczekaj | 2023 | 300,000 | (1) | 0 | 0 | 0 | 0 | 300,000 | (1) | |||||||||||||||||||
| President and Chief Operating Officer | 2022 | 300,000 | (1) | 0 | 0 | 0 | 0 | 300,000 | (1) | |||||||||||||||||||
| Dr. Chirinjeev Kathuria | 2023 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| Executive Chairman | 2022 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
(1) Represents salary earned by Mr. Uczekaj in his position as President and Chief Executive Officer of Aspen Avionics.
Outstanding Equity Awards at 2023 Fiscal Year-End
The following table sets forth summary information regarding the outstanding equity awards held by our NEOs at December 31, 2023.
| Name | Number of Shares or Units of Stock that Have Not Vested (#) | Market Value of Shares or Units of Stock that Have Not Vested ($) | ||||||
| Joseph D. Burns | 0 | $ | 0 | |||||
| John Uczekaj | 0 | $ | 0 | |||||
| Dr. Chirinjeev Kathuria | 0 | $ | 0 | |||||
Narrative to the 2023 Summary Compensation Table
Employment Agreements. We are in the process of negotiating employment terms with our NEOs and expect to enter into employment agreements with our NEOs that will take effect as of the Closing of the Business Combination. As of closing of the Business Combination, we anticipate our NEOs will be Joseph D. Burns, Chief Executive Officer, John Uczekaj, President and Chief Operating Officer, and Martin Peryea, Senior Vice President and General Manager, Electric Air Mobility Division. The terms of each employment agreement will be disclosed after such employment agreement is finalized.
Components of Compensation for Fiscal Year 2024
Base Salary and Bonuses. Following Closing of the Business Combination, the AIRO NEOs will receive a base salary and bonuses to compensate them for services rendered to AIRO. The base salary payable to each NEO is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. Base salary amounts will be established based on consideration of, among other factors, the scope of the NEO’s position, responsibilities and years of service and the compensation committee’s general knowledge of the competitive market, based on, among other things, experience with other similarly situated companies and AIRO’s industry and market data reviewed by the compensation committee.
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Legacy Equity-Based Compensation. Upon the acquisition of Jaunt on March 10, 2022, AIRO assumed the Jaunt Air Mobility, LLC 2021 Option Plan, which was renamed the AIRO Group Holdings, Inc. Option Plan (the “Legacy Option Plan”). Under the Legacy Option Plan, employees and consultants of Jaunt may be granted options to purchase AIRO’s Common Stock. The Legacy Option Plan provides that grants of options will be made at a price no less than the estimated fair value of the AIRO Common Stock at the grant date. The total number of shares reserved for issuance under the Legacy Option Plan consists of 605,236 shares of AIRO’s Common Stock. No new option grants under the Legacy Option Plan are contemplated, and ParentCo will assume the Legacy Option Plan at Closing of the Business Combination. The exercise price and grant amounts have been determined in accordance with the provisions of the Legacy Option Plan.
2024 Equity Incentive Plan. Promptly following the Closing of the Business Combination, the ParentCo Board shall approve and adopt the 2024 Equity Incentive Plan (the “2024 Plan”), subject to approval by the Kernel shareholders. For additional information regarding the 2024 Plan, see “Shareholder Proposal No. 5: The Incentive Plan Proposal.”
Employee Stock Purchase Plan. Promptly following the Closing of the Business Combination, the ParentCo Board shall approve and adopt the Employee Stock Purchase Plan (the “ESPP”), subject to approval by the Kernel shareholders. For additional information regarding the ESPP, see “Shareholder Proposal No. 6: The Employee Stock Purchase Plan Proposal.”
Other Elements of Compensation
Retirement Plans. ParentCo intends to adopt and maintain a 401(k) retirement savings plan for its employees, including its NEOs, who satisfy certain eligibility requirements. ParentCo expects that its NEOs will be eligible to participate in the 401(k) plan on the same terms as other full-time, salaried employees. The IRC allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. ParentCo believes that providing a vehicle for tax-deferred retirement savings through a 401(k) plan adds to the overall desirability of its executive compensation package and further incentivizes its employees, including its NEOs, in accordance with its compensation policies.
Health/Welfare Plans. ParentCo intends for all of its full-time, salaried employees, including its NEOs, to be eligible to participate in its health and welfare plans, which ParentCo expects will include: (i) medical, dental, and vision benefits, and (ii) life and accidental death and dismemberment insurance.
No Tax Gross-Ups. ParentCo does not intend to make gross-up payments to cover its NEOs’ personal income taxes that may pertain to any of the compensation or benefits paid or provided by ParentCo.
Employment Agreements
AIRO does not currently have employment agreements with any of its NEOs. However, in connection with the Business Combination and prior to Closing, ParentCo will enter into employment agreements with the AIRO NEOs to be effective as of the date of Closing with terms and conditions that are comparable to the employment agreements offered by companies of AIRO’s size in its industry, including standard restrictive covenants. The terms of each employment agreement will be disclosed after each such agreement is finalized.
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Kernel
During the fiscal year ended December 31, 2023, we did not provide any compensation to our directors for their services on the Kernel Board.
AIRO
Members of the AIRO Board have not historically received compensation for their services as board members. During the fiscal year ended December 31, 2023, AIRO did not provide any compensation to its directors for their services on the AIRO Board.
Non-Employee Director Compensation Policy
In connection with the Business Combination, the ParentCo Board will adopt a non-employee director compensation policy, to be effective as of the Closing. The policy is designed to enable ParentCo to attract and retain, on a long-term basis, highly qualified non-employee directors. Pursuant to this policy, each non-employee director will be eligible to receive cash retainers (which will be payable quarterly in arrears and prorated for partial years of service) and equity awards as set forth below:
Annual Retainer for ParentCo Board Membership
$35,000 for general availability and participation in meeting and conference calls of the ParentCo Board.
Additional Annual Retainer for Committee Membership
| Audit Committee Chairperson: | $ | 15,000 | ||
| Audit Committee member (other than Chairperson): | $ | 7,500 | ||
| Compensation Committee Chairperson: | $ | 10,000 | ||
| Compensation Committee member (other than Chairperson): | $ | 5,000 | ||
| Nominating and Corporate Governance Committee Chairperson: | $ | 8,000 | ||
| Nominating and Corporate Governance Committee member (other than Chairperson): | $ | 4,000 | ||
| Additional Retainer for Chairperson of the Board: | $ | 30,000 |
In addition, the policy will provide that, upon initial election or appointment to the ParentCo Board, each new non-employee director will be granted a one-time grant of a non-statutory stock option to purchase shares of ParentCo Common Stock (the “Director Initial Grant”) on the date of such director’s election or appointment to the ParentCo Board. The Director Initial Grant will vest in substantially equal quarterly installments over three years, subject to the director’s continued service as a member of the ParentCo Board through each applicable vesting date. The Director Initial Grant is subject to full acceleration vesting upon the sale of ParentCo.
ParentCo will reimburse all reasonable out-of-pocket expenses incurred by directors for their attendance at meetings of the ParentCo Board or any committee thereof.
Employee directors will receive no additional compensation for their service as a director.
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MANAGEMENT AFTER THE BUSINESS COMBINATION
Pursuant to the Business Combination Agreement, immediately after the Closing, the Parties shall take all necessary action to designate and appoint to the Post-Closing Board nine directors, including (i) seven persons designated prior to the Closing by AIRO, at least four of whom will be independent; and (ii) two persons designated prior to the Closing by Kernel. Initially, AIRO has designated Joseph Burns, Chirinjeev Kathuria, and John Uczekaj as non-independent directors, and John M. Belcher and Gregory D. Winfree as independent directors. Kernel has designated Surendra Ajjarapu and Donald Fell as independent directors. In addition, following the Closing, the Post-Closing Board will appoint two additional independent directors to the ParentCo Board.
Executive Officers and Directors After the Business Combination
Upon the consummation of the Business Combination, the business and affairs of ParentCo will be managed by or under the direction of the ParentCo Board. The Proposed ParentCo Charter provides for a ParentCo Board consisting of nine (9) directors divided into three staggered classes. Each director’s term is subject to the election and qualification of his or her successor, or his or her earlier death, disqualification, resignation or removal. Subject to any rights applicable to any then outstanding preferred stock, any vacancies on the ParentCo Board may be filled only by the affirmative vote of a majority of the directors then in office. ParentCo’s directors only may be removed for cause by the affirmative vote of the holders of at least two-thirds of ParentCo’s voting securities.
The following table sets forth the name, age and position of each of the expected directors and executive officers of ParentCo upon consummation of the Business Combination:
| Name | Age | Position(s) | ||
| Executive Officers: | ||||
| Joseph D. Burns | 62 | Chief Executive Officer, Director | ||
| John Uczekaj | 65 | President, Chief Operating Officer, Director | ||
| Dr. Mariya Pylypiv | 35 | Chief Financial Officer | ||
| Employee Director: | ||||
| Dr. Chirinjeev Kathuria | 59 | Executive Chairman, Director | ||
| Non-Employee Directors: | ||||
| John M. Belcher(1)(2) | 83 | Director | ||
| Gregory D. Winfree(3) | 59 | Director | ||
| Surendra Ajjarapu | 53 | Director | ||
| Donald Fell(1)(2) | 78 | Director |
| (1) | Member of Audit Committee |
| (2) | Member of Compensation Committee |
| (3) | Member of Nominating and Corporate Governance Committee |
Biographies
Executive Officers
Captain Joseph D. Burns has served as AIRO’s Chief Executive Officer and as a member of AIRO’s board of directors since its inception in 2020. Captain Burns is a 30-year veteran of the aviation, technology, and communications industries. Captain Burns was an executive at United Airlines from 1992 to 2020, most recently serving as the Managing Director of Technology and Flight Test at United Airlines responsible for over $250 million in annual NextGen programs. Captain Burns held several positions at United Airlines, including Managing Director – Flight Standards, FAA Certificate Director of Operations, Director Flight Standards, Chief Pilot FFDO Program, Manager Automation Systems, and Pilot Instructor. Type-rated on many large jet transports, he currently flies as International Captain on the Boeing 767. His engineering and management experience also includes CEO positions at Sensurion Aerospace from 2014 to 2018 and ATN Systems, Inc. from 2001 to 2014. Captain Burns currently serves on the National Space-Based Positioning, Navigation, and Timing Advisory Board and Emeritus for EMS Technologies. He is also a member of the NextGen Advisory Council Subcommittee and the Chairman Emeritus for the Airline Operations Committee and the Air Traffic Control Council of Airlines for America, formerly known as the Air Transport Association of America. Captain Burns received a Master of Business Administration in Management from the Miami University Farmer School of Business and a Bachelor of Science in Aeronautics/Aeronautical Engineering from Miami University.
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John Uczekaj has served as AIRO’s President and Chief Operating Officer since 2022. Mr. Uczekaj has served as the President and Chief Executive Officer of Aspen Avionics since 2007. He has over 35 years of experience in the avionics industry, starting out as an engineer at Boeing and moving into key management positions at Sperry and Honeywell. While at Honeywell, Mr. Uczekaj was made executive vice president and general manager of the Aerospace Electronics Systems division. Immediately prior to joining Aspen Avionics, Mr. Uczekaj was president and COO of The NORDAM Group. Mr. Uczekaj received the Aviation Industry Entrepreneur of the Year in 2012 from the Living Legends of Aviation and was inducted into the Living Legends of Aviation in 2013. He is a member of the Board of Directors of the General Aviation Manufacturers Association (GAMA). Mr. Uczekaj holds a Bachelor of Science in Electrical and Computer Engineering from Oregon State University and an MBA from City University, Seattle, Washington. Mr. Uczekaj is an instrument rated private pilot.
Dr. Mariya Pylypiv joined AIRO as Interim Chief Financial Officer in June 2023, following her role as co-founder and co-CEO of Opus Exec (dba as Maven Execs) since September 2022. She is currently a board member at UpHealth, Inc. (NYSE: UPH) and previously held various executive positions at UpHealth, including VP of Finance (May 2022 to August 2022) and Chief Strategy Officer (June 2021 to May 2023). Prior to that, she served as Vice President of Investment Banking and Corporate Development (January 2021 to August 2021) and worked as an Investment Banking and Corporate Development Associate (March 2018 to December 2020) at Sikich LLP. Her previous experience includes roles as a Senior Research Analyst at Acrospire Investment Management LLC (February 2016 to March 2018) and as a Quantitative Research Analyst at Rotella Capital Management (July 2014 to January 2016). Dr. Pylypiv has provided her expertise to advisory boards in investment banking, financial investments, health tech, aerospace, and technology. She holds a Bachelor of Business Economics in Accounting and Audit and a Masters in Accounting and Audit from Vasyl Stefanyk Precarpathian National University, B.A. and M.A. degrees in International Economics from Ternopil National Economic University, and a Ph.D. in Consumer and Family Economics with a focus on Finance from Purdue University. Dr. Pylypiv has completed various certifications in financial accounting, ESG, corporate governance, and cybersecurity.
Board of Directors
Dr. Chirinjeev Kathuria has served as Executive Chairman of AIRO since its inception in 2020. Dr. Kathuria is an Indian-American investor, businessperson, and philanthropist. He is co-founder and serves on the board of directors of UpHealth, Inc. (NYSE: UPH), a digital health company founded in 2020. Dr. Kathuria also co-founded Ocean Biomedical, Inc. (Nasdaq: OCEA) and serves as the executive chairman of its board of directors, a position he has held since its inception in 2019. Ocean Biomedical, Inc. licenses the inventions and technologies of research universities and medical centers and develops them into products that address unmet medical needs. In addition, Dr. Kathuria co-founded New Generation Power in February 2009 and American Teleradiology NightHawks, Inc. in March 2003. American Teleradiology NightHawks, Inc. merged with NightHawk Radiology Holdings, Inc. and the combined company went public on Nasdaq in October 2006. From March 1998 to March 2000, Dr. Kathuria served as a director of The X-Stream Networks Inc., an internet service provider that was sold to Liberty Surf Group S.A. and subsequently went public on the Paris Stock Exchange. Dr. Kathuria has also been involved in space exploration and, in January 1999, became the founding director of MirCorp, the first commercial company to privately launch and fund manned space programs. Dr. Kathuria ran for U.S. Senate in Illinois, becoming the first Indian-American to run for the U.S. Senate in U.S. history, in a race that included eventual winner, former President Barack Obama. Dr. Kathuria received a Bachelor of Science degree and Doctor of Medicine degree from Brown University and a Master of Business Administration degree from Stanford University.
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John M. Belcher is the Chief Executive Officer of JMCB Enterprise Solutions, which he founded in 2017. He provides management and engineering consulting as a board member and investor in eight technology companies internationally. He previously acted as the Chief Executive Officer and Chairman of ARINC, which he built into a global operation with products and services available in over 154 countries. He was also the President and Chief Executive Officer of Hughes Aircraft of Canada and the President/Chief Executive officer of Thomson Hickling Aviation. He held several executive positions with Canada’s Federal Government, including Executive Director of Facilities, Director General of Office Automation Services and Information Systems, and Director General of Corporate Systems, Supply and Services Canada. He has over 40 years of experience in aviation, aerospace, airports, information technology, communications, and defense. He previously served as Chairman of the Canadian Advanced Technology Association and Chairman of the Advisor Board for the University of Waterloo. He also served on the board of directors for several trade associations and aerospace technology companies. He has received numerous awards and honors, including the Canadian National Transportation Award, the Maryland International Business Leadership Award, Business Leader of the Year for Annapolis and Anne Arundel County, the Louis V. Gerstner, Jr. Excellence Award, and the Anne Arundel Excellence in Leadership Award. He is a member of the Annapolis and Anne Arundel County Chamber of Commerce Business Hall of Fame. Most recently he was awarded the USA Ellis Island Medals of Honor for his contribution to aviation, aerospace, and information technology as well as his successes as an entrepreneur and community leader. He graduated from the University of Ottawa with a B.S.C. in Applied Science and earned a graduate degree in Communication Systems Engineering and Business Management from Queens University.
Gregory D. Winfree is the Agency Director of the Texas A&M Transportation Institute (TTI) the largest, most comprehensive higher education-affiliated transportation research institute in the United States. He was appointed to the position in December 2016. Prior to his appointment at TTI, he worked as the Assistant Secretary of Research and Technology for the U.S. Department of Transportation, a position to which he was appointed by former President Barack Obama. As Assistant Secretary, he was the senior executive responsible for overseeing more than 1,000 scientific, data analysis, and administrative staff members. The program offices he was responsible for included the John A. Volpe National Transportation Systems Center, the Research, Development and Technology Coordination Office, the Bureau of Transportation Statistics, the Positioning, Navigation, Timing and Spectrum Management Office, the Intelligent Transportation Systems Joint Program Office, and the Transportation Safety Institute. He has also served as legal counsel for several Fortune 500 corporations. His previous legal positions include Chief Litigation Counsel for Freeport-McMoran Copper & Gold, Director of Litigation for Wyeth Pharmaceuticals (now known as Pfizer), and Senior Litigation Counsel for Union Carbide Corporation (now known as the Dow Chemical Company). He is also proficient in technology and innovation and is credited as the inventor on certain design and utility patents. He graduated from St. John’s University with a B.S. in Communications and earned his J.D. from the Georgetown University Law Center.
For the biography of each of Kernel’s appointees to the ParentCo Board, see the section entitled “Information About Kernel — Directors and Executive Officers.”
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Director Qualification
The officers of ParentCo and the ParentCo Board following the Business Combination are well qualified as leaders. In their prior positions they have gained experience in core management skills, such as strategic and financial planning, financial reporting, compliance, risk management, and leadership development. ParentCo’s officers and directors following the Business Combination also have experience serving on boards of directors and board committees of other public companies and private companies and have an understanding of corporate governance practices and trends, which provides an understanding of different business processes, challenges, and strategies. Further, certain officers and directors have other experience that makes them valuable, such as prior experience in mergers and acquisitions, in financial services, managing and investing in assets.
The Kernel Board believes that the above-mentioned attributes, along with the leadership skills and other experiences of the officers and board members, will provide ParentCo with a diverse range of perspectives and judgment necessary to facilitate the goals of ParentCo and be good stewards of capital.
Family Relationships
There are no family relationships among any of AIRO, Kernel, or ParentCo’s current or proposed directors or executive officers.
Composition of ParentCo’s Board of Directors
The ParentCo Board will consist of nine members. In the future, the ParentCo nominating and corporate governance committee and ParentCo Board may consider a broad range of factors relating to the qualifications and background of nominees. The ParentCo nominating and corporate governance committee’s and ParentCo Board’s priority in selecting board members is to identify persons who will further the interests of stockholders through his or her established record of professional accomplishments, the ability to contribute positively to the collaborative culture among board members, knowledge of ParentCo’s business, understanding of the competitive landscape, and professional and personal experiences and expertise relevant to ParentCo’s growth strategy. Directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal. The Proposed ParentCo Charter and Bylaws that will become effective immediately following the Closing of the Business Combination also provide that directors may be removed only for cause by the affirmative vote of the holders of at least two-thirds of the votes that all ParentCo stockholders would be entitled to cast in an annual election of directors, and that any vacancy on the ParentCo Board, including a vacancy resulting from an enlargement of the ParentCo Board, may be filled only by vote of a majority of its directors then in office.
Director Independence
Nasdaq’s rules generally require that a majority of a listed company’s board of directors to be comprised of independent directors. In addition, such rules require that all members of a listed company’s audit, compensation and nominating and corporate governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act.
In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.
Upon the Closing, we expect ParentCo’s independent directors, as such term is defined by the applicable rules and regulations of Nasdaq, will be John M. Belcher, Gregory D. Winfree, Surendra Ajjarapu and Donald Fell. In addition, following the Closing, the Post-Closing Board will appoint two additional independent directors to the ParentCo Board.
Under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Kernel Board has determined that all members of the proposed ParentCo Board except Joseph Burns, John Uczekaj, and Dr. Chirinjeev Kathuria, will be independent directors, including for purposes of the rules of Nasdaq and the SEC. In making such independence determination, the Kernel Board considered the relationships that each director will have with ParentCo and all other facts and circumstances that the Kernel Board deemed relevant in determining his or her independence, including the beneficial ownership of ParentCo capital stock by each director. In considering the independence of the directors listed above, the Kernel Board considered the association of the ParentCo directors with the holders of more than 5% of ParentCo common stock following Closing. Upon the closing of the Business Combination, we expect that the composition and functioning of the ParentCo Board and each of its committees will comply with all applicable requirements of Nasdaq and the rules and regulations of the SEC, without relying on exemptions from those rules for controlled companies. Joseph Burns, John Uczekaj and Dr. Chirinjeev Kathuria are not independent directors under these rules because they will be employed as the chief executive officer, chief operating officer and president, and executive chairman, respectively, of ParentCo.
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Staggered Board
In accordance with the terms of the Proposed ParentCo Charter and Bylaws that will become effective upon the Closing, the ParentCo Board will be divided into three staggered classes of directors and each will be assigned to one of the three classes. At each annual meeting of the stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2024 for Class I directors, 2025 for Class II directors and 2026 for Class III directors.
| ● | Our Class I directors will be Donald Fell and two additional independent directors to be appointed after closing by the Post-Closing Board. | |
| ● | Our Class II directors will be John Uczekaj, Surendra Ajjarapu, and Gregory D. Winfree. | |
| ● | Our Class III directors will be Joseph D. Burns, Dr. Chirinjeev Kathuria, and John M. Belcher. |
The Proposed ParentCo Charter and Bylaws that will become effective immediately upon the Closing will provide that the number of directors shall be fixed from time to time by a resolution of the majority of the ParentCo Board.
The division of the ParentCo Board into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of the ParentCo Board or a change in control.
Board Leadership Structure and Board’s Role in Risk Oversight
Dr. Chirinjeev Kathuria will serve as ParentCo’s executive chairman and Joseph Burns as ParentCo’s chief executive officer, hence the roles of lead director or chairman and the chief executive officer are separated. ParentCo plans to keep these roles separated following the Closing. ParentCo believes that separating these positions allows the chief executive officer to focus on setting the overall strategic direction of ParentCo, expanding the organization to deliver on its strategy and overseeing its day-to-day business, while allowing a lead director of the ParentCo Board to lead the board of directors in its fundamental role of providing strategic advice. The ParentCo Board recognizes the time, effort and energy that the chief executive officer is required to devote to his or her position in the current business environment, as well as the commitment required to serve as lead director, particularly as the ParentCo Board’s oversight responsibilities continue to grow. While the Proposed ParentCo Governing Documents do not require that its lead director and chief executive officer positions be separate, the Kernel Board believes that having separate positions is the appropriate leadership structure for ParentCo at this time and demonstrates its commitment to good corporate governance.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. ParentCo faces a number of risks, including risks relating to its financial condition, development and commercialization activities, operations, strategic direction and intellectual property as more fully discussed in the section entitled “Risk Factors” appearing elsewhere in this proxy statement/prospectus. Management is responsible for the day-to-day management of risks ParentCo faces, while the ParentCo Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the ParentCo Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.
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The role of the ParentCo Board in overseeing the management of ParentCo’s risks is conducted primarily through committees of the ParentCo Board, as disclosed in the descriptions of each of the committees below and in the charters of each of the committees. The full board of directors (or the appropriate board committee in the case of risks that are under the purview of a particular committee) discusses with management ParentCo’s major risk exposures, their potential impact on ParentCo, and the steps ParentCo takes to manage them. When a board committee is responsible for evaluating and overseeing the management of a particular risk or risks, the chairperson of the relevant committee reports on the discussion to the full ParentCo Board during the committee reports portion of the next board meeting. This enables the ParentCo Board and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
Committees of ParentCo Board
Following the Closing, ParentCo will establish an audit committee, a compensation committee and a nominating and corporate governance committee, each of which will operate pursuant to a charter adopted by the ParentCo Board and will be effective upon the Closing. Upon the effectiveness of the Closing, the composition and functioning of all of ParentCo committees will comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, and with Nasdaq and SEC rules and regulations.
Audit Committee
Effective upon the Closing, John M. Belcher, Donald Fell and an additional director to be appointed by the Post-Closing ParentCo Board will serve on the audit committee, which will be chaired by Donald Fell. The Kernel Board has determined that each member of the audit committee is “independent” for audit committee purposes as that term is defined in the rules of the SEC and the applicable Nasdaq rules, and each has sufficient knowledge in financial and auditing matters to serve on the audit committee. The Kernel Board has designated Donald Fell as an “audit committee financial expert,” as defined under the applicable Nasdaq rules. The audit committee’s responsibilities include:
| ■ | appointing, approving the compensation of, and assessing the independence of ParentCo’s independent registered public accounting firm; |
| ■ | pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by ParentCo’s independent registered public accounting firm; |
| ■ | reviewing the overall audit plan with ParentCo’s independent registered public accounting firm and members of management responsible for preparing our financial statements; |
| ■ | reviewing and discussing with management and ParentCo’s independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by ParentCo; | |
| ■ | coordinating the oversight and reviewing the adequacy of ParentCo’s internal control over financial reporting; |
| ■ | establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns; |
| ■ | recommending based upon the audit committee’s review and discussions with management and ParentCo’s independent registered public accounting firm whether ParentCo’s audited financial statements shall be included in our Annual Report on Form 10-K; |
| ■ | monitoring the integrity of ParentCo’s financial statements and ParentCo’s compliance with legal and regulatory requirements as they relate to its financial statements and accounting matters; |
| ■ | preparing the audit committee report required by SEC rules to be included in ParentCo’s annual proxy statement; |
| ■ | reviewing all related person transactions for potential conflict of interest situations and approving all such transactions; and |
| ■ | reviewing quarterly earnings releases. |
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Compensation Committee
Effective upon the Closing, John M. Belcher, Donald Fell, and an additional independent director to be appointed by the Post-Closing ParentCo Board will serve on the compensation committee. The chair of the compensation committee shall be determined following such independent director’s appointment. The Kernel Board has determined that each member of the compensation committee is “independent” as defined in the applicable Nasdaq rules. The compensation committee’s responsibilities include:
| ■ | annually reviewing and recommending to the ParentCo Board the corporate goals and objectives relevant to the compensation of ParentCo’s principal executive officer; |
| ■ | evaluating the performance of ParentCo’s principal executive officer in light of such corporate goals and objectives and based on such evaluation: (i) determining cash compensation of ParentCo’s principal executive officer; and (ii) reviewing and approving grants and awards to ParentCo’s principal executive officer under equity-based plans; |
| ■ | reviewing and approving or recommending to the ParentCo Board the compensation of ParentCo’s other executive officers; |
| ■ | reviewing and establishing ParentCo’s overall management compensation philosophy and policy; |
| ■ | overseeing and administering ParentCo’s compensation and similar plans; |
| ■ | evaluating and assessing potential and current compensation advisors in accordance with the independence standards identified in the applicable Nasdaq rules; |
| ■ | reviewing and approving ParentCo’s policies and procedures for the grant of equity-based awards; |
| ■ | reviewing and recommending to the ParentCo Board the compensation of ParentCo’s directors; |
| ■ | preparing the compensation committee report required by SEC rules, if and when required, to be included in ParentCo’s annual proxy statement; and |
| ■ | reviewing and approving the retention, termination or compensation of any consulting firm or outside advisor to assist in the evaluation of compensation matters. |
Nominating and Corporate Governance Committee
Effective upon the Closing, Gregory D. Winfree and two additional independent directors to be appointed by the Post-Closing ParentCo Board will serve on the nominating and corporate governance committee, which will be chaired by Gregory D. Winfree. The Kernel Board has determined that each member of the nominating and corporate governance committee is “independent” as defined in the applicable Nasdaq rules. The nominating and corporate governance committee’s responsibilities include:
| ■ | developing and recommending to the ParentCo Board criteria for board and committee membership; |
| ■ | establishing procedures for identifying and evaluating ParentCo Board candidates, including nominees recommended by stockholders; |
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| ■ | reviewing the composition of the ParentCo Board to ensure that it is composed of members containing the appropriate skills and expertise to advise ParentCo; |
| ■ | identifying individuals qualified to become members of the ParentCo Board; |
| ■ | recommending to the ParentCo Board the persons to be nominated for election as directors and to each of the board’s committees; |
| ■ | developing and recommending to the ParentCo Board a code of business conduct and ethics and a set of corporate governance guidelines; and |
| ■ | overseeing the evaluation of the ParentCo Board and ParentCo management. |
The ParentCo Board may from time to time establish other committees.
Compensation Committee Interlocks and Insider Participation
None of the members of the proposed ParentCo compensation committee has at any time during the prior three years been one of the officers or employees of AIRO or Kernel. None of AIRO or Kernel’s executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on the ParentCo Board or compensation committee.
Corporate Governance
We intend to adopt a written code of business conduct and ethics, effective upon the Closing, that applies to ParentCo’s directors, officers and employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following the Closing, a current copy of the code will be posted on the investor relations section of ParentCo’s website, which is located at https://theairogroup.com/investor-relations. The inclusion of the website address in this proxy statement/prospectus does not incorporate by reference the information on or accessible through the website into this proxy statement/prospectus. If ParentCo makes any substantive amendments to, or grants any waivers from, the code of business conduct and ethics for any officer or director, it will disclose the nature of such amendment or waiver on its website or in a current report on Form 8-K.
Limitation on Liability and Indemnification Matters
The Proposed ParentCo Charter, which will become effective upon the Closing, will contain provisions that limit the liability of ParentCo’s directors and officers for monetary damages to the fullest extent permitted by Delaware law. Consequently, ParentCo’s directors and officers will not be personally liable to ParentCo or its stockholders for monetary damages for any breach of fiduciary duties as directors or officers, except liability for:
| ● | any breach of the director’s or officer’s duty of loyalty to ParentCo or its stockholders; | |
| ● | any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; | |
| ● | unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; | |
| ● | any transaction from which the director derived an improper personal benefit; or | |
| ● | in the case of officers, any action by or in the right of ParentCo. |
Each of the Proposed ParentCo Charter and Bylaws, which will become upon the Closing, will provide that ParentCo is required to indemnify its directors and officers, in each case to the fullest extent permitted by Delaware law. The ParentCo Bylaws will also obligate ParentCo to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit ParentCo to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether ParentCo would otherwise be permitted to indemnify him or her under Delaware law. ParentCo will enter and expects to continue to enter into agreements to indemnify ParentCo’s directors, executive officers and other employees as determined by the ParentCo Board. With specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these certificate of incorporation and bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. ParentCo also maintains directors’ and officers’ liability insurance.
The limitation of liability and indemnification provisions in the Proposed ParentCo Charter and Bylaws may discourage stockholders from bringing a lawsuit against ParentCo’s directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against ParentCo’s directors and officers, even though an action, if successful, might benefit ParentCo and its stockholders. Further, a stockholder’s investment may be adversely affected to the extent that ParentCo pays the costs of settlement and damage.
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DESCRIPTION OF KERNEL’S and Parentco’s SECURITIES
Description of Kernel Capital Stock Prior to the Business Combination
General
Kernel is authorized to issue 551,000,000 shares, consisting of 500,000,000 Class A Ordinary Shares, par value $0.0001 per share, 50,000,000 Class B Ordinary Shares, par value $0.0001 per share, and 1,000,000 preference shares, par value $0.0001 per share. As of the Record Date, 509,341 Class A Ordinary Shares are outstanding, held by one shareholder of record, 7,618,750 Class B Ordinary Shares are outstanding, held by nine (9) shareholder of record, and no preferred shares are outstanding.
Units
Each Unit consists of one Class A Ordinary Share and one half of one Warrant. Each Warrant entitles the holder to purchase one Class A Ordinary Share at a price of $11.50 per share, subject to adjustment as described in this proxy statement/prospectus.
Ordinary Shares
Kernel’s shareholders of record are entitled to one vote for each Ordinary Share held on all matters to be voted on by shareholders. In connection with any vote held to approve an initial business combination, the Sponsor, as well as Kernel’s directors and officers, have agreed to vote their respective Founder Shares and any other Ordinary Shares held by them in favor of the business combination.
Kernel will proceed with a business combination only if Kernel has net tangible assets of at least $5,000,001 upon the completion of such business combination and a majority of the shares voted are voted in favor of the business combination and the NTA Proposal is approved, removing the requirement in Kernel’s Amended and Restated Memorandum and Articles of Association and the closing condition in the Business Combination Agreement that Kernel have net tangible assets of at least $5,000,001 at Closing. At least five days’ notice must be given for each Shareholders Meeting (although Kernel will provide whatever minimum number of days are required under Federal securities laws). Shareholders may vote at meetings in person or by proxy.
Only holders of Kernel’s Class B Ordinary Shares are eligible to vote for the election of directors. Directors may only be elected by an ordinary resolution of the holders a majority of the Class B Ordinary Shares that are present and vote at a meeting.
Pursuant to Kernel’s governing documents, if Kernel does not complete a business combination by August 5, 2024, it will trigger Kernel’s automatic winding up, dissolution and liquidation, unless Kernel submits and its shareholders approve an extension. The Sponsor and the directors and officers of Kernel have agreed to waive their rights to share in any distribution from the Trust Account with respect to their Founder Shares upon Kernel’s winding up, dissolution and liquidation.
Kernel’s shareholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the shares, except that Public Shareholders have the right to have their shares redeemed for cash if they vote on the Business Combination, properly demand Redemption of their shares as described in this proxy statement/prospectus and the Business Combination is completed. Public Shareholders who redeem their shares still have the right to exercise the Warrants that they received as part of the Units.
For additional information with respect to the Redemption Rights of Kernel’s shareholders, see the section entitled “Questions and Answers — Q. Do I have Redemption Rights?”
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Preference Shares
The Memorandum and Articles of Association authorizes the issuance of 1,000,000 preference shares, with such designation, rights and preferences as may be determined from time to time by the Kernel Board. Accordingly, the Kernel Board is empowered, without shareholder approval, to issue preference shares with dividend, liquidation, redemption, voting or other rights which could adversely affect the voting power or other rights of the holders of shares. However, the underwriting agreement for Kernel’s IPO prohibits it, prior to a business combination, from issuing preference shares which participate in any manner in the proceeds of the Trust Account, or which vote as a class with the Ordinary Shares on a business combination. Kernel may issue some or all of the preference shares to effect a business combination, but is not issuing any preference shares in connection with the Business Combination. In addition, the preference shares could be utilized as a method of discouraging, delaying or preventing a change in control of Kernel. Although Kernel does not currently intend to issue any preference shares, it cannot assure you that it will not do so in the future.
Warrants
As of the Record Date, 23,987,500 Warrants were outstanding, including 15,237,500 Public Warrants and 8,750,000 Private Placement Warrants. Each Public Warrant entitles the registered holder to purchase one Class A Ordinary Share at a price of $11.50 per full share, subject to adjustment as discussed below, at any time commencing upon the later of 12 months from the closing of the IPO or 30 days after the completion of a business combination. Pursuant to the Warrant Agreement, a Public Warrant Holder may exercise its Warrants only for a whole number of shares. This means that only an even number of Warrants may be exercised at any given time by a Public Warrant Holder. However, except as set forth below, no Public Warrants will be exercisable for cash unless Kernel has an effective and current registration statement covering the Class A Ordinary Shares issuable upon exercise of the Warrants and a current prospectus relating to such Ordinary Shares. Notwithstanding the foregoing, if a registration statement covering the Kernel’s Class A Ordinary Shares issuable upon exercise of the Public Warrants is not effective within 60 business days from the completion of the initial business combination, Public Warrant Holders may, until such time as there is an effective registration statement and during any period when Kernel will have failed to maintain an effective registration statement, exercise Warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act. If an exemption from registration is not available, holders will not be able to exercise their Warrants on a cashless basis. The Public Warrants will expire at 5:00 p.m., New York City time on the earlier to occur of: (i) five years from the completion of an initial business combination, (ii) the liquidation of Kernel, if Kernel fails to complete a business combination, or (iii) the redemption date as fixed by Kernel pursuant to the Warrant Agreement, if Kernel elects to redeem all Warrants.
The Private Placement Warrants are identical to the Public Warrants except that the Private Placement Warrants (including the Ordinary Shares issuable upon exercise of the Private Placement Warrants) will (i) not be transferable, assignable or salable until 30 days after the completion of Kernel’s initial business combination, (ii) be exercisable for cash (even if a registration statement covering the Kernel’s Ordinary Shares issuable upon exercise of such Warrants is not effective) or on a cashless basis, at the holder’s option, and (iii) not be redeemable by Kernel, in each case so long as they are still held by the initial purchasers or their respective affiliates.
Kernel may call the Warrants for redemption (excluding the Private Placement Warrants), in whole and not in part, at a price of $0.01 per Warrant:
| ● | at any time while the Warrants are exercisable, | |
| ● | upon not less than 30 days’ prior written notice of redemption to each Public Warrant Holder, | |
| ● | if and only if, the reported last sale price of the shares of the Kernel’s Class A Ordinary Shares equals or exceeds $18.00 per share, for any 20 trading days within a 30-day trading period ending on the third business day prior to the notice of redemption to Public Warrant Holders, and | |
| ● | if and only if, there is a current registration statement in effect with respect to Kernel’s Class A Ordinary Shares underlying such Warrants at the redemption date and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption. |
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Recent trading prices for Kernel Class A common stock have not exceeded the $18.00 per share threshold at which the warrants would become redeemable, even if the Business Combination was consummated, the price of ParentCo common stock remained the same as those currently trading for Kernel Class A common stock, and ParentCo had a registration statement effective, as described above, which would have allowed the warrants to be redeemable.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00. Once the warrants become exercisable, we may redeem the outstanding warrants:
| ● | in whole and not in part; |
| ● | at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to the table below, based on the redemption date and the “fair market value” of our Class A Ordinary Shares (as defined below) except as otherwise described below; |
| ● | if, and only if, the closing price of our Class A Ordinary Shares equals or exceeds $10.00 per Public Share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant as described under the heading “-Warrants-Public Shareholders’ Warrants-Anti-Dilution Adjustments”) for any 20 trading days within the 30-trading day period ending three trading days before we send the notice of redemption to the warrant holders; and |
| ● | if the closing price of the Class A Ordinary Shares for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which we send the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant as described under the heading “-Warrants-Public Shareholders’ Warrants-Anti-Dilution Adjustments”), the private placement warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above. |
Beginning on the date the notice of redemption is given until the Public Warrants are redeemed or exercised, holders may elect to exercise their Public Warrants on a cashless basis. The numbers in the table below represent the number of Class A Ordinary Shares that a Public Warrant holder will receive upon such cashless exercise in connection with a redemption by us pursuant to this redemption feature, based on the “fair market value” of our Class A Ordinary Shares on the corresponding redemption date (assuming holders elect to exercise their Public Warrants and such Public Warrants are not redeemed for $0.10 per warrant), determined for these purposes based on volume weighted average price of our Class A Ordinary Shares during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of Public Warrants, and the number of months that the corresponding redemption date precedes the expiration date of the Public Warrants, each as set forth in the table below. We will provide our Public Warrant holders with the final fair market value no later than one business day after the 10-trading day period described above ends. The share prices set forth in the column headings of the table below will be adjusted as of any date on which the number of shares issuable upon exercise of a warrant or the exercise price of a warrant is adjusted. If the number of shares issuable upon exercise of a warrant is adjusted, the adjusted share prices in the column headings will equal the share prices immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the number of shares deliverable upon exercise of a warrant immediately prior to such adjustment and the denominator of which is the number of shares deliverable upon exercise of a warrant as so adjusted. The number of shares in the table below shall be adjusted in the same manner and at the same time as the number of shares issuable upon exercise of a warrant.
| Redemption Date | Fair Market Value of Class A Ordinary Shares | |||||||||||||||||||||||||||||||||||
| (period to expiration of warrants) | $<$10.00 | $11.00 | $12.00 | $13.00 | $14.00 | $15.00 | $16.00 | $17.00 | $>$18.00 | |||||||||||||||||||||||||||
| 60 months | 0.261 | 0.281 | 0.297 | 0.311 | 0.324 | 0.337 | 0.348 | 0.358 | 0.361 | |||||||||||||||||||||||||||
| 57 months | 0.257 | 0.277 | 0.294 | 0.310 | 0.324 | 0.337 | 0.348 | 0.358 | 0.361 | |||||||||||||||||||||||||||
| 54 months | 0.252 | 0.272 | 0.291 | 0.307 | 0.322 | 0.335 | 0.347 | 0.357 | 0.361 | |||||||||||||||||||||||||||
| 51 months | 0.246 | 0.268 | 0.287 | 0.304 | 0.320 | 0.333 | 0.346 | 0.357 | 0.361 | |||||||||||||||||||||||||||
| 48 months | 0.241 | 0.263 | 0.283 | 0.301 | 0.317 | 0.332 | 0.344 | 0.356 | 0.361 | |||||||||||||||||||||||||||
| 45 months | 0.235 | 0.258 | 0.279 | 0.298 | 0.315 | 0.330 | 0.343 | 0.356 | 0.361 | |||||||||||||||||||||||||||
| 42 months | 0.228 | 0.252 | 0.274 | 0.294 | 0.312 | 0.328 | 0.342 | 0.355 | 0.361 | |||||||||||||||||||||||||||
| 39 months | 0.221 | 0.246 | 0.269 | 0.290 | 0.309 | 0.325 | 0.340 | 0.354 | 0.361 | |||||||||||||||||||||||||||
| 36 months | 0.213 | 0.239 | 0.263 | 0.285 | 0.305 | 0.323 | 0.339 | 0.353 | 0.361 | |||||||||||||||||||||||||||
| 33 months | 0.205 | 0.232 | 0.257 | 0.280 | 0.301 | 0.320 | 0.337 | 0.352 | 0.361 | |||||||||||||||||||||||||||
| 30 months | 0.196 | 0.224 | 0.250 | 0.274 | 0.297 | 0.316 | 0.335 | 0.351 | 0.361 | |||||||||||||||||||||||||||
| 27 months | 0.185 | 0.214 | 0.242 | 0.268 | 0.291 | 0.313 | 0.332 | 0.350 | 0.361 | |||||||||||||||||||||||||||
| 24 months | 0.173 | 0.204 | 0.233 | 0.260 | 0.285 | 0.308 | 0.329 | 0.348 | 0.361 | |||||||||||||||||||||||||||
| 21 months | 0.161 | 0.193 | 0.223 | 0.252 | 0.279 | 0.304 | 0.326 | 0.347 | 0.361 | |||||||||||||||||||||||||||
| 18 months | 0.146 | 0.179 | 0.211 | 0.242 | 0.271 | 0.298 | 0.322 | 0.345 | 0.361 | |||||||||||||||||||||||||||
| 15 months | 0.130 | 0.164 | 0.197 | 0.230 | 0.262 | 0.291 | 0.317 | 0.342 | 0.361 | |||||||||||||||||||||||||||
The exact fair market value and redemption date may not be set forth in the table above, in which case, if the fair market value is between two values in the table or the redemption date is between two redemption dates in the table, the number of Class A Ordinary Shares to be issued for each warrant exercised will be determined by a straight-line interpolation between the number of shares set forth for the higher and lower fair market values and the earlier and later redemption dates, as applicable, based on a 365 or 366-day year, as applicable. For example, if the volume weighted average price of our Class A Ordinary Shares during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of the warrants is $11.00 per share, and at such time there are 57 months until the expiration of the warrants, holders may choose to, in connection with this redemption feature, exercise their warrants for 0.277 Class A Ordinary Shares for each whole warrant. For an example where the exact fair market value and redemption date are not as set forth in the table above, if the volume weighted average price of our Class A Ordinary Shares during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of the warrants is $13.50 per share, and at such time there are 38 months until the expiration of the warrants, holders may choose to, in connection with this redemption feature, exercise their warrants for 0.298 Class A Ordinary Shares for each whole warrant. In no event will the warrants be exercisable on a cashless basis in connection with this redemption feature for more than 0.361 Class A Ordinary Shares per warrant (subject to adjustment). Finally, as reflected in the table above, if the warrants are out of the money and about to expire, they cannot be exercised on a cashless basis in connection with a redemption by us pursuant to this redemption feature, since they will not be exercisable for any Class A Ordinary Shares.
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This redemption feature differs from the typical warrant redemption features used in many other blank check offerings, which typically only provide for a redemption of warrants for cash (other than the private placement warrants) when the trading price for the Class A Ordinary Shares exceeds $18.00 per share for a specified period of time. This redemption feature is structured to allow for all of the outstanding warrants to be redeemed when the Class A Ordinary Shares are trading at or above $10.00 per Public Share, which may be at a time when the trading price of our Class A Ordinary Shares is below the exercise price of the warrants. We have established this redemption feature to provide us with the flexibility to redeem the warrants without the warrants having to reach the $18.00 per share threshold set forth above. Holders choosing to exercise their warrants in connection with a redemption pursuant to this feature will, in effect, receive a number of shares for their warrants based on an option pricing model with a fixed volatility input as of the date of this prospectus. This redemption right provides us with an additional mechanism by which to redeem all of the outstanding Public Warrants, and therefore have certainty as to our capital structure as the warrants would no longer be outstanding and would have been exercised or redeemed. We will be required to pay the applicable redemption price to warrant holders if we choose to exercise this redemption right and it will allow us to quickly proceed with a redemption of the Public Warrants if we determine it is in our best interest to do so. As such, we would redeem the Public Warrants in this manner when we believe it is in our best interest to update our capital structure to remove the Public Warrants and pay the redemption price to the warrant holders.
As stated above, we can redeem the warrants when the Class A Ordinary Shares are trading at a price starting at $10.00, which is below the exercise price of $11.50, because it will provide certainty with respect to our capital structure and cash position while providing Public Warrant holders with the opportunity to exercise their Public Warrants on a cashless basis for the applicable number of shares. If we choose to redeem the Public Warrants when the Class A Ordinary Shares are trading at a price below the exercise price of the Public Warrants, this could result in the warrant holders receiving fewer Class A Ordinary Shares than they would have received if they had chosen to wait to exercise their Public Warrants for Class A Ordinary Shares if and when such Class A Ordinary Shares were trading at a price higher than the exercise price of $11.50.
No fractional Class A Ordinary Shares will be issued upon exercise. If, upon exercise, a holder would be entitled to receive a fractional interest in a share, we will round down to the nearest whole number of the number of Class A Ordinary Shares to be issued to the holder. If, at the time of redemption, the warrants are exercisable for a security other than the Class A Ordinary Shares pursuant to the warrant agreement (for instance, if we are not the surviving company in our initial business combination), the warrants may be exercised for such security. At such time as the warrants become exercisable for a security other than the Class A Ordinary Shares, the Company (or surviving company) will use its commercially reasonable efforts to register under the Securities Act the security issuable upon the exercise of the warrants.
The right to exercise will be forfeited unless the Public Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a Public Warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such Public Warrant.
The redemption criteria for the Public Warrants have been established at a price which is intended to provide Public Warrant Holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the Public Warrant exercise price so that if the share price declines as a result of a redemption call, the redemption will not cause the share price to drop below the exercise price of the Public Warrants.
In the event Kernel (or after the business combination, ParentCo) elects to call the warrants for redemption, its management will fix a date of redemption (the “Redemption Date”). Kernel will mail or cause to be mailed notice of redemption by first class mail, postage prepaid, not less than thirty (30) days prior to the Redemption Date, to the registered holders of the warrants at the last address as they appear on the registration books. Any notice mailed in such manner shall be conclusively presumed to have been given whether or not the registered holder of our warrant received that notice. The warrants may be exercised on a cashless basis at any time after notice of redemption shall have been given by Kernel and prior to the Redemption Date.
On and after the Redemption Date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption.
If Kernel (or after the business combination, ParentCo) calls the Public Warrants for redemption as described above, its management will have the option to require all holders that wish to exercise Warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the Warrants for that number of Class A Ordinary Shares equal to the quotient obtained by dividing (x) the product of the number of shares underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” will mean the volume weighted average price of our Class A Ordinary Shares during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. Whether Kernel will exercise its option to require all holders to exercise their Warrants on a “cashless basis” will depend on a variety of factors including the price of the Class A Ordinary Shares at the time the Warrants are called for redemption, Kernel’s cash needs at such time and concerns regarding dilutive share issuances.
The Warrants are issued under a Warrant Agreement between Continental Stock Transfer & Trust Company, as warrant agent and Kernel. The Warrant Agreement provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of a majority of the then outstanding Public Warrants in order to make any change that adversely affects the interests of the registered holders.
The exercise price and number of Class A Ordinary Shares issuable on exercise of the Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or Kernel’s recapitalization, reorganization, merger or consolidation. However, the Warrants will not be adjusted for issuances of Class A Ordinary Shares at a price below their respective exercise prices. Kernel is also permitted, in its sole discretion, to lower the exercise price (but not below the par value of a Class A Ordinary Share) at any time prior to the expiration date for a period of not less than 10 business days; provided, however, that Kernel provides at least 10 business days prior written notice of such reduction to registered holders of the Warrants and that any such reduction will be applied consistently to all of the Warrants. Any such reduction in the exercise price will comply with any applicable regulations under the Federal securities laws, including Rule 13e-4 under the Exchange Act generally and Rule 13e-4(f)(1)(i) specifically.
The Warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to Kernel, for the number of Warrants being exercised. The Public Warrant Holder will not have the rights or privileges of holders of Class A Ordinary Shares and any voting rights until they exercise their Warrants and receive Class A Ordinary Shares. After the issuance of Class A Ordinary Shares upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
Except as described above, no Public Warrants will be exercisable and Kernel will not be obligated to issue Class A Ordinary Shares unless at the time a holder seeks to exercise such warrant, a prospectus relating to the Class A Ordinary Shares issuable upon exercise of the Warrants is current and the Class A Ordinary Shares has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the Warrants. Under the terms of the Warrant Agreement, Kernel has agreed to use its best efforts to meet these conditions and to maintain a current prospectus relating to the Class A Ordinary Shares issuable upon exercise of the Warrants until the expiration of the Warrants. However, Kernel cannot assure you that it will be able to do so and, if it does not maintain a current prospectus relating to the Class A Ordinary Shares issuable upon exercise of the Warrants, holders will be unable to exercise their Warrants and Kernel will not be required to settle any such warrant. If the prospectus relating to the Class A Ordinary Shares issuable upon the exercise of the Warrants is not current or if the Class A Ordinary Shares is not qualified or exempt from qualification in the jurisdictions in which the holders of the Warrants reside, Kernel will not be required to net cash settle or cash settle the warrant exercise, the Warrants may have no value, the market for the Warrants may be limited and the Warrants may expire worthless.
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Public Warrant Holders may elect, at their sole option and discretion, to be subject to a restriction on the exercise of their Warrants such that an electing Public Warrant Holder (and his, her or its affiliates) would not be able to exercise their Warrants to the extent that, after giving effect to such exercise, such holder (and his, her or its affiliates) would beneficially own in excess of 9.8% of the Class A Ordinary Shares outstanding. Notwithstanding the foregoing, any person who acquires a warrant with the purpose or effect of changing or influencing the control of Kernel, or in connection with or as a participant in any transaction having such purpose or effect, immediately upon such acquisition will be deemed to be the beneficial owner of the underlying Class A Ordinary Shares and not be able to take advantage of this provision.
No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share (as a result of a subsequent share dividend payable in shares of common stock, or by a split up of the Class A Ordinary Shares or other similar event), Kernel will, upon exercise, round up or down to the nearest whole number the number of Class A Ordinary Shares to be issued to the Public Warrant Holder.
The Warrant Agreement provides that, subject to applicable law, any action, proceeding or claim against Kernel arising out of or relating in any way to the warrant agreement will be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and Kernel irrevocably submits to such jurisdiction, which jurisdiction will be the exclusive forum for any such action, proceeding or claim. See “Risk Factors – The Warrant Agreement will designate the courts of the State of New York or the United States District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of Kernel Warrants, which could limit the ability of warrant holders to obtain a favorable judicial forum for disputes with Kernel.” This provision applies to claims under the Securities Act but does not apply to claims under the Exchange Act or any claim for which the federal district courts of the United States of America are the sole and exclusive forum.
You should review a copy of the warrant agreement, which is attached as an exhibit to this proxy statement/prospectus, for a complete description of the terms and conditions applicable to the warrants, and which is incorporated herein by reference. The description herein in qualified in its entirety by reference to the warrant agreement. You are urged to read the warrant agreement completely and in its entirety.
Private Placement Warrants
Except as described below, the private placement warrants have terms and provisions that are identical to those of our Public Warrants, including as to exercise price, exercisability and exercise period.
The private placement warrants (including shares of ParentCo common stock issuable upon exercise of the private placement warrants) will not be transferable, assignable or salable until 30 days after the Closing of our Business Combination (except, among other limited exceptions, to our officers and directors and other persons or entities affiliated with Kernel’s Sponsor), and subject to securities laws restrictions regarding sale of private securities.
The private placement warrants will not be redeemable by Kernel or ParentCo so long as they are held by Kernel’s sponsor or its permitted transferees. If they are held by holders other than the Sponsor or its permitted transferees, the private placement warrants will be redeemable by Kernel or ParentCo and exercisable by the holders on the same basis as the Public Warrants.
Kernel’s Sponsor or its permitted transferees have the option to exercise the private placement warrants on a cashless basis. If holders of the private placement warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering their warrants for that number of shares of ParentCo common stock equal to the quotient obtained by dividing (x) the product of the number of shares of ParentCo common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” for this purpose shall mean the average reported last sale price of ParentCo common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent. The reason that we have agreed that these warrants will be exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees is because it is not known at this time whether they will be affiliated with Kernel or ParentCo following the Closing. If they remain affiliated with us, their ability to sell our securities in the open market will be significantly limited. We expect to have policies in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of time when insiders will be permitted to sell our securities, an insider cannot trade in our securities if he or she is in possession of material non-public information. Accordingly, unlike public shareholders who typically could sell the shares of Kernel common stock or ParentCo common stock issuable upon exercise of the warrants freely in the open market, the insiders could be significantly restricted from doing so. As a result, we believe that allowing the holders to exercise such warrants on a cashless basis is appropriate.
In addition, holders of our private placement warrants are entitled to certain registration rights.
Contractual Arrangements with respect to Certain Warrants
Kernel has agreed that so long as the Private Placement Warrants are still held by the initial purchasers or their affiliates, Kernel will not redeem such Warrants, Kernel will allow the holders to exercise such Warrants on a cashless basis and such Warrants may be exercisable for cash.
Dividends
Kernel has not paid any cash dividends on its Ordinary Shares to date and does not intend to pay cash dividends prior to the Business Combination. The payment of cash dividends in the future, including after the Business Combination, will be dependent upon ParentCo’s revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of the Business Combination. The payment of any dividends subsequent to the Business Combination will be within the discretion of the ParentCo Board. It is the present intention of the Kernel Board to retain all earnings, if any, for use in ParentCo’s business operations and, accordingly, the Kernel Board does not anticipate declaring any dividends in the foreseeable future.
Transfer Agent, Rights Agent and Warrant Agent
The Transfer Agent for Kernel Shares and warrant agent for its Warrants is Continental Stock Transfer & Trust Company, One State Street, 30th Floor, New York, NY 10004-1561.
Listing of Kernel’s Securities
Kernel’s Units, Class A Ordinary Shares and Warrants are listed on Nasdaq under the symbols “KRNLU”, “KRNL” and “KRNLW,” respectively. At the closing of the Business Combination, the Units will separate into their component shares of Kernel’s common stock and Warrants so that the Units will no longer trade separately under “KRNLU.” Kernel cannot assure you that Kernel’s securities will continue to be listed on Nasdaq as Kernel might not in the future meet certain continued listing standards.
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Certain Differences in Corporate Law
Companies incorporated in the Cayman Islands are governed by the Companies Act. The Companies Act differs from laws applicable to U.S. corporations and their shareholders. A description of the differences between the laws of the Cayman Islands and Delaware law are set forth in the section entitled “Comparison of Corporate Governance and Shareholder Rights”
Memorandum and Articles of Association
The Memorandum and Articles of Association contain provisions designed to provide certain rights and protections to its shareholders prior to the completion of a Business Combination. The following are the material rights and protections contained in the Memorandum and Articles of Association:
| ● | the right of Public Shareholders to exercise Redemption Rights and redeem or have repurchased their shares in lieu of participating in a proposed business combination; | |
| ● | a prohibition against completing a business combination unless Kernel has net tangible assets of at least $5,000,001 upon completion of such business combination; | |
| ● | a requirement that if Kernel seeks shareholder approval of any business combination, a majority of the outstanding Ordinary Shares must be voted in favor of such business combination; | |
| ● | a requirement that directors may call general meetings on their own accord and are required to call a general meeting if holders of not less than 30% in par value of the issued shares request such a meeting; | |
| ● | a prohibition, prior to a business combination, against Kernel issuing (i) any Ordinary Shares or (ii) any other securities which participate in or are otherwise entitled in any manner to any of the proceeds in the Trust Account or which vote as a class with the Public Shares on a business combination; | |
| ● | a requirement that Kernel’s management take all actions necessary to liquidate the Trust Account in the event Kernel does not complete a business combination by August 5, 2024; and | |
| ● | a limitation on shareholders’ rights to receive a portion of the Trust Account. |
The Companies Act permits a company incorporated in the Cayman Islands to amend its memorandum and articles of association with the approval of a special resolution under Cayman Islands law, being the approval of the holders of at least two-thirds of the Kernel Shares as of the Record Date that are present and vote at a general meeting. A company’s memorandum and articles of association may specify that the approval of a higher majority is required but, provided the approval of the required majority is obtained, any Cayman Islands company may amend its memorandum and articles of association regardless of whether its memorandum and articles of association provides otherwise. Accordingly, although Kernel could amend any of the provisions relating to its structure and business plan which are contained in its Memorandum and Articles of Association, Kernel views all of these provisions as binding obligations to its shareholders and neither Kernel, nor its officers or directors, will take any action to amend or waive any of these provisions prior to the completion of an initial business combination.
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Capital Stock of ParentCo after the Business Combination
The following summary is qualified in its entirety by reference to the complete text of the Proposed ParentCo Charter and Proposed ParentCo Bylaws, in the forms attached hereto as Annex B and Annex C, respectively. We urge you to read the Proposed ParentCo Governing Documents in their entirety for a complete description of the rights and preferences of ParentCo’s capital stock following the Business Combination.
For more information about the Proposed ParentCo Governing Documents, see “Shareholder Proposal No. 3: The ParentCo Charter Amendment Proposal.”
Authorized Capitalization
The Proposed ParentCo Charter will authorize the issuance of 310,000,000 shares of capital stock, consisting of 300,000,000 shares of common stock (“ParentCo Common Stock”) and 10,000,000 shares of preferred stock, each having a par value of $0.0001. Immediately after the consummation of the Business Combination, we expect there to be approximately 94,784,699 shares of ParentCo Common Stock outstanding, assuming none of the outstanding public shares are redeemed in connection with the Business Combination; approximately 91,626,725 shares of ParentCo Common Stock outstanding, assuming 50% of the outstanding public shares are redeemed in connection with the Business Combination; and approximately 88,468,750 shares of ParentCo Common Stock outstanding, assuming maximum redemptions by our public shareholders in connection with the Business Combination.
Common Stock
Upon the consummation of the Business Combination, ParentCo will be authorized to issue one class of common stock. Holders of ParentCo Common Stock are entitled to one vote for each share of ParentCo Common Stock held of record for the election of directors and on all matters submitted to a vote of stockholders. Except as described under “Anti-Takeover Effects of Delaware Law and Provisions of Proposed ParentCo Governing Documents” below, a majority vote of the holders of ParentCo Common Stock is generally required to take action under the Proposed ParentCo Governing Documents. Holders of ParentCo Common Stock are entitled to receive dividends ratably, if any, as may be declared by the ParentCo Board out of legally available funds, subject to any preferential dividend rights of any preferred stock then outstanding. Upon ParentCo’s dissolution, liquidation or winding up, holders of ParentCo Common Stock are entitled to share ratably in ParentCo’s net assets legally available after the payment of all debts and other liabilities, subject to the preferential rights of any preferred stock then outstanding. Holders of ParentCo Common Stock have no preemptive, subscription, redemption, or conversion rights, and no sinking fund provisions are applicable to ParentCo Common Stock. The rights, preferences, and privileges of holders of ParentCo Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that ParentCo may designate and issue in the future.
Preferred Stock
Upon consummation of the Business Combination, the ParentCo Board will be authorized, without action by the stockholders, to designate and issue up to an aggregate of 10,000,000 shares of preferred stock in one or more series. The ParentCo Board can designate the rights, preferences, and privileges of the shares of each series and any of its qualifications, limitations, or restrictions. The ParentCo Board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of ParentCo Common Stock. The issuance of preferred stock, while providing flexibility in connection with possible future financings and acquisitions and other corporate purposes, could have the effect, under certain circumstances, of restricting dividends on ParentCo Common Stock, diluting the voting power of the ParentCo Common Stock, impairing the liquidation rights of the ParentCo Common Stock, or delaying, deferring, or preventing a change in control of ParentCo, which might harm the market price of ParentCo Common Stock. See also “Anti-Takeover Effects of Delaware Law and Provisions of Proposed ParentCo Governing Documents” below.
The ParentCo Board will make any determination to issue such shares based on its judgment as to ParentCo’s best interests and the best interests of ParentCo stockholders. Upon the completion of the Business Combination, ParentCo will have no shares of preferred stock outstanding and no current plans to issue any shares of preferred stock following completion of the Business Combination.
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Warrants
The ParentCo warrants after the Business Combination shall be identical to the Kernel Public Warrants prior to the Business Combination, expect ParentCo warrant will entitle the registered holder to purchase one share of ParentCo Common Stock at a price of $11.50 per full share, subject to adjustment as discussed below, at any time 30 days after the completion of the Business Combination. For a comprehensive description of the terms of the ParentCo warrants, please see “Description of Kernel Capital Stock Prior to the Business Combination — Warrants.”
Anti-Takeover Effects of Delaware Law and Provisions of Proposed ParentCo Governing Documents
Certain provisions of the DGCL and the Proposed ParentCo Governing Documents could have the effect of delaying, deferring or discouraging another party from acquiring control of ParentCo. These provisions, which are summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and, as a consequence, they might also inhibit temporary fluctuations in the market price of ParentCo Common Stock that often result from actual or rumored hostile takeover attempts. These provisions are also designed in part to encourage anyone seeking to acquire control of ParentCo to first negotiate with the ParentCo Board. These provisions might also have the effect of preventing changes in the ParentCo Board or management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests. However, we believe that the advantages gained by protecting ParentCo’s ability to negotiate with any unsolicited and potentially unfriendly acquirer outweigh the disadvantages of discouraging such proposals, including those priced above the then-current market value of ParentCo Common Stock, because, among other reasons, the negotiation of such proposals could improve their terms.
Delaware Takeover Statute
Upon completion of the Business Combination, ParentCo will be subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:
| ● | before the stockholder became interested, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; | |
| ● | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or | |
| ● | at or after the time the stockholder became interested, the business combination was approved by the board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. |
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Section 203 defines a business combination to include:
| ● | any merger or consolidation involving the corporation and the interested stockholder; | |
| ● | any sale, transfer, lease, pledge, exchange, mortgage or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; | |
| ● | subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; | |
| ● | subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or | |
| ● | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.
Provisions of Proposed ParentCo Governing Documents
The Proposed ParentCo Governing Documents will include a number of provisions that may have the effect of delaying, deferring or discouraging another party from acquiring control of ParentCo and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with the ParentCo Board rather than pursue non-negotiated takeover attempts. These provisions include the items described below.
Board composition and filling vacancies. In accordance with the Proposed ParentCo Charter, the ParentCo Board will be divided into three classes serving staggered three-year terms, with one class being elected each year. The Proposed ParentCo Charter also provides that directors may be removed only for cause and then only by the affirmative vote of the holders of two-thirds or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on the ParentCo Board, however occurring, including a vacancy resulting from an increase in the size of the board, may only be filled by the affirmative vote of a majority of directors then in office even if less than a quorum.
Meetings of stockholders. The Proposed ParentCo Bylaws provide that only the Chairman of the Board, Chief Executive Officer of ParentCo, or a majority of the members of the ParentCo Board then in office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. The Proposed ParentCo Bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.
Advance notice requirements. The Proposed ParentCo Bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of ParentCo stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to the corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at ParentCo’s principal executive offices not less than 90 days or more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in the Proposed ParentCo Bylaws.
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Amendment to Proposed ParentCo Governing Documents. As required by the DGCL, any amendment of the Proposed ParentCo Charter must first be approved by a majority of the ParentCo Board, and if required by law or the Proposed ParentCo Charter, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment, and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to directors, the bylaws, stockholder action, limitation of liability, business combinations and the amendment of the Proposed ParentCo Charter must be approved by not less than two-thirds of the outstanding shares entitled to vote on the amendment, and not less than two-thirds of the outstanding shares of each class entitled to vote thereon as a class. The Proposed ParentCo Bylaws may be amended by the affirmative vote of at least two-thirds (2/3) of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of all of the then-outstanding shares of the capital stock of ParentCo entitled to vote generally in the election of directors, voting together as a single class, or, if the ParentCo Board recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.
Undesignated preferred stock. The Proposed ParentCo Charter provides for authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable the ParentCo Board to render more difficult or to discourage an attempt to obtain control of ParentCo by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, the ParentCo Board were to determine that a takeover proposal is not in the best interests of ParentCo or its stockholders, the ParentCo Board could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, the Proposed ParentCo Charter grants the ParentCo Board broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of ParentCo Common Stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of ParentCo.
Exclusive forum. The Proposed ParentCo Charter provides that the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on behalf of ParentCo, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of the ParentCo Board or officers to ParentCo or its stockholders, (iii) any action asserting a claim against ParentCo arising pursuant to any provision of the DGCL or the Proposed ParentCo Governing Documents, (iv) any action to interpret, apply, enforce, or determine the validity of the Proposed ParentCo Governing Documents, or (v) any action asserting a claim against ParentCo governed by the internal affairs doctrine. In addition, the Proposed ParentCo Charter provides that, unless ParentCo consents in writing to the selection of an alternative forum, the U.S. federal district courts shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act; provided, however, that ParentCo stockholders cannot and will not be deemed to have waived ParentCo’s compliance with the U.S. federal securities laws and the rules and regulations thereunder. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in ParentCo’s securities shall be deemed to have notice of and consented to these provisions. These forum provisions may impose additional costs on stockholders, may limit stockholders’ ability to bring a claim in a forum they find favorable, and the designated courts may reach different judgments or results than other courts. In addition, there is uncertainty as to whether the federal forum provision for Securities Act claims will be enforced. It is possible that a court could rule that a forum selection provision is inapplicable for a particular claim or action or that such provision is unenforceable.
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information regarding (i) the actual beneficial ownership of Kernel Ordinary Shares as of July 10, 2024, the record date, and (ii) expected beneficial ownership of ParentCo, the post-combination company, common stock immediately following the Closing, assuming that no Public Shares are redeemed (Scenario 1), 50% of the Public Shares are redeemed (Scenario 2), and alternatively that the maximum (100%) Public Shares are redeemed (Scenario 3), by:
| ● | each person who is, or is expected to be, the beneficial owner of more than 5% of issued and outstanding Kernel Ordinary Shares or of ParentCo common stock; | |
| ● | each of Kernel’s current executive officers and directors; | |
| ● | each person who will become an executive officer or director of ParentCo post-Business Combination; and | |
| ● | all executive officers and directors of Kernel as a group pre-Business Combination and all executive officers and directors of ParentCo post-Business Combination. |
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days. Unless otherwise indicated, Kernel believes that all persons named in the table have sole voting and investment power with respect to all shares of Kernel Ordinary Shares beneficially owned by them.
The beneficial ownership of shares of Kernel Ordinary Shares pre-Business Combination is based on 16,878,091 shares of Kernel Ordinary Shares (including 509,341 Public Shares, 8,750,000 placement shares underlying the Private Placement Warrants, and 7,618,750 Founder Shares) issued and outstanding as of July 10, 2024.
The beneficial ownership information below excludes the shares underlying the Public Warrants and the Private Placement Warrants because those securities are not exercisable within 60 days of this proxy statement/prospectus and are contingent upon the consummation of the Business Combination. The beneficial ownership information below also excludes the shares expected to be issued or reserved under the 2024 Plan.
The expected beneficial ownership of shares of ParentCo common stock post-Business Combination assuming none of the Public Shares are redeemed has been determined based upon the following: (i) that no Public Shareholders exercise their redemption rights (no redemptions scenario), (ii) that none of the investors set forth in the table below has purchased or purchases shares of Kernel Ordinary Shares (pre-Business Combination) or ParentCo common stock (post-Business Combination), (iii) that 77,000,000 shares of ParentCo common stock are issued in connection with the Business Combination, and (iv) there will be an aggregate of 89,628,091 shares of ParentCo common stock issued and outstanding at Closing. (The number of shares of ParentCo common stock to be issued in the Business Combination are subject to closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are expected to be immaterial.)
The expected beneficial ownership of shares of ParentCo common stock post-Business Combination assuming that 50% of the issued and outstanding Public Shares have been redeemed has been determined based on the following: (i) that holders of 254,670 Public Shares exercise their redemption rights (50% redemption scenario), (ii) that none of the investors set forth in the table below has purchased or purchases Kernel Ordinary Shares (pre-Business Combination) or ParentCo common stock (post-Business Combination), (iii) that 77,000,000 shares of ParentCo common stock are issued in the Business Combination, and (iv) there will be an aggregate of 89,373,421 shares of ParentCo common stock issued and outstanding at Closing.
The expected beneficial ownership of shares of ParentCo common stock post-Business Combination assuming the maximum number of Public Shares have been redeemed has been determined based on the following: (i) that holders of 509,341 Public Shares exercise their redemption rights (maximum redemption scenario), (ii) that none of the investors set forth in the table below has purchased or purchases Kernel Ordinary Shares (pre-Business Combination) or ParentCo common stock (post-Business Combination), (iii) that 77,000,000 shares of ParentCo common stock are issued in the Business Combination, and (iv) there will be an aggregate of 89,118,750 shares of ParentCo common stock issued and outstanding at Closing.
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Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them.
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| Assuming No | Assuming 50% | Assuming Maximum | ||||||||||||||||||||||||||||||||||||||
| Before the Business Combination | Redemptions | Redemptions | Redemptions | |||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of shares of | Number of shares of | Number of shares of | ||||||||||||||||||||||||||||||||||||
| Address of | Kernel | AIRO | ParentCo | ParentCo | ParentCo | |||||||||||||||||||||||||||||||||||
| Beneficial | Ordinary | Capital | Common | Common | Common | |||||||||||||||||||||||||||||||||||
| Owner(1) | Shares (2) | % | Stock | % | Stock | % | Stock | % | Stock | % | ||||||||||||||||||||||||||||||
| Directors and Executive Officers of Kernel: | ||||||||||||||||||||||||||||||||||||||||
| Suren Ajjarapu(1)(3) | 7,493,750 | 92.2 | % | — | — | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | ||||||||||||||||||||||||||
| Howard Doss(1) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Michael Peterson(1) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Donald Fell(1) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Srinivas Venkatesh(1) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Siva Srinivasan(1) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| All Directors and Executive Officers of Kernel as a Group (Six Individuals) | 7,493,750 | 92.2 | % | — | — | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | ||||||||||||||||||||||||||
| Five Percent Holders of Kernel: | ||||||||||||||||||||||||||||||||||||||||
| VKSS Capital, LLC(1)(3) | 7,493,750 | 92.2 | % | — | — | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | ||||||||||||||||||||||||||
| Saba Capital Management, L.P.(4) | 1,575,610 | 19.4 | % | — | — | 1,575,610 | 1.8 | % | 1,575,610 | 1.8 | % | 1,575,610 | 1.8 | % | ||||||||||||||||||||||||||
| Boaz R. Weinstein(4) | 1,575,610 | 19.4 | 1,575,610 | 1.8 | % | 1,575,610 | 1.8 | % | 1,575,610 | 1.8 | % | |||||||||||||||||||||||||||||
| Fir Tree Capital Management LP(5) | 459,482 | 5.7 | % | — | — | 459,482 | * | % | 459,482 | * | % | 459,482 | * | % | ||||||||||||||||||||||||||
| Radcliffe Capital Management, L.P(6) | 527,364 | 6.5 | % | 527,364 | * | % | 527,364 | * | % | 527,364 | * | % | ||||||||||||||||||||||||||||
| RGC Management Company, LLC(6) | 527,364 | 6.5 | % | 527,364 | * | % | 527,364 | * | % | 527,364 | * | % | ||||||||||||||||||||||||||||
| Steven B. Katznelson(6) | 527,364 | 6.5 | % | 527,364 | * | % | 527,364 | * | % | 527,364 | * | % | ||||||||||||||||||||||||||||
| Christopher Hinkel(6) | 527,364 | 6.5 | % | 527,364 | * | % | 527,364 | * | % | 527,364 | * | % | ||||||||||||||||||||||||||||
| Radcliffe SPAC Master Fund, L.P. (6) | 527,364 | 6.5 | % | 527,364 | * | % | 527,364 | * | % | 527,364 | * | % | ||||||||||||||||||||||||||||
| Radcliffe SPAC GP, LLC(6) | 527,364 | 6.5 | % | 527,364 | * | % | 527,364 | * | % | 527,364 | * | % | ||||||||||||||||||||||||||||
| Mizuho Financial Group, Inc. (7) | 540,110 | 6.6 | % | 540,110 | * | % | 540,110 | * | % | 540,110 | * | % | ||||||||||||||||||||||||||||
| Antara Capital LP (8) | 452,224 | 5.6 | % | 452,224 | * | % | 452,224 | * | % | 452,224 | * | % | ||||||||||||||||||||||||||||
| Antara Capital GP LLC (8) | 452,224 | 5.6 | % | 452,224 | * | % | 452,224 | * | % | 452,224 | * | % | ||||||||||||||||||||||||||||
| Himanshu Gulati (8) | 452,224 | 5.6 | % | 452,224 | * | % | 452,224 | * | % | 452,224 | * | % | ||||||||||||||||||||||||||||
| Directors and Executive Officers of ParentCo After Consummation of the Business Combination: | ||||||||||||||||||||||||||||||||||||||||
| Surendra Ajjarapu (1)(3) | 7,493,750 | 92.2 | % | — | — | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | ||||||||||||||||||||||||||
| Donald Fell | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Joseph D. Burns(9) | — | — | 3,107,907 | 9.8 | % | 7,529,363 | 8.4 | % | 7,529,363 | 8.4 | % | 7,529,363 | 8.4 | % | ||||||||||||||||||||||||||
| John Uczekaj(9) | — | — | 659,371 | 2.1 | % | 1,597,423 | 1.8 | % | 1,597,423 | 1.8 | % | 1,597,423 | 1.8 | % | ||||||||||||||||||||||||||
| Dr. Chirinjeev Kathuria(9) | — | — | 7,624,880 | 24.0 | % | 18,472,398 | 20.6 | % | 18,472,398 | 20.7 | % | 18,472,398 | 20.7 | % | ||||||||||||||||||||||||||
| John M. Belcher(9) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Gregory D. Winfree(9) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Dr. Mariya Pylypiv(9) | — | — | 107 | * | % | 259 | * | % | 259 | * | % | 259 | * | % | ||||||||||||||||||||||||||
| All Directors and Executive Officers of ParentCo as a Group (9 Individuals) | 7,493,750 | 92.2 | % | 11,392,265 | 35.8 | % | 39,668,193 | 44.3 | % | 39,668,193 | 44.4 | % | 39,668,193 | 44.5 | % | |||||||||||||||||||||||||
| Five Percent Holders of ParentCo After Consummation of the Business Combination: | ||||||||||||||||||||||||||||||||||||||||
| Suren Ajjarapu(1)(3) | 7,493,750 | 92.2 | % | — | — | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | ||||||||||||||||||||||||||
| VKSS Capital, LLC(1)(3) | 7,493,750 | 92.2 | % | — | — | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | 12,068,750 | 13.5 | % | ||||||||||||||||||||||||||
| Joseph D. Burns(9) | — | — | 3,107,907 | 9.8 | % | 7,529,363 | 8.4 | % | 7,529,363 | 8.4 | % | 7,529,363 | 8.4 | % | ||||||||||||||||||||||||||
| Dr. Chirinjeev Kathuria(9) | — | — | 7,624,880 | 24.0 | % | 18,472,398 | 20.6 | % | 18,472,398 | 20.7 | % | 18,472,398 | 20.7 | % | ||||||||||||||||||||||||||
| 236 |
| * | Less than 1%. |
| (1) | Unless otherwise noted, the business address of each of these entities or individuals is c/o Kernel Group Holdings, Inc., 515 Madison Avenue, Suite 8133, New York, NY 10022. |
| (2) | Interests shown consist solely of founder shares, classified as Class B Ordinary Shares. Such shares are convertible into Class A Ordinary Shares on a one-for-one basis, subject to adjustment. |
| (3) | Represents shares held by VKSS Capital, LLC, our Sponsor. Suren Ajjarapu is the managing member of our Sponsor and may be deemed to have beneficial ownership of the Ordinary Shares held directly by our Sponsor. Suren Ajjarapu disclaims any beneficial ownership of the reported shares other than to the extent of any pecuniary interest they may have therein, directly or indirectly. |
| (4) | According to a Schedule 13G filed with the SEC on May 27, 2022, filed pursuant to a entered into a Joint Filing Agreement of even date therewith, on behalf of Saba Capital Management, L.P., a Delaware limited partnership, Saba Capital Management GP, LLC, a Delaware limited liability company, and Mr. Boaz R. Weinstein. Mr. Weinstein exercises the voting powers associated with the securities corresponding this entry. The business address of these shareholders is 405 Lexington Avenue, 58th Floor, New York, New York 10174. |
| (5) | According to a Schedule 13G/A filed with the SEC on February 14, 2023, on behalf of Fir Tree Capital Management LP, a Delaware limited partnership. The business address of this shareholder is 55 West 46th Street, 29th Floor New York, NY 10036. |
| (6) | According to a Schedule 13G filed with the SEC on February 8, 2023, on behalf of Radcliffe Capital Management, L.P., RGC Management Company, LLC, Steven B. Katznelson, Christopher Hinkel, Radcliffe SPAC Master Fund, L.P., and Radcliffe SPAC GP, LLC. The business address of these shareholders is 50 Monument Road, Suite 300, Bala Cynwyd, PA 19004. The number of shares held by Radcliffe Capital Management, L.P., RGC Management Company, LLC, Steven B. Katznelson, Christopher Hinkel, Radcliffe SPAC Master Fund, L.P., and Radcliffe SPAC GP, LLC is reported as of February 14, 2024, as stated in the Schedule 13G/A, which does not reflect any redemption of shares by Kernel in connection with the Extension Meeting, Extension Meeting – Second, and Extension Meeting – Third. |
| (7) | According to a Schedule 13G filed with the SEC on February 13, 2024, on behalf of Mizuho Financial Group, Inc. The business address of this shareholder is 1–5–5, Otemachi, Chiyoda–ku, Tokyo 100–8176, Japan. The number of shares held by Mizuho Financial Group, Inc. is reported as of February 13, 2024, as stated in the Schedule 13G, which does not reflect any redemption of shares by Kernel in connection with the Extension Meeting - Third. |
| (8) | According to a Schedule 13G filed with the SEC on February 14, 2024, on behalf of Antara Capital LP, Antara Capital GP LLC, and Himanshu Gulati. The business address of these shareholders is 55 Hudson Yards, 47th Floor, Suite C, New York, NY 10001. The number of shares held by Antara Capital LP, Antara Capital GP LLC, and Himanshu Gulati is reported as of February 14, 2024, as stated in the Schedule 13G, which does not reflect any redemption of shares by Kernel in connection with the Extension Meeting - Third. |
| (9) | Unless otherwise noted, the business address of each of these entities or individuals is c/o AIRO Group Holdings, Inc., 5001 Indian School Road NE, Suite 100, Albuquerque, NM 87110. |
The following tables summarize the pro forma Kernel shares of ParentCo common stock issued and outstanding immediately after the Business Combination both on an issued and outstanding share and diluted basis, presented under the three redemption scenarios:
| Scenarios | ||||||||||||||||||||||||
| 1 | 2 | 3 | ||||||||||||||||||||||
| Issued and Outstanding Share Basis | No Redemption | % Owned | 50% Redemption | % Owned | Maximum Redemption | % Owned | ||||||||||||||||||
| Kernel Public Shares | 509,341 | 0.6 | % | 254,671 | 0.3 | % | - | - | % | |||||||||||||||
| Kernel Founder Shares | 7,618,750 | 8.4 | % | 7,618,750 | 8.5 | % | 7,618,750 | 8.5 | % | |||||||||||||||
| AIRO Stockholders (1) | 77,000,000 | 85.9 | % | 77,000,000 | 86.1 | % | 77,000,000 | 86.4 | % | |||||||||||||||
| Extension Shares (2) | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | 4,450,000 | 5.0 | % | |||||||||||||||
| Meteora Termination Shares (3) | 50,000 | 0.1 | % | 50,000 | 0.1 | % | 50,000 | 0.1 | % | |||||||||||||||
| Pro Forma common stock at December 31, 2023 | 89,628,091 | 100.0 | % | 89,373,421 | 100.0 | % | 89,118,750 | 100.0 | % | |||||||||||||||
| Potential sources of dilution: | ||||||||||||||||||||||||
| Public Warrants (4) | 15,237,500 | 17.0 | % | 15,237,500 | 17.0 | % | 15,237,500 | 17.1 | % | |||||||||||||||
| Private Warrants (5) | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | 8,750,000 | 9.8 | % | |||||||||||||||
| First Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Second Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| Third Earnout Share Payment (6) | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | 11,000,000 | 12.3 | % | |||||||||||||||
| AIRO Warrants (7) | 266,230 | 0.3 | % | 266,230 | 0.3 | % | 266,230 | 0.3 | % | |||||||||||||||
| AIRO Options (8) | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | 1,435,615 | 1.6 | % | |||||||||||||||
| (1) | Does not reflect closing adjustments to the merger consideration required by the terms of the Business Combination Agreement, including net working capital adjustments, closing net debt adjustment and transaction expenses in excess of $14,000,000, that are not expected to be significant. |
| 237 |
| (2) | Assumes the issuance of 4.45 million Class A common stock under the terms of the Extension Agreement and the Business Combination Agreement which also allows the same treatment for working capital costs. The Extension Agreement calls for an issuance of up to 2.7 million shares for the payment of extension payments, and Kernel estimates 1.75 million shares for working capital costs. | |
| (3) | Assumes the issuance of 50,000 shares of ParentCo common stock to an entity designated by Meteora upon closing of the Business Combination in consideration for termination of the Forward Purchase Agreement. |
| (4) | Assumes exercise of 15,237,500 Public Warrants (at a purchase price of $11.50 per Public Warrant) resulting in a cash inflow of $175,231,250 for ParentCo and 15,237,500 shares of ParentCo common stock issued to holders of Public Warrants. |
| (5) | Assumes exercise of 8,750,000 Private Placement Warrants (at $11.50 per Private Placement Warrant) resulting in a cash inflow of $100,625,000 for ParentCo and 8,750,000 shares of ParentCo common stock issued to holders of Private Placement Warrants. |
| (6) | Assumes the earnout measurements will be met per the Business Combination Agreement: |
(i) In the event ParentCo’s revenue for after the fiscal year that includes the Closing Date is greater than or equal to $50,000,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date is greater than or equal to $62,500,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date is greater than or equal to $78,100,000, ParentCo shall issue to each of the AIRO stockholders such AIRO stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
| (7) | Assumes exercise of 266,230 AIRO Warrants (at $4.17 per AIRO Warrant) resulting in a cash inflow of $1,110,179 for ParentCo and 266,230 shares of ParentCo common stock issued to holders of AIRO Warrants.
| |
| (8) | Assumes exercise of 1,435,615 AIRO Options (at $2.13 per AIRO Option) resulting in a cash inflow of $3,057,860 for ParentCo and 1,435,615 shares of ParentCo common stock issued to holders of AIRO Options. |
| 238 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kernel’s Related Party Transactions
Founder Shares
On November 19, 2020, the previous sponsor paid an aggregate of $25,000 for certain expenses on behalf of Kernel in exchange for issuance of 5,750,000 Class B Ordinary Shares (the “Founder Shares”). On January 11, 2021, Kernel effected a 1 for 1.25 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 5,750,000 to 7,187,500 shares, and the previous sponsor transferred an aggregate of 75,000 Founder Shares to the independent directors and an aggregate of 50,000 Founder Shares to the advisors. On February 2, 2021, Kernel effected a 1 for 1.06 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 7,187,500 to 7,618,750 shares and resulted in the previous sponsor holding 7,493,750 Founder Shares. The previous sponsor agreed to forfeit up to an aggregate of 993,750 Founder Shares to the extent that the option to purchase additional Units was not exercised in full by the underwriters or was reduced, so that the Founder Shares would represent 20% of Kernel’s issued and outstanding shares after the Initial Public Offering. On February 5, 2021, the underwriter fully exercised its over-allotment option; thus, these 993,750 Founder Shares are no longer subject to forfeiture.
On December 28, 2022, Kernel entered into a purchase agreement (the “Purchase Agreement”) with Kernel Capital Holdings, LLC, the previous sponsor, which held 7,493,750 Founder Shares that were issued to the previous sponsor prior to our IPO, and 8,750,000 Private Placement Warrants, and VKSS Capital, LLC (the “Sponsor”), our new sponsor, pursuant to which Kernel Capital Holdings, LLC transferred to VKSS Capital, LLC all of the Founder Shares and Private Placement Warrants.
The Initial Shareholders agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of: (A) one year after the completion of the initial Business Combination and (B) subsequent to the initial Business Combination, (x) if the closing price of the Class A Ordinary Shares equals or exceeds $12.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the initial Business Combination, or (y) the date on which Kernel completes a liquidation, merger, share exchange, reorganization or other similar transaction that results in all of the Public Shareholders having the right to exchange their Ordinary Shares for cash, securities or other property.
Registration Rights
The holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of working capital loans (and any Class A Ordinary Shares issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon conversion of working capital loans) were entitled to registration rights pursuant to a registration and shareholder rights agreement signed upon the effective date of the Initial Public Offering. The holders of these securities were entitled to make up to three demands, excluding short form demands, that we register such securities. In addition, the holders will be entitled to certain demand and “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of the initial Business Combination. Kernel will bear the expenses incurred in connection with the filing of any such registration statements.
Office Space and Related Support Services
Kernel’s Sponsor is entitled to receive reimbursement of an aggregate of $10,000 per month under an administrative support agreement for office space, secretarial and administrative support provided to Kernel, for which Sponsor has not been paid.
| 239 |
Related Party Loans
On November 19, 2020, the Sponsor agreed to loan Kernel up to $300,000 to be used for the payment of costs related to the Initial Public Offering pursuant to a promissory note (the “Note”). The Note was non-interest bearing, unsecured and due upon the closing of the Initial Public Offering. Kernel borrowed $77,000 outstanding under the Note. Kernel repaid approximately $13,000 on February 5, 2021 and repaid the remaining amount of approximately $64,000 on February 10, 2021. Subsequent to the repayment, the facility was no longer available to Kernel.
In addition, in order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of Kernel’s officers and directors may, but are not obligated to, loan Kernel funds as may be required (“Working Capital Loans”). If Kernel completes a Business Combination, Kernel may repay the Working Capital Loans out of the proceeds of the Trust Account released to Kernel. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, Kernel may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1.75 million of such Working Capital Loans may be convertible into warrants of the post Business Combination entity at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. As of December 31, 2022 and December 31, 2021, Kernel had no borrowings under the Working Capital Loans.
During July, August and October 2023, the Company entered into loan agreements with six investors and the Sponsor (the “Loan Agreements”). Pursuant to the Loan Agreements, the investors loaned the Sponsor a total of $1,150,000, which will in turn be loaned by the Sponsor to the Company, to cover a portion of the extension fees with any remaining balance to be used for the Company’s working capital. The Loan Agreements accrue 8% interest per annum and shall be repaid upon closing the initial Business Combination. The Company intends to pay all principal under the Loan Agreements and pursuant to the agreement, the Company shall not be responsible for the payment of any interest on the loans.
AIRO Related Party Transactions
Effective June 7, 2022, AIRO and New Generation Aerospace, Inc. (“NGA”) entered into a Success Fee Agreement pursuant to which NGA would provide the following services to AIRO relating to the AIRO’s consideration and execution of roll-up mergers and an initial public offering or SPAC business combination (the “Services”):
| ● | Coordination of the formation and operation thesis of an initial public offering, including targeting and vetting strategic roll-up transactions; |
| ● | Assistance with negotiating and closing roll-up transactions and related equity allocations; |
| ● | Coordination of investment bank bookrunners and onboarding professional advisors; and | |
| ● | Provide ongoing diligence support services, including audit preparation. |
In consideration for its provision of the Services, AIRO shall pay NGA a fee of $1.5 million (the “Success Fee”) upon the closing of the Business Combination. NGA began providing the Services to AIRO in 2021 and will continue to provide ongoing diligence support in connection with the Business Combination. Dr. Kathuria, AIRO’s executive chairman and a promoter, owns 85% of the shares of NGA. The Success Fee will be distributed to Neeraj Arora, Inderjote Kathuria, and Michael R. Pontarelli (together, the “Minority Members”) as deferred salaries and to the Minority Members and Dr. Kathuria as reimbursement for expenses incurred in connection with providing the Services, not to exceed $500,000. Dr. Kathuria will not receive any portion of the Success Fee as a deferred salary. On October 2, 2023, the parties signed an Amended and Restated Success Fee Agreement pursuant to which 90% of the Contingent Fee will be payable in shares of AIRO Common Stock no later than two days prior to closing of the Business Combination, and the remaining cash payment of $150,007.78 will be paid at closing.
Since June 2022, AIRO issued three unsecured promissory notes to MPeryea RD LLC (the “Lender”) (each, a “Note”) totaling $500,000. Under the terms of the Notes, one-time interest equal to 100% of the principal shall be paid in the form of shares of AIRO’s Common Stock immediately prior to Closing of the Business Combination and 110% of the principal (plus twelve percent interest per annum accruing from Closing) shall be payable 190 days after Closing. Martin Peryea, our Senior Vice President and General Manager, Electric Air Mobility Division, is the sole member and manager of MPeryea RD LLC.
In January 2024, AIRO entered into a loan agreement and promissory note with Dangroup ApS (the “Dangroup Note”), an AIRO shareholder, in the principal amount of $0.5 million. The parties subsequently amended the Dangroup Note in March 2024 and June 2024. As amended, interest accrues at a rate of 10.5% per annum, and the note is payable within five business days following the date that AIRO, or a successor of AIRO, closes one or more financing transactions with an aggregate value of at least $35,000,000.
In addition to the MPeryea RD LLC Notes and Dangroup Note, AIRO has additional unsecured promissory notes, with no collateral and no guarantees, with related parties totaling $2.7 million in the aggregate in varying amounts of $5,000 to $250,000. These notes are further described in “AIRO’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Comparability of Results—3. Bridge Financing.”
| 240 |
Policies for Approval of Related Party Transactions
Prior to the completion of the Business Combination, ParentCo expects to adopt a written related person transaction policy that sets forth procedures for the identification, review, consideration and approval or ratification of related person transactions. The policy will become effective immediately upon the closing of the Merger. For purposes of ParentCo’s policy only, a related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which ParentCo and any related person are, were, or will be participants and in which the amount involved exceeds $120,000. Transactions involving compensation for services provided to ParentCo as an employee or director are not covered by this policy. A related person is any executive officer, director, or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate family members and any entity owned or controlled by such persons.
Under the policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, ParentCo’s management must present information regarding the related person transaction to ParentCo’s audit committee, or, if audit committee approval would be inappropriate, to another independent body of the ParentCo Board, for review, consideration, and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to ParentCo of the transaction, and whether the transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, ParentCo will collect information that it deems reasonably necessary from each director, executive officer, and, to the extent feasible, significant stockholder to enable ParentCo to identify any existing or potential related person transactions and to effectuate the terms of the policy.
In addition, under ParentCo’s Code of Conduct, which it intends to adopt in connection with this offering, our employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest.
In considering related person transactions, ParentCo’s audit committee, or other independent body of the ParentCo Board, will take into account the relevant available facts and circumstances including, but not limited to:
| ● | the risks, costs, and benefits to ParentCo; | |
| ● | the impact on a director’s independence in the event that the related person is a director, immediate family member of a director, or an entity with which a director is affiliated; | |
| ● | the availability of other sources for comparable services or products; and | |
| ● | the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. |
The policy requires that, in determining whether to approve, ratify, or reject a related person transaction, ParentCo’s audit committee, or other independent body of the ParentCo Board, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, ParentCo’s best interests and those of its stockholders, as ParentCo’s audit committee, or other independent body of the ParentCo Board, determines in the good faith exercise of its discretion.
| 241 |
COMPARISON OF CORPORATE GOVERNANCE AND SHAREHOLDER RIGHTS
Kernel is an exempted company incorporated under the Cayman Islands Companies Law. The Cayman Islands Companies Law, Cayman Islands Companies Law generally and the Existing Kernel Governing Documents govern the rights of its shareholders. The Cayman Islands Companies Law and Cayman Islands Companies Law generally differs in some material respects from laws generally applicable to United States corporations and their stockholders. In addition, the Existing Kernel Governing Documents differ in certain material respects from the Proposed Kernel Governing Documents and the Proposed ParentCo Governing Documents. ParentCo will be incorporated in Delaware and governed by Delaware law. As a result, when you become a stockholder of ParentCo, your rights will differ in some regards as compared to when you were a shareholder of Kernel.
Below is a summary chart outlining important similarities and differences in the corporate governance and stockholder/shareholder rights associated with each of Kernel and ParentCo according to applicable law and/or the governing documents of Kernel and ParentCo. You also should review the Proposed ParentCo Charter and the Proposed ParentCo Bylaws attached hereto as Annex D and Annex E to this proxy statement/prospectus, as well as the Delaware corporate law and corporate laws of the Cayman Islands, including the Cayman Islands Companies Law, to understand how these laws apply to Kernel and ParentCo.
Delaware | Cayman Islands | |||
| Applicable legislation | General Corporation Law of the State of Delaware. | Cayman Islands Companies Act (as revised) | ||
| Stockholder/Shareholder Approval of Business Combinations | Mergers generally require approval of a majority of all outstanding shares. Mergers in which less than 20% of the acquirer’s stock is issued generally do not require acquirer stockholder approval. Mergers in which one corporation owns 90% or more of a second corporation may be completed without the vote of the second corporation’s board of directors or stockholders. | Mergers under the Cayman Islands Companies Law require a special resolution, and any other authorization as may be specified in the relevant articles of association. Parties holding certain security interests in the constituent companies must also consent. All mergers (other than parent/subsidiary mergers) require shareholder approval — there is no exception for smaller mergers. Where a bidder in connection with a tender offer / contractual acquisition of equity (i.e. not a statutory merger under Cayman Islands Companies Law) has acquired 90% or more of the shares in a Cayman Islands company, it can compel the acquisition of the shares of the remaining shareholders and thereby become the sole shareholder. A Cayman Islands company may also be acquired through a “scheme of arrangement” sanctioned by a Cayman Islands court and approved by a majority in number representing 75% in value of shareholders in attendance and voting at a general meeting. |
| 242 |
Delaware | Cayman Islands | |||
| Stockholder/Shareholder Votes for Routine Matters | Generally, approval of routine corporate matters that are put to a stockholder vote require the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter. | Under the Cayman Islands Companies Law and the Existing Kernel Governing Documents, routine corporate matters, requiring shareholder approval, may be approved by an ordinary resolution (being a resolution passed by a simple majority of the shareholders as being entitled to do so). | ||
| Requirement for Quorum | Quorum is a majority in voting power of the stocked issued and outstanding and entitled to vote at the meeting unless otherwise set in the constitutional documents, but cannot be less than one third of shares entitled to vote at the meeting. | Quorum is set in the company’s memorandum and articles of association. | ||
| Stockholder/Shareholder Consent to Action Without Meeting | Unless otherwise provided in the certificate of incorporation, stockholders may act by written consent. | Shareholder action by unanimous written resolutions is permitted by the articles of association. | ||
| Appraisal Rights | Generally a stockholder of a publicly traded corporation does not have appraisal rights in connection with a merger except in certain circumstances. | Minority shareholders that dissent from a merger are entitled to be paid the fair value of their shares, which, if necessary, may ultimately be determined by the court. | ||
| Inspection of Books and Records | Any stockholder may inspect the corporation’s books and records for a proper purpose during the usual hours for business. | Shareholders generally do not have any rights to inspect or obtain copies of the register of shareholders or other corporate records of a company. | ||
| Stockholder/Shareholder Lawsuits | A stockholder may bring a derivative suit subject to procedural requirements (including adopting Delaware as the exclusive forum)). | In the Cayman Islands, the decision to institute proceedings on behalf of a company is generally taken by the company’s board of directors. A shareholder may be entitled to bring a derivative action on behalf of the company, but only in certain limited circumstances. |
| 243 |
Delaware | Cayman Islands | |||
| Fiduciary Duties of Directors | Directors must exercise a duty of care and duty of loyalty and good faith to the company and its stockholders. | A director owes fiduciary duties to a company, including to exercise powers for the purposes conferred, exercise independent judgment, not make secret profits, avoid conflicts of interest and act in good faith in the best interests of the company as a whole. In addition to fiduciary duties, directors owe a duty of care, diligence and skill. Such duties are owed to the company but may be owed directly to creditors or shareholders in certain limited circumstances. | ||
| Indemnification of Directors and Officers | A corporation shall have the power to indemnify any person who was or is a party to any proceeding because such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another entity against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred if the person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and. with respect to any criminal proceeding, had no reasonable cause to believe their conduct was unlawful. If the action was brought by or on behalf of the corporation, no indemnification is made when a person is adjudged liable to the corporation unless a court determines such person is fairly and reasonably entitled to indemnity for expenses the court deems proper. | A Cayman Islands exempted company generally may indemnify its directors or officers except with regard to fraud, willful neglect or willful default. |
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Delaware | Cayman Islands | |||
| Limited Liability of Directors | Permits limiting or eliminating the monetary liability of a director to a corporation or its stockholders, except with regard to breaches of duty of loyalty, intentional misconduct, unlawful repurchases or dividends, or improper personal benefit. | Liability of directors may be eliminated except with regard to their own fraud or willful default. | ||
| Removal of Directors | Any director or the entire board may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as follows: (1) unless the charter otherwise provides, or (2) in the case of a corporation having cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such director’s removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board. | A company’s memorandum and articles of association may provide that a director may be removed for any or no reason and that, in addition to shareholders, boards may be granted the power to remove a director. | ||
| Number of Directors | The number of directors is fixed by the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment of the certificate of incorporation. The bylaws may provide that the board may increase the size of the board and fill any vacancies. | Subject to the memorandum and articles of association, the board may increase the size of the board and fill any vacancies. |
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PRICE RANGE OF SECURITIES AND DIVIDENDS
Price Range of Kernel’s Securities
Kernel’s Units, Class A Ordinary Shares and Public Warrants are each traded on Nasdaq under the symbols “KRNLU,” “KRNL” and “KRNLW,” respectively. Kernel’s Units commenced public trading on February 6, 2021, and shares of Kernel’s Class A Ordinary Shares and Public Warrants began separate trading on March 26, 2021.
The following table sets forth, for the calendar quarter and years indicated, the high and low sales prices per Unit as reported on the Nasdaq for the period from February 6, 2021 (the first day on which Units began trading) through December 31, 2023, and for Kernel Class A Ordinary Shares and Public Warrants for the period from March 26, 2021 (the first day on which Kernel’s Class A Ordinary Shares and Public Warrants were traded separately) through December 31, 2023.
| Units (KRNLU) | Class A Ordinary Shares (KRNL) | Warrants (KRNLW) | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
| Quarter ended June 30, 2021 | $ | 10.32 | $ | 9.93 | $ | 9.95 | $ | 9.61 | $ | 1.06 | $ | 0.51 | ||||||||||||
| Quarter ended September 30, 2021 | $ | 10.30 | $ | 9.95 | $ | 9.76 | $ | 9.62 | $ | 1.19 | $ | 0.58 | ||||||||||||
| Quarter ended December 31, 2021 | $ | 10.23 | $ | 9.93 | $ | 9.77 | $ | 9.72 | $ | 0.69 | $ | 0.48 | ||||||||||||
| Quarter ended March 31, 2022 | $ | 9.97 | $ | 9.85 | $ | 9.81 | $ | 9.69 | $ | 0.49 | $ | 0.19 | ||||||||||||
| Quarter ended June 30, 2022 | $ | 9.94 | $ | 9.82 | $ | 9.89 | $ | 9.78 | $ | 0.34 | $ | 0.08 | ||||||||||||
| Quarter ended September 30, 2022 | $ | 9.94 | $ | 9.85 | $ | 9.93 | $ | 9.82 | $ | 0.10 | $ | 0.03 | ||||||||||||
| Quarter ended December 31, 2022 | $ | 10.09 | $ | 9.91 | $ | 10.11 | $ | 9.93 | $ | 0.04 | $ | 0.00 | ||||||||||||
| Quarter ended March 31, 2023 | $ | 10.85 | $ | 10.06 | $ | 10.42 | $ | 10.10 | $ | 0.18 | $ | 0.01 | ||||||||||||
| Quarter ended June 30, 2023 | $ | 10.55 | $ | 10.19 | $ | 10.49 | $ | 10.30 | $ | 0.15 | $ | 0.09 | ||||||||||||
| Quarter ended September 30, 2023 | $ | 10.60 | $ | 9.90 | $ | 10.61 | $ | 10.42 | $ | 0.12 | $ | 0.06 | ||||||||||||
| Quarter ended December 31, 2023 | $ | 10.93 | $ | 10.60 | $ | 10.75 | $ | 10.56 | $ | 0.06 | $ | 0.02 | ||||||||||||
| Quarter ended March 31, 2024 | $ | 11.24 | $ | 9.84 | $ | 11.07 | $ | 10.71 | $ | 0.08 | $ | 0.03 | ||||||||||||
Dividend Policy of Kernel and ParentCo
Kernel has not paid any cash dividends on its common stock to date and does not intend to pay cash dividends prior to the completion of the Business Combination. The payment of cash dividends in the future will be dependent upon ParentCo’s revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of the Business Combination. The payment of any cash dividends subsequent to the Business Combination will be within the discretion of the ParentCo Board at such time. In addition, the Board is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Representatives of Kernel’s independent registered public accounting firm, WithumSmith+Brown, PC, will be invited to attend the Extraordinary General Meeting of Kernel’s shareholders. If the representatives attend the meeting, the representatives will have the opportunity to make a statement if they so desire and they are expected to be available to respond to appropriate questions.
Appraisal rights are not available to holders of our Ordinary Shares in connection with the Business Combination. However, holders of Kernel Ordinary Shares may be entitled to redemption under certain circumstances. See the section “Extraordinary General Meeting of Kernel shareholders—Redemption Rights.”
Unless we have received contrary instructions, we may send a single copy of this proxy statement/prospectus to any household at which two or more shareholders reside if we believe the shareholders are members of the same family. This process, known as “householding,” reduces the volume of duplicate information received at any one household and helps to reduce our expenses. However, if shareholders prefer to receive multiple sets of our disclosure documents at the same address this year or in future years, the shareholders should follow the instructions described below. Similarly, if an address is shared with another shareholder and together both of the shareholders would like to receive only a single set of our disclosure documents, the shareholders should follow these instructions:
| ● | If the shares are registered in the name of the shareholder, the shareholder should contact us at our offices at Kernel Group Holdings., 515 Madison Avenue, Suite 8078, New York, New York 10022 or by telephone at (646) 908-2659, to inform us of his or her request; or | |
| ● | If a bank, broker or other nominee holds the shares, the shareholder should contact the bank, broker or other nominee directly. |
The transfer agent for our securities is Continental Stock Transfer & Trust Company.
SUBMISSION OF SHAREHOLDER PROPOSALS
The Kernel Board is aware of no other matter that may be brought before the Extraordinary General Meeting.
The Extraordinary General Meeting is to be held on July 31, 2024. The next annual meeting of shareholders will be held in 2025. It is expected that ParentCo will set, and publicly announce, the date for the 2024 annual meeting of shareholders at a later date. For any proposal to be considered for inclusion in our proxy statement and form of proxy for submission to the shareholders at our 2024 annual meeting of shareholders, it must be submitted in writing and comply with the requirements of Rule 14a-8 of the Exchange Act and our bylaws. Rule 14a-8 proposals must be received at our principal office a reasonable time before we begin to print and send our proxy materials for our 2024 annual meeting of shareholders. For all other future Rule 14a-8 proposals, notice must be received at our principal office not less than 120 calendar days before the date of the proxy statement released to shareholders in connection with the previous year’s annual meeting. If we did not hold an annual meeting in the previous year, or if the date of the next annual meeting has been changed by more than 30 days from the anniversary of the immediately preceding annual meeting, then the notice must be provided a reasonable time before we begin to print and send our proxy materials.
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Our bylaws, currently and as proposed to be amended and restated effective at the time of the Closing, provide notice procedures for shareholders to nominate a person as a director and to propose business to be considered by shareholders at a meeting. To be timely, a shareholder’s notice must be delivered to us at the principal executive offices of Kernel not later than the close of business on the 90th nor earlier than the opening of business on the 120th day before the anniversary date of the immediately preceding annual meeting of shareholders; provided, however that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, or if no annual meeting was held in the preceding year, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the date on which public announcement of the date of the annual meeting was first made by Kernel.
In addition to satisfying the notice requirements under Rule 14a-8 and our bylaws, to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than our nominees must provide notice that sets forth the information required by Rule 14a-19 under the Exchange Act, which notice must be postmarked or transmitted electronically to us at our principal office no later than 60 calendar days prior to the first anniversary date of the immediately preceding annual meeting. If we did not hold an annual meeting in the previous year, or the date of the next annual meeting is changed by more than 30 calendar days from the anniversary of the immediately preceding annual meeting, then notice must be provided by the later of 60 calendar days prior to the date of the next annual meeting or the 10th calendar day following the day on which public announcement of the date of the next annual meeting is first made.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC as required by the Exchange Act. You can read Kernel’s SEC filings, including this proxy statement/prospectus, over the Internet at the SEC’s website at http://www.sec.gov.
If you would like additional copies of this proxy statement/prospectus or if you have questions about the Business Combination or the proposals to be presented at the Extraordinary General Meeting, you should contact Kernel at the following address and telephone number:
Kernel Group Holdings, Inc.
515 Madison Avenue, Suite 8078
New York, New York 10022
Attn: Suren Ajjarapu
Telephone No.: (646) 908-2659
You may also obtain these documents by requesting them in writing or by telephone from Kernel’s proxy solicitation agent at the following address and telephone number:
Issuer Direct Corporation
One Glenwood Ave, Suite 1001
Raleigh, NC 27603
Telephone No: (919) 481-4000
Email: proxy@issuerdirect.com
If you are a shareholder of Kernel and would like to request documents, please do so by July 24, 2024, in order to receive them before the Extraordinary General Meeting. If you request any documents from us, we will mail them to you by first class mail, or another equally prompt means.
All information contained in this proxy statement/prospectus relating to Kernel has been supplied by Kernel, and all such information relating to AIRO has been supplied by AIRO. Information provided by either Kernel or AIRO does not constitute any representation, estimate or projection of any other party.
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This document is a proxy statement/prospectus of Kernel for the Extraordinary General Meeting. We have not authorized anyone to give any information or make any representation about the Business Combination, Kernel or AIRO that is different from, or in addition to, that contained in this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. The information contained in this proxy statement/prospectus speaks only as of the date of this proxy statement/prospectus, unless the information specifically indicates that another date applies.
Nelson Mullins Riley & Scarborough LLP has passed upon the validity of the securities of ParentCo offered by this proxy statement/prospectus and certain other legal matters related to this proxy statement/prospectus.
The financial statements of Kernel Group Holdings, Inc. as of the years ended December 31, 2023 and 2022 appearing in this proxy statement/prospectus have been audited by WithumSmith+Brown, PC, independent registered public accounting firm, as set forth in their report thereon (which contains an explanatory paragraph relating to substantial doubt about the ability of Kernel Group Holdings, Inc. to continue as a going concern as described in Note 1 to the financial statements), appearing elsewhere in this proxy statement/prospectus, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of AIRO Group Holdings, Inc. as of December 31, 2023 and 2022 and for each of the two years in the period ended December 31, 2023, included in this proxy statement/prospectus have been so incorporated in reliance on the report (which contains an explanatory paragraph relating to AIRO Group Holdings, Inc.’s ability to continue as a going concern as described in Note 1 to the consolidated financial statements) of BPM LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
DELIVERY OF DOCUMENTS TO SHAREHOLDERS
Pursuant to the rules of the SEC, Kernel and services that it employs to deliver communications to its shareholders are permitted to deliver to two or more shareholders sharing the same address a single copy of each of Kernel’s annual report to shareholders and Kernel’s proxy statement. Upon written or oral request, Kernel will deliver a separate copy of the annual report to shareholders and/or proxy statement to any shareholder at a shared address to which a single copy of each document was delivered and who wishes to receive separate copies of such documents. Shareholders receiving multiple copies of such documents may likewise request that Kernel delivers single copies of such documents in the future. Shareholders may notify Kernel of their requests by calling or writing Kernel at its principal executive offices at 515 Madison 8th Floor, Suite 8078, New York, New York 10022 or (646) 908-2659.
ENFORCEABILITY OF CIVIL LIABILITY
Kernel is a Cayman Islands exempted company. If Kernel does not change its jurisdiction of incorporation from the Cayman Islands to Delaware by effecting the Domestication, you may have difficulty serving legal process within the United States upon Kernel. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against Kernel in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Furthermore, there is doubt that the courts of the Cayman Islands would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. However, Kernel may be served with process in the United States with respect to actions against Kernel arising out of or in connection with violation of U.S. federal securities laws relating to offers and sales of Kernel’s securities by serving Kernel’s U.S. agent irrevocably appointed for that purpose.
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KERNEL GROUP HOLDINGS, INC.
AIRO GROUP HOLDINGS, INC.
| F-1 |
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2024 | December 31, 2023 | |||||||
(Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 804 | $ | 804 | ||||
| Prepaid expenses | 91,709 | 27,148 | ||||||
| Total current assets | 92,513 | 27,952 | ||||||
| Cash and investments held in Trust Account | 5,563,640 | 67,819,662 | ||||||
| Total Assets | $ | 5,656,153 | $ | 67,847,614 | ||||
| Liabilities and Shareholders’ Deficit: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,931,193 | $ | 3,729,095 | ||||
| Accrued expenses and other current liabilities | 33,670 | 50,615 | ||||||
| Accrued expenses - related party | 320,000 | 290,000 | ||||||
| Promissory notes - related party | 2,422,628 | 2,215,368 | ||||||
| Convertible promissory notes, net of discount | 1,790,346 | 1,565,113 | ||||||
| Total current liabilities | 8,497,837 | 7,850,191 | ||||||
| Warrant liabilities | 959,500 | 479,750 | ||||||
| Total Liabilities | 9,457,337 | 8,329,941 | ||||||
| Commitments and Contingencies | - | - | ||||||
| Class A ordinary shares subject to possible redemption, $0.0001 par value; 509,341 and 6,315,949 shares issued and outstanding at approximately $10.73 and $10.72 per share redemption value as of March 31, 2024 and December 31, 2023, respectively | 5,463,640 | 67,719,662 | ||||||
| Shareholders’ Deficit: | ||||||||
| Preference shares, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding as of March 31, 2024 and December 31, 2023 | — | — | ||||||
| Class A ordinary shares, $0.0001 par value; 500,000,000 shares authorized; no non-redeemable shares issued or outstanding as of March 31, 2024 and December 31, 2023 | — | — | ||||||
| Class B ordinary shares, $0.0001 par value; 50,000,000 shares authorized; 7,618,750 shares issued and outstanding as of March 31, 2024 and December 31, 2023 | 762 | 762 | ||||||
| Ordinary shares | 762 | 762 | ||||||
| Additional paid-in capital | — | — | ||||||
| Accumulated deficit | (9,265,586 | ) | (8,202,751 | ) | ||||
| Total Shareholders’ Deficit | (9,264,824 | ) | (8,201,989 | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | 5,656,153 | $ | 67,847,614 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| 2024 | 2023 | |||||||
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| General and administrative expenses | $ | 427,852 | $ | 919,365 | ||||
| Administrative fees - related party | 30,000 | 30,000 | ||||||
| Loss from operations | (457,852 | ) | (949,365 | ) | ||||
| Other income (expense): | ||||||||
| Unrealized loss from change in fair value of warrant liabilities | (479,750 | ) | (2,704,146 | ) | ||||
| Income from cash and investments held in Trust Account | 321,077 | 959,464 | ||||||
| Interest expense - amortization of debt discount | (204,028 | ) | (32,404 | ) | ||||
| Interest expense | — | (1,830 | ) | |||||
| Total other income (expense), net | (362,701 | ) | (1,778,916 | ) | ||||
| Net loss | $ | (820,553 | ) | $ | (2,728,281 | ) | ||
| Basic and diluted weighted average shares outstanding, Class A ordinary shares | 2,551,225 | 17,781,598 | ||||||
| Basic and diluted net loss per share, Class A ordinary shares | $ | (0.08 | ) | $ | (0.11 | ) | ||
| Basic and diluted weighted average shares outstanding, Class B ordinary shares | 7,618,750 | 7,618,750 | ||||||
| Basic and diluted net loss per share, Class B ordinary shares | $ | (0.08 | ) | $ | (0.11 | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT (UNAUDITED)
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| THREE MONTHS ENDED MARCH 31, 2024 | ||||||||||||||||||||||||||||
| Ordinary Shares | ||||||||||||||||||||||||||||
| Class A | Class B | Additional Paid-in | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at January 1, 2024 | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (8,202,751 | ) | $ | (8,201,989 | ) | ||||||||||||||
| Proceeds allocated to Share Rights of convertible promissory notes | — | — | — | — | 228,795 | — | 228,795 | |||||||||||||||||||||
| Remeasurement of Class A ordinary shares to redemption amount | — | — | — | — | (228,795 | ) | (242,282 | ) | (471,077 | ) | ||||||||||||||||||
| Net loss | — | — | — | — | — | (820,553 | ) | (820,553 | ) | |||||||||||||||||||
| Balance at March 31, 2024 (unaudited) | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (9,265,586 | ) | $ | (9,264,824 | ) | ||||||||||||||
| THREE MONTHS ENDED MARCH 31, 2023 | ||||||||||||||||||||||||||||
| Ordinary Shares | ||||||||||||||||||||||||||||
| Class A | Class B | Additional Paid-in | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at January 1, 2023 | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (13,574,384 | ) | $ | (13,573,622 | ) | ||||||||||||||
| Balance | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (13,574,384 | ) | $ | (13,573,622 | ) | ||||||||||||||
| Proceeds received in excess of initial fair value of convertible promissory note | — | — | — | — | 546,809 | — | 546,809 | |||||||||||||||||||||
| Remeasurement of Class A ordinary shares to redemption amount | (546,809 | ) | (1,012,654 | ) | (1,559,463 | ) | ||||||||||||||||||||||
| Net loss | — | — | — | — | — | (2,728,281 | ) | (2,728,281 | ) | |||||||||||||||||||
| Balance at March 31, 2023 (unaudited) | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (17,315,319 | ) | $ | (17,314,557 | ) | ||||||||||||||
| Balance | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (17,315,319 | ) | $ | (17,314,557 | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| 2024 | 2023 | |||||||
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (820,553 | ) | $ | (2,728,281 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Income from cash and investments held in Trust Account | (321,077 | ) | (959,464 | ) | ||||
| Interest expense - amortization of debt discount | 204,028 | 32,404 | ||||||
| Unrealized loss from change in fair value of warrant liabilities | 479,750 | 2,704,146 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | (64,561 | ) | (255,774 | ) | ||||
| Due from sponsor | — | (281,691 | ) | |||||
| Accounts payable | 202,098 | 2,211,294 | ||||||
| Accrued expenses and other current liabilities | (16,945 | ) | (1,589,700 | ) | ||||
| Accrued expenses - related party | 30,000 | 30,000 | ||||||
| Net cash used in operating activities | (307,260 | ) | (837,066 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Advances to Trust Account | (150,000 | ) | (600,000 | ) | ||||
| Proceeds from Trust Account for payment to redeeming shareholders | 62,727,099 | 232,542,916 | ||||||
| Net cash provided by investing activities | 62,577,099 | 231,942,916 | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from promissory notes - related party | 207,260 | 750,000 | ||||||
| Proceeds from convertible promissory notes | 250,000 | 600,000 | ||||||
| Payment to redeeming shareholders | (62,727,099 | ) | (232,542,916 | ) | ||||
| Net cash used in financing activities | (62,269,839 | ) | (231,192,916 | ) | ||||
| Net Change in Cash | — | (87,066 | ) | |||||
| Cash - Beginning of the period | 804 | 93,095 | ||||||
| Cash - End of the period | $ | 804 | $ | 6,029 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-5 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
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 units (the “Units” and, with respect to the Class A ordinary shares included in the Units being offered, the “Public Shares”), including 3,975,000 additional Units to cover the underwriters’ over-allotment (the “Over-Allotment Units”), at $10.00 per Unit, generating gross proceeds of approximately $304.8 million, and incurring offering costs of approximately $17.4 million, of which approximately $10.7 million was for deferred underwriting commissions. On May 24, 2023, the underwriters agreed to waive their rights to their portion of the fee payable by the Company for deferred underwriting commissions, with respect to any potential Business Combination of the Company.
Simultaneously with the closing of the Initial Public Offering, the Company consummated a private placement (the “Private Placement”) of 8,750,000 warrants (the “Private Placement Warrants”), at a price of $1.00 per Private Placement Warrant with the Original Sponsor, generating gross proceeds of approximately $8.8 million, which is discussed in Note 4.
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 Class B ordinary shares of the Company, par value $0.0001 per share and 8,750,000 Private Placement Warrants, each of which is exercisable to purchase one Class A ordinary share of the Company, par value $0.0001 per share, for an aggregate purchase price of $1.00 payable at the time the Company effects the initial Business Combination. The 7,618,750 Class B ordinary shares which the New Sponsor will purchase from the Original Sponsor will include 75,000 Founder Shares transferred by the Original Sponsor to the independent directors and 50,000 Founder Shares transferred by the Original Sponsor to the former advisors, which have been purchased by the New Sponsor and are pending transfer at closing by the exchange agent. Upon the closing of the initial Business Combination, New Sponsor shall also convey 2,000,000 Class B ordinary shares to the equity holders of the Original Sponsor, as of December 28, 2022, pro rata based on the equity holders’ underlying interest in the Company’s Class B ordinary shares as of December 28, 2022 (see Note 4).
Upon the closing of the Initial Public Offering and the Private Placement, approximately $304.8 million ($10.00 per Unit) of the net proceeds of the Initial Public Offering and certain of the proceeds of the Private Placement were placed in the Trust Account with Continental Stock Transfer & Trust Company (“Continental”) acting as trustee and has been invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 (the “Investment Company Act”), as amended, having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations, as determined by the Company, until the earlier of (i) the completion of a Business Combination and (ii) the distribution of the Trust Account as described below.
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.
| F-6 |
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 does not complete a Business Combination within 42 months (including three six-month extensions) from the closing of the Initial Public Offering, or August 5, 2024 (the “Combination Period”) or (B) with respect to any other provisions relating to shareholders’ rights or pre-initial Business Combination activity, unless the Company provides the Public Shareholders with the opportunity to redeem their Public Shares in conjunction with any such amendment.
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 of interest to pay dissolution expenses), divided by the number of the then-outstanding Public Shares, which redemption will completely extinguish Public Shareholders’ rights as shareholders (including the right to receive further liquidating distributions, if any); and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders and the board of directors, liquidate and dissolve, subject in the case of clauses (ii) and (iii), to the Company’s obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law.
| F-7 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
In connection with the redemption of 100% of the Company’s outstanding Public Shares for a portion of the funds held in the Trust Account, each holder will receive a full pro rata portion of the amount then in the Trust Account, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay the Company’s taxes payable (less taxes payable and up to $100,000 of interest to pay dissolution expenses).
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 per share initially held in the Trust Account. In order to protect the amounts held in the Trust Account, the Sponsor agreed that it will be liable to the Company if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has entered into a written letter of intent, confidentiality or other similar agreement or business combination agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.00 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). In the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have vendors, service providers (except the Company’s independent registered public accounting firm), prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account. There can be no guarantee that the Company will be successful in obtaining such waivers from its targeted vendors and service providers.
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% of the Company’s Public Shares (the “Termination Date”), which was previously February 5, 2023 (the “Extension Amendment Proposal”). The February Charter Amendment allowed the Company to extend the Termination Date by up to six (6) one-month extensions to August 5, 2023 (each, an “Extension,” and such later date, the “Extended Deadline”) 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. 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 by the applicable Extended Deadline (the “Extension Payment”), the lesser of (x) $300,000 or (y) $0.06 per share for each of the Company’s publicly held shares outstanding as of the deadline prior to the Extension (after giving effect to redemptions in connection with the approval of the February Charter Amendment by the Company’s shareholders with respect to the first such Extension). In connection with the approval of the 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 February Charter Amendment (the “Trust Amendment Proposal”). In connection with the approval of the Extension Amendment Proposal and the Trust Amendment Proposal at the shareholders meeting, holders of 22,848,122 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.15 per share, for an aggregate of approximately $231.9 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $74.7 million before the first Extension Payment.
| F-8 |
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 of the Company’s Class A ordinary shares exercised their rights to redeem those shares for cash at an approximate price of $10.42 per share, for an aggregate of approximately $13.6 million.
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 of the Company’s Class A ordinary shares exercised their rights to redeem those shares for cash at an approximate price of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $5.6 million, inclusive of Extension Payments, as of March 31, 2024.
| F-9 |
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 per share, shall convert into a share of Class B common stock, par value $0.0001 per share, and each Class A ordinary share, par value $0.0001 per share, shall convert into a share of Class A common stock, par value $0.0001 per share. Further, each share of Class B common stock and each share of Class A common stock that is then issued and outstanding shall convert automatically, on a one-for-one basis, into one share of Kernel common stock (the “Kernel Common Stock”).
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 (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. 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.
| F-10 |
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 million.
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 per share price.
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 million in net tangible assets at closing.
On June 24, 2024, the Parties entered into the Fourth Amendment to the Business Combination Agreement (the “Fourth Amendment”). The Fourth Amendment amends the Business Combination Agreement to delete the Sponsor’s right to receive Earnout Shares.
| F-11 |
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 in its operating bank account and a working capital deficit of approximately $8.4 million.
The Company’s liquidity needs to date have been satisfied through a contribution of $25,000 from the Original Sponsor to cover certain expenses in exchange for the issuance of the Founder Shares, the loan of $77,000 from the Original Sponsor under a note, certain portion of the proceeds from the consummation of the Private Placement not held in the Trust Account, the promissory notes of $2.5 million, and Convertible Promissory Notes (as defined below) of approximately $2.0 million. The Company repaid $77,000 of the loan from the Original Sponsor in February 2021. In addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans (as defined below). If the Company completes a Business Combination, the Company may repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans.
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,” the Company has determined that the liquidity condition, the date of the mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after August 5, 2024. The unaudited condensed consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. The Company’s management plans to complete a Business Combination prior to the mandatory liquidation date.
| F-12 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X and pursuant to the rules and regulations of the SEC. Accordingly, certain disclosures included in the annual consolidated financial statements have been condensed or omitted from these unaudited condensed consolidated financial statements as they are not required for interim financial statements under U.S. GAAP and the rules of the SEC. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the period presented. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected through December 31, 2024, or any future period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Making estimates requires the Company’s management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial consolidated statements, which the Company’s management considered in formulating its estimate, could change in the near term due to one or more future confirming events. One of the more significant accounting estimates included in these unaudited condensed consolidated financial statements is the determination of the fair value of the warrant liabilities. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the Federal Deposit Insurance Corporation coverage limit of $250,000 and investments held in the Trust Account. The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents as of March 31, 2024 or December 31, 2023.
Cash and Investments Held in Trust Account
Until February 2023, the Company’s portfolio of investments held in the Trust Account was comprised of U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or investments in money market funds that invest in U.S. government securities and generally have a readily determinable fair value, or a combination thereof. In February 2023, the Company transferred the funds in the Trust Account into cash. In July 2023, the Company instructed Continental to instead hold the funds in the Trust Account in an interest-bearing demand deposit account, and in August 2023, the Company transferred the Trust Account funds to an interest-bearing demand deposit account. When the Company’s investments held in the Trust Account are comprised of U.S. government securities, the investments are classified as trading securities. When the Company’s investments held in the Trust Account are comprised of money market funds, the investments are recognized at fair value. Trading securities and investments in money market funds are presented on the condensed consolidated balance sheets at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of these securities are included in income from investments held in Trust Account in the accompanying condensed consolidated statements of operations. The estimated fair values of investments held in the Trust Account are determined using available market information. During the three months ended March 31, 2024, $62.7 million was paid to redeeming shareholders. At March 31, 2024 and December 31, 2023, the cash held in the Trust Account totaled approximately $5.6 million and cash and investments held in the Trust Account totaled approximately $67.8 million, respectively.
| F-13 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements” (“ASC 820”), equals or approximates the carrying amounts represented in the consolidated balance sheets, except for warrant liabilities (see Note 10).
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers consist of:
| ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
The warrants issued in connection with the Initial Public Offering and the Private Placement Warrants are recognized as derivative liabilities in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised. The fair value of warrants issued in connection with the Private Placement has been measured by using the market value of the Public Warrants (as defined below). The fair value of the warrants issued in connection with the Initial Public Offering was initially measured using a Monte-Carlo simulation and subsequently has been measured based on the market price at each measurement date when separately listed and traded. The determination of the fair value of the derivative liability may be subject to change as more current information becomes available and accordingly the actual results could differ significantly. Derivative liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities. The Company’s public and private warrant liabilities (see Notes 7 and 10) are classified as derivatives in the condensed consolidated balance sheets with changes in the fair value recognized in the condensed consolidated statements of operations.
| F-14 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
Convertible Promissory Notes
On March 23, 2023, Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal amount of $600,000 (the “First Polar Fund Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 600,000 Class A common stock at the closing of a Business Combination (“Share Rights”). At the option of Polar Multi-Strategy Master Fund, upon the closing of a Business Combination, the outstanding principal of $600,000 at March 31, 2024 may be converted into shares of Class A common stock at a rate of one Class A common stock for each $10 of additional capital contribution (60,000 shares).
On April 4, 2023, Aesther Healthcare Sponsor agreed to loan the Company an aggregate principal amount of $50,000 (“the Aesther Healthcare Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 50,000 Share Rights. At the option of Aesther Healthcare Sponsor, upon the closing of a Business Combination, the outstanding principal of $50,000 at March 31, 2024 may be converted into shares of Class A common stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (5,000 shares).
On April 25, 2023, Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal amount of $800,000 (the “Second Polar Fund Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 800,000 Share Rights. At the option of Polar Multi-Strategy Master Fund, upon the closing of a Business Combination, the outstanding principal of $800,000 at March 31, 2024 may be converted into shares of Class A common stock at a rate of one Class A common stock for each $10 of additional capital contribution (80,000 shares).
On December 6, 2023, Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal amount of $250,000 (the “Third Polar Fund Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 250,000 Share Rights. At the option of Polar Multi-Strategy Master Fund, upon the closing of a Business Combination, the outstanding principal of $250,000 at March 31, 2024 may be converted into shares of Class A common stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (25,0000 shares).
On February 23, 2024, three accredited investors (RLH SPAC Fund LP, TQ Master Fund LP and Sternstar LLC) agreed to loan the Company an aggregate principal amount of $250,000 ($100,000 pursuant to the RLH SPAC Fund convertible note, $100,000 pursuant to the TQ Master Fund convertible note, and $50,000 pursuant to the Sternstar convertible note), to be used for a portion of the expenses of the Company in exchange for the issuance of an aggregate 250,000 Share Rights. At the option of the investors, upon the closing of a Business Combination, the outstanding principal of $250,000 may be converted into shares of Class A common stock at a rate of one Class A common stock for each $10 of additional capital contribution (25,000 shares).
The Convertible Promissory Notes (as defined below) are non-interest bearing and are due within five business days from the date on which the Company consummates a Business Combination. If the Company does not consummate a Business Combination, the Company may use a portion of any funds held outside the Trust Account to repay the Convertible Promissory Notes; however, no proceeds from the Trust Account may be used for such repayment if the Company does not consummate the Business Combination.
Collectively, the First Polar Fund Convertible Note, the Aesther Healthcare Convertible Note, Second Polar Fund Convertible Note, the Third Polar Fund Convertible Note, the RLH SPAC Fund convertible note, the TQ Master Fund convertible note, and the Sternstar convertible note, are referred to as the Convertible Promissory Notes. The Company accounted for its Share Rights as equity-classified instruments based on an assessment of the Share Right’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815. The assessment considers whether the Share Rights are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the Share Rights meet all the requirements for equity classification under ASC 815, including whether the Share Rights are indexed to the Company’s own common stock, among other conditions for the equity classification. This assessment, which requires the use of professional judgment, was conducted at the time of Share Rights issuance. Both the Convertible Promissory Notes and the Share Rights meet the scope exception of ASC 815-10-15-74(a). The Company applied the guidance in ASC 470-20-25-2, “Debt With Conversion and Other Options”, requiring that the loan proceeds be allocated to the two instruments based on their relative fair values. At March 23, 2023, the Company allocated $53,191 of the proceeds to the First Polar Fund Convertible Note and $546,809 for the Share Rights. At April 4, 2023, the Company allocated $4,409 of the proceeds to the Aesther Healthcare Convertible Note and $45,591 for the Share Rights. At April 25, 2023, the Company allocated $70,299 of the proceeds to the Second Polar Fund Convertible Note and $729,701 for the Share Rights. At December 6, 2023, the Company allocated $21,441 of the proceeds to the Third Polar Fund Convertible Note and $228,559 for the Share Rights. At February 23, 2024, the Company allocated $8,482 of the proceeds to the RLH SPAC Fund convertible note and $91,518 for the Share Rights. At February 23, 2024, the Company allocated $8,482 of the proceeds to the TQ Master Fund convertible note, and $91,518 to the Share Rights. At February 23, 2024, the Company allocated $4,241 of the proceeds to the Sternstar convertible note and $45,759 to the Share Rights. The Share Rights are recognized as a debt discount to the Convertible Promissory Notes and accreted through interest expense to the face value of the Convertible Promissory Notes utilizing an effective interest method. At March 31, 2024, the carrying value of the Convertible Promissory Notes (see Note 5) was approximately $1.8 million, reflecting an unamortized discount of $159,654 and at December 31, 2023, the carrying value of the Convertible Promissory Notes (see Note 5) was approximately $1.6 million, reflecting an unamortized discount of $134,887.
| F-15 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
Offering Costs Associated with the Initial Public Offering
Offering costs consisted of legal, accounting, underwriting fees and other costs incurred through the Initial Public Offering that were directly related to the Initial Public Offering. Offering costs are allocated to the separable financial instruments issued in the Initial Public Offering based on a relative fair value basis, compared to total proceeds received. Offering costs associated with derivative warrant liabilities are expensed as incurred, and presented as other income (expenses) in the condensed consolidated statements of operations. Offering costs associated with the Class A ordinary shares issued were charged against the carrying value of Class A ordinary shares upon the completion of the Initial Public Offering.
Class A Ordinary Shares Subject to Possible Redemption
The Company accounts for its Class A ordinary shares subject to possible redemption in accordance with the guidance in ASC 480. Class A ordinary shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. Conditionally redeemable Class A ordinary shares (including Class A ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, Class A ordinary shares are classified within the shareholders’ deficit section of the Company’s condensed consolidated balance sheets. The Company’s Class A ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, as of March 31, 2024 and December 31, 2023, the Company had 509,341 and 6,315,949 Class A ordinary shares subject to possible redemption, respectively, that are presented as temporary equity, outside of the shareholders’ deficit section of the Company’s condensed consolidated balance sheets. During the three months ended March 31, 2024, 5,806,608 Class A ordinary shares were redeemed by shareholders.
Under ASC 480-10 S99, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the security. Effective with the closing of the Initial Public Offering, the Company recognized the accretion from initial book value to redemption amount, which resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.
Net Loss per Ordinary Share
The Company complies with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” The Company has two classes of shares, which are referred to as Class A ordinary shares and Class B ordinary shares. Income and losses are shared pro rata between the two classes of shares. This presentation assumes a Business Combination as the most likely outcome. Net loss per ordinary share is calculated by dividing the net loss by the weighted average number of ordinary shares outstanding for the respective period.
The calculation of diluted net loss per ordinary share does not consider the effect of the warrants underlying the Units sold in the Initial Public Offering and the Private Placement Warrants to purchase 23,987,500 Class A ordinary shares, nor the effect of the conversion features under the Convertible Promissory Notes to issue up to 195,000 additional Class A ordinary shares, in the calculation of diluted loss per share, because their exercise is contingent upon future events and their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2024 and 2023. Accretion associated with the redeemable Class A ordinary shares is excluded from earnings per share as the redemption value approximates fair value.
| F-16 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
The Company has considered the effect of Class B ordinary shares that were excluded from the weighted average number as they were contingent on the exercise of over-allotment option by the underwriters. Since the contingency was satisfied, the Company included these shares in the weighted average number as of the beginning of the interim period to determine the dilutive impact of these shares.
SCHEDULE OF BASIC AND DILUTED NET INCOME PER SHARE OF ORDINARY SHARE
For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net loss - basic and diluted | $ | (205,843 | ) | $ | (614,710 | ) | $ | (1,909,942 | ) | $ | (818,339 | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average ordinary shares outstanding, basic and diluted | 2,551,225 | 7,618,750 | 17,781,598 | 7,618,750 | ||||||||||||
| Basic and diluted net loss per ordinary share | $ | (0.08 | ) | $ | (0.08 | ) | $ | (0.11 | ) | $ | (0.11 | ) | ||||
Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes” (“ASC 740”). ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of March 31, 2024 and December 31, 2023. The Company’s management determined that the Cayman Islands is the Company’s only major tax jurisdiction. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
There is currently no taxation imposed on income by the government of the Cayman Islands. In accordance with Cayman federal income tax regulations, income taxes are not levied on the Company. Consequently, income taxes are not reflected in the Company’s consolidated financial statements. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Recent Accounting Pronouncements
Recently Adopted Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The ASU introduces a new credit loss methodology, current expected credit losses (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU. The CECL framework utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods, which generally require that a loss be incurred before it is recognized. The Company adopted this standard on January 1, 2023 and the impact was not material to the unaudited condensed consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The ASU amends ASC 820 to clarify that a contractual sales restriction is not considered in measuring an equity security at fair value and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The ASU applies to both holders and issuers of equity and equity-linked securities measured at fair value. The amendments in this ASU are effective for the Company in fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company adopted this standard on January 1, 2024 and the impact was not material to the unaudited condensed consolidated financial statements.
| F-17 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
NOTE 3. INITIAL PUBLIC OFFERING
On February 5, 2021, the Company consummated its Initial Public Offering of 30,475,000 Units, including 3,975,000 Over-Allotment Units, at $10.00 per Unit, generating gross proceeds of approximately $304.8 million, and incurring offering costs of approximately $17.4 million, of which approximately $10.7 million was for deferred underwriting commissions. For the three months ended March 31, 2024, 5,806,608 Class A ordinary shares were redeemed by shareholders.
Each Unit consists of one Class A ordinary share and one-half of one redeemable warrant (“Public Warrant”). Each whole Public Warrant will entitle the holder to purchase one Class A ordinary share at an exercise price of $11.50 per share, subject to adjustment (see Note 7).
NOTE 4. RELATED PARTY TRANSACTIONS
Founder Shares
On November 19, 2020, the Original Sponsor paid an aggregate of $25,000 for certain expenses on behalf of the Company in exchange for issuance of 5,750,000 Class B ordinary shares (the “Founder Shares”). On January 11, 2021, the Company effected a 1 for 1.25 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 5,750,000 to 7,187,500 shares, and the Original Sponsor transferred an aggregate of 75,000 Founder Shares to the independent directors and an aggregate of 50,000 Founder Shares to the former advisors (the number of shares are after the effect of the forward stock split discussed in the next sentence). On February 2, 2021, the Company effected a 1 for 1.06 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 7,187,500 to 7,618,750 shares and resulted in the Original Sponsor holding 7,493,750 Founder Shares. The Original Sponsor agreed to forfeit up to an aggregate of 993,750 Founder Shares to the extent that the option to purchase additional Units was not exercised in full by the underwriters or was reduced, so that the Founder Shares would represent 20% of the Company’s issued and outstanding shares after the Initial Public Offering. On February 5, 2021, the underwriter fully exercised its over-allotment option; thus, these 993,750 Founder Shares are no longer subject to forfeiture.
The Initial Shareholders agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of (A) one year after the completion of the initial Business Combination and (B) subsequent to the initial Business Combination, (x) if the closing price of the Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading-day period commencing at least 150 days after the initial Business Combination, or (y) the date on which the Company completes a liquidation, merger, share exchange, reorganization or other similar transaction that results in all of the Public Shareholders having the right to exchange their ordinary shares for cash, securities or other property.
On December 28, 2022, the Company entered into a purchase agreement with the Original Sponsor and the New Sponsor, pursuant to which the New Sponsor, or an entity designated by the New Sponsor, will purchase from the Original Sponsor 7,618,750 Class B ordinary shares of the Company, par value $0.0001 per share and 8,750,000 Private Placement Warrants, each of which is exercisable to purchase one Class A ordinary share of the Company, par value $0.0001 per share, for an aggregate purchase price of $1.00 payable at the time the Company effects the initial Business Combination. The 7,618,750 Class B ordinary shares which the New Sponsor will purchase from the Original Sponsor will include 75,000 Founder Shares transferred by the Original Sponsor to the independent directors and 50,000 Founder Shares transferred by the Original Sponsor to the former advisors, which have been purchased by the New Sponsor and are pending transfer at closing by the exchange agent. Upon the closing of the initial Business Combination, the New Sponsor shall also convey 2,000,000 Class B ordinary shares to the equity holders of the Original Sponsor, as of the Effective Date, pro rata based on the equity holders’ underlying interest in the Company’s Class B ordinary shares as of December 28, 2022.
Private Placement Warrants
Simultaneously with the closing of the Initial Public Offering, the Company consummated the Private Placement of 8,750,000 Private Placement Warrants, at a price of $1.00 per Private Placement Warrant with the Original Sponsor, generating gross proceeds of approximately $8.8 million.
| F-18 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
On December 28, 2022, the Original Sponsor transferred all Private Placement Warrants to the exchange agent, and upon closing of a Business Combination, the Private Placement Warrants will be transferred to the New Sponsor.
Each whole Private Placement Warrant is exercisable for one whole Class A ordinary share at a price of $11.50 per share. A portion of the proceeds from the sale of the Private Placement Warrants to the Original Sponsor was added to the proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the Private Placement Warrants will expire worthless. The Private Placement Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.
The Sponsor and the Company’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of their Private Placement Warrants until 30 days after the completion of the initial Business Combination.
Related Party Loans
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company may repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1.5 million of such Working Capital Loans may be convertible into warrants of the post Business Combination entity at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans.
During the year ended December 31, 2023, the Company entered into loan agreements with eleven investors and the Sponsor (the “Loan Agreements”). Pursuant to the Loan Agreements, the investors loaned the Sponsor a total of $2.5 million, which will in turn be loaned by the Sponsor to the Company, to cover a portion of the Extension Payments with any remaining balance to be used for the Company’s working capital. The Loan Agreements accrue 8% interest per annum and shall be repaid upon closing the initial Business Combination. The Company intends to pay all principal under the Loan Agreements and shall not be responsible for the payment of any interest on the loans. As of March 31, 2024 and December 31, 2023, the total amount drawn on the Loan Agreements was approximately $2.4 million and $2.2 million, respectively.
Administrative Support Agreement
Commencing on the date that the Company’s securities were first listed on Nasdaq through the earlier of consummation of the initial Business Combination or its liquidation, the Company agreed to pay the Sponsor $10,000 per month for office space, administrative and support services. For the three months ended March 31, 2024 and 2023, the Company incurred $30,000 and $30,000 for such services, respectively. As of March 31, 2024 and December 31, 2023, $320,000 and $290,000 were outstanding, respectively, and included in accrued expenses – related party as reflected in the accompanying condensed consolidated balance sheets.
In addition, the Sponsor, officers and directors, or any of their respective affiliates will be reimbursed for any out-of-pocket expenses incurred in connection with activities on the Company’s behalf such as identifying potential target businesses and performing due diligence on suitable Business Combinations. The audit committee will review on a quarterly basis all payments that were made by the Company to the Sponsor, officers or directors, or their affiliates. Any such payments prior to an initial Business Combination will be made from funds held outside the Trust Account. For the three months ended March 31, 2024 and 2023, the Company did not incur or reimburse any Business Combination costs to the Sponsor or any related party.
NOTE 5. DEBT
The Convertible Promissory Notes are non-interest bearing and are due within five business days from the date on which the Company consummates a Business Combination. If the Company does not consummate a Business Combination, the Company may use a portion of any funds held outside the Trust Account to repay the Convertible Promissory Notes; however, no proceeds from the Trust Account may be used for such repayment if the Company does not consummate a Business Combination. The Convertible Promissory Notes may be converted into Class A common stock at one share for each $10 of additional capital contribution at the option of the investor.
| F-19 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
The Company complies with ASC Topic 835, “Interest” (“ASC 835”). In accordance with ASC 835-30, discounts to the principal amounts are included in the carrying value of the Convertible Promissory Notes and amortized to “Interest expense” over the remaining term of the underlying debt to the Convertible Promissory Notes’ maturity date.
As described in Note 2, on March 23, 2023, the Company entered into the First Polar Fund Convertible Note pursuant to which Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal amount of $600,000. The Company on April 25, 2023 entered into the Second Polar Fund Convertible Note, pursuant to which Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal amount of $800,000. Additionally, on December 6, 2023, the Company entered into the Third Polar Fund Convertible Note, pursuant to which Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal amount of $250,000. As of March 31, 2024 and December 31, 2023, the outstanding balance under the First, Second, and Third Polar Fund Convertible Promissory Notes amounted to an aggregate of approximately $1.7 million. The Company recorded $546,809, $729,701, and $228,559 for debt discount upon issuance of the First Polar Fund Convertible Note, Second Polar Fund Convertible Note, and Third Polar Fund Convertible Note, respectively. For the three months ended March 31, 2024, and the year ended December 31, 2023, the amortization of the discount resulted in total interest expense of $134,887 and $1,370,182 for these loans, respectively.
As described in Note 2, the Company entered into the Aesther Healthcare Convertible Note on April 4, 2023, pursuant to which Aesther Healthcare Sponsor agreed to loan the Company an aggregate principal amount of $50,000. As of March 31, 2024 and December 31, 2023, the outstanding balance under the Aesther Healthcare Convertible Note amounted to an aggregate of $50,000. The Company recorded a $45,591 debt discount upon issuance of the Aesther Healthcare Convertible Promissory Note. As of January 1, 2024, the discount recognized at issuance was fully amortized.
As described in Note 2, on February 23, 2024, three accredited investors (RLH SPAC Fund LP, TQ Master Fund LP and Sternstar LLC) agreed to loan the Company $100,000, $100,000, and $50,000 respectively. For the three months ended March 31, 2024, the outstanding balance for the three accredited investors amounted to an aggregate of $250,000. The Company recorded $69,141 to interest expense for these loans for the three months ended March 31, 2024.
For the three months ended March 31, 2024, the amortization of the discount resulted in total interest expense of $204,028 for all of the Company’s Convertible Promissory Notes. For the three months ended March 31, 2023, the amortization of the discount resulted in interest expense of $32,404.
The following table presents the aggregate of Convertible Promissory Notes as of March 31, 2024:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| Principal value | $ | 1,950,000 | ||
| Debt discount | (159,654 | ) | ||
| Carrying value | $ | 1,790,346 |
NOTE 6. COMMITMENTS AND CONTINGENCIES
Registration and Shareholder Rights
The holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans (and any Class A ordinary shares issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans) were entitled to registration rights pursuant to a registration and shareholder rights agreement signed upon the effective date of the Initial Public Offering. The holders of these securities were entitled to make up to three demands, excluding short form demands, that the Company registers such securities. In addition, the holders will be entitled to certain demand and “piggyback” registration rights with respect to registration statements filed subsequent to the completion of the initial Business Combination. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
| F-20 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
Premium Finance Agreement - D&O Insurance
In order to obtain a public company directors and officers insurance policy (“D&O Insurance”), the Company entered into two agreements with premium financing lenders, whereby the lenders paid the D&O Insurance premium for the Company (“Premium Finance Agreements”). If the Company were to not pay the lenders monthly installment payments, the lenders would cancel the D&O Insurance and the remaining D&O Insurance premium would be returned to the lenders. In addition, if the Company were to cancel the D&O Insurance, the remaining D&O Insurance premium would be returned to the lenders.
The first Premium Finance Agreement is for $350,000 and accrues interest at a fixed rate of 7.5% per annum for a total of $3,136 over the term of the Premium Finance Agreement. Monthly payments of $35,784, were paid in four monthly installments, which commenced on February 28, 2023 with a maturity date of May 28, 2023. Upon entering into the Premium Finance Agreement, an upfront payment of $210,000 was due and paid on March 27, 2023.
The second Premium Finance Agreement is for $194,569 and accrues interest at a fixed rate of 7.5% per annum for a total of $1,744 over the term of the Premium Finance Agreement. Monthly payments of $19,893, were paid in four monthly installments, which commenced on February 28, 2023 with a maturity date of May 28, 2023. Upon entering into the Premium Finance Agreement, an upfront payment of $116,741 was due and paid on March 27, 2023.
The total expenses incurred under the Premium Finance Agreements, covering upfront, monthly, and interest payments, were $206,043 during the three months ended March 31, 2023 and are included in general and administrative expenses on the accompanying condensed consolidated statements of operations. The total cash disbursements made under the Finance Agreements for upfront, monthly, and interest payments totaled $438,095 during the three months ended March 31, 2023.
The total expenses incurred for D&O Insurance for the three months ended March 31, 2024 and 2023 were $105,848 and $206,043, respectively are included in general and administrative expenses on the accompanying condensed consolidated statements of operations. Total cash disbursements made for D&O Insurance for the three months ended March 31, 2024 and 2023 totaled $105,848 and $438,095, respectively.
NOTE 7. WARRANTS
As of both March 31, 2024 and December 31, 2023, the Company had 15,237,500 Public Warrants and 8,750,000 Private Placement Warrants outstanding.
Public Warrants may only be exercised for a whole number of shares. No fractional Public Warrants will be issued upon separation of the Units and only whole Public Warrants will trade. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) 12 months from the closing of the Initial Public Offering; provided in each case that the Company has an effective registration statement under the Securities Act covering the Class A ordinary shares issuable upon exercise of the Public Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder (or the Company permit holders to exercise their warrants on a cashless basis under certain circumstances). The Company agreed that as soon as practicable, but in no event later than twenty (20) business days after the closing of the initial Business Combination, the Company will use commercially reasonable efforts to file with the SEC a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants and to maintain a current prospectus relating to those Class A ordinary shares until the warrants expire or are redeemed, as specified in the warrant agreement. If a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants is not effective by the 60th day after the closing of the initial Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above, if the Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, it will not be required to file or maintain in effect a registration statement.
| F-21 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
The warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation. In addition, if (x) the Company issues additional Class A ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of the initial Business Combination at an issue price or effective issue price of less than $9.20 per ordinary share (with such issue price or effective issue price to be determined in good faith by the board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of the initial Business Combination on the date of the consummation of the initial Business Combination (net of redemptions), and (z) the volume weighted average trading price of Class A ordinary shares during the 20 trading day period starting on the trading day prior to the day on which the Company consummates its initial Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, the $18.00 per share redemption trigger price described under “Redemption of warrants when the price per Class A ordinary share equals or exceeds $18.00” and “Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00” will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price, and the $10.00 per share redemption trigger price described under “Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00” will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except (i) that the Private Placement Warrants and the Class A ordinary shares issuable upon exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions, (ii) except as described below, the Private Placement Warrants will be non-redeemable so long as they are held by the Sponsor or such its permitted transferees and (iii) the Sponsor or its permitted transferees will have the option to exercise the Private Placement Warrants on a cashless basis and have certain registration rights. If the Private Placement Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by such holders on the same basis as the Public Warrants.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $18.00:
Once the warrants become exercisable, the Company may call the outstanding warrants (except as described herein with respect to the Private Placement Warrants):
| ● | in whole and not in part; | |
| ● | at a price of $0.01 per warrant; | |
| ● | upon a minimum of 30 days’ prior written notice of redemption; and | |
| ● | if, and only if, the last reported sale price (the “closing price”) of Class A ordinary shares equals or exceeds $18.00 per share (as adjusted) for any 20 trading days within a 30-trading-day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders. |
The Company will not redeem the warrants as described above unless a registration statement under the Securities Act covering the issuance of the Class A ordinary shares issuable upon exercise of the warrants is then effective and a current prospectus relating to those Class A ordinary shares is available throughout the 30-day redemption period.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00:
Once the warrants become exercisable, the Company may redeem the outstanding warrants:
| ● | in whole and not in part; | |
| ● | at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of Class A ordinary shares to be determined by reference to an agreed table based on the redemption date and the “fair market value” of Class A ordinary shares; | |
| ● | if, and only if, the closing price of Class A ordinary shares equals or exceeds $10.00 per share (as adjusted) for any 20 trading days within the 30-trading-day period ending three trading days before the Company sends the notice of redemption to the warrant holders; and |
| ● | if the closing price of the Class A ordinary shares for any 20 trading days within a 30-trading-day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted), the Private Placement Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above. |
The “fair market value” of Class A ordinary shares for the above purpose shall mean the volume weighted average price of Class A ordinary shares during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. In no event will the warrants be exercisable on a cashless basis in connection with this redemption feature for more than 0.361 Class A ordinary shares per warrant (subject to adjustment).
| F-22 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
In no event will the Company be required to net cash settle any warrant. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.
NOTE 8. CLASS A ORDINARY SHARES SUBJECT TO POSSIBLE REDEMPTION
The Company’s Class A ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of future events. The Company is authorized to issue 500,000,000 Class A ordinary shares with a par value of $0.0001 per share. Holders of the Company’s Class A ordinary shares are entitled to one vote for each share. As of March 31, 2024 and December 31, 2023, there were 509,341 and 6,315,949, respectively, of Class A ordinary shares outstanding, which were all subject to possible redemption and are classified outside of permanent equity in the balance sheets.
The Class A ordinary shares subject to possible redemption reflected on the condensed consolidated balance sheets are reconciled on the following table:
SCHEDULE OF CLASS A ORDINARY SHARES SUBJECT TO POSSIBLE REDEMPTION
| Gross proceeds received from Initial Public Offering | $ | 304,750,000 | ||
| Less: | ||||
| Fair value of Public Warrants at issuance | (23,922,875 | ) | ||
| Offering costs allocated to Class A ordinary shares | (16,172,159 | ) | ||
| Plus: | ||||
| Accretion on Class A ordinary shares to redemption value | 44,479,800 | |||
| Class A ordinary shares subject to possible redemption as of December 31, 2022 | 309,134,766 | |||
| Redemption of shares | (246,225,327 | ) | ||
| Derecognition of deferred underwriting fee payable allocated to Class A ordinary shares | 9,910,904 | |||
| Accretion on Class A ordinary shares subject to possible redemption | (5,100,681 | ) | ||
| Class A ordinary shares subject to possible redemption as of December 31, 2023 | 67,719,662 | |||
| Redemption of shares | (62,727,099 | ) | ||
| Accretion on Class A ordinary shares subject to possible redemption | 471,077 | |||
| Class A ordinary shares subject to possible redemption as of March 31, 2024 | $ | 5,463,640 |
NOTE 9. SHAREHOLDERS’ DEFICIT
Preference Shares - The Company is authorized to issue 1,000,000 preference shares with a par value of $0.0001 per share. As of March 31, 2024 and December 31, 2023, there were no preference shares issued or outstanding.
Class A Ordinary Shares - The Company is authorized to issue 500,000,000 Class A ordinary shares with a par value of $0.0001 per share. Holders of the Company’s Class A ordinary shares are entitled to one vote for each share. For the three months ended March 31, 2024, 5,806,608 Class A ordinary shares were redeemed by shareholders. As of March 31, 2024 and December 31, 2023, there were 509,341 and 6,315,949 Class A ordinary shares outstanding, all of which were subject to possible redemption and included as temporary equity (see Note 8).
Class B Ordinary Shares - There were 7,618,750 shares issued and outstanding as of March 31, 2024 and December 31, 2023.
Class A ordinary shareholders and Class B ordinary shareholders of record are entitled to one vote for each share held on all matters to be voted on by shareholders. Except as described below, holders of Class A ordinary shares and holders of Class B ordinary shares will vote together as a single class on all matters submitted to a vote of the shareholders except as required by law.
The Class B ordinary shares will automatically convert into Class A ordinary shares at the time of the initial Business Combination at a ratio such that the number of Class A ordinary shares issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of (i) the total number of ordinary shares issued and outstanding upon completion of the Initial Public Offering, plus (ii) the total number of Class A ordinary shares issued or deemed issued or issuable upon conversion or exercise of any equity-linked securities (as defined herein) or rights issued or deemed issued, by the Company in connection with or in relation to the consummation of the initial Business Combination, excluding any Class A ordinary shares or equity-linked securities exercisable for or convertible into Class A ordinary shares issued, deemed issued, or to be issued, to any seller in the initial Business Combination and any Private Placement Warrants issued to the Sponsor, its affiliates or any member of the management team upon conversion of Working Capital Loans. In no event will the Class B ordinary shares convert into Class A ordinary shares at a rate of less than one to one.
NOTE 10. FAIR VALUE MEASUREMENTS
The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023, and indicate the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS
| Description | Amount at Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| March 31, 2024 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Warrant liability – Public Warrants | $ | 609,500 | $ | — | $ | 609,500 | $ | — | ||||||||
| Warrant liability – Private Placement Warrants | $ | 350,000 | $ | — | $ | 350,000 | $ | — | ||||||||
| F-23 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
| Description | Amount at Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Assets | ||||||||||||||||
| Investments held in Trust Account: | ||||||||||||||||
| Cash or demand deposit account | $ | 67,819,662 | $ | 67,819,662 | $ | — | $ | — | ||||||||
| Liabilities | ||||||||||||||||
| Warrant liability – Public Warrants | $ | 304,750 | $ | — | $ | 304,750 | $ | — | ||||||||
| Warrant liability – Private Placement Warrants | $ | 175,000 | $ | — | $ | 175,000 | $ | — | ||||||||
| Warrant liability | $ | 175,000 | $ | — | $ | 175,000 | $ | — | ||||||||
Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. There were no transfers during March 31, 2024 and December 31, 2023.
Level 1 assets include cash, demand deposit account and investments in money market funds that invest solely in U.S. Treasury securities. The Company uses inputs such as actual trade data, benchmark yields, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its investments.
For periods where no observable traded price was available, which was prior to March 2021 for the Public Warrants, and prior to December 2022 for the Private Placement Warrants, the fair value of the Public Warrants issued in connection with the Initial Public Offering was estimated using a Black-Scholes option pricing model. The Company utilized a Black-Scholes option pricing model to estimate the fair value of the Private Placement Warrants at each of the relevant reporting periods as described above, with changes in fair value recognized in the condensed consolidated statements of operations.
NOTE 11. SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred up to the date the unaudited condensed consolidated financial statements were issued. Based upon this review, other than as described below, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.
On April 5, 2024, the Company elected to extend the period of time it has to consummate its initial Business Combination by one month from April 5, 2024 to May 5, 2024. The Extension is the third of up to six monthly Extensions permitted under the Company’s governing documents.
On May 3, 2024, the Company elected to extend the period of time it has to consummate its initial Business Combination by one month from May 5, 2024 to June 5, 2024. The Extension is the fourth of up to six monthly Extensions permitted under the Company’s governing documents.
On June 3, 2024, the Company elected to extend the period of time it has to consummate its initial Business Combination by one month from June 5, 2024 to July 5, 2024. The Extension is the fifth of up to six monthly Extensions permitted under the Company’s governing documents.
On July 3, 2024, the Company elected to extend the period of time it has to consummate its initial Business Combination by one month from July 5, 2024 to August 5, 2024. The Extension is the sixth of up to six monthly Extensions permitted under the Company’s governing documents.
On April 4, 2024, the Company entered into a subscription agreement with an investor and the Sponsor to loan an aggregate principal amount of $250,000 (the “April 2024 Convertible Promissory Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of an aggregate of $250,000 Share Rights. At the option of the investor, upon the closing of a Business Combination, the outstanding principal amount of $250,000 may be converted into Class A common stock at a rate of one Class A common stock for each $10 of additional capital contribution (25,000 shares). The April 2024 Convertible Promissory Note is non-interest bearing and due within five business days from the date on which the Company consummates a Business Combination. If the Company does not consummate a Business Combination, the Company may use a portion of any funds held outside the Trust Account to repay the April 2024 Convertible Promissory Note; however, no proceeds from the Trust Account may be used for such repayment if the Company does not consummate the Business Combination.
On February 5, 2024, the Company received a notice (the “February 5, 2024 Nasdaq Notice”) from the Listing Qualifications Department of Nasdaq stating that the Company was not in compliance with Nasdaq IM-5102-2, which requires that a special purpose acquisition company complete one or more Business Combinations within 36 months of the effectiveness of its initial public offering registration statement. With respect to the February 5, 2024 Nasdaq Notice, a hearing on the matter was held on April 11, 2024. On April 19, 2024, the Nasdaq Hearings Panel issued written notice of its decision to grant the Company’s request for an exception to its listing deficiencies until July 1, 2024 in view of the Company’s substantial steps toward closing its previously announced initial Business Combination with AIRO Group Holdings and its plan for achieving compliance with Nasdaq listing rules upon closing of the transaction for listing on The Nasdaq Capital Market. On June 20, 2024, the Company requested that the Panel extend the deadline to regain compliance from July 1, 2024 to August 5, 2024, and on June 20, 2024, the request was granted.
On May 2, 2024, the Company received a written notice (the “May 2, 2024 Notice”) from the Listing Qualifications Department of Nasdaq notifying the Company that, for the last 32 consecutive business days, the Company’s Market Value of Listed Securities (“MVLS”) was below the minimum of $35 million required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rules 5550(b)(2) (the “Market Value Standard”). The Nasdaq also noted that the Company does not meet the requirements under Nasdaq Listing Rules 5550(b)(1) and 5550(b)(3). An indicator will be displayed with quotation information related to the Company’s securities on NASDAQ.com and NASDAQTrader.com and may be displayed by other third-party providers of market data information, however, the May 2, 2024 Notice does not impact the listing of the Company’s securities on The Nasdaq Capital Market at this time.
The May 2, 2024 Notice provided that, in accordance with Nasdaq Listing Rule 5810(c)(3)(C) (the “Compliance Period Rule”), the Company has a period of 180 calendar days from the date of the May 2, 2024 Notice, or until October 29, 2024 (the “Compliance Date”), to regain compliance with the Market Value Standard. During this period, the Company’s securities will continue to trade on The Nasdaq Capital Market. If at any time before the Compliance Date the Company’s MVLS closes at or above $35 million for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff will provide written notification to the Company that it has regained compliance with the Market Value Standard and will close the matter.
If the Company does not regain compliance with the Market Value Standard by the Compliance Date, the Staff will provide a written notification to the Company that its securities are subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Hearings Panel (the “Panel”). However, there can be no assurance that, if the Company receives a delisting notice and appeals the delisting determination by the Staff to the Panel, such appeal would be successful.
The Company intends to monitor its MVLS between now and the Compliance Date, and may, if appropriate, evaluate available options to resolve the deficiency under the Market Value Standard and regain compliance with the Market Value Standard. However, there can be no assurance that the Company will be able to regain or maintain compliance with Nasdaq listing criteria.
| F-24 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Kernel Group Holdings, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kernel Group Holdings, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in shareholders’ deficit and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, if the Company is unable to raise additional funds to alleviate liquidity needs and complete a business combination by August 5, 2024 then the Company will cease all operations except for the purpose of liquidating. The liquidity condition and date for mandatory liquidation and subsequent dissolution raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ WithumSmith+Brown, PC | |
| We have served as the Company’s auditor since 2020. | |
| New York, New York | |
| March 11, 2024 | |
| PCAOB Number 100 |
| F-25 |
CONSOLIDATED BALANCE SHEETS
| December 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 804 | $ | 93,095 | ||||
| Prepaid expenses | 27,148 | 42,022 | ||||||
| Total current assets | 27,952 | 135,117 | ||||||
| Cash and investments held in Trust Account | 67,819,662 | 309,234,766 | ||||||
| Total Assets | $ | 67,847,614 | $ | 309,369,883 | ||||
| Liabilities and Shareholders’ Deficit: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,729,095 | $ | 848,420 | ||||
| Accrued expenses and other current liabilities | 50,615 | 1,949,715 | ||||||
| Accrued expenses - related party | 290,000 | 170,000 | ||||||
| Promissory note - related party | 2,215,368 | — | ||||||
| Convertible promissory notes, net of discount | 1,565,113 | — | ||||||
| Total current liabilities | 7,850,191 | 2,968,135 | ||||||
| Deferred underwriting commissions | — | 10,666,250 | ||||||
| Warrant liabilities | 479,750 | 174,354 | ||||||
| Total Liabilities | 8,329,941 | 13,808,739 | ||||||
| Commitments and Contingencies | - | |||||||
| Class A ordinary shares subject to possible redemption, $0.0001 par value; 6,315,949 and 30,475,000 shares issued and outstanding at approximately $10.72 and $10.14 per share redemption value as of December 31, 2023 and December 31, 2022, respectively | 67,719,662 | 309,134,766 | ||||||
| Shareholders’ Deficit: | ||||||||
| Preference shares, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding as of December 31, 2023 and December 31, 2022 | — | — | ||||||
| Class A ordinary shares, $0.0001 par value; 500,000,000 shares authorized; no non-redeemable shares issued or outstanding as of December 31, 2023 and December 31, 2022 | — | — | ||||||
| Class B ordinary shares, $0.0001 par value; 50,000,000 shares authorized; 7,618,750 shares issued and outstanding as of December 31, 2023 and December 31, 2022 | 762 | 762 | ||||||
| Ordinary shares | ||||||||
| Additional paid-in capital | — | — | ||||||
| Accumulated deficit | (8,202,751 | ) | (13,574,384 | ) | ||||
| Total Shareholders’ Deficit | (8,201,989 | ) | (13,573,622 | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | 67,847,614 | $ | 309,369,883 | ||||
The accompanying notes are an integral part of these financial statements.
| F-26 |
CONSOLIDATED STATEMENTS OF OPERATIONS
| 2023 | 2022 | |||||||
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| General and administrative expenses | $ | 2,449,228 | $ | 992,819 | ||||
| Administrative fees - related party | 120,000 | 120,000 | ||||||
| Loss from operations | (2,569,228 | ) | (1,112,819 | ) | ||||
| Other income (expense): | ||||||||
| Unrealized (loss) gain from change in fair value of warrant liabilities | (305,396 | ) | 12,299,146 | |||||
| Income from cash and investments held in Trust Account | 2,260,223 | 4,469,702 | ||||||
| Gain on waiver of deferred underwriting commissions by underwriter allocated to Public Warrants | 755,346 | — | ||||||
| Unrealized loss on fair value of derivative liabilities - forward purchase agreement | (6,261,728 | ) | — | |||||
| Interest expense - amortization of debt discount | (1,415,773 | ) | — | |||||
| Interest expense | (4,880 | ) | — | |||||
| Total other income (expense), net | $ | (4,972,208 | ) | $ | 15,656,029 | |||
| Net (loss) income | $ | (7,541,436 | ) | $ | 15,656,029 | |||
| Basic and diluted weighted average shares outstanding, Class A ordinary shares | 12,726,377 | 30,475,000 | ||||||
| Basic and diluted net (loss) income per share, Class A ordinary shares | $ | (0.37 | ) | $ | 0.41 | |||
| Basic and diluted weighted average shares outstanding, Class B ordinary shares | 7,618,750 | 7,618,750 | ||||||
| Basic and diluted net (loss) income per share, Class B ordinary shares | $ | (0.37 | ) | $ | 0.41 | |||
The accompanying notes are an integral part of these financial statements.
| F-27 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
YEAR ENDED DECEMBER 31, 2023
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Ordinary Shares | Additional | Total | ||||||||||||||||||||||||||
| Class A | Class B | Paid-in | Accumulated | Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at January 1, 2023 | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (13,574,384 | ) | $ | (13,573,622 | ) | ||||||||||||||
| Proceeds allocated to Share Rights of convertible promissory note - related party | — | — | — | — | 1,550,660 | — | 1,550,660 | |||||||||||||||||||||
| Remeasurement of Class A ordinary shares to redemption amount | — | — | — | — | (1,550,660 | ) | 6,651,341 | 5,100,681 | ||||||||||||||||||||
| Extinguishment of forward purchase agreement | — | — | — | — | — | 6,261,728 | 6,261,728 | |||||||||||||||||||||
| Fair value of equity contract, mutual termination agreement | 0 | 0 | 0 | 0 | 0 | 53,100 | 53,100 | |||||||||||||||||||||
| Fair value of equity contract, mutual termination agreement | 0 | 0 | 0 | 0 | 0 | (53,100 | ) | (53,100 | ) | |||||||||||||||||||
| Net loss | — | — | — | — | — | (7,541,436 | ) | (7,541,436 | ) | |||||||||||||||||||
| Balance at December 31, 2023 | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (8,202,751 | ) | $ | (8,201,989 | ) | ||||||||||||||
YEAR ENDED DECEMBER 31, 2022
| Ordinary Shares | Additional | Total | ||||||||||||||||||||||||||
| Class A | Class B | Paid-in | Accumulated | Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at January 1, 2022 | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (24,845,647 | ) | $ | (24,844,885 | ) | ||||||||||||||
| Balance | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (24,845,647 | ) | $ | (24,844,885 | ) | ||||||||||||||
| Remeasurement of Class A ordinary shares to redemption amount | — | — | — | — | — | (4,384,766 | ) | (4,384,766 | ) | |||||||||||||||||||
| Net income | — | — | — | — | — | 15,656,029 | 15,656,029 | |||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 15,656,029 | 15,656,029 | |||||||||||||||||||||
| Balance at December 31, 2022 | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (13,574,384 | ) | $ | (13,573,622 | ) | ||||||||||||||
| Balance | — | $ | — | 7,618,750 | $ | 762 | $ | — | $ | (13,574,384 | ) | $ | (13,573,622 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
| F-28 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2023 | 2022 | |||||||
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net (loss) income | $ | (7,541,436 | ) | $ | 15,656,029 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Income from cash and investments held in Trust Account | (2,260,223 | ) | (4,469,702 | ) | ||||
| Interest expense - amortization of debt discount | 1,415,773 | — | ||||||
| Unrealized loss (gain) from change in fair value of warrant liabilities | 305,396 | (12,299,146 | ) | |||||
| Unrealized loss on fair value of derivative liabilities - forward purchase agreement | 6,261,728 | — | ||||||
| Gain on waiver of deferred underwriting commissions by underwriter allocated to Public Warrants | (755,346 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | 14,874 | 402,481 | ||||||
| Accounts payable | 2,880,675 | 50,631 | ||||||
| Accrued expenses and other current liabilities | (1,899,100 | ) | 227,857 | |||||
| Accrued expenses - related party | 120,000 | 120,000 | ||||||
| Net cash used in operating activities | (1,457,659 | ) | (311,850 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Advances to Trust Account | (2,550,000 | ) | — | |||||
| Proceeds from Trust Account for payment to redeeming shareholders | 246,225,328 | — | ||||||
| Net cash provided by investing activities | 243,675,328 | — | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from promissory note - related party | 2,215,368 | — | ||||||
| Proceeds from convertible promissory note | 1,700,000 | — | ||||||
| Payment to redeeming shareholders | (246,225,328 | ) | — | |||||
| Offering costs paid | — | (70,000 | ) | |||||
| Net cash used in financing activities | (242,309,960 | ) | (70,000 | ) | ||||
| Net Change in Cash | (92,291 | ) | (381,850 | ) | ||||
| Cash - Beginning of the year | 93,095 | 474,945 | ||||||
| Cash - End of the year | $ | 804 | $ | 93,095 | ||||
| Non-cash investing and financing activities: | ||||||||
| Waiver of deferred underwriting commissions by underwriter | $ | 9,910,904 | $ | — | ||||
The accompanying notes are an integral part of these financial statements.
| F-29 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 1. DESCRIPTION OF ORGANIZATION, BUSINESS OPERATIONS, RISKS AND UNCERTAINTIES 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 December 31, 2023, the Company had not commenced any operations. All activity from November 10, 2020 through December 31, 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 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 units (the “Units” and, with respect to the Class A ordinary shares included in the Units being offered, the “Public Shares”), including 3,975,000 additional Units to cover the underwriters’ over-allotment (the “Over-Allotment Units”), at $10.00 per Unit, generating gross proceeds of approximately $304.8 million, and incurring offering costs of approximately $17.4 million, of which approximately $10.7 million was for deferred underwriting commissions. On May 24, 2023, the underwriters agreed to waive their rights to their portion of the fee payable by the Company for deferred underwriting commissions, with respect to any potential Business Combination of the Company (see Note 6).
Simultaneously with the closing of the Initial Public Offering, the Company consummated a private placement (the “Private Placement”) of 8,750,000 warrants (the “Private Placement Warrants”), at a price of $1.00 per Private Placement Warrant with the Original Sponsor, generating gross proceeds of approximately $8.8 million, which is discussed in Note 4.
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 Class B ordinary shares of the Company, par value $0.0001 per share and 8,750,000 Private Placement Warrants, each of which is exercisable to purchase one Class A ordinary share of the Company, par value $0.0001 per share, for an aggregate purchase price of $1.00 payable at the time the Company effects the initial Business Combination. Upon the closing of the initial Business Combination, New Sponsor shall also convey 2,000,000 Class B ordinary shares to the equityholders of the Original Sponsor, as of December 28, 2022, pro rata based on the equityholders’ underlying interest in the Company’s Class B ordinary shares as of December 28, 2022 (see Note 4).
Upon the closing of the Initial Public Offering and the Private Placement, approximately $304.8 million ($10.00 per Unit) of the net proceeds of the Initial Public Offering and certain of the proceeds of the Private Placement were placed in the Trust Account with Continental Stock Transfer & Trust Company (“Continental”) acting as trustee and has been invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 (the “Investment Company Act”), as amended, having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations, as determined by the Company, until the earlier of (i) the completion of a Business Combination and (ii) the distribution of the Trust Account as described below.
| F-30 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
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.
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). The per-share amount to be distributed to Public Shareholders who redeem their Public Shares will not be reduced by the deferred underwriting commissions the Company will pay to the underwriters (as discussed in Note 6). 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 the Company has net tangible assets of at least $5,000,001 upon such consummation of a Business Combination and 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.
| F-31 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
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 does not complete a Business Combination within 30 months (including six month extension) from the closing of the Initial Public Offering, or February 5, 2023, (the “Combination Period”) or (B) with respect to any other provisions relating to shareholders’ rights or pre-initial Business Combination activity, unless the Company provides the Public Shareholders with the opportunity to redeem their Public Shares in conjunction with any such amendment.
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 of interest to pay dissolution expenses), divided by the number of the then-outstanding Public Shares, which redemption will completely extinguish Public Shareholders’ rights as shareholders (including the right to receive further liquidating distributions, if any); and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders and the board of directors, liquidate and dissolve, subject in the case of clauses (ii) and (iii), to the Company’s obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law.
In connection with the redemption of 100% of the Company’s outstanding Public Shares for a portion of the funds held in the Trust Account, each holder will receive a full pro rata portion of the amount then in the Trust Account, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay the Company’s taxes payable (less taxes payable and up to $100,000 of interest to pay dissolution expenses).
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 per share initially held in the Trust Account. In order to protect the amounts held in the Trust Account, the Sponsor agreed that it will be liable to the Company if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has entered into a written letter of intent, confidentiality or other similar agreement or Business Combination agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.00 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). In the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have vendors, service providers (except the Company’s independent registered public accounting firm), prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account. There can be no guarantee that the Company will be successful in obtaining such waivers from its targeted vendors and service providers.
| F-32 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Charter Amendment and Share Redemptions
In an extraordinary general meeting held on February 3, 2023, shareholders approved a charter amendment (the “Charter Amendment”), changing the structure and cost of the Company’s right to extend the 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% of the Company’s Public Shares (the “Termination Date”), which was previously February 5, 2023 (the “Charter Amendment Proposal”). The Charter Amendment allowed the Company to extend the Termination Date by up to six (6) one-month extensions to August 5, 2023 (each, an “Extension,” and such later date, the “Extended Deadline”) 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. To effect each 1-month Extension, the Company, its Sponsor or any of their affiliates or designees must deposit into the Company’s Trust Account with Continental by the applicable Extended Deadline (the “Extension Payment”), the lesser of (x) $300,000 or (y) $0.06 per share for each of the Company’s publicly held shares outstanding as of the deadline prior to the extension (after giving effect to redemptions in connection with the approval of the Charter Amendment by the Company’s shareholders with respect to the first such extension). In connection with the approval of the Charter Amendment Proposal, the shareholders also approved a proposal to amend the Company’s trust agreement with Continental (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 Charter Amendment (the “Trust Amendment Proposal”). In connection with the approval of the Charter Amendment Proposal and the Trust Amendment Proposal at the shareholders meeting, holders of 22,848,122 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate price of $10.15 per share, for an aggregate of approximately $231.9 million. Following the payment of the redemptions, the Trust Account had a balance of approximately $74.7 million before the first Extension Payment.
The shareholders of the Company approved the Amendment to the Amended and Restated Memorandum and Articles of Association of the Company (the “Second 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 “Section Charter Amendment Proposal”). To effect each 1-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 Second 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 Charter 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 Second Charter Amendment (the “Second Trust Amendment Proposal”).
| F-33 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
In connection with the approval of the Second Charter Amendment Proposal and the Second Trust Amendment Proposal at the August 3, 2023 Shareholders Meeting, holders of 1,310,929 of the Company’s Class A ordinary shares exercised their rights to redeem those shares for cash at an approximate price of $10.42 per share, for an aggregate of approximately $13.6 million. Following the payment of the redemptions, for the year ended December 31, 2023 showed the Trust Account with a balance of $67,819,662 inclusive of Extension Payments.
On each of February 9, 2023, March 7, 2023, April 4, 2023, May 9, 2023, June 6, 2023, and July 5, 2023 the Company deposited $300,000, and on each of August 3, 2023, September 5, 2023, October 5, 2023, November 6, 2023, and December 5, 2023 the Company deposited $150,000 into the Trust Account to extend the date to consummate a Business Combination through March 5, 2023, April 5, 2023, May 5, 2023, June 5, 2023, July 5, 2023, August 5, 2023, September 5, 2023, October 5, 2023, November 5, 2023, December 5, 2023, and January 5, 2024, respectively. As of December 31, 2023, cash deposited into the Trust Account in relation to the extensions amounted to $2,550,000. Refer to Note 11 for additional details.
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 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 (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 per share, shall convert into a share of Class B common stock, par value $0.0001 per share, and each Class A ordinary share, par value $0.0001 per share, shall convert into a share of Class A common stock, par value $0.0001 per share. Further, each share of Class B common stock and each share of Class A common stock that is then issued and outstanding shall convert automatically, on a one-for-one basis, into one share of Kernel common stock (the “Kernel Common Stock”).
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) $770,000,000 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 have the contingent right to receive from ParentCo, in the aggregate, up to 33,000,000 additional 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 $42,600,000 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 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. In the event that ParentCo’s EBITDA for any Earnout Period is (x) greater than or equal to $(19,300,000) for the first time during the Earnout Eligibility Period, (y) greater than or equal to $4,000,000 for the first time during the Earnout Eligibility Period and (z) greater than or equal to $98,600,000 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.
| F-34 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
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) 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. Refer to Note 11 for further information regarding the Third Amendment (the “Third Amendment”) to the Business Combination Agreement entered into on February 5, 2024, by and among the Parties.
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, 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 (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).
| F-35 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
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 on a $10.00 Per Share Price. Refer to Note 11 for additional details.
Risks and Uncertainties
The following is a summary of the principal risks described below in Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K. We believe that the risks described in the “Risk Factors” section are material to investors, but other factors not presently known to us or that we currently believe are immaterial may also adversely affect us. The following summary should not be considered an exhaustive summary of the material risks facing the Company, and it should be read in conjunction with the “Risk Factors” section and the other information contained in this Annual Report on Form 10-K.
● The company has no operating history and no revenues, and investors have no basis on which to evaluate the Company’s ability to achieve its business objective.
● Past performance by the management team or their respective affiliates may not be indicative of future performance of an investment in the Company.
● Your only opportunity to affect the investment decision regarding a potential business combination may be limited to the exercise of your right to redeem your shares from the Company for cash.
● If the Company seeks shareholder approval of our initial business combination, the Sponsor has agreed to vote in favor of such initial business combination, regardless of how the public shareholders vote.
● The ability of public shareholders to redeem their shares for cash may make the Company’s financial condition unattractive to potential business combination targets, which may make it difficult for the Company to enter into a business combination with a target.
● The requirement that the Company consummate an initial business combination within 36 (or 42, subject to six one-month extensions) months after the closing of its initial public offering may give potential target businesses leverage over the Company in negotiating a business combination and may limit the time the Company has in which to conduct due diligence on potential business combination targets, in particular as the Company approachs its dissolution deadline, which could undermine the Company’s ability to complete our initial business combination on terms that would produce value for its shareholders.
| F-36 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
● The Company’s search for a business combination, and any target business with which it ultimately consummates a business combination, may be materially adversely affected by the recent coronavirus (COVID-19) outbreak and the status of debt and equity markets.
● If the Company seeks shareholder approval of our initial business combination, the Company’s Sponsor, executive officers, directors or their affiliates may elect to purchase public shares or warrants, which may influence a vote on a proposed business combination and reduce the public “float” of the Company’s Class A ordinary shares or public warrants.
● If a shareholder fails to receive notice of the Company’s offer to redeem our public shares in connection with its initial business combination, or fails to comply with the procedures for tendering its shares, such shares may not be redeemed.
● The SEC issued final rules to regulate special purpose acquisition companies that may increase the Company’s costs and the time needed to complete its initial business combination.
● If the net proceeds of the IPO and the sale of the private placement warrants not being held in the Trust Account are insufficient to allow the Company to operate for the 36 months (or 42 months, subject to six one-month extensions) following the closing of the IPO, it could limit the amount available to fund the Company’s search for a target business or businesses and its ability to complete its initial business combination, and the Company will depend on loans from its Sponsor, its affiliates or members of the Company’s management team to fund its search and to complete its initial business combination.
● You will not have any rights or interests in funds from the Trust Account, except under certain limited circumstances. Therefore, to liquidate your investment, you may be forced to sell your public shares or warrants, potentially at a loss.
● You will not be entitled to protections normally afforded to investors of many other blank check companies.
● The waiver of fees by Citigroup Global Markets Inc. may indicate that they may be unwilling to be associated with the Company’s initial business combination.
● Nasdaq may delist the Company’s securities from its exchange which could limit investors’ ability to make transactions in the Company’s securities and subject the Company to additional trading restrictions
● If the Company seeks shareholder approval of its initial business combination and the Company does not conduct redemptions pursuant to the tender offer rules, and if you or a “group” of shareholders are deemed to hold in excess of 15% of the Company’s Class A ordinary shares, you will lose the ability to redeem all such shares in excess of 15% of the Company’s Class A ordinary shares.
● Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going concern.”
● Because the Company instructed Continental Stock Transfer & Trust Company to hold the funds in the Trust Account in an interest-bearing demand deposit account at a bank until the earlier of the consummation of our initial business combination or the Company’s liquidation, following such liquidation of investments in the Trust Account, the Company will receive less interest on the funds held in the Trust Account than it would have received had it not liquidated such investments in the Trust Account, which would reduce the dollar amount the public shareholders would receive upon any redemption or liquidation of the Company.
| F-37 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
● Subsequent to the Company’s completion of its initial business combination, it may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and the price of its securities, which could cause shareholders to lose some or all of their investment.
● If third parties bring claims against the Company, the proceeds held in the Trust Account could be reduced and the per-share redemption amount received by shareholders may be less than $10.00 per public share.
● The Company’s directors may decide not to enforce the indemnification obligations of the Sponsor, resulting in a reduction in the amount of funds in the Trust Account available for distribution to our public shareholders.
● The Company may not have sufficient funds to satisfy indemnification claims of its directors and executive officers.
● The Company’s warrants are accounted for as liabilities and the changes in value of its warrants could have a material effect on its financial results and thus may have an adverse effect on the market price of its securities.
| F-38 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Going Concern
As of December 31, 2023, the Company had approximately $804 in its operating bank account and a working capital deficit of $7,822,239.
The Company’s liquidity needs to date have been satisfied through a contribution of $25,000 from Original Sponsor to cover for certain expenses in exchange for the issuance of the Founder Shares, the loan of $77,000 from the Original Sponsor under the Note, certain portion of the proceeds from the consummation of the Private Placement not held in the Trust Account, the Promissory Note of $2,500,000, and Convertible Promissory Note of $1,700,000. The Company repaid $77,000 of the loan from the Original Sponsor in February 2021. In addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans. If the Company completes a Business Combination, the Company may repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans.
Management has determined 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,” the Company has determined that the liquidity condition, the date of the mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after August 5, 2024 (see Note 11). The financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. The Company’s management plans to complete a Business Combination prior to the mandatory liquidation date.
| F-39 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for financial information and pursuant to the rules and regulations of the SEC.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Making estimates requires the Company’s management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which the Company’s management considered in formulating its estimate, could change in the near term due to one or more future confirming events. One of the more significant accounting estimates included in these financial statements is the determination of the fair value of the warrant liability and Forward Purchase Agreement. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the Federal Deposit Insurance Corporation coverage limit of $250,000 and investments held in Trust Account. The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents as of December 31, 2023 or December 31, 2022.
| F-40 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Cash and Investments Held in Trust Account
Until February 2023, the Company’s portfolio of investments held in the Trust Account was comprised of U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or investments in money market funds that invest in U.S. government securities and generally have a readily determinable fair value, or a combination thereof. In July 2023, the Company instructed Continental to instead hold the funds in the Trust Account in an interest-bearing demand deposit account. In February 2023, the Company transferred the funds in the Trust Account into cash, and in August 2023, the Company transferred the Trust Account funds back to an interest-bearing demand deposit account. When the Company’s investments held in the Trust Account are comprised of U.S. government securities, the investments are classified as trading securities. When the Company’s investments held in the Trust Account are comprised of money market funds, the investments are recognized at fair value. Trading securities and investments in money market funds are presented on the consolidated balance sheets at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of these securities are included in income from investments held in Trust Account in the accompanying statements of operations. The estimated fair values of investments held in the Trust Account are determined using available market information. For the year ended December 31, 2023, $246,225,327 was paid to redeeming shareholders. At December 31, 2023 and December 31, 2022, the cash and investments held in the Trust Account totaled $67,819,662 and $309,234,766, respectively.
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the ASC Topic 820, “Fair Value Measurements”, equals or approximates the carrying amounts represented in the consolidated balance sheets, except for warrant liabilities (see Note 10).
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers consist of:
| ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815, “Derivatives and Hedging”. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
The warrants issued in connection with the Initial Public Offering and the Private Placement Warrants are recognized as derivative liabilities in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each consolidated balance sheet date until exercised. The fair value of warrants issued in connection with the Private Placement has been measured by using the market value of the public warrants. The fair value of the warrants issued in connection with the Initial Public Offering was initially measured using a Monte-Carlo simulation and subsequently has been measured based on the market price at each measurement date when separately listed and traded. The determination of the fair value of the derivative liability may be subject to change as more current information becomes available and accordingly the actual results could differ significantly. Derivative liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities. The Company’s public and private warrant liabilities (see Notes 7 and 10) are classified as derivatives in the consolidated balance sheets with changes in the fair value recognized in the statements of operations.
| F-41 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The Forward Purchase Agreement (see Note 4) was classified as a derivative in the consolidated balance sheets with changes in the fair value recognized in the statements of operations.
Convertible Promissory Notes
On March 23, 2023, Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal of $600,000 (the ‘First Polar Fund Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 600,000 Class A Common Stock at the closing of a Business Combination (“Share Rights”). At the option of Polar Multi-Strategy Master Fund, upon the closing of a Business Combination, the outstanding principal of $600,000 at December 31, 2023 may be converted into a number of Class A Common Stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (60,000 shares).
On April 4, 2023, Aesther Healthcare Sponsor agreed to loan the Company an aggregate principal of $50,000 (“the Aesther Healthcare Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 50,000 Class A Common Stock at the closing of a Business Combination (“Share Rights”). At the option of Aesther Healthcare Sponsor, upon the closing of a Business Combination, the outstanding principal of $50,000 at December 31, 2023 may be converted into a number of Class A Common Stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (5,000 shares).
On April 25, 2023, Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal of $800,000 (the “Second Polar Fund Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 800,000 Class A Common Stock at the closing of a Business Combination (“Share Rights”). At the option of Polar Multi-Strategy Master Fund, upon the closing of a Business Combination, the outstanding principal of $800,000 at December 31, 2023 may be converted into a number of Class A Common Stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (80,000 shares).
On December 6, 2023, Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal of $250,000 (the “Third Polar Fund Convertible Note”) to be used for a portion of the expenses of the Company in exchange for the issuance of 250,000 Class A Common Stock at the closing of a Business Combination (“Share Rights”). At the option of Polar Multi-Strategy Master Fund, upon the closing of a Business Combination, the outstanding principal of $250,000 at December 31, 2023 may be converted into a number of Class A Common Stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (25,0000 shares).
Collectively, the First Polar Fund Convertible Note, the Aesther Healthcare Convertible Note, Second Polar Fund Convertible Note, and Third Polar Fund Convertible Note are referred to as the Convertible Notes. The Company accounted for its Share Rights as equity-classified instruments based on an assessment of the Share Right’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815. The assessment considers whether the Share Rights are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the Share Rights meet all the requirements for equity classification under ASC 815, including whether the Share Rights are indexed to the Company’s own common stock, among other conditions for the equity classification. This assessment, which requires the use of professional judgment, was conducted at the time of Share Rights issuance. Both the Convertible Promissory Note and the Share Rights meet the scope exception of ASC 815-10-15-74(a). The Company applied the guidance in ASC 470-20-25-2, “Debt With Conversion and Other Options”, requiring that the loan proceeds be allocated to the two instruments based on their relative fair values. At March 23, 2023, the Company allocated $53,191 of the proceeds to the First Polar Fund Convertible Note and $546,809 for the Share Rights. At April 4, 2023, the Company allocated $4,409 of the proceeds to the Aesther Healthcare Convertible Note and $45,591 for the Share Rights. At April 25, 2023, the Company allocated $70,299 of the proceeds to the Second Polar Fund Convertible Note and $729,701 for the Share Rights. At December 6, 2023, the Company allocated $21,441 of the proceeds to the Third Polar Fund Convertible Note and $228,559 for the Share Rights. The Share Rights are recognized as a debt discount to the Convertible Promissory Notes and accreted through interest expense to the face value of the Convertible Promissory Notes utilizing an effective interest method. At December 31, 2023, the carrying value of the Convertible Promissory Notes (see Note 5) was $1,565,113, reflecting the unamortized discount of $134,887.
| F-42 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Offering Costs Associated with the Initial Public Offering
Offering costs consisted of legal, accounting, underwriting fees and other costs incurred through the Initial Public Offering that were directly related to the Initial Public Offering. Offering costs are allocated to the separable financial instruments issued in the Initial Public Offering based on a relative fair value basis, compared to total proceeds received. Offering costs associated with derivative warrant liabilities are expensed as incurred, and presented as other income (expenses) in the statements of operations. Offering costs associated with the Class A ordinary shares issued were charged against the carrying value of Class A ordinary shares upon the completion of the Initial Public Offering. The Company classifies deferred underwriting commissions as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities.
Class A Ordinary Shares Subject to Possible Redemption
The Company accounts for its Class A ordinary shares subject to possible redemption in accordance with the guidance in ASC Topic 480, “Distinguishing Liabilities from Equity.” Class A ordinary shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. Conditionally redeemable Class A ordinary shares (including Class A ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, Class A ordinary shares are classified as shareholders’ equity. The Company’s Class A ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, as of December 31, 2023 and December 31, 2022, the Company had 6,315,949 and 30,475,000 Class A ordinary shares subject to possible redemption, that are presented as temporary equity, outside of the shareholders’ deficit section of the Company’s consolidated balance sheets, respectively. For the year ended December 31, 2023, 24,159,051 Class A ordinary shares were redeemed by shareholders.
Under ASC 480-10 S99, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the security. Effective with the closing of the Initial Public Offering, the Company recognized the accretion from initial book value to redemption amount, which resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.
Net (Loss) Income per Ordinary Share
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share.” The Company has two classes of shares, which are referred to as Class A ordinary shares and Class B ordinary shares. Income and losses are shared pro rata between the two classes of shares. This presentation assumes a Business Combination as the most likely outcome. Net (loss) income per ordinary share is calculated by dividing the net (loss) income by the weighted average number of ordinary shares outstanding for the respective period.
The calculation of diluted net (loss) income per ordinary share does not consider the effect of the warrants underlying the Units sold in the Initial Public Offering and the Private Placement Warrants to purchase 23,987,500 Class A ordinary shares, nor the effect of the conversion features under the convertible promissory notes to issue up to 170,000 additional Class A ordinary shares, in the calculation of diluted (loss) income per share, because their exercise is contingent upon future events and their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted net (loss) income per share is the same as basic net (loss) income per share for the year ended December 31, 2023 and 2022. Accretion associated with the redeemable Class A ordinary shares is excluded from earnings per share as the redemption value approximates fair value.
| F-43 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The Company has considered the effect of Class B ordinary shares that were excluded from weighted average number as they were contingent on the exercise of over-allotment option by the underwriters. Since the contingency was satisfied, the Company included these shares in the weighted average number as of the beginning of the interim period to determine the dilutive impact of these shares.
SCHEDULE OF BASIC AND DILUTED NET INCOME PER SHARE OF ORDINARY SHARE
| For the Year Ended December 31, 2023 | For the Year Ended December 31, 2022 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net (loss) income - basic and diluted | $ | (4,717,354 | ) | $ | (2,824,082 | ) | $ | 12,524,823 | $ | 3,131,206 | ||||||
| Denominator: | ||||||||||||||||
| Weighted average ordinary shares outstanding, basic and diluted | 12,726,377 | 7,618,750 | 30,475,000 | 7,618,750 | ||||||||||||
| Basic and diluted net (loss) income per ordinary share | $ | (0.37 | ) | $ | (0.37 | ) | $ | 0.41 | $ | 0.41 | ||||||
Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes”. ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2023 and December 31, 2022. The Company’s management determined that the Cayman Islands is the Company’s only major tax jurisdiction. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
There is currently no taxation imposed on income by the government of the Cayman Islands. In accordance with Cayman federal income tax regulations, income taxes are not levied on the Company. Consequently, income taxes are not reflected in the Company’s financial statements. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Financial Instruments – Credit Losses
In January 2023, the Company adopted the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires an entity to utilize a new impairment model known as the current expected credit loss (CECL) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized costs, loans, and available-for-sale debt securities. The adoption of this standard did not have a material effect on the Company’s operating results or financial position as the only securities to which this standard applies are the U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or investments in money market funds that invest in U.S. government securities and generally have a readily determinable fair value, which the Company deemed to have no credit losses.
Recent Accounting Pronouncements
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The ASU amends ASC 820 to clarify that a contractual sales restriction is not considered in measuring an equity security at fair value and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The ASU applies to both holders and issuers of equity and equity-linked securities measured at fair value. The amendments in this ASU are effective for the Company in fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is still evaluating the impact of this pronouncement on the financial statements.
The Company’s management does not believe that any other recently issued, but not yet effective, accounting standards updates, if currently adopted, would have a material effect on the Company’s financial statements.
| F-44 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 3. INITIAL PUBLIC OFFERING
On February 5, 2021, the Company consummated its Initial Public Offering of 30,475,000 Units, including 3,975,000 Over-Allotment Units, at $10.00 per Unit, generating gross proceeds of approximately $304.8 million, and incurring offering costs of approximately $17.4 million, of which approximately $10.7 million was for deferred underwriting commissions. For the year ended December 31, 2023, 24,159,051, Class A ordinary shares were redeemed by shareholders.
Each Unit consists of one Class A ordinary share and one-half of one redeemable warrant (“Public Warrant”). Each whole Public Warrant will entitle the holder to purchase one Class A ordinary share at an exercise price of $11.50 per share, subject to adjustment (see Note 9).
NOTE 4. RELATED PARTY TRANSACTIONS
Founder Shares
On November 19, 2020, the Original Sponsor paid an aggregate of $25,000 for certain expenses on behalf of the Company in exchange for issuance of 5,750,000 Class B ordinary shares (the “Founder Shares”). On January 11, 2021, the Company effected a 1 for 1.25 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 5,750,000 to 7,187,500 shares, and the Original Sponsor transferred an aggregate of 75,000 Founder Shares to the independent directors and an aggregate of 50,000 Founder Shares to the Former Advisors. On February 2, 2021, the Company effected a 1 for 1.06 forward stock split of the Founder Shares that increased the number of outstanding Founder Shares from 7,187,500 to 7,618,750 shares and resulted in the Original Sponsor holding 7,493,750 Founder Shares. The Original Sponsor agreed to forfeit up to an aggregate of 993,750 Founder Shares to the extent that the option to purchase additional Units was not exercised in full by the underwriters or was reduced, so that the Founder Shares would represent 20% of the Company’s issued and outstanding shares after the Initial Public Offering. On February 5, 2021, the underwriter fully exercised its over-allotment option; thus, these 993,750 Founder Shares are no longer subject to forfeiture.
The Initial Shareholders agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of (A) one year after the completion of the initial Business Combination and (B) subsequent to the initial Business Combination, (x) if the closing price of the Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading-day period commencing at least 150 days after the initial Business Combination, or (y) the date on which the Company completes a liquidation, merger, share exchange, reorganization or other similar transaction that results in all of the Public Shareholders having the right to exchange their ordinary shares for cash, securities or other property.
On December 28, 2022, the Company entered into a purchase agreement with the Original Sponsor, and the New Sponsor, pursuant to which the New Sponsor, or an entity designated by the New Sponsor, will purchase from the Original Sponsor 7,618,750 Class B ordinary shares of the Company, par value $0.0001 per share and 8,750,000 Private Placement Warrants, each of which is exercisable to purchase one Class A ordinary share of the Company, par value $0.0001 per share, for an aggregate purchase price of $1.00 payable at the time the Company effects the initial Business Combination. Upon the closing of the initial Business Combination, New Sponsor shall also convey 2,000,000 Class B ordinary shares to the equityholders of the Original Sponsor, as of the Effective Date, pro rata based on the equityholders’ underlying interest in the Company’s Class B ordinary shares as of the Effective Date.
| F-45 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Private Placement Warrants
Simultaneously with the closing of the Initial Public Offering, the Company consummated a private placement (the “Private Placement”) of 8,750,000 Private Placement Warrants, at a price of $1.00 per Private Placement Warrant with the Original Sponsor, generating gross proceeds of approximately $8.8 million.
On December 28, 2022, the Original Sponsor transferred all Private Placement Warrants to the New Sponsor.
Each whole Private Placement Warrant is exercisable for one whole Class A ordinary share at a price of $11.50 per share. A portion of the proceeds from the sale of the Private Placement Warrants to the Original Sponsor was added to the proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the Private Placement Warrants will expire worthless. The Private Placement Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.
The Sponsor and the Company’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of their Private Placement Warrants until 30 days after the completion of the initial Business Combination.
Related Party Loans
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company may repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans may be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1.5 million of such Working Capital Loans may be convertible into warrants of the post Business Combination entity at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans.
During the year ended December 31, 2023, the Company entered into loan agreements with the Sponsor (the “Loan Agreements” or “Promissory Notes – related party”). Pursuant to the Loan Agreements, the investors loaned the Sponsor a total of $2,500,000, which will in turn be loaned by the Sponsor to the Company, to cover a portion of the extension fees with any remaining balance to be used for the Company’s working capital. The Loan Agreements accrue 8% interest per annum and shall be repaid upon closing the initial Business Combination. The Company intends to pay all principal under the Loan Agreements. As of December 31, 2023, the total amount drawn on the Loan Agreements was $2,215,368.
Administrative Support Agreement
Commencing on the date that the Company’s securities were first listed on Nasdaq through the earlier of consummation of the initial Business Combination or its liquidation, the Company agreed to pay the Sponsor $10,000 per month for office space, administrative and support services. For the years ended December 31, 2023 and 2022, the Company incurred $120,000 and $120,000 for such services, respectively. As of December 31, 2023 and December 31, 2022, $290,000 and $170,000 were outstanding, respectively, and included in accrued expenses – related party as reflected in the accompanying consolidated balance sheets.
In addition, the Sponsor, officers and directors, or any of their respective affiliates will be reimbursed for any out-of-pocket expenses incurred in connection with activities on the Company’s behalf such as identifying potential target businesses and performing due diligence on suitable Business Combinations. The audit committee will review on a quarterly basis all payments that were made by the Company to the Sponsor, officers or directors, or the Company’s or their affiliates. Any such payments prior to an initial Business Combination will be made from funds held outside the Trust Account. For the year ended December 31, 2023 and 2022, the Company did not incur or reimburse any Business Combination costs to the Sponsor or any related party.
| F-46 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Forward Purchase Agreement
In February 2023, the Company entered into a forward purchase agreement (the “Forward Purchase Agreement”) pursuant to which Meteora Special Opportunity Fund I, LP, Meteora Capital Partners, LP, Meteora Select Trading Opportunities Master, LP (collectively the “Seller”), intends, but is not obligated, to purchase from the Company up to a maximum of 7,700,000 Class A ordinary shares (the “Forward Purchase Shares”) from holders (other than the Company or its affiliates) who have elected to redeem such shares in connection with the Business Combination. Purchases by Seller will be made through brokers in the open market after the redemption deadline in connection with the Business Combination at a price no higher than the redemption price to be paid by the Company in connection with the Business Combination.
The Seller will determine in its sole discretion the specific number of Forward Purchase Shares (up to 7,700,000) that it will purchase, if any, and the obligation of the Company to sell the Forward Purchase Shares is subject to the approval of the Seller’s manager following notice to the Seller that the Company intends to enter into an agreement for a Business Combination.
The Forward Purchase Agreement also provides that the Seller is entitled to registration rights with respect to the Forward Purchase Shares. The proceeds from the sale of the Forward Purchase Shares may be used as part of the consideration to the Company in an initial Business Combination, expenses in connection with an initial Business Combination or for working capital in the post-Business Combination company. These purchases are required to be made regardless of whether any Class A ordinary shares are redeemed by the Public Shareholders and are intended to provide the Company with a minimum funding level for an initial Business Combination. The forward purchase shares will be issued only in connection with the closing of an initial Business Combination.
The Company accounts for the Forward Purchase Agreement in accordance with the guidance contained in ASC 480-10. Such guidance provides that because the forward purchase agreement does not meet the criteria for equity treatment thereunder, the agreement must be recorded as a liability. Accordingly, the Company classifies the forward purchase agreement as an asset or liability at its fair value. This asset or liability is subject to re-measurement at each consolidated balance sheet date. With each such remeasurement, the asset or liability will be adjusted to fair value, with the change in fair value recognized in the Company’s statements of operations.
On November 27, 2023, the Company, Seller, and AIRO entered into a mutual termination agreement (the “Mutual Termination Agreement”) to terminate the Forward Purchase Agreement. In consideration of the termination of the FPA, ParentCo agreed to issue 50,000 shares of common stock to an entity designated by Seller at the time of the closing of the Business Combination, which shares will have certain demand and piggyback registration rights. At the termination date the Company assessed the fair value of the derivative liability - forward purchase agreement and determined the change in fair value to be immaterial. The derivative liability - forward purchase agreement was extinguished as a result of the Mutual Termination Agreement, and upon the derecognition of the liability, a reduction of $6.3 million was recorded as a gain to accumulated deficit.
Pursuant to the Mutual Termination Agreement, in the event that the closing of the Business Combination does not occur or the Company otherwise fails to make the payment of the 50,000 shares, the Company shall pay or cause to be paid a break-up fee equal to (i) all of Seller’s actual out-of-pocket reasonable and documented fees, costs and expenses relating to the transaction in an amount not to exceed $50,000, plus (ii) $500,000, payable by the Company to the Seller, and (iii) reimbursement of reasonable and documented attorney fees and other reasonable out-of-pocket expenses related thereto actually incurred by Seller or its affiliates in connection with the transaction not to exceed $50,000.
| F-47 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The Company considered the guidance under ASC 815, Derivatives and Hedging, and determined the consideration shares payment pursuant to the Mutual Termination Agreement described above met the scope exception within ASC 815-10-15-74. As such, the equity-classified contract was accounted for within equity at fair value as determined on the settlement date. The measurement date fair value of $53,100 was determined using the Company’s share price on the settlement date, the number of shares pursuant to the Mutual Termination Agreement, and probability weighted for the Company’s expected percentage of completing its Business Combination.
NOTE 5. DEBT
The Convertible Promissory Notes are non-interest bearing and are due within five business days from the date on which the Company consummates a Business Combination. If the Company does not consummate a Business Combination, the Company may use a portion of any funds held outside the Trust Account to repay the Convertible Promissory Notes; however, no proceeds from the Trust Account may be used for such repayment if the Company does not consummate the Business Combination. The Convertible Promissory Notes may be converted into Class A Common Stock at one share for each $10 of additional capital contribution at the option of the investor.
The Company complies with ASC Topic 835, “Interest” (“ASC 835”). In accordance with ASC 835-30, discounts to the principal amounts are included in the carrying value of the Notes and amortized to “Interest expense” over the remaining term of the underlying debt to the Convertible Promissory Note’s maturity date.
As described in Note 2, on March 23, 2023 the Company entered into the First Polar Fund Convertible Note pursuant to which Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal of $600,000. The Company on April 25, 2023 entered into the Second Polar Fund Convertible Note, pursuant to which Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal of $800,000. Additionally, the Company on December 6, 2023, entered into the Third Polar Fund Convertible Note, pursuant to which Polar Multi-Strategy Master Fund agreed to loan the Company an aggregate principal of $250,000. As of December 31, 2023 and December 31, 2022, the outstanding balance under the First, Second, and Third Polar Fund Convertible Promissory Notes amounted to an aggregate of $1,650,000 and $0, respectively. The Company recorded $546,809, $729,701, and $228,559 for debt discount upon issuance of the First Polar Fund Convertible Note, Second Polar Fund Convertible Note, and Third Polar Fund Convertible Note, respectively. For the year ended December 31, 2023, the amortization of the discount resulted in total interest expense of $1,370,182 for these loans.
The Company also entered into the Aesther Healthcare Convertible Note on April 4, 2023, pursuant to which Aesther Healthcare Sponsor agreed to loan the Company an aggregate principal of $50,000. As of December 31, 2023 and December 31, 2022, the outstanding balance under the Aesther Healthcare Convertible Note amounted to an aggregate of $50,000 and $0, respectively. The Company recorded a $45,591 debt discount upon issuance of the Aesther Healthcare Convertible Promissory Note. As of December 31, 2023, the amortization of the discount resulted in interest expense of $45,591 for this loan.
For the year ended December 31, 2023, the amortization of the discount resulted in total interest expense of $1,415,773 for all of the Company’s convertible promissory note loans.
The following table presents the aggregate of Convertible Promissory Notes as of December 31, 2023:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| Principal value | $ | 1,700,000 | ||
| Debt discount | (134,887 | ) | ||
| Carrying value | $ | 1,565,113 |
| F-48 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 6. COMMITMENTS AND CONTINGENCIES
Registration and Shareholder Rights
The holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of Convertible Promissory Note (and any Class A ordinary shares issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans) were entitled to registration rights pursuant to a registration and shareholder rights agreement signed upon the effective date of the Initial Public Offering. The holders of these securities were entitled to make up to three demands, excluding short form demands, that the Company registers such securities. In addition, the holders will be entitled to certain demand and “piggyback” registration rights with respect to registration statements filed subsequent to the completion of the initial Business Combination. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
The Company granted the underwriters a 45-day option from the final date of the prospectus relating to the Initial Public Offering to purchase up to 3,975,000 additional Units at the Initial Public Offering price less the underwriting discounts and commissions. On February 5, 2021, the underwriter fully exercised its over-allotment option.
The underwriters were entitled to an underwriting discount of $0.20 per unit, approximately $6.1 million in the aggregate, paid upon the closing of the Initial Public Offering. In addition, $0.35 per unit, or approximately $10.7 million in the aggregate will be payable to the underwriters for deferred underwriting commissions. On May 24, 2023, the underwriters agreed to waive its rights to its portion of the fee payable by the Company for deferred underwriting commissions, with respect to any potential Business Combination of the Company. Of the total $10,666,250 waived fee, $9,910,904 was recorded as a decrease to accumulated deficit and $755,346 was recorded as a gain on the waiver of deferred underwriting commissions by underwriter in the consolidated statements of operations, following a manner consistent with the original allocation of the deferred underwriting fees.
Premium Finance Agreement - D&O Insurance
In order to obtain a public company directors and officers insurance policy (“D&O Insurance”), the Company entered into two agreements with premium financing lenders, where by the lenders paid the D&O Insurance premium for the company (“Premium Finance Agreements”). If the Company were to not pay the lenders monthly installment payments, the lenders would cancel the D&O Insurance and the remaining D&O Insurance premium would be returned to the lenders. In addition, if the Company were to cancel the D&O Insurance, the remaining D&O Insurance premium would be returned to the lenders.
The first Premium Finance Agreement is for $350,000 and accrues interest at a fixed rate of 7.5% per annum for a total of $3,136 over the term of the Premium Finance Agreement. Monthly payments of $35,784, were paid in four monthly installments, which commenced on February 28, 2023 with a maturity date of May 28, 2023. Upon entering into the Premium Finance Agreement, an upfront payment of $210,000 was due and paid on March 27, 2023.
The second Premium Finance Agreement is for $194,569 and accrues interest at a fixed rate of 7.5% per annum for a total of $1,744 over the term of the Premium Finance Agreement. Monthly payments of $19,893, were paid in four monthly installments, which commenced on February 28, 2023 with a maturity date of May 28, 2023. Upon entering into the Premium Finance Agreement, an upfront payment of $116,741 was due and paid on March 27, 2023.
For the year ended December 31, 2023, the total expenses incurred under the Premium Finance Agreements, covering upfront, monthly and interest payments were $548,665 and are included in general and administrative expenses on the accompanying statements of operations. The total cash disbursements made under the Finance Agreements totaled $545,302 for the year ended December 31, 2023.
| F-49 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 7. WARRANTS
As of December 31, 2023 and December 31, 2022, the Company had 15,237,500 Public Warrants and 8,750,000 Private Placement Warrants outstanding.
Public Warrants may only be exercised for a whole number of shares. No fractional Public Warrants will be issued upon separation of the Units and only whole Public Warrants will trade. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) 12 months from the closing of the Initial Public Offering; provided in each case that the Company has an effective registration statement under the Securities Act covering the Class A ordinary shares issuable upon exercise of the Public Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder (or the Company permit holders to exercise their warrants on a cashless basis under certain circumstances). The Company agreed that as soon as practicable, but in no event later than twenty (20) business days after the closing of the initial Business Combination, the Company will use commercially reasonable efforts to file with the SEC a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants and to maintain a current prospectus relating to those Class A ordinary shares until the warrants expire or are redeemed, as specified in the warrant agreement. If a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants is not effective by the 60th day after the closing of the initial Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above, if the Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, it will not be required to file or maintain in effect a registration statement.
The warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation. In addition, if (x) the Company issues additional Class A ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of the initial Business Combination at an issue price or effective issue price of less than $9.20 per ordinary share (with such issue price or effective issue price to be determined in good faith by the board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of the initial Business Combination on the date of the consummation of the initial Business Combination (net of redemptions), and (z) the volume weighted average trading price of Class A ordinary shares during the 20 trading day period starting on the trading day prior to the day on which the Company consummates its initial Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, the $18.00 per share redemption trigger price described under “Redemption of warrants when the price per Class A ordinary share equals or exceeds $18.00” and “Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00” will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price, and the $10.00 per share redemption trigger price described under “Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00” will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price.
| F-50 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except (i) that the Private Placement Warrants and the Class A ordinary shares issuable upon exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions, (ii) except as described below, the Private Placement Warrants will be non-redeemable so long as they are held by the Sponsor or such its permitted transferees and (iii) the Sponsor or its permitted transferees will have the option to exercise the Private Placement Warrants on a cashless basis and have certain registration rights. If the Private Placement Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by such holders on the same basis as the Public Warrants.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $18.00:
Once the warrants become exercisable, the Company may call the outstanding warrants (except as described herein with respect to the Private Placement Warrants):
| ● | in whole and not in part; | |
| ● | at a price of $0.01 per warrant; | |
| ● | upon a minimum of 30 days’ prior written notice of redemption; and | |
| ● | if, and only if, the last reported sale price (the “closing price”) of Class A ordinary shares equals or exceeds $18.00 per share (as adjusted) for any 20 trading days within a 30-trading-day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders. |
The Company will not redeem the warrants as described above unless a registration statement under the Securities Act covering the issuance of the Class A ordinary shares issuable upon exercise of the warrants is then effective and a current prospectus relating to those Class A ordinary shares is available throughout the 30-day redemption period.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00:
Once the warrants become exercisable, the Company may redeem the outstanding warrants:
| ● | in whole and not in part; | |
| ● | at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of Class A ordinary shares to be determined by reference to an agreed table based on the redemption date and the “fair market value” of Class A ordinary shares; | |
| ● | if, and only if, the closing price of Class A ordinary shares equals or exceeds $10.00 per share (as adjusted) for any 20 trading days within the 30-trading-day period ending three trading days before the Company sends the notice of redemption to the warrant holders; and | |
| ● | if the closing price of the Class A ordinary shares for any 20 trading days within a 30-trading-day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted), the Private Placement Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above. |
The “fair market value” of Class A ordinary shares for the above purpose shall mean the volume weighted average price of Class A ordinary shares during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. In no event will the warrants be exercisable on a cashless basis in connection with this redemption feature for more than 0.361 Class A ordinary shares per warrant (subject to adjustment).
In no event will the Company be required to net cash settle any warrant. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.
| F-51 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 8. CLASS A ORDINARY SHARES SUBJECT TO POSSIBLE REDEMPTION
The Company’s Class A ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of future events. The Company is authorized to issue 500,000,000 Class A ordinary shares with a par value of $0.0001 per share. Holders of the Company’s Class A ordinary shares are entitled to one vote for each share. As of December 31, 2023 and December 31, 2022, there were 6,315,949 and 30,475,000, respectively, of Class A ordinary shares outstanding, which were all subject to possible redemption and are classified outside of permanent equity in the consolidated balance sheets.
The Class A ordinary shares subject to possible redemption reflected on the consolidated balance sheets are reconciled on the following table:
SCHEDULE OF CLASS A ORDINARY SHARES SUBJECT TO POSSIBLE REDEMPTION
| Gross proceeds received from Initial Public Offering | $ | 304,750,000 | ||
| Less: | ||||
| Fair value of Public Warrants at issuance | (23,922,875 | ) | ||
Offering costs allocated to Class A ordinary shares | (16,172,159 | ) | ||
| Plus: | ||||
| Accretion on Class A ordinary shares to redemption value | 44,479,800 | |||
| Class A ordinary shares subject to possible redemption as of December 31, 2022 | 309,134,799 | |||
| Accretion on Class A ordinary shares subject to possible redemption | (241,415,104 | ) | ||
| Class A ordinary shares subject to possible redemption as of December 31, 2023 | $ | 67,719,662 |
NOTE 9. SHAREHOLDERS’ DEFICIT
Preference Shares-The Company is authorized to issue 1,000,000 preference shares with a par value of $0.0001 per share. As of December 31, 2023 and December 31, 2022, there were no preference shares issued or outstanding.
Class A Ordinary Shares-The Company is authorized to issue 500,000,000 Class A ordinary shares with a par value of $0.0001 per share. Holders of the Company’s Class A ordinary shares are entitled to one vote for each share. For the year ended December 31, 2023, 24,159,051 Class A ordinary shares were redeemed by shareholders. As of December 31, 2023 and December 31, 2022, there were 6,315,949 and 30,475,000 Class A ordinary shares outstanding, all of which were subject to possible redemption and included as temporary equity (see Note 8).
Class B Ordinary Shares- There were 7,618,750 shares issued and outstanding as of December 31, 2023 and December 31, 2022.
Class A ordinary shareholders and Class B ordinary shareholders of record are entitled to one vote for each share held on all matters to be voted on by shareholders. Except as described below, holders of Class A ordinary shares and holders of Class B ordinary shares will vote together as a single class on all matters submitted to a vote of the shareholders except as required by law.
The Class B ordinary shares will automatically convert into Class A ordinary shares at the time of the initial Business Combination at a ratio such that the number of Class A ordinary shares issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of (i) the total number of ordinary shares issued and outstanding upon completion of the Initial Public Offering, plus (ii) the total number of Class A ordinary shares issued or deemed issued or issuable upon conversion or exercise of any equity-linked securities (as defined herein) or rights issued or deemed issued, by the Company in connection with or in relation to the consummation of the initial Business Combination, excluding any Class A ordinary shares or equity-linked securities exercisable for or convertible into Class A ordinary shares issued, deemed issued, or to be issued, to any seller in the initial Business Combination and any Private Placement Warrants issued to the Sponsor, its affiliates or any member of the management team upon conversion of Working Capital Loans. In no event will the Class B ordinary shares convert into Class A ordinary shares at a rate of less than one to one.
| F-52 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 10. FAIR VALUE MEASUREMENTS
The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022, and indicate the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS
| Description | Amount at Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Assets | ||||||||||||||||
| Investments held in Trust Account: | ||||||||||||||||
| Cash or Deposit Account | $ | 67,819,662 | $ | 67,819,662 | $ | — | $ | — | ||||||||
| Liabilities | ||||||||||||||||
| Derivative liability – forward purchase agreement | $ | — | $ | — | $ | — | $ | — | ||||||||
| Warrant liability – Public Warrants | $ | 304,750 | $ | — | $ | 304,750 | $ | — | ||||||||
| Warrant liability – Private Placement Warrants | $ | 175,000 | $ | — | $ | 175,000 | $ | — | ||||||||
| Description | Amount at Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Assets | ||||||||||||||||
| Investments held in Trust Account: | ||||||||||||||||
| Money market funds | $ | 309,234,766 | $ | 309,234,766 | $ | — | $ | — | ||||||||
| Liabilities | ||||||||||||||||
| Warrant liability – Public Warrants | $ | 86,854 | $ | 86,854 | $ | — | $ | — | ||||||||
| Warrant liability – Private Placement Warrants | $ | 87,500 | $ | — | $ | 87,500 | $ | — | ||||||||
| Warrant liability | 87,500 | 87,500 | ||||||||||||||
Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. The estimated fair value of the Private Placement Warrants was transferred from a Level 3 measurement to a Level 2 fair value measurement in December 2022, as the Black-Scholes model used historically did not produce a meaningful result, the Company determined that the fair value of each Private Placement Warrant is equivalent to that of each Public Warrant. The estimated fair value of the Public Warrants transferred from a Level 1 fair value measurement to a Level 2 fair value measurement in the second quarter of 2023 due to limited trading activity observed. There were no other transfers during the years ended December 31, 2023 and 2022.
Level 1 assets include cash, demand deposit account and investments in money market funds that invest solely in U.S. Treasury securities. The Company uses inputs such as actual trade data, benchmark yields, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its investments.
For periods where no observable traded price was available, the fair value of the Public Warrants issued in connection with the Initial Public Offering, the Company utilized Black-Scholes Option Pricing Model to estimate the fair value of the private warrants at each reporting period, with changes in fair value recognized in the statements of operations.
The estimated fair value of the Forward Purchase Agreement was measured at fair value using a Monte Carlo simulation model, which was determined using Level 3 inputs. Inherent in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life, and risk-free interest rate. The Company estimates the volatility based on historical volatility of select peer company’s shares that matches the expected remaining life of the Forward Purchase Agreement. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the Forward Purchase Agreement. The expected life of the Forward Purchase Agreement is assumed to be equivalent to their remaining contractual term. Any changes in these assumptions can change the valuation significantly.
The following table provides quantitative information regarding Level 3 fair value measurements inputs at their inception date:
SCHEDULE OF LEVEL 3 FAIR VALUE MEASUREMENT INPUTS
| Forward Purchase Agreement | At June 30, 2023 | |||
| Exercise price | $ | 10.39 | ||
| Stock Price | $ | 10.49 | ||
| Time to Business Combination (years) | 3.34 | |||
| Risk-free rate | 4.33 | % | ||
| Volatility rate | 4.70 | % | ||
| Probability of completing an initial Business Combination | 75 | % | ||
The following table provides quantitative information regarding Level 3 fair value measurements inputs at their measurement date:
| Forward Purchase Agreement | At November 27, 2023 | |||
| Exercise price | $ | 10.53 | ||
| Stock Price | 10.62 | |||
| Time to Business Combination (years) | 2.97 | |||
| Risk-free rate | 4.39 | % | ||
| Volatility rate | 4.80 | % | ||
| Probability of completing an initial Business Combination | 75 | % | ||
On November 27, 2023, the Company, Seller, and AIRO entered into a mutual termination agreement (the “Mutual Termination Agreement”) to terminate the Forward Purchase Agreement. Refer above to Note 4 for further discussion of the termination.
The following table provides a summary of the changes in the fair value of the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis:
SCHEDULE OF FINANCIAL INSTRUMENTS THAT ARE MEASURED AT FAIR VALUE ON A RECURRING BASIS
| Derivative liability - forward purchase agreement at December 31, 2022 | $ | - | ||
| Unrealized loss | 5,473,232 | |||
| Fair value as of June 30, 2023 | $ | 5,473,232 | ||
| Unrealized loss | 788,496 | |||
| Fair value as of September 30, 2023 | $ | 6,261,728 | ||
| Unrealized loss | - | |||
| Fair value as of November 27, 2023, immediately prior to extinguishment | $ | 6,261,728 | ||
| Extinguishment of derivative liability - forward purchase agreement (See Note 4) | (6,261,728 | ) | ||
| Fair value as of November 27, 2023, upon extinguishment | $ | - | ||
| Unrealized loss | - | |||
| Fair value as of December 31, 2023 | $ | - |
As discussed in Note 4, the Forward Purchase Agreement was terminated on November 27, 2023 and upon termination, the derivative liability - forward purchase agreement had a fair value of $0 as of December 31, 2023.
| F-53 |
KERNEL GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
NOTE 11. SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred up to the date financial statements were issued. Based upon this review, other than as described below, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.
On January 4, 2024, The Company deposited $150,000 into the Company’s Trust Account for its public shareholders, representing $0.02 per public share, allowing the Company to extend the period of time it has to consummate its initial Business Combination by one month from January 5, 2024, to August 5, 2024. The Extension is the sixth of up to six-monthly extensions permitted under the Company’s governing documents.
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 Inc. shareholders 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, (the “Outside Date”) from August 2, 2023, to August 5, 2024.
On February 1, 2024, the Company held an extraordinary general meeting of its shareholders pursuant to due notice (the “Shareholders Meeting”). 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 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 Charter Amendment allows the Company to extend the Termination Date by up to six (6) one-month extensions to August 5, 2024 (each of which we refer to as an “Extension”, and such later date, the “Extended Deadline”) 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 Shareholders approved the proposal at the meeting (the “Extension Amendment Proposal”) to change the structure and cost of the Company’s right to extend the date by which the Company must (i) consummate a merger, capital stock exchange, asset acquisition, stock repurchase, reorganization or similar Business Combination involving the Company and one or more businesses, (ii) cease its operations if it fails to complete such Business Combination, or (iii) redeem or repurchase 100% of the Company’s Class A ordinary shares included as part of the units sold in the Company’s initial public offering from February 5, 2024, 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.
At the Shareholders Meeting, holders of 5,806,608 of the Company’s Public Shares exercised their right to redeem those shares for cash at an approximate value of $10.80 per share, for an aggregate of approximately $62.7 million. Following the payment of the redemptions, the Trust Account will have a balance of approximately $5.5 million.
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 amended and removed the previous requirement of the Company to satisfy maintain a minimum of $5,000,001 in net tangible assets at Closing.
On February 5, 2024 the Company received a notice (the “February 5, 2024 Nasdaq Notice”) from the Listing Qualifications Department of Nasdaq stating that the Company is not in compliance with Nasdaq IM-5101-2, which requires that a special purpose acquisition company complete one or more Business Combinations within 36 months of the effectiveness of its initial public offering registration statement. The letter stated that unless the Company requests a hearing before the Nasdaq Hearings Panel (the “Panel”), trading of the Company’s securities on the Nasdaq Capital Market would be suspended at the opening of business on February 14, 2024. The Company requested a hearing before the Panel to request sufficient time to complete the previously disclosed proposed Business Combination with AIRO Group Holdings. The hearing request made pursuant to the Nasdaq Notice resulted in a stay of any suspension or delisting action, pending the hearing. The hearing is scheduled for April 11, 2024. However, there can be no assurance that the Company will be able to satisfy Nasdaq’s continued listing requirements, regain compliance with Nasdaq IM-5101-2, and maintain compliance with other Nasdaq listing requirements.
On February 23, 2024, three accredited investors agreed to loan the Company an aggregate principal of $250,000, (the “February 2024 Convertible Promissory Notes”) $100,000, $100,000, and $50,000 respectively, to be used for a portion of the expenses of the Company in exchange for the issuance of an aggregate 250,000 Class A Common Stock at the closing of a Business Combination (“Share Rights”), or 100,000, 100,000, and 50,000 to each of the investors. At the option of the investors, upon the closing of a Business Combination, the outstanding principal of $250,000 may be converted into a number of Class A Common Stock at a rate of one Class A Common Stock for each $10 of additional capital contribution (25,000 shares). The Convertible Promissory Notes are non-interest bearing and are due within five business days from the date on which we consummate a Business Combination. If the Company does not consummate a Business Combination, the Company may use a portion of any funds held outside the Trust Account to repay the Convertible Promissory Notes; however, no proceeds from the Trust Account may be used for such repayment if the Company does not consummate the Business Combination.
On March 5, 2024, the Company issued a press release announcing that they have elected to extend the period of time it has to consummate its initial Business Combination by one month from March 5, 2024 to April 5, 2024 (the “Extension”). The Extension is the second of up to six monthly extensions permitted under the Company’s governing documents.
On June 24, 2024, the Company, ParentCo, Kernel Merger Sub, AIRO Merger Sub, Seller Representative, AIRO Group Holdings, and the Sponsor entered into the Fourth Amendment to the Business Combination Agreement, which amends the Business Combination Agreement to delete the Sponsor’s right to receive Earnout Shares.
| F-54 |
Condensed Consolidated Balance Sheets
unaudited
| March 31, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 8,129,109 | $ | 4,117,875 | ||||
| Restricted cash | 2,525,268 | 8,984,437 | ||||||
| Accounts receivable, net | 1,184,815 | 1,377,388 | ||||||
| Related party receivables | 571,826 | 445,033 | ||||||
| Inventory | 3,021,491 | 2,864,170 | ||||||
| Prepaid expenses and other current assets | 1,195,269 | 1,368,123 | ||||||
| Total current assets | 16,627,778 | 19,157,026 | ||||||
| Property and equipment, net | 9,878,595 | 10,132,103 | ||||||
| Right-of-use operating lease assets | 240,762 | 329,957 | ||||||
| Goodwill | 599,972,842 | 602,602,501 | ||||||
| Intangible assets, net | 102,079,963 | 105,054,245 | ||||||
| Other assets | 252,285 | 246,786 | ||||||
| Total assets | $ | 729,052,225 | $ | 737,522,618 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 17,209,090 | $ | 17,229,424 | ||||
| Related party payables | 1,019,225 | 993,023 | ||||||
| Accrued expenses | 7,446,039 | 6,974,174 | ||||||
| Operating lease liabilities, current | 238,545 | 328,560 | ||||||
| Deferred revenue | 4,876,777 | 11,088,153 | ||||||
| Related party borrowings | 5,236,991 | 4,371,239 | ||||||
| Revolving lines of credit | 1,044,956 | 743,227 | ||||||
| Current maturities of debt | 25,066,097 | 25,014,151 | ||||||
| Due to seller | 18,331,295 | 18,766,921 | ||||||
| Total current liabilities | 80,469,015 | 85,508,872 | ||||||
| Long-term debt, net of current maturities | 500,000 | 500,000 | ||||||
| Deferred compensation | 9,903,800 | 9,327,168 | ||||||
| Deferred tax liability | 1,363,690 | 1,475,102 | ||||||
| Long-term deferred revenue | 18,813 | 14,649 | ||||||
| Operating lease liabilities, noncurrent | 7,630 | 8,853 | ||||||
| Other long-term liabilities | 50,000 | 50,000 | ||||||
| Contingent consideration | 45,382,276 | 45,182,276 | ||||||
| Total liabilities | 137,695,224 | 142,066,920 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.000001 par value; 35,000,000 shares authorized; 27,858,276 shares issued and outstanding as of March 31, 2024 and December 31, 2023 | 28 | 28 | ||||||
| Additional paid-in capital | 764,267,949 | 763,975,884 | ||||||
| Stockholder loan | (5 | ) | (5 | ) | ||||
| Accumulated other comprehensive loss | (3,142,236 | ) | (761,163 | ) | ||||
| Accumulated deficit | (169,768,735 | ) | (167,759,046 | ) | ||||
| Total stockholders’ equity | 591,357,001 | 595,455,698 | ||||||
| Total liabilities and stockholders’ equity | $ | 729,052,225 | $ | 737,522,618 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-55 |
Condensed Consolidated Statements of Operations
unaudited
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenue | $ | 13,739,936 | $ | 5,485,728 | ||||
| Cost of revenue | 5,252,855 | 3,296,851 | ||||||
| Gross profit | 8,487,081 | 2,188,877 | ||||||
| Operating expenses: | ||||||||
| Research and development | 3,156,860 | 3,278,641 | ||||||
| Sales and marketing | 1,250,410 | 1,127,205 | ||||||
| General and administrative | 4,543,285 | 5,079,612 | ||||||
| Total operating expenses | 8,950,555 | 9,485,458 | ||||||
| Loss from operations | (463,474 | ) | (7,296,581 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense, net | (288,488 | ) | (612,377 | ) | ||||
| Other expense, net | (268,149 | ) | (10,392,989 | ) | ||||
| Total other expense | (556,637 | ) | (11,005,366 | ) | ||||
| Loss before income tax expense | (1,020,111 | ) | (18,301,947 | ) | ||||
| Income tax expense | (989,578 | ) | - | |||||
| Net loss | $ | (2,009,689 | ) | $ | (18,301,947 | ) | ||
| Net loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.66 | ) | ||
| Weighted-average number of common shares used in computing net loss per share, basic and diluted | 27,858,276 | 27,858,276 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-56 |
AIRO Group Holdings, Inc.
Condensed Consolidated Statements of comprehensive loss
unaudited
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net loss | $ | (2,009,689 | ) | $ | (18,301,947 | ) | ||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation, net of tax | (2,381,073 | ) | 1,086,989 | |||||
| Total other comprehensive income (loss) | (2,381,073 | ) | 1,086,989 | |||||
| Comprehensive loss | $ | (4,390,762 | ) | $ | (17,214,958 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-57 |
Condensed Consolidated Statements of Stockholders’ Equity
unaudited
| Common Stock | Additional Paid-In | Stockholder | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Loan | Loss | Deficit | Equity | ||||||||||||||||||||||
| Balance as of January 1, 2024 | 27,858,276 | $ | 28 | $ | 763,975,884 | $ | (5 | ) | $ | (761,163 | ) | $ | (167,759,046 | ) | $ | 595,455,698 | ||||||||||||
| Stock-based compensation | - | - | 292,065 | - | - | - | 292,065 | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (2,381,073 | ) | - | (2,381,073 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (2,009,689 | ) | (2,009,689 | ) | |||||||||||||||||||
| Balance as of March 31, 2024 | 27,858,276 | $ | 28 | $ | 764,267,949 | $ | (5 | ) | $ | (3,142,236 | ) | $ | (169,768,735 | ) | $ | 591,357,001 | ||||||||||||
| Common Stock | Additional Paid-In | Stockholder | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Loan | Loss | Deficit | Equity | ||||||||||||||||||||||
| Balance as of January 1, 2023 | 27,858,276 | $ | 28 | $ | 762,160,659 | $ | (5 | ) | $ | (3,861,000 | ) | $ | (135,302,623 | ) | $ | 622,997,059 | ||||||||||||
| Stock-based compensation | - | - | 577,722 | - | - | - | 577,722 | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 1,086,989 | - | 1,086,989 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (18,301,947 | ) | (18,301,947 | ) | |||||||||||||||||||
| Balance as of March 31, 2023 | 27,858,276 | $ | 28 | $ | 762,738,381 | $ | (5 | ) | $ | (2,774,011 | ) | $ | (153,604,570 | ) | $ | 606,359,823 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-58 |
Condensed Consolidated Statements of Cash Flows
unaudited
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,009,689 | ) | $ | (18,301,947 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Stock-based compensation | 292,065 | 577,722 | ||||||
| Provision for (recovery of) credit losses | 6,553 | (3,282 | ) | |||||
| Non-cash interest | 138,424 | 155,267 | ||||||
| Depreciation and amortization | 3,236,221 | 3,172,008 | ||||||
| Accretion of deferred compensation assumed | - | 239,497 | ||||||
| Amortization of right-of-use lease assets | 87,466 | 130,672 | ||||||
| Change in fair value of contingent consideration | 200,000 | 10,430,975 | ||||||
| Change in deferred taxes | (85,552 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 175,181 | 485,720 | ||||||
| Related party receivables | (126,793 | ) | (75,793 | ) | ||||
| Prepaid expenses and other assets | 169,709 | (400,087 | ) | |||||
| Inventory | (204,302 | ) | 108,258 | |||||
| Accounts payable, accrued expenses and other long-term liabilities | 559,441 | 2,130,005 | ||||||
| Related party payables | 62,984 | 52,400 | ||||||
| Lease liabilities | (89,508 | ) | (130,135 | ) | ||||
| Deferred revenue | (5,998,506 | ) | 10,184,472 | |||||
| Deferred compensation | 576,632 | 274,503 | ||||||
| Net cash provided by (used in) operating activities | (3,009,674 | ) | 9,030,255 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment and investment in intangible assets | (171,037 | ) | (70,307 | ) | ||||
| Net cash used in investing activities | (171,037 | ) | (70,307 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Change in lines of credit | 301,729 | (48,960 | ) | |||||
| Change in related party lines of credit | - | 868,115 | ||||||
| Proceeds from borrowings | 250,000 | 400,000 | ||||||
| Repayments on borrowings | (228,611 | ) | (161,770 | ) | ||||
| Proceeds from related party borrowings | 704,000 | 775,000 | ||||||
| Debt issuance costs paid | - | (25,000 | ) | |||||
| Payment of contingent consideration | - | (10,000 | ) | |||||
| Net cash provided by financing activities | 1,027,118 | 1,797,385 | ||||||
| Effect of exchange rate changes | (294,342 | ) | 15,337 | |||||
| Net increase (decrease) in cash and restricted cash | (2,447,935 | ) | 10,772,670 | |||||
| Cash and restricted cash as of beginning of period | 13,102,312 | 828,652 | ||||||
| Cash and restricted cash as of end of period | $ | 10,654,377 | $ | 11,601,322 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-59 |
Notes to Unaudited Condensed Consolidated Financial Statements
| 1. | The Company and Summary of Significant Accounting Policies |
Nature of Operations
AIRO Group Holdings, Inc. (“Holdings”) a Delaware corporation, was formed on October 5, 2021, for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry to develop its business across four primary divisions: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility.
In October 2021, Holdings entered into agreements and plans of merger (the “Merger Agreements”) with AIRO Drone, LLC (“AIRO Drone”), Agile Defense, LLC (“Agile Defense”), Coastal Defense, Inc. (“Coastal Defense”), Jaunt Air Mobility, LLC (“Jaunt”), and Aspen Avionics, Inc. (“Aspen Avionics”). Holdings also entered into an equity purchase agreement (“Equity Purchase Agreement”) with Sky-Watch A/S (“Sky-Watch”). AIRO Drone, Agile Defense, Coastal Defense, Jaunt, Aspen Avionics and Sky-Watch together represent the “Merger Entities.” Under the Merger Agreements and Equity Purchase Agreement, the parties desired to enter into a transaction in which Holdings would acquire all of the equity of the Merger Entities. Between February and April 2022, the acquisitions of the Merger Entities by Holdings were completed.
On March 3, 2023, the Company entered into an Agreement and Plan of Merger by and between the Company, Kernel Group Holdings, Inc. (“Kernel”), AIRO Group, Inc., Kernel Merger Sub, Inc., AIRO Merger Sub, Inc., VKSS Capital, LLC, and Dr. Chirinjeev Kathuria (the “Business Combination Agreement”). Pursuant to the Business Combination Agreement, Kernel will domesticate as a Delaware corporation, following which Kernel will merge with and into Kernel Merger Sub, Inc. (the “First Merger”) and the Company will merge with and into AIRO Merger Sub, Inc. (the “Second Merger”). Upon closing of the First Merger and Second Merger, both Kernel and Holdings and its subsidiaries (together, the “Company”) will survive as wholly owned subsidiaries of AIRO Group, Inc., whose common stock and warrants are expected to trade on Nasdaq as “AIRO” and “AIROW.” The Company and the other parties thereto subsequently amended the Business Combination Agreement in August 2023, January 2024, February 2024, and June 2024 to fix the number of earnout shares that can be granted in each earnout period, revise the earnout thresholds, remove the $5,000,001 net tangible assets closing condition, and delete the Sponsor’s right to receive Earnout Shares.
Holdings has organized the assembled businesses into four primary divisions consisting of: (i) Advanced Avionics (Aspen Avionics); (ii) Training (Coastal Defense and Agile Defense); (iii) Uncrewed Air Systems (Sky-Watch and AIRO Drone); and (iv) Electric Air Mobility (Jaunt). Advanced Avionics develops, manufactures, and sells avionics and electronic global position system (“GPS”) sensors for the General Aviation (“GA”), Unmanned Aerial Systems (“UAS”) and Electric Vertical Takeoff and Landing (“eVTOL”) market segments. The Training Division provides training and advisory services to the U.S. military and the private aerospace industry. The Uncrewed Air Systems Division provides drones, drone platforms and services used for civilian, commercial, and military applications. The Electric Air Mobility Division builds next generation aircraft to meet the growing demands for faster, more affordable, and environmentally more sustainable travel over urban areas.
Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries, including Old AGI, Inc. f/k/a AIRO Group, Inc. (“AIRO Group”), AIRO Drone, Agile Defense, Jaunt, Sky-Watch, Coastal Defense, and Aspen Avionics. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results. The condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated financial statements as of that date, but do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as of an annual date.
The results for the unaudited interim condensed consolidated statements of operations are not necessarily indicative of results to be expected for the year ending December 31, 2024 or for any future interim period. The unaudited interim condensed consolidated financial statements do not include all of the disclosures required by U.S. GAAP for complete financial statements. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2023 and notes thereto.
| F-60 |
Liquidity and Management’s Plans
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception. As of March 31, 2024, the Company had cash and restricted cash of $10.7 million of which $2.5 million was either restricted or was designated to only being used for Sky-Watch operations and a working capital deficit of $63.8 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is actively pursuing a transaction with a special purpose acquisition company (“SPAC”). Management expects to use the proceeds from the SPAC transaction to support the operations of the consolidated entity, settle the outstanding indebtedness assumed from the Merger Entities and to pay the consideration owed to certain entities in connection with the closing of the mergers. There can be no assurance that the SPAC transaction will be successful. In the event the Company does not complete its SPAC transaction, the Company will seek additional funding through other means including private equity financing and debt financing. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments, estimates and assumptions are used to determine litigation and claims and other asset and liability amounts. The Company bases its estimates and judgments on historical experience along with other pertinent information available at the time the estimate is made. However, future events are subject to change and the estimates and judgments may require adjustments. Actual results could differ from these estimates and these differences may be material.
Business Combinations and Asset Acquisitions
The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. Examples of estimates and assumptions in valuing certain of the intangible assets and goodwill the Company has acquired include, but are not limited to, future expected cash flows from acquired developed technologies, customer relationships, and tradenames. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
The authoritative guidance allows a measurement period of the purchase price allocation that ends when the entity has obtained all relevant information about facts that existed at the acquisition date, and that cannot exceed one year from the date of acquisition. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the condensed consolidated statements of operations.
Where the purchase of an entity or net assets does not meet the definition of a business, the Company accounts for the transaction as an asset acquisition. In an asset acquisition, the purchase price is allocated to the net assets acquired on a relative fair value basis, and no goodwill is recognized in the transaction. Direct costs for asset acquisitions are generally considered part of the purchase price.
| F-61 |
Business Risk and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and accounts receivable. Cash is maintained with financial institutions and the composition and maturities are regularly monitored by management. Deposits at any time may exceed federally insured limits. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. A large portion of the Company’s sales result in partial prepayments prior to shipment from customers. Otherwise customer invoices generally have payment terms of net 30 days and do not have a significant financing component.
The Company’s operational structure includes an existing operating business and early-stage businesses in emerging and developing markets that are concentrated in an industry characterized by rapid technological advances, changes in customer requirements, and evolving regulatory requirements and industry standards. Any significant delays in the development or introduction of products or services, or any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements, or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company’s business and operating results.
The Company’s business, results of operations, and financial condition for the foreseeable future will likely continue to depend on sales to a relatively small number of customers. In the future, these customers may decide not to purchase the Company’s products, may purchase fewer products than in previous years, or may alter their purchasing patterns. Further, the amount of revenue attributable to any single customer or customer concentration generally may fluctuate in any given period. In addition, a decline in the production levels of one or more of the Company’s major customers could reduce revenue. The loss of one or more key customers, a reduction in sales to any key customer or the Company’s inability to attract new significant customers could negatively impact revenue and adversely affect the Company’s business, results of operations, and financial condition.
Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less from the date of purchase to be cash equivalents. The Company had no cash equivalents as of March 31, 2024 and December 31, 2023.
Restricted Cash
The Company had $2.5 million and $9.0 million in restricted cash as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 and December 31, 2023, restricted cash was primarily deposits from a customer contract that have been placed in an escrow account to be released upon shipment of orders.
Accounts Receivable, Net
Accounts receivable are reported on the accompanying condensed consolidated balance sheets at the gross outstanding amount adjusted for a provision for credit losses. The Company determines the provision for credit losses by regularly evaluating expected loss as well as individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. As of March 31, 2024 and December 31, 2023, the Company provided a provision for credit losses of $0.1 million for amounts that may ultimately be uncollectible. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
| F-62 |
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is primarily determined based on standard cost and approximates actual cost on a first-in, first-out basis. Work-in-process and finished goods include materials, labor and allocated overhead. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. Reductions to the carrying value of inventory are charged to cost of revenue and a new, lower cost basis for that inventory is established. Subsequent changes to facts or circumstances do not result in the restoration or increase in the related inventory value. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Fair Value Measurements
The Company applies the requirements of the fair value measurements framework, which establishes a hierarchy for measuring fair value and requires enhanced disclosures about fair value measurements. The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement guidance also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy in which these assets and liabilities must be grouped based on significant levels of inputs as follows:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2: | Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability. | |
| Level 3: | Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following is a summary of the financial liabilities measured at fair value on a recurring basis by caption and by level within the fair value hierarchy as of March 31, 2024 and December 31, 2023:
| Fair value as of March 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Debt | $ | - | $ | - | $ | 19,440,519 | $ | 19,440,519 | ||||||||
| Contingent consideration | - | - | 45,382,276 | 45,382,276 | ||||||||||||
| Total financial liabilities | $ | - | $ | - | $ | 64,822,795 | $ | 64,822,795 | ||||||||
| Fair value as of December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Debt | $ | - | $ | - | $ | 19,426,848 | $ | 19,426,848 | ||||||||
| Contingent consideration | - | - | 45,182,276 | 45,182,276 | ||||||||||||
| Total financial liabilities | $ | - | $ | - | $ | 64,609,124 | $ | 64,609,124 | ||||||||
There were no financial assets measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023. There were no transfers between Levels 1, 2, or 3 within the fair value hierarchy during the three months ended March 31, 2024 nor during the year ended December 31, 2023.
| F-63 |
Debt
As discussed in Note 2. Revolving Lines of Credit and Long-Term Debt, the Company modified certain debt arrangements as of March 31, 2022. The debt was recorded at present value to estimate the fair value of the debt obligation as of March 31, 2024 and December 31, 2023. The effective interest rate in the fair value shown above for March 31, 2024 and December 31, 2023 was 12.5%.
Contingent Consideration
As of March 31, 2024 and December 31, 2023, the contingent consideration includes an obligation assumed from the Jaunt acquisition that is contingent on future cash receipts and promissory notes issued in conjunction with the Merger Entities.
The contingent consideration liability is measured at fair value on a recurring basis for which there was no available quoted market prices or principal markets. The inputs for this measurement were unobservable and were, therefore, classified as Level 3 inputs.
The obligation assumed from Jaunt was valued using discounted cash flow models. As of March 31, 2024 and December 31, 2023, the significant inputs included discount factors ranging from 21% to 45% and a 67% initial public offering (“IPO”) likelihood to arrive at a total fair value of $36.0 million and $35.8 million, respectively.
The fair value of the contingent consideration promissory notes issued to the former equity holders of Agile Defense, AIRO Drone and Coastal Defense totaled $9.4 million as of March 31, 2024 and December 31, 2023. Valuations were based on a 67% probability of an IPO closing and a discount rate of 3% as of March 31, 2024 and December 31, 2023 based on proximity to an estimated closing date. In October 2023, the Company signed various agreements with certain promissory note holders pursuant to which 90% of the total amounts payable in cash, or approximately $11.9 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $1.3 million shall be paid at closing of the business combination.
| F-64 |
As of January 1, 2023, the contingent consideration included a $5.9 million earnout and a $7.8 million promissory note issued in conjunction with the acquisition of Sky-Watch. During the first quarter of 2023, the contingent promissory note issued in conjunction with the acquisition of Sky-Watch was amended such that it was payable no later than December 31, 2023. As the contingency was resolved, the difference between the December 31, 2022 fair value of $7.8 million and the face value of the promissory note of $12.9 million was recorded to other expense, net during the three months ended March 31, 2023 and the $12.9 million liability was reclassed to due to seller. See Note 12 for additional considerations related to due to seller.
The Sky-Watch earnout liability was originally payable up to $6.5 million, of which up to a maximum of $3.0 million was payable on a dollar-for-dollar basis on revenue earned within the first two-year anniversary of the acquisition and $3.5 million would become due and payable if and only if Sky-Watch earns a minimum of $13.8 million in revenue during the period from the acquisition date through June 2024. In December 2022, the Equity Purchase Agreement was amended to increase the second earnout amount to $7.5 million and to extend the earnout period to include the full fiscal year periods of 2022 through 2024. In March 2023, the Equity Purchase Agreement was further amended to add a third earnout of $4.0 million if revenue during the full fiscal year periods of 2022 through 2024 reaches $17.0 million. During the three months ended March 31, 2023, the change in fair value related to this earn-out totaled $2.2 million. As of December 31, 2023, the earnout liability was recorded to the full amount owed net of $3.0 million in payments made to date totaling $11.5 million and was classified as due to seller as all contingencies had been resolved. See Note 12 for additional considerations related to due to seller.
The changes in fair value of the Level 3 financial liabilities for the three months ended March 31, 2024 and 2023 were as follows:
| Contingent | ||||||||
| Debt | Consideration | |||||||
| Balance as of January 1, 2024 | $ | 19,426,848 | $ | 45,182,276 | ||||
| Change in fair value | 13,671 | 200,000 | ||||||
| Balance as of March 31, 2024 | $ | 19,440,519 | $ | 45,382,276 | ||||
| Balance as of January 1, 2023 | $ | 19,098,741 | $ | 54,807,319 | ||||
| Change in fair value | 82,027 | 10,527,047 | ||||||
| Settlement | - | (10,000 | ) | |||||
| Transfers to due to seller liability | - | (12,880,000 | ) | |||||
| Balance as of March 31, 2023 | $ | 19,180,768 | $ | 52,444,366 | ||||
The change in the fair value of the debt is included in “Interest expense, net” on the condensed consolidated statements of operations and represents the amortization of the debt discount. The change in the fair value of the contingent consideration, which includes the effect of translating the contingent consideration with Sky-Watch from local currency to reporting currency, is included in “Other expense, net” on the condensed consolidated statements of operations.
Fair Value of Financial Instruments
The carrying value of accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate fair value due to the short time to maturity. The carrying value of the Company’s borrowings approximates fair value based on current rates available to the Company.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability approach method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the condensed consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases, as well as for net operating losses and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more-likely-than-not to be realized.
| F-65 |
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will more-likely-than-not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as income tax expense. No interest or penalties have been accrued for as of March 31, 2024 or December 31, 2023.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation of property and equipment is provided primarily utilizing the straight-line method for condensed consolidated financial statement purposes at rates based on the following useful lives:
| Aircraft equipment | 5 - 20 years | |
| Machinery and equipment | 2 - 15 years | |
| Furniture and fixtures | 3 - 10 years | |
| Leasehold improvements | The shorter of the useful life or term of the lease | |
| Software | 3 - 7 years |
Additions, improvements, and expenditures that significantly add to the productivity or extend the economic life of assets are capitalized. Any amounts incurred as recurring expenditures or that do not extend or improve the economic life of the asset are expensed as incurred.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested at the reporting unit level for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has selected October 1st as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment for these assets. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if an impairment test is necessary. Management may choose to proceed directly to the evaluation, bypassing the initial qualitative assessment. The impairment test involves comparing the fair value of the reporting unit to which goodwill is allocated to its net book value, including goodwill. A goodwill impairment loss would be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. No goodwill impairment charges have been recorded for any period presented.
Definite-lived Intangible Assets
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of the acquired business to the respective net tangible and intangible assets. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed. The Company capitalizes third-party legal costs and filing fees, if any, associated with obtaining patents. Once the patent asset has been placed in service, the Company amortizes these costs over the shorter of the asset’s legal life, generally 20 years from the initial filing date, or its estimated economic life using the straight-line method.
| F-66 |
The estimated useful lives for the Company’s intangible assets are as follows:
| Estimated useful life | ||
| Developed technology | 8 to 13 years | |
| Tradenames - definite-lived | 4 to 8 years | |
| Customer relationships | 3 to 7 years | |
| Patents | up to 20 years |
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value.
Revenue Recognition
The Company recognizes revenue when, or as, it satisfies performance obligations by transferring promised products or services to its customers in an amount that reflects the consideration the Company expects to receive. The Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company accounts for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable.
For certain sales, the Company has contracts with customers that include multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, by allocating the contract’s total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”) of each distinct good or service in the contract. The Company determines the SSP based on its overall pricing objectives, taking into consideration market conditions. Determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is recognized when control of the promised services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. The Company’s contracts do not include highly variable components. The timing of revenue recognition, billings, and cash collections can result in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities). The costs to obtain contracts, primarily commission expenses, are expensed when incurred.
Amounts that are invoiced are recorded in accounts receivable and revenues or deferred revenue, depending on whether the revenue recognition criteria have been met. A large portion of the Company’s sales result in partial prepayments prior to shipment from customers. Otherwise customer invoices generally have payment terms of net 30 days and do not have a significant financing component.
The Company’s revenues are derived from various sources: (i) avionics products consisting primarily of hardware with embedded firmware sold to an authorized dealer network and avionics and global navigation satellite system technologies (“GNSS”) products sold to original equipment manufacturers (“OEMs”), (ii) research and development (“R&D”) projects, (iii) sales-based royalties related to GNSS technology licensed to OEMs, (iv) consultation and training services related to aerial integration and close air support providing the latest tactics, technique, and procedures (“TTP”) to incorporate contract close air support/intelligence surveillance reconnaissance (“CCAS/ISR”) with video downlink systems into tactical operations, (v) technology and equipment sales (vi) mini unmanned aerial systems (“MUAS” or “commercial drones”) sales, including hardware, software, training, support and product service, and (vii) drone services, including surveys, imaging, security, and other drone applications.
| F-67 |
The Company expenses costs to obtain a contract as incurred when the amortization period is one year or less.
In general, revenue is disaggregated by segment and geography. See Note 11. Segment Information.
Product Revenue
Product revenue, which includes avionics, MUAS/commercial drones and other equipment sales, is recognized upon the transfer of control of promised products to the customer in an amount that depicts the consideration the Company is entitled to for the related products. Product revenue is recognized upon shipment or delivery and title and risk of loss have transferred to the customer.
Service and Extended Warranty Revenue
Service revenue includes drone services, support, training, consultations, and out-of-warranty repairs. Revenue from services rendered is recognized over time in amounts that correspond directly with the value to the customer when performance is completed. Support revenue is recognized on a straight line basis over the support period, which is generally one year.
Extended warranties are service-type warranties and are typically sold under separate contracts. Revenue for those extended warranties is recognized over the contractual service period, which is typically two years.
Research and Development Contracts
Revenue from engineering development projects is recognized over a period of time based on the input method and is measured by the percentage of total labor and materials cost incurred to date to estimated total labor and materials cost at completion for each contract. The input method of accounting involves considerable use of estimates in determining revenues, costs, and profits and in assigning the amounts to accounting periods; as a result, there can be a significant disparity between earnings as reported and actual cash received by the Company during any reporting period.
Sales-based Royalties
Revenue for sales-based royalties is recognized at a point in time as subsequent sales occur.
The following table summarizes the revenue recognition based on time periods:
| Three Months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Point in time | $ | 13,022,568 | $ | 5,275,442 | ||||
| Over time | 717,368 | 210,286 | ||||||
| $ | 13,739,936 | $ | 5,485,728 | |||||
The contract liabilities as of March 31, 2024 and December 31, 2023 were $4.9 million and $11.1 million, respectively. The majority of contract liabilities are expected to be recognized as revenue through 2025. The Company had no significant contract assets as of March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024, the Company recognized $0.7 million in revenue previously included in contract liabilities as of December 31, 2023.
| F-68 |
Cost of Revenue
Cost of revenue includes labor cost and direct material cost, including freight and duties. Indirect production costs comprising of consumables, cost of sales freight, quality related costs and production maintenance costs are also included in cost of revenue.
Shipping and Handling
Shipping charges billed to customers are included in revenue and related costs are included in cost of revenue.
Research and Development
Research and development costs are expensed when incurred.
Product Warranty
Drone Product Warranty
The Company provides a one-year warranty on certain drone sales provided the customer enters into a one-year service-and-support contract. Estimated future warranty obligations related to those products are recorded as a component of cost of revenue in the condensed consolidated statements of operations at the time of sale.
Avionics Product Warranty
The Company establishes warranty reserves based on estimates of avionics product warranty return rates and expected costs to repair or to replace the avionics products under warranty. The warranty provision is recorded as a component of cost of revenue in the condensed consolidated statements of operations. The Company does not offer returns unless special circumstances exist and the return is approved by the Company.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards based on the grant-date estimated fair value of the awards. Options and restricted stock awards may be granted as time-based awards, performance-based awards or combinations of the time-based and performance-based awards. The Company expenses the fair value of its options to employees and non-employees on a straight-line basis over the associated service period for time-based awards, which is generally the vesting period. The performance-based awards begin their period of ratable vesting at the time that the Company determines that the achievement of the performance thresholds is probable. The Company accounts for forfeitures as they occur and does not estimate forfeitures at the time of grant. Ultimately, the actual expense recognized over the vesting period will be for only those options that vest.
Comprehensive Loss
Comprehensive loss generally represents all changes in the equity of a business except those resulting from investments or contributions by stockholders. Unrealized gains and losses on foreign currency translation adjustments, net of tax are included in the Company’s components of comprehensive loss, which are excluded from net loss.
Lease Accounting
At contract inception, the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease and reassesses that conclusion if the contract is modified. Operating leases are recorded in operating lease right-of-use (“ROU”) assets, lease liability, current and lease liability, noncurrent on the condensed consolidated balance sheets. The Company did not have any finance leases during the periods presented.
| F-69 |
The Company recognizes operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The lease ROU asset is reduced for tenant incentives, if any, and excludes any initial direct costs incurred, if any. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. The Company defines the initial lease term to include renewal options determined to be reasonably certain. If the Company determines the option to extend or terminate is reasonably certain, it is included in the determination of lease assets and liabilities. The Company reassesses the lease term if and when a significant event or change in circumstances occurs within the control of the Company, such as construction of significant leasehold improvements that are expected to have economic value when the option becomes exercisable.
The Company recognizes a single lease cost on a straight-line basis over the term of the lease, and the Company classifies all cash payments within operating activities in the condensed consolidated statements of cash flows.
The Company has lease agreements with lease and non-lease components, which it has elected to not combine for all asset classes. In addition, the Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less of all asset classes.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the treasury stock method and computed by dividing net loss available to common stockholders by the diluted weighted-average shares of common stock outstanding during each period. The potentially dilutive shares are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when the effect is dilutive.
The potentially dilutive shares of common stock that have been excluded from the calculation of net loss per share because of the anti-dilutive effect are as follows as of March 31:
2024 | 2023 | |||||||
| Outstanding stock options | 605,236 | 605,236 | ||||||
| Warrants to purchase common stock | 112,246 | 112,246 | ||||||
| Contingent restricted stock awards | 431,818 | 431,818 | ||||||
| Potential stock issuable for contingent interest payment | 274,544 | 222,222 | ||||||
| Potential shares issuable under debt conversion agreements | 3,622,316 | - | ||||||
| Total anti-dilutive securities | 5,046,160 | 1,371,522 | ||||||
The number of potentially dilutive shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of the period end. Such amounts have not been adjusted for the treasury stock method or weighted-average outstanding calculations as required if the securities were dilutive.
Debt Discounts
Debt issuance costs are presented as a discount to the related debt and are amortized over the term of the related loan for which the fees were incurred using the straight-line method, which approximates the effective interest method.
The Company has issued convertible debt together with detachable warrants and other equity incentives. The Company allocates the proceeds from the related debt between the debt and the equity classified incentives using the relative fair value method. The amount of proceeds allocated to incentives and the fair value of the warrants is recorded as a discount against the debt and amortized over the term of the related debt using the effective interest method.
Foreign Currency
The functional currency of the Company’s foreign subsidiary is its local currency. As such, assets and liabilities are translated to U.S. dollars at the exchange rates on the date of consolidation and related revenues and expenses are generally translated at average exchange rates prevailing during the period included in results of operations. Adjustments resulting from foreign currency translation are recorded in accumulated other comprehensive loss on the condensed consolidated balance sheets. Foreign currency transaction gains and losses are included in other expense, net on the condensed consolidated statements of operations. Losses from foreign currency transactions were not significant for the three months ended March 31, 2024 and 2023, respectively.
| F-70 |
Recent Accounting Pronouncements
On August 5, 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06 Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The Company adopted the new standard on January 1, 2024 and the adoption did not have a material impact on the condensed consolidated financial statements.
On October 28, 2021, the FASB issued ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which amends Accounting Standards Codification (“ASC”) 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The Company adopted the new standard on January 1, 2024 which did not have a material impact on the condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024 and requires retrospective application to all prior periods presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on the condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024. Entities are permitted to early adopt the standard for annual financial statements that have not yet been issued or made available for issuance. Adoption is either prospectively or retrospectively. The Company will adopt this ASU on a prospective basis. The Company is currently evaluating the impact of the new standard on the condensed consolidated financial statements and related disclosures.
| 2. | Revolving Lines of Credit and Long-Term Debt |
Revolving Lines of Credit
In February 2020, Aspen Avionics entered into a Loan and Security Agreement for an asset-based loan facility (the “Facility”) with Crestmark, a Division of Pathward (formerly known as Metabank), with a maximum advance limit of $2.5 million. The Facility is due on demand. The Facility carries variable interest at the greater of 9% or prime plus 4.25% (12.75% as of March 31, 2024 and December 31, 2023) and is collateralized by substantially all assets of Aspen Avionics. Cash receipts of Aspen Avionics are submitted to a lockbox, which is subject to a control agreement whereby all cash receipts are received by the lender and applied against the balance of the loan. Aspen Avionics obtains additional advances on the Facility based on eligible accounts receivable and inventory collateral.
The terms of the Facility include reporting requirements and a tangible net worth covenant, which Aspen Avionics was not in compliance with as of March 31, 2024 or December 31, 2023. In January 2023, the borrowing base formula was updated, removing inventory from the borrowing base, and lowered the net tangible worth threshold. As of March 31, 2024 and December 31, 2023, Aspen Avionics was out of compliance with the amended tangible net worth threshold and was in discussions with the bank regarding an additional amendment waiving the violation. In May 2024, the lender waived compliance with the tangible net worth threshold for January 2024 and February 2024. The Facility is guaranteed by three subsidiaries of Aspen Avionics: Accord Technology, LLC, Accord Software and Systems, Inc., and AvValues, LLC.
As of March 31, 2024 and December 31, 2023, the outstanding balance on the Facility, net of unamortized debt issuance costs, was $0.6 million and $0.3 million, respectively.
In November 2018, Coastal Defense obtained two variable rate non-disclosable revolving lines of credit of up to $0.5 million and $0.2 million, due on demand, from First Citizens Community Bank (“FCCB”). These arrangements are collateralized by aircraft security agreements, assignments of life insurance, an assignment of a deposit account, and commercial security agreements dated November 15, 2018, and all associated financing statements. Interest was initially set at the prime rate as published in the Wall Street Journal plus 0.50 percentage points. Commencing in 2022, the Company was in default on these facilities, resulting in an additional 4% in interest per annum. The annual interest rate was 13% as of March 31, 2024 and December 31, 2023. Jeffrey F. Parker, Coastal Defense’s Vice-President, Treasurer, and stockholder of Holdings; Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, Coastal Defense’s President and stockholder of Holdings; have guaranteed these notes. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2069. No withdrawals or significant repayments were made during the three months ended March 31, 2024, the year ended December 31, 2023 or through the date of issuance. The total amount outstanding on the lines of credit as of March 31, 2024 and December 31, 2023 was $0.4 million and $0.5 million, respectively.
The two lines of credit with First Citizens Community Bank contain certain financial covenants. As of March 31, 2024 and December 31, 2023, the Company was not in compliance with these financial covenants. The lines of credit are due on demand and are shown as a current liability under “Revolving lines of credit” on the condensed consolidated balance sheets.
| F-71 |
Current Maturities of Debt and Long-Term Debt
Current maturities of debt and long-term debt consist of the following as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| First Citizens Community Bank 2018 | $ | 426,368 | $ | 535,041 | ||||
| Bridge Loans | 3,859,500 | 3,609,500 | ||||||
| Muncy Bank & Trust Company 2021-1 | 651,000 | 651,000 | ||||||
| Muncy Bank & Trust Company 2021-2 | 450,000 | 450,000 | ||||||
| SBA COVID-19 Economic Injury Disaster Loan (“EIDL”) | 500,000 | 500,000 | ||||||
| Financed Insurance Premiums | 115,330 | 185,619 | ||||||
| First Citizens Community Bank 2019-1 | 64,575 | 81,729 | ||||||
| First Citizens Community Bank 2019-2 | 58,804 | 74,414 | ||||||
| 2022 Notes | 2,066,396 | 2,066,396 | ||||||
| 2019 Notes | 5,022,353 | 5,022,353 | ||||||
| 2018 Notes | 12,351,771 | 12,351,771 | ||||||
| 25,566,097 | 25,527,823 | |||||||
| Less: unamortized debt discount | - | (13,672 | ) | |||||
| Less: current maturities of long-term debt | (25,066,097 | ) | (25,014,151 | ) | ||||
| Long-term debt, net of current maturities | $ | 500,000 | $ | 500,000 | ||||
Aggregate maturities required on long-term debt as of March 31, 2024 are due in future years as follows:
| Amount | ||||
| 2024 (remaining) | $ | 25,066,097 | ||
| 2025 | - | |||
| 2026 | - | |||
| 2027 | 6,974 | |||
| 2028 | 10,891 | |||
| Thereafter | 482,135 | |||
| Total | $ | 25,566,097 | ||
| F-72 |
First Citizens Community Bank 2018
On November 15, 2018, Coastal Defense entered into a $2.6 million note payable agreement with First Citizens Community Bank. This arrangement is collateralized by aircraft security agreements, assignments of life insurance, an assignment of a deposit account, a commercial security agreement dated November 15, 2018, and all associated financing statements. The loan includes a provision for a prepayment penalty in the amount of 5% on the current principal balance in year one, 4% of the current principal balance in year two, 3% of the current principal balance in year three, and 2% of the current principal balance in year four. The loan requires that Coastal Defense maintain a debt service coverage ratio of 1.20 to 1.00 and had an initial interest rate of 5.75% per year. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2023. As of March 31, 2024 and December 31, 2023, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note became due on demand and is shown as a component of “Current maturities of debt” on the condensed consolidated balance sheets. As of March 31, 2024 and December 31, 2023, the interest rate was 10.49% per year. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company has negotiated forbearance agreements to prevent FCCB from enforcing the judgments through June 30, 2024. Jeffrey F. Parker, Coastal Defense’s Vice President and Treasurer and stockholder of Holdings; the estate of Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, Coastal Defense’s President and stockholder of Holdings; have guaranteed this note.
Bridge Loans
Since May 2022, the Company has issued unsecured promissory notes, with no collateral or guarantees, to third parties for purposes of funding its operations. The principal balance of these notes was $3.9 million as of March 31, 2024 and $3.6 million as of December 31, 2023.
As of March 31, 2024, notes totaling $3.1 million, as amended, accrue an interest charge equal to 100% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination with Kernel, with 110% of the principal paid 190 days following closing plus 12% interest per annum accruing from the closing date. Notes totaling $0.5 million accrue an interest charge equal to 50% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination with Kernel with 100% of the principal paid 190 days following closing plus 12% interest per annum accruing from the closing date. Notes totaling $0.3 million accrue an interest charge equal to 150% of the principal amount, payable in shares of Company common stock immediately prior to closing of the business combination, with the principal due on the earlier of 190 days following closing and the date at which the Company closes at least $10 million in additional financing, plus 12% interest per annum accruing from the closing date.
| F-73 |
First Citizens Community Bank 2019-1
On February 25, 2019, Coastal Defense entered into a $0.2 million note payable agreement with First Citizens Community Bank with an initial interest rate of 5.75% per year. The loan is collateralized by aircraft security agreements, an assignment of life insurance, an assignment on a deposit account, commercial security agreements dated February 25, 2019, and all associated financing statements. The loan includes a provision for a prepayment penalty in the amount of 5% on the current principal balance in year one, 4% of the current principal balance in year two, 3% of the current principal balance in year three and 2% of the current principal balance in year four. The loan requires that Coastal Defense maintain a debt service coverage ratio of 1.20 to 1.00. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2026. As of March 31, 2024 and December 31, 2023, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note became due on demand and is shown as a component of “Current maturities of debt” on the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023. As of March 31, 2024 and December 31, 2023, the interest rate was 10.49% per year. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company has negotiated forbearance agreements to prevent FCCB from enforcing the judgments through June 30, 2024. Jeffrey F. Parker, Coastal Defense’s Vice President, Treasurer, and stockholder of Holdings; the estate of Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, stockholder of Holdings; have guaranteed this note.
First Citizens Community Bank 2019-2
On May 15, 2019, Coastal Defense entered into a $0.2 million note payable agreement with First Citizens Community Bank. The loan is collateralized by aircraft security agreements, an assignment of life insurance, an assignment on a deposit account, commercial security agreements dated May 15, 2019 and all associated financing statements. The loan includes a provision for a prepayment penalty in the amount of 5% on the current principal balance in year one, 4% of the current principal balance in year two, 3% of the current principal balance in year three and 2% of the current principal balance in year four. The loan requires that Coastal Defense maintain a debt service coverage ratio of 1.20 to 1.00 and had an initial interest rate of 5.75% per year. As part of the CDI acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2026. As of March 31, 2024 and December 31, 2023, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note became due on demand and is shown as a component of “Current maturities of debt” on the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023. As of March 31, 2024 and December 31, 2023, the interest rate was 10.49% per year. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company has negotiated forbearance agreements to prevent FCCB from enforcing the judgments through June 30, 2024. Jeffrey F. Parker, Coastal Defense’s Vice President, Treasurer, and stockholder of Holdings; the estate of Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, stockholder of Holdings; have guaranteed this note.
Impact of Restructuring – Debt Conversions
In January 2024, the maturity date of the $19.4 million of debt related to the 2018, 2019 and 2022 Notes was extended to June 30, 2024.
Muncy Bank & Trust Company 2021-1
On September 15, 2021, Coastal Defense entered into a $0.7 million commercial promissory note agreement with the Muncy Bank & Trust Company (“Muncy”) for continuing operations. The loan carries an annual interest rate of 4.5% per year and originally matured in March 2022. The maturity date of this promissory note was extended and the principal amount of $0.7 million is due and payable on October 15, 2024 with interest payments due monthly. This arrangement is collateralized by a life insurance policy and a contract with the Air Force. Jeffrey F. Parker, Coastal Defense’s Vice President and Treasurer and stockholder of Holdings, and Alison D. Parker, Corporate Secretary of Coastal Defense, have guaranteed this note. The note payable may be prepaid without penalty.
Muncy Bank & Trust Company 2021-2
On January 21, 2021, Coastal Defense entered into a $0.4 million commercial promissory note agreement with the Muncy for continuing operations and for the execution of the Naval Special Warfare task orders. The loan carries an annual interest rate of 4.5% per year and originally matured in October 2021. The maturity date of this promissory note was extended and the principal amount of $0.4 million is due and payable on October 20, 2024 with interest payments due monthly. This arrangement is collateralized by a contract with the Naval Special Warfare Command. Jeffrey F. Parker, Coastal Defense’s Vice President, Treasurer, and stockholder of Holdings has guaranteed this note. The note payable may be prepaid without penalty.
| 3. | Common Stock and Warrants |
Common Stock
The Company has reserved the following shares of authorized but unissued common stock as of March 31, 2024: 0.6 million stock options, 0.1 million warrants, 0.4 million of contingent restricted stock awards, 3.6 million shares to be issued in connection with the debt conversion agreements, 0.3 million of potential shares that are issuable for contingent interest on investor notes based on the estimated trading price of when shares would become publicly traded.
| F-74 |
Warrants
The Company assumed warrants to purchase 0.1 million shares of the Company’s common stock as part of the merger with Jaunt. These warrants expire ten years from the date of issuance, March 10, 2022, have an exercise price of $9.90 per share and were outstanding as of March 31, 2024 and December 31, 2023. The Company determined that these warrants are equity classified.
| 4. | Management Carveout Plan |
In December 2021, the Company adopted the 2021 Management Carveout Plan (the “Carveout Plan”), which establishes a benefit pool for designated employees and consultants payable upon the occurrence of a change in control, which is defined as two steps consisting of 1) the closing of the merger with Holdings and 2) an IPO of Holdings or merger with a SPAC by June 30, 2023. The amount to be paid as benefits under the Carveout Plan are determined based upon percentages of the total net proceeds calculated at the closing of the Holdings’ IPO or a SPAC merger, ranging from 0% to 5%. The net proceeds are calculated as the net sum of cash and the fair value of equity securities available for distribution to the stockholders of the Company after all liabilities, exclusive of the subordinated convertible notes or other loans from the stockholders and transaction costs are paid, capped at $2.3 billion. The benefit payments to the participants in the Carveout Plan are to be made in the form or forms of payment and in the same proportions as the consideration paid by the purchaser. In October 2023, the Company executed an agreement with the creditors under the Carveout Plan pursuant to which 90% of the total amounts payable in cash under the Carveout Plan, or approximately $0.8 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $0.1 million shall be paid at closing of the business combination. The Carveout Plan was amended to extend the termination date to June 30, 2024. As of March 31, 2024 and December 31, 2023, no amounts have been expensed or accrued for in connection with the Carveout Plan as a change in control was not deemed probable as of March 31, 2024 or December 31, 2023.
| 5. | Goodwill |
The changes in the carrying value of goodwill were as follows:
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| Balance as of January 1, 2023 | $ | - | $ | 111,560,480 | $ | 451,370,520 | $ | 36,511,468 | $ | 599,442,468 | ||||||||||
| Effect of exchange rate | - | 3,160,033 | - | - | 3,160,033 | |||||||||||||||
| Balance as of December 31, 2023 | - | 114,720,513 | 451,370,520 | 36,511,468 | 602,602,501 | |||||||||||||||
| Effect of exchange rate | - | (2,629,659 | ) | - | - | (2,629,659 | ) | |||||||||||||
| Balance as of March 31, 2024 | $ | - | $ | 112,090,854 | $ | 451,370,520 | $ | 36,511,468 | $ | 599,972,842 | ||||||||||
| F-75 |
| 6. | Intangible Assets, Net |
Intangible assets acquired through business combinations were as follows:
| As of March 31, 2024 | ||||||||||||||||
| Weighted Average Remaining Life (Years) | Gross | Accumulated Amortization | Carrying Value | |||||||||||||
| Developed technology-definite lived | 10.6 | $ | 99,630,537 | $ | 18,900,967 | $ | 80,729,570 | |||||||||
| Developed technology-indefinite lived | N/A | 92,839 | - | 92,839 | ||||||||||||
| Tradenames - definite lived | 4.7 | 1,903,549 | 592,130 | 1,311,419 | ||||||||||||
| Tradenames - indefinite lived | N/A | 8,737,607 | - | 8,737,607 | ||||||||||||
| Customer Relationships | 4.8 | 20,116,078 | 9,181,503 | 10,934,575 | ||||||||||||
| Patents | 7.9 | 567,090 | 293,137 | 273,953 | ||||||||||||
| $ | 131,047,700 | $ | 28,967,737 | $ | 102,079,963 | |||||||||||
| As of December 31, 2023 | ||||||||||||||||
| Weighted Average Remaining Life (Years) | Gross | Accumulated Amortization | Carrying Value | |||||||||||||
| Developed technology - definite lived | 10.8 | $ | 99,779,550 | $ | 16,922,028 | $ | 82,857,522 | |||||||||
| Patents pending | N/A | 83,713 | - | 83,713 | ||||||||||||
| Tradenames - definite-lived | 4.9 | 1,911,000 | 519,006 | 1,391,994 | ||||||||||||
| Tradenames - indefinite-lived | N/A | 8,737,607 | - | 8,737,607 | ||||||||||||
| Customer relationships | 5.0 | 20,175,918 | 8,511,311 | 11,664,607 | ||||||||||||
| Patents | 7.3 | 652,310 | 333,508 | 318,802 | ||||||||||||
| $ | 131,340,098 | $ | 26,285,853 | $ | 105,054,245 | |||||||||||
Amortization expense is reported on the condensed consolidated statements of operations line items as shown in the table below for the years ended March 31:
| 2024 | 2023 | |||||||
| Cost of revenue | $ | 106,667 | $ | 106,667 | ||||
| Research and development | 1,897,286 | 1,899,456 | ||||||
| Sales and marketing | 707,693 | 705,568 | ||||||
| General and administrative | 88,115 | 83,797 | ||||||
| $ | 2,799,761 | $ | 2,795,488 | |||||
Total estimated future amortization expense as of March 31, 2024 is as follows:
| 2024 (remaining) | $ | 8,394,873 | ||
| 2025 | 10,523,644 | |||
| 2026 | 10,215,014 | |||
| 2027 | 10,004,104 | |||
| 2028 | 9,824,460 | |||
| Thereafter | 44,287,422 | |||
| $ | 93,249,517 |
| F-76 |
| 7. | Inventory |
Inventory consisted of the following as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | 2,742,535 | $ | 2,292,513 | ||||
| Work in process | 61,970 | 355,052 | ||||||
| Finished goods | 216,986 | 216,605 | ||||||
| Total | $ | 3,021,491 | $ | 2,864,170 | ||||
| 8. | Balance Sheet Details |
Accrued expenses consisted of the following as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Accrued legal and professional fees | $ | 1,546,474 | $ | 1,444,470 | ||||
| Payroll related expenses | 1,832,949 | 1,693,475 | ||||||
| Accrued warranty | 207,466 | 159,610 | ||||||
| Accrued taxes | 2,371,842 | 1,368,971 | ||||||
| Other accrued expenses | 1,487,308 | 2,307,648 | ||||||
| $ | 7,446,039 | $ | 6,974,174 | |||||
| F-77 |
| 9. | Deferred Compensation |
The Company has deferred salary arrangements with various employees that allow for a portion of their compensation to be deferred and paid upon a single outside investment of no less than $25 million, or such earlier time as the Company determines in its sole discretion that sufficient funds are available to commence payment of the deferred amounts. Employees must be actively employed, including approved leave, or if a consultant, providing services to the Company. The Company does not expect the deferred salary arrangements will be paid out in the next 12 months unless the business combination with Kernel is consummated. Any unpaid amounts are forfeited upon termination of employment or consultancy with the Company. In October 2023, the Company signed various agreements with the employees with deferred compensation pursuant to which 90% of the total amounts accrued as deferred compensation, or approximately $6.7 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining amount shall be paid at closing of the business combination.
| 10. | Commitments and Contingencies |
Consulting Agreement
In October 2020, the Company entered into an agreement for market analysis and business strategy consulting. The services were performed in prior periods. The agreement states a fee of $0.5 million for the services, due upon the completion of an IPO, SPAC merger, financing raise of at least $100 million or an acquisition of at least 50% of the equity of the Company. The fee for these consulting services was included in “Accrued expenses” on the condensed consolidated balance sheets.
Contingent Fee Arrangement
In June 2022, the Company executed a previously arranged contingent fee agreement with New Generation Aerospace, Inc. (“NGA”) to compensate NGA for past services rendered and future services rendered through December 31, 2022 related to the acquisitions and financing of the Merger Entities in the amount of $1.5 million (the “Contingent Fee”). The Contingent Fee is payable upon the closing of an IPO. In October 2023, the Company signed various agreements with certain debt holders pursuant to which 90% of the Contingent Fee, or approximately $1.4 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $0.1 million shall be paid at closing of the business combination. As the payment of the Contingent Fee is not deemed probable as of March 31, 2024 and December 31, 2023, the Contingent Fee has not been accrued in accordance with ASC 450, Contingencies (“ASC 450”).
KDC IPO Payment Agreement
In April 2022, Aspen Avionics and KippsDeSanto & Co. (“KDC”) entered into an amendment (the “KDC IPO Payment Agreement”) to the parties’ prior engagement letter dated August 7, 2018 (the “KDC Agreement”), pursuant to which Aspen Avionics engaged KDC to provide financial advisory services in connection with AIRO’s potential acquisition of Aspen Avionics. Pursuant to the terms of the KDC IPO Payment Agreement upon the closing of an IPO, Aspen Avionics is obligated to cause a one-time, final payment of $1.0 million to be made to KDC in satisfaction of Aspen Avionics obligations under the KDC Agreement. As the payment of the KDC IPO Payment Agreement is not deemed probable as of March 31, 2024 or December 31, 2023, the KDC IPO Payment Agreement has not been accrued in accordance with ASC 450.
Non-binding Letters of Intent
In November 2023, the Company signed non-binding letters of intent to acquire two flight training schools. The parties have undertaken due diligence to determine whether a binding purchase agreement will be negotiated. The total anticipated purchase price for the acquisitions is expected to range from $5.1 million to $7.7 million, which would be paid in a combination of cash and the issuance of equity.
Litigation
A civil action was filed against AIRO Group in the Circuit Court of Cook County, State of Illinois in February 2022. The claimant alleges that an agreement for certain services entered into in March 2020 was breached and resulted in damages to claimant. This case was dismissed on July 5, 2022. However, the court allowed the claimant to amend its complaint. On August 5, 2022, the claimant filed its amended complaint, and the Company filed its response on October 12, 2022. The parties have exchanged written discovery and are in the process of taking depositions. The court ordered the parties to mandatory arbitration which will take place in the third or fourth quarter of 2024. The Company intends to continue to vigorously defend against the complaint.
Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company intends to negotiate a resolution with FCCB and, in the meantime, has negotiated forbearance agreements to prevent FCCB from enforcing the judgments.
A civil action was filed against Holdings, AIRO Group, AIRO Group (Illinois), AIRO Drone, Agile Defense, Joseph Burns, Chirinjeev Kathuria and John Uczekaj in Chancery Court in Delaware in September 2023. The claimant, Robert Perrin, a Company shareholder, alleges that the Company’s entities failed to pay him for services allegedly rendered under an Employment Agreement with AIRO Group (Illinois), that the individual defendants have breached their fiduciary duties as the Company’s board members, and that defendants violated the Computer Fraud and Abuse Act. On November 17, 2023, the Company filed a motion to dismiss. In response, the claimant filed an Amended Complaint on February 22, 2024 in which he dropped AIRO Group (Illinois) as a defendant, dropped the breach of contract claim and added a wage claim under Delaware statute. On April 5, 2024, the Company filed a Partial Answer and Affirmative Defenses as well as a Partial Motion to Dismiss. In response, the claimant filed a Second Amended Complaint on May 14, 2024 in which he dropped the wage claim under Delaware statute and added a civil conspiracy claim against all defendants. The Company intends to continue to vigorously defend against all claims asserted in the complaint.
| F-78 |
Aside from the above matters, the Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss or the measurement of a loss can be complex. The Company will accrue losses that are both probable and reasonably estimable. As of March 31, 2024 and December 31, 2023, there were no accruals related to litigation.
| 11. | Segment Information |
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s chief operating decision maker (“CODM”) has been identified as the chief executive officer. The Company will continue to reevaluate reportable and operating segments. The Company expects to manage its business primarily based upon four operating segments, Advanced Avionics, Uncrewed Air Systems, Electric Air Mobility and Training. Each of these operating segments represents a reportable segment. The Company has determined that each reportable segment represents a reporting unit and, in accordance with ASC 350, each reporting unit requires an allocation of goodwill.
| ● | Advanced Avionics: This segment develops, manufactures, and sells avionics and GPS sensors for the GA, UAS and eVTOL market segments. The Company’s advanced avionics products are focused on GA aftermarket, OEM display, integration and connected panel solutions. |
| ● | Uncrewed Air Systems: This segment offers direct operation of drones and drone systems, provision of drone-derived information, and the development of drone-optimized communication services. Additionally, it consists of development and commercialization of market leading MUAS for professional users, primarily in the defense and security markets. The MUAS includes internally developed software, hardware, and mechanical system components. Operations cover sourcing, manufacturing, assembly, quality assurance testing activities and logistics. |
| ● | Electric Air Mobility: This segment includes designing, licensing and ultimately the manufacturing of air vehicles incorporating slowed rotor compound technology that is capable of transporting people and packages operated by pilots or autonomous flight systems. |
| ● | Training: This segment provides and operates military aircraft for U.S. military services and Department of Defense (“DOD”) contractors. Segment revenues are earned from 1) flying training missions as part of armed forces training groups, and 2) providing aircraft and support services to DOD contractors. |
The Company evaluates the performance of its reportable segments based on the revenue and gross profit for each reporting segment. The Company does not report total assets, capital expenditures or operating expenses by operating segment as such information is not used by the CODM for purposes of assessing performance or allocating resources.
The following tables shows information by reportable segment for the three months ended March 31:
| March 31, 2024 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| Revenue | $ | 2,991,595 | $ | 9,449,378 | $ | - | $ | 1,298,963 | $ | 13,739,936 | ||||||||||
| Cost of revenue | 1,667,749 | 2,559,848 | - | 1,025,258 | 5,252,855 | |||||||||||||||
| Gross profit | $ | 1,323,846 | $ | 6,889,530 | $ | - | $ | 273,705 | $ | 8,487,081 | ||||||||||
| March 31, 2023 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| Revenue | $ | 2,979,484 | $ | 921,948 | $ | 210,806 | $ | 1,373,490 | $ | 5,485,728 | ||||||||||
| Cost of revenue | 1,901,974 | 328,920 | 171,119 | 894,838 | 3,296,851 | |||||||||||||||
| Gross profit | $ | 1,077,510 | $ | 593,028 | $ | 39,687 | $ | 478,652 | $ | 2,188,877 | ||||||||||
| F-79 |
The following table presents revenues by geographic area for the three months ended:
| March 31, 2024 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 2,991,595 | $ | - | $ | - | $ | 1,298,963 | $ | 4,290,558 | ||||||||||
| Europe | - | 9,449,378 | - | - | 9,449,378 | |||||||||||||||
| $ | 2,991,595 | $ | 9,449,378 | $ | - | $ | 1,298,963 | $ | 13,739,936 | |||||||||||
| March 31, 2023 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 2,979,484 | $ | - | $ | 210,806 | $ | 1,373,490 | $ | 4,563,780 | ||||||||||
| Europe | - | 921,948 | - | - | 921,948 | |||||||||||||||
| $ | 2,979,484 | $ | 921,948 | $ | 210,806 | $ | 1,373,490 | $ | 5,485,728 | |||||||||||
The following table presents tangible long-lived assets by geographic area as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 212,345 | $ | - | $ | 2,812 | $ | 8,730,240 | $ | 8,945,397 | ||||||||||
| Europe | - | 933,198 | - | 933,198 | ||||||||||||||||
| $ | 212,345 | $ | 933,198 | $ | 2,812 | $ | 8,730,240 | $ | 9,878,595 | |||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 218,291 | $ | - | $ | 3,142 | $ | 9,089,428 | $ | 9,310,861 | ||||||||||
| Europe | - | 821,242 | - | - | 821,242 | |||||||||||||||
| $ | 218,291 | $ | 821,242 | $ | 3,142 | $ | 9,089,428 | $ | 10,132,103 | |||||||||||
| 12. | Related Party Transactions |
Related party transactions include the following:
| ● | During 2022, Sky-Watch entered into a Credit Facility Agreement, which was subsequently amended, with Dangroup ApS, a stockholder, for a revolving line of credit of up to DKK 33.0 million ($4.7 million) that is due at the earlier of closing of the business combination or June 30, 2023. Interest was fixed at 12% per annum. The outstanding balance due on this credit facility was $1.6 million as of December 31, 2022 and was repaid during 2023. There were no amounts outstanding or available as of March 31, 2024 or December 31, 2023. |
| F-80 |
| ● | Aspen Avionics has a Commercialization Agreement with Centro Italiano Richerche Aerospaziali S.c.p.A (“CIRA”), a stockholder of Aspen Avionics, whereby CIRA licensed certain technology to Aspen Avionics. As consideration for the license, CIRA will receive a royalty based on each unit sold by Aspen Avionics. In March 2020, Aspen Avionics entered into an agreement with CIRA to settle unpaid royalty amounts due under a development agreement. The Company owed $0.6 million and $0.5 million to CIRA as of March 31, 2024 and December 31, 2023, respectively. | |
| ● | Aspen Avionics owed $0.3 million and $0.2 million to Accord Global, a stockholder, as of March 31, 2024 and December 31, 2023, respectively. Sales to Accord Global were $0.1 million during the three months ended March 31, 2024 and 2023. Amounts due from Accord Global were $0.2 million and $0.1 million as of March 31, 2024 and December 31, 2023, respectively. | |
| ● | As of March 31, 2024 and December 31, 2023, Coastal Defense had net receivables due from Failor Services, Inc. (“Failor”), which is owned by a stockholder of the Company, of $0.4 million which are included in “Related party receivables” on the condensed consolidated balance sheets. No purchases were made from Failor during period from the Coastal Defense acquisition date through March 31, 2024. Coastal Defense also pays for certain expenses on Failor’s behalf, which are reimbursable to Coastal Defense. | |
| ● | Since May 2022, the Company has issued unsecured promissory notes, with no collateral or guarantees, to employees and stockholders for purposes of funding its operations. The principal balance of these notes was $3.2 million as of March 31, 2024 and $3.1 million as of December 31, 2023. | |
| As of March 31, 2024, notes totaling $2.3 million, as amended, accrue an interest charge equal to 100% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination with Kernel, with 110% of the principal paid 190 days following closing plus 12% interest per annum accruing from the closing date. Notes totaling $0.4 million carry the same terms except only 100% of the principal is paid 190 days following closing. Notes totaling $0.2 million accrue an interest charge equal to 50% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination with Kernel with 100% of the principal paid 190 days following closing plus 12% interest per annum accruing from the closing date. Notes totaling $0.2 million accrue an interest charge equal to 115% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination, with 100% of the principal paid 190 days following closing plus 15% interest per annum accruing from the closing date. The remaining note totaling $0.2 million, as amended, accrues an interest charge equal to $50,000, payable in shares of common stock immediately prior to closing of the business combination, with the principal due by June 1, 2024. The parties subsequently amended this note and the principal is now due by July 31, 2024. | ||
| ● | Coastal Defense entered into unsecured due on demand notes with two stockholders (the “Stockholder Notes”). Interest is charged at 7.00% per year. As of March 31, 2024 and December 31, 2023, the total outstanding balance of the Stockholder Notes was $1.0 million. No specific repayment schedules have been determined. | |
| ● | In January 2024, the Company entered into a loan agreement and promissory note with Dangroup ApS, a shareholder, in the principal amount of $0.5 million which is included in related party borrowings on the condensed consolidated balance sheets. As of March 31, 2024, interest accrues at a rate of 10.5% per annum, and the note matures on the earlier of the fifth business day following the Company’s business combination or July 1, 2024. The parties amended the loan agreement and promissory note in June 2024 to extend the maturity date as set forth in Note 13. Subsequent Events. | |
| ● | As detailed in Note 1, the Company entered into promissory notes with the Merger Entities during 2022. The fair value of the contingent consideration promissory notes issued to the former equity holders of Agile Defense, AIRO Drone and Coastal Defense totaled $9.4 million as of March 31, 2024 and December 31, 2023 and are included in contingent consideration on the condensed consolidated balance sheets. | |
| ● | As detailed in Note 1, the Company entered into a promissory note in conjunction with the acquisition of Sky-Watch in 2022 which was amended in 2023 such that it was payable no later than December 31, 2023. As the contingency was resolved, the difference between the December 31, 2022 fair value of $7.8 million and the face value of the promissory note of $12.9 million was recorded to other expense, net during the three months ended March 31, 2023 and the $12.9 million liability was reclassed to due to seller on the condensed consolidated balance sheets. In December 2023, the parties amended the terms of the promissory note due to Sky-Watch to be payable no later than March 31, 2024. In March 2024, the parties amended the terms of the promissory note to be payable no later than June 30, 2024. In June 2024, the parties amended the terms of the promissory note to be payable within five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $35,000,000. | |
| ● | As detailed in Note 1, the Sky-Watch earnout liability was originally payable up to $6.5 million, of which up to a maximum of $3.0 million was payable on a dollar-for-dollar basis on revenue earned within the first two-year anniversary of the acquisition and $3.5 million would become due and payable if and only if Sky-Watch earns a minimum of $13.8 million in revenue during the period from the acquisition date through June 2024. In December 2022, the Equity Purchase Agreement was amended to increase the second earnout amount to $7.5 million and to extend the earnout period to include the full fiscal year periods of 2022 through 2024. In March 2023, the Equity Purchase Agreement was further amended to add a third earnout of $4.0 million if revenue during the full fiscal year periods of 2022 through 2024 reaches $17.0 million with the earnouts payable by May 31, 2024. As of December 31, 2023, the earnout liability was recorded to the full amount owed net of $3.0 million in payments made to date totaling $11.5 million and was classified as due to seller as all contingencies had been resolved. In June 2024, the parties amended the Equity Purchase Agreement to extend the payment date for the remaining earnout liability to five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $45,000,000. | |
| ● | As of March 31, 2024 and December 31, 2023, the total amount included in due to seller and owed under the promissory note and the earnouts was $18.3 million and $18.8 million, respectively. In March 2024, the parties further amended the Equity Purchase Agreement, to extend the due dates of the earnout liability and the promissory note to June 30, 2024 in exchange for the former shareholders of Sky-Watch becoming eligible for an additional earnout of $1.0 million if Sky-Watch achieves Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of DKK 127,107,500 or above for fiscal year 2024. As both the promissory note and earnouts 2 and 3 were due within three months of the amendment date and as the Company would not have been able to refinance the $18.3 million with another lender, the Company determined this modification to be an extinguishment in accordance with ASC 470-50. The loss on debt extinguishment was not significant. | |
| ● | In May 2024, Aspen Avionics entered into Amendment No. 4 to that Loan and Security Agreement with Pathward, N.A., f/k/a Crestmark, waiving the tangible net worth threshold under that agreement for January 2024 and February 2024. | |
| ● | In June 2024, Journey Bank, f/k/a Muncy Bank, agreed to extend the maturity date of the promissory note between Journey Bank and Coastal Defense, Inc. dated September 15, 2021 from June 15, 2024 to October 15, 2024. Journey Bank also agreed to extend the maturity date of the promissory note between Journey Bank and Coastal Defense, Inc. dated January 21, 2021 from June 20, 2024 to October 20, 2024. |
| 13. | Subsequent Events |
The Company has evaluated subsequent events through July 5, 2024, which represents the date the condensed consolidated financial statements were available for issuance. Other than the items listed below, there were no subsequent events that would require adjustment to or disclosure in these condensed consolidated financial statements.
From April through July 5, 2024, the Company raised $1.6 million in the form of unsecured promissory notes with no collateral and no guarantees. Notes totaling $0.2 million accrue an interest charge equal to 150% of the principal amount, payable in shares of Company common stock immediately prior to closing of the business combination with Kernel with the principal due 190 days following closing plus 12% interest accruing from the closing date. Notes totaling $1.4 million accrue varying interest charges equal to, in the aggregate, 150% of the aggregate principal amount, payable in shares of Company common stock immediately prior to closing of the business combination, with the principal due on the earlier of 1) 190 days following closing and 2) five days following the date at which the Company closes at least $10 million in additional financing. The notes accrue interest at a rate of 12% per annum accruing from the closing date.
In June 2024, the Company amended its loan agreement and promissory note with Dangroup ApS to extend the maturity date to five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $35,000,000.
In June 2024, the Company amended the Equity Purchase Agreement to extend the payment dates for the remaining balance on the seller promissory note to five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $35,000,000, and for the remaining earnout liability to five business days following the date that the Company, or its successor, closes one or more financing transactions with an aggregate value of at least $45,000,000. Interest shall continue to accrue on the earned but unpaid earnout amounts at the federal discount rate plus five percent, compounded quarterly. The former shareholders agreed to waive enforcement of payment until June 30, 2025.
In June 2024, the Company amended an unsecured promissory note with a related party in the amount of $0.2 million to extend the maturity date to July 31, 2024. The note accrues an interest charge equal to $50,000, payable in shares of common stock immediately prior to closing of the business combination.
| F-81 |
AIRO Group Holdings, INC.
Consolidated Financial Statements
December 31, 2023 and 2022
| F-82 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of AIRO Group Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AIRO Group Holdings, Inc. (a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s cash and working capital as of December 31, 2023 are not sufficient to complete its planned activities for the next twelve months. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BPM LLP
We have served as the Company’s auditor since 2022.
San Jose, California
April 9, 2024
| F-83 |
Consolidated Balance Sheets
| December 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,117,875 | $ | 605,154 | ||||
| Restricted cash | 8,984,437 | 223,498 | ||||||
| Accounts receivable, net | 1,377,388 | 1,654,730 | ||||||
| Related party receivables | 445,033 | 391,077 | ||||||
| Inventory | 2,864,170 | 2,156,460 | ||||||
| Prepaid expenses and other current assets | 1,368,123 | 751,495 | ||||||
| Tax receivable | - | 101,869 | ||||||
| Total current assets | 19,157,026 | 5,884,283 | ||||||
| Property and equipment, net | 10,132,103 | 10,821,760 | ||||||
| Right-of-use operating lease assets | 329,957 | 973,265 | ||||||
| Goodwill | 602,602,501 | 599,442,468 | ||||||
| Intangible assets, net | 105,054,245 | 116,054,351 | ||||||
| Other assets | 246,786 | 167,556 | ||||||
| Total assets | $ | 737,522,618 | $ | 733,343,683 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 17,229,424 | $ | 10,524,802 | ||||
| Related party payables | 993,023 | 937,641 | ||||||
| Accrued expenses | 6,974,174 | 4,678,138 | ||||||
| Operating lease liabilities, current | 328,560 | 478,316 | ||||||
| Deferred revenue | 11,088,153 | 655,513 | ||||||
| Related party, current | 4,371,239 | 4,085,822 | ||||||
| Revolving lines of credit | 743,227 | 1,165,560 | ||||||
| Current maturities of debt | 25,014,151 | 4,902,117 | ||||||
| Due to seller | 18,766,921 | - | ||||||
| Total current liabilities | 85,508,872 | 27,427,909 | ||||||
| Long-term debt, net of current maturities | 500,000 | 19,598,741 | ||||||
| Deferred compensation | 9,327,168 | 7,446,053 | ||||||
| Deferred tax liability | 1,475,102 | 500,347 | ||||||
| Long-term deferred revenue | 14,649 | 14,352 | ||||||
| Operating lease liabilities, noncurrent | 8,853 | 501,903 | ||||||
| Other long-term liabilities | 50,000 | 50,000 | ||||||
| Contingent consideration | 45,182,276 | 54,807,319 | ||||||
| Total liabilities | 142,066,920 | 110,346,624 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.000001 par value; 35,000,000 shares authorized; 27,858,276 shares issued and outstanding as of December 31, 2023 and 2022 | 28 | 28 | ||||||
| Additional paid-in capital | 763,975,884 | 762,160,659 | ||||||
| Stockholder loan | (5 | ) | (5 | ) | ||||
| Accumulated other comprehensive loss | (761,163 | ) | (3,861,000 | ) | ||||
| Accumulated deficit | (167,759,046 | ) | (135,302,623 | ) | ||||
| Total stockholders’ equity | 595,455,698 | 622,997,059 | ||||||
| Total liabilities and stockholders’ equity | $ | 737,522,618 | $ | 733,343,683 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-84 |
Consolidated Statements of Operations
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 43,253,815 | $ | 17,081,041 | ||||
| Cost of revenue | 18,339,915 | 12,953,412 | ||||||
| Gross profit | 24,913,900 | 4,127,629 | ||||||
| Operating expenses: | ||||||||
| Research and development | 11,870,771 | 9,299,067 | ||||||
| Sales and marketing | 5,374,332 | 4,597,867 | ||||||
| General and administrative | 17,600,953 | 17,229,338 | ||||||
| Total operating expenses | 34,846,056 | 31,126,272 | ||||||
| Loss from operations | (9,932,156 | ) | (26,998,643 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense, net | (2,137,234 | ) | (3,615,162 | ) | ||||
| Change in fair value of derivative liabilities | - | 665,746 | ||||||
| Loss on extinguishment of debt | - | (540,873 | ) | |||||
| Other expense, net | (18,093,226 | ) | (6,273,941 | ) | ||||
| Total other expense | (20,230,460 | ) | (9,764,230 | ) | ||||
| Loss before income tax benefit (expense) | (30,162,616 | ) | (36,762,873 | ) | ||||
| Income tax benefit (expense) | (2,293,807 | ) | 11,211,510 | |||||
| Net loss | $ | (32,456,423 | ) | $ | (25,551,363 | ) | ||
| Net loss per share - basic and diluted | $ | (1.17 | ) | $ | (1.23 | ) | ||
| Weighted-average number of common shares used in computing net loss per share, basic and diluted | 27,858,276 | 20,796,761 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-85 |
Consolidated Statements of comprehensive loss
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (32,456,423 | ) | $ | (25,551,363 | ) | ||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation, net of tax | 3,099,837 | (3,861,000 | ) | |||||
| Total other comprehensive income (loss) | 3,099,837 | (3,861,000 | ) | |||||
| Comprehensive loss | $ | (29,356,586 | ) | $ | (29,412,363 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-86 |
Consolidated Statements of Redeemable Convertible Preferred Stock And Stockholders’ Equity (Deficit)
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-In | Stockholder | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loan | Loss | Deficit | (Deficit) | ||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | 22,007,751 | $ | 58,780,134 | 5,876 | $ | - | $ | 3,506,353 | $ | - | $ | - | $ | (109,751,260 | ) | $ | (106,244,907 | ) | ||||||||||||||||||
| Warrants exercised | 2,833,885 | 286,500 | 327 | - | 9,154 | - | - | - | 9,154 | |||||||||||||||||||||||||||
| Conversion of debt into preferred stock | 16,124,927 | 32,249,855 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Conversion of preferred stock into common stock | (40,966,563 | ) | (91,316,489 | ) | 2,569,555 | 3 | 91,316,486 | - | - | - | 91,316,489 | |||||||||||||||||||||||||
| Reclassification of warrant liability | - | - | - | - | 3,568,887 | - | - | - | 3,568,887 | |||||||||||||||||||||||||||
| Issuance of common stock in connection with Aspen reverse acquisition | - | - | 23,464,336 | 22 | 605,915,721 | (5 | ) | - | - | 605,915,738 | ||||||||||||||||||||||||||
| Issuance of common stock in connection with Coastal Defense acquisition | - | - | 1,818,182 | 3 | 44,872,732 | - | - | - | 44,872,735 | |||||||||||||||||||||||||||
| Fair value of warrants assumed | - | - | - | - | 2,399,277 | - | - | - | 2,399,277 | |||||||||||||||||||||||||||
| Fair value of stock options assumed | - | - | - | - | 7,724,956 | - | - | - | 7,724,956 | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 2,847,093 | - | - | - | 2,847,093 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | (3,861,000 | ) | - | (3,861,000 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (25,551,363 | ) | (25,551,363 | ) | |||||||||||||||||||||||||
| Balance as of December 31, 2022 | - | - | 27,858,276 | 28 | 762,160,659 | (5 | ) | (3,861,000 | ) | (135,302,623 | ) | 622,997,059 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 1,815,225 | - | - | - | 1,815,225 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | 3,099,837 | - | 3,099,837 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (32,456,423 | ) | (32,456,423 | ) | |||||||||||||||||||||||||
| Balance as of December 31, 2023 | - | $ | - | 27,858,276 | $ | 28 | $ | 763,975,884 | $ | (5 | ) | $ | (761,163 | ) | $ | (167,759,046 | ) | $ | 595,455,698 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-87 |
Consolidated Statements of Cash Flows
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (32,456,423 | ) | $ | (25,551,363 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Stock-based compensation | 1,815,225 | 2,847,093 | ||||||
| Recovery of doubtful accounts | - | (44,038 | ) | |||||
| Non-cash interest | 635,684 | 2,566,443 | ||||||
| Provision for credit losses | 12,965 | - | ||||||
| Loss on extinguishment of debt | - | 540,873 | ||||||
| Loss on disposal of property and equipment | - | 10,005 | ||||||
| Depreciation and amortization | 12,730,779 | 9,558,400 | ||||||
| Accretion of deferred compensation assumed | 478,993 | 715,655 | ||||||
| Amortization of right-of-use lease assets | 516,800 | 489,269 | ||||||
| Change in fair value of contingent consideration | 18,009,278 | 5,607,411 | ||||||
| Change in fair value of investor subordinated convertible notes end-of-term payments | - | 1,358,160 | ||||||
| Change in fair value of preferred stock warrant liability | - | (2,023,907 | ) | |||||
| Patent intangible asset impairment | - | 194,730 | ||||||
| Change in deferred tax accounts | 974,754 | (11,201,024 | ) | |||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | 279,539 | 27,246 | ||||||
| Related party receivables | (53,956 | ) | (52,595 | ) | ||||
| Prepaid expenses and other assets | (281,898 | ) | 2,099,005 | |||||
| Inventory | (663,522 | ) | 2,814,106 | |||||
| Accounts payable, accrued expenses and other long-term liabilities | 8,914,658 | 4,490,268 | ||||||
| Related party payables | 55,483 | 156,491 | ||||||
| Lease liabilities | (516,298 | ) | (491,780 | ) | ||||
| Deferred revenue | 10,251,760 | (997,619 | ) | |||||
| Deferred compensation | 1,402,122 | 1,560,966 | ||||||
| Net cash provided by (used in) operating activities | 22,105,943 | (5,326,205 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Cash acquired in acquisitions of businesses | - | 873,258 | ||||||
| Purchase of property and equipment and investment in intangible assets | (835,922 | ) | (78,812 | ) | ||||
| Proceeds from sale of property and equipment | - | 129,202 | ||||||
| Net cash provided by (used in) investing activities | (835,922 | ) | 923,648 | |||||
| Cash flows from financing activities: | ||||||||
| Change in lines of credit | (422,333 | ) | (597,571 | ) | ||||
| Change in related party lines of credit | (1,598,188 | ) | 1,200,370 | |||||
| Proceeds from borrowings | 1,184,500 | 3,070,000 | ||||||
| Repayments on borrowings | (796,665 | ) | (608,581 | ) | ||||
| Proceeds from related party borrowings | 1,580,000 | 1,500,000 | ||||||
| Repayments on related party borrowings | (25,000 | ) | (18,000 | ) | ||||
| Proceeds from the exercise of warrants | - | 295,654 | ||||||
| Debt issuance costs paid | (25,000 | ) | (25,000 | ) | ||||
| Payment of contingent consideration | (3,010,000 | ) | (65,853 | ) | ||||
| Cash paid to seller | (6,175,808 | ) | - | |||||
| Net cash provided by (used in) financing activities | (9,288,494 | ) | 4,751,019 | |||||
| Effect of exchange rate changes | 292,133 | 416,568 | ||||||
| Net increase in cash and restricted cash | 12,273,660 | 765,030 | ||||||
| Cash and restricted cash as of beginning of period | 828,652 | 63,622 | ||||||
| Cash and restricted cash as of end of period | $ | 13,102,312 | $ | 828,652 | ||||
| Supplemental disclosure of non-cash financing and investing activities: | ||||||||
| Common stock issued in business combinations | $ | - | $ | 650,788,478 | ||||
| Fair value of warrants assumed in business combinations | $ | - | $ | 2,399,277 | ||||
| Fair value of stock options assumed in business combinations | $ | - | $ | 7,724,956 | ||||
| Contingent consideration obligations assumed in business combinations | $ | - | $ | 48,857,739 | ||||
| Conversion of debt to preferred stock | $ | - | $ | 32,249,855 | ||||
| Other long-term liabilities converted to convertible debt | $ | - | $ | 483,333 | ||||
| Preferred stock converted to common stock | $ | - | $ | 91,316,489 | ||||
| Reclassification of warrant liability to equity | $ | - | $ | 3,568,887 | ||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | 129,109 | $ | 1,151,848 | ||||
| Financing of insurance premiums | $ | 297,351 | $ | 287,291 | ||||
| Purchases of property and equipment included in accounts payable | $ | - | $ | 2,593,740 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-88 |
Notes to Consolidated Financial Statements
| 1. | The Company and Summary of Significant Accounting Policies |
Nature of Operations
AIRO Group Holdings, Inc. (“Holdings”) a Delaware corporation, was formed on October 5, 2021, for the purpose of acquiring and integrating various companies engaged in the aerospace and defense industry to develop its business across four primary divisions: (i) Advanced Avionics; (ii) Training; (iii) Uncrewed Air Systems; and (iv) Electric Air Mobility.
In October 2021, Holdings entered into agreements and plans of merger (the “Merger Agreements”) with AIRO Drone, LLC (“AIRO Drone”), Agile Defense, LLC (“Agile Defense”), Coastal Defense, Inc. (“Coastal Defense”), Jaunt Air Mobility, LLC (“Jaunt”), and Aspen Avionics, Inc. (“Aspen Avionics”). Holdings also entered into an equity purchase agreement (“Equity Purchase Agreement”) with Sky-Watch A/S (“Sky-Watch”). AIRO Drone, Agile Defense, Coastal Defense, Jaunt, Aspen Avionics and Sky-Watch together represent the “Merger Entities.” Under the Merger Agreements and Equity Purchase Agreement, the parties desired to enter into a transaction in which Holdings would acquire all of the equity of the Merger Entities. Between February and April 2022, the acquisitions of the Merger Entities by Holdings were completed as described in Note 2.
On March 3, 2023, the Company entered into an Agreement and Plan of Merger by and between the Company, Kernel Group Holdings, Inc. (“Kernel”), AIRO Group, Inc., Kernel Merger Sub, Inc., AIRO Merger Sub, Inc., VKSS Capital, LLC, and Dr. Chirinjeev Kathuria (the “Business Combination Agreement”). Pursuant to the Business Combination Agreement, Kernel will domesticate as a Delaware corporation, following which Kernel will merge with and into Kernel Merger Sub, Inc. (the “First Merger”) and the Company will merge with and into AIRO Merger Sub, Inc. (the “Second Merger”). Upon closing of the First Merger and Second Merger, both Kernel and Holdings and its subsidiaries (together, the “Company”) will survive as wholly owned subsidiaries of AIRO Group, Inc., whose common stock and warrants are expected to trade on Nasdaq as “AIRO” and “AIROW.” The Company and the other parties thereto subsequently amended the Business Combination Agreement in August 2023, January 2024 and February 2024 to fix the number of earnout shares that can be granted in each earnout period, revise the earnout thresholds, and remove the $5,000,001 net tangible assets closing condition.
Holdings has organized the assembled businesses into four primary divisions consisting of: (i) Advanced Avionics (Aspen Avionics); (ii) Training (Coastal Defense and Agile Defense); (iii) Uncrewed Air Systems (Sky-Watch and AIRO Drone); and (iv) Electric Air Mobility (Jaunt). Advanced Avionics develops, manufactures, and sells avionics and electronic global position system (“GPS”) sensors for the General Aviation (“GA”), Unmanned Aerial Systems (“UAS”) and Electric Vertical Takeoff and Landing (“eVTOL”) market segments. The Training Division provides training and advisory services to the U.S. military and the private aerospace industry. The Uncrewed Air Systems Division provides drones, drone platforms and services used for civilian, commercial, and military applications. The Electric Air Mobility Division builds next generation aircraft to meet the growing demands for faster, more affordable, and environmentally more sustainable travel over urban areas.
Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries, including Old AGI, Inc. f/k/a AIRO Group, Inc. (“AIRO Group”), AIRO Drone, Agile Defense, Jaunt, Sky-Watch, Coastal Defense, and Aspen Avionics. All intercompany accounts and transactions have been eliminated in consolidation.
AIRO Drone was acquired on February 25, 2022 pursuant to the terms and conditions of an Agreement and Plan of Merger by and among AIRO Drone, AIRO Group, Holdings, AIRO Drone Merger Sub LLC and Joseph Burns as target representative dated as of October 6, 2021, as amended, in exchange for contingent consideration in the form of a promissory note in the amount of $2.1 million which is payable within five (5) business days after the public trading of the Company’s common stock begins (the “AIRO Drone/Holdings Merger”).
For accounting purposes, the AIRO Drone/Holdings Merger was accounted for as a reverse recapitalization of Holdings by AIRO Drone as the assets of Holdings as of February 25, 2022 were primarily deferred offering costs and due to Holdings not meeting the definition of a business in conjunction with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). Accordingly, for accounting purposes, the consolidated financial statements after the closing of the AIRO Drone/Holdings Merger represented a continuation of the financial statements of AIRO Drone, except for the capital structure which has been adjusted to reflect the legal capital structure of Holdings. The net liabilities of Holdings, which represents Holdings prior to the Airo Drone/Holdings Merger, totaled $2.2 million and were recorded at historical cost with no goodwill or other intangible assets recorded. The value of the promissory note issued as part of the merger consideration was not recorded on the date of the reverse recapitalization since this was a capital transaction and the contingency associated with the promissory note was deemed not probable as of February 25, 2022.
Agile Defense was acquired on February 25, 2022 pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Agile Defense, AIRO Group, Holdings, Agile Defense Merger Sub, LLC, and Joseph Burns as target representative dated as of October 6, 2021, as amended, in exchange for contingent consideration in the form of a promissory note in the amount of $2.3 million which is payable within five (5) business days after the public trading of the Company’s common stock begins. Management determined that the screen test requirements under ASC 805 were met such that Agile Defense was not considered a business, and therefore the transaction with Agile Defense was accounted for as an asset acquisition. The net assets and liabilities of Agile Defense totaled approximately $0.1 million. The value of the promissory note issued as part of this asset acquisition was not recorded since the contingency associated with the promissory note was deemed not probable as of February 25, 2022.
On March 10, 2022, Holdings acquired Jaunt, which was accounted for as a business combination in accordance with ASC 805 as further described in Note 2. Business Combinations. On March 28, 2022, Holdings acquired Sky-Watch, which was accounted for as a business combination in accordance with ASC 805 as further described in Note 2. Business Combinations.
Aspen Avionics was acquired on April 1, 2022 pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Aspen Avionics, AIRO Group, Holdings, Aspen Merger Sub, Inc. and John Uczekaj as target representative dated as of October 6, 2021, as amended, in exchange for consideration in the form of 2,575,758 shares of the Company’s common stock (the “Aspen/Holdings Merger”). The Aspen/Holdings Merger is reflected as a reverse acquisition for accounting purposes as Aspen Avionics was determined to be the accounting acquirer. This determination was based upon the terms of the merger agreements and other factors including: (i) Aspen Avionics board members holding key positions in the combined company (CEO and COO as well as board seats of the combined company, (ii) Aspen Avionics being the location of the headquarters and providing the staffing for most corporate functions including accounting, (iii) Aspen Avionics initiating the merger transactions, and (iv) Aspen Avionics being larger in both revenue and assets as compared to Holdings immediately prior to the Aspen/Holding Merger. As a result of the reverse acquisition, Aspen Avionics is treated as if it were the legal successor to Holdings’s reporting obligation as of the date of the acquisition and the consolidated financial statements represent the continuation of the consolidated financial statements of Aspen Avionics, except for the capital structure which has been adjusted to reflect the legal capital structure of Holdings on the acquisition date. The historical equity of Aspen Avionics has been adjusted to the legal capital structure based upon the shares issued in the reverse acquisition ratio of 864 Aspen Avionics shares to 1 Holdings share.
As Holdings, as of immediately prior to the Aspen/Holdings Merger, met the definition of a business in conjunction with ASC 805, the Aspen/Holdings Merger resulted in recording the net assets, including intangible assets, and liabilities, and the contingent consideration promissory notes issued in conjunction with the AIRO Drone/Holdings Merger and acquisition of Agile Defense, which were previously not subject to ASC 805, at fair value as further described in Note 2. Business Combinations. Goodwill measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date was also recorded as described in Note 2. Business Combinations.
On April 26, 2022, Holdings acquired Coastal Defense, which was accounted for as a business combination in accordance with ASC 805 as further described in Note 2. Business Combinations.
The consolidated financial statements presented for the year ended December 31, 2022 are those of Aspen Avionics for the entire period, Holdings (including the activity of Holdings, AIRO Drone, Agile Defense, Jaunt, and Sky-Watch) from April 1, 2022 to the end of the period ended December 31, 2022 and Coastal Defense from April 26, 2022 to the end of the period ended December 31, 2022.
In the Merger Agreements, each of the transactions had a provision for potential rescission of the transaction should an initial public offering or merger with a special purpose acquisition company (“SPAC”) not be completed by either August 31, 2022, or September 30, 2022, in accordance with the terms of the specific Merger Agreement. On August 25, 2022, each of the Merger Agreements was amended to remove the rescission clauses in their entirety.
| F-89 |
Liquidity and Management’s Plans
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception. As of December 31, 2023, the Company had cash and restricted cash of $13.1 million of which $9.0 million was either restricted or was designated to only being used for Sky-Watch operations and a working capital deficit of $66.4 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is actively pursuing a transaction with a SPAC. Management expects to use the proceeds from the SPAC transaction to support the operations of the consolidated entity, settle the outstanding indebtedness assumed from the Merger Entities and to pay the consideration owed to certain entities in connection with the closing of the mergers. There can be no assurance that the SPAC transaction will be successful. In the event the Company does not complete its SPAC transaction, the Company will seek additional funding through other means including private equity financing and debt financing. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments, estimates and assumptions are used to determine litigation and claims and other asset and liability amounts. The Company bases its estimates and judgments on historical experience along with other pertinent information available at the time the estimate is made. However, future events are subject to change and the estimates and judgments may require adjustments. Actual results could differ from these estimates and these differences may be material.
Business Combinations and Asset Acquisitions
The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. Examples of estimates and assumptions in valuing certain of the intangible assets and goodwill the Company has acquired include, but are not limited to, future expected cash flows from acquired developed technologies, customer relationships, and tradenames. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
The authoritative guidance allows a measurement period of the purchase price allocation that ends when the entity has obtained all relevant information about facts that existed at the acquisition date, and that cannot exceed one year from the date of acquisition. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statements of operations.
Where the purchase of an entity or net assets does not meet the definition of a business, the Company accounts for the transaction as an asset acquisition. In an asset acquisition, the purchase price is allocated to the net assets acquired on a relative fair value basis, and no goodwill is recognized in the transaction. Direct costs for asset acquisitions are generally considered part of the purchase price.
| F-90 |
Business Risk and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and accounts receivable. Cash is maintained with financial institutions and the composition and maturities are regularly monitored by management. Deposits at any time may exceed federally insured limits.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. Payment terms are generally 30 days from delivery of product or service but may fluctuate depending on the terms of each specific contract. During the year ended December 31, 2023, two customers accounted for 61% of the Company’s revenue. During the year ended December 31, 2022, two customers accounted for 23% of the Company’s revenue. As of December 31, 2023, two customers accounted for 52% of accounts receivable. As of December 31, 2022, two customers accounted for 40% of accounts receivable.
The Company’s operational structure includes an existing operating business and early-stage businesses in emerging and developing markets that are concentrated in an industry characterized by rapid technological advances, changes in customer requirements, and evolving regulatory requirements and industry standards. Any significant delays in the development or introduction of products or services, or any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements, or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company’s business and operating results.
The Company’s business, results of operations, and financial condition for the foreseeable future will likely continue to depend on sales to a relatively small number of customers. In the future, these customers may decide not to purchase the Company’s products, may purchase fewer products than in previous years, or may alter their purchasing patterns. Further, the amount of revenue attributable to any single customer or customer concentration generally may fluctuate in any given period. In addition, a decline in the production levels of one or more of the Company’s major customers could reduce revenue. The loss of one or more key customers, a reduction in sales to any key customer or the Company’s inability to attract new significant customers could negatively impact revenue and adversely affect the Company’s business, results of operations, and financial condition.
Supply Risk
During the years ended December 31, 2023 and 2022, purchases from three vendors constituted 51% of total inventory purchases.
Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less from the date of purchase to be cash equivalents. The Company had no cash equivalents as of December 31, 2023 and 2022.
Restricted Cash
The Company had $9.0 million and $0.2 million in restricted cash as of December 31, 2023 and 2022, respectively. As of December 31, 2023, restricted cash was primarily deposits from a customer contract that have been placed in an escrow account to be released upon shipment of orders. As of December 31, 2022, restricted cash was comprised of cash held in account subject to collateral agreements to be used for the payment on revolving credit card balances and cash pledged as collateral on various loans.
Accounts Receivable, Net
Accounts receivable are reported on the accompanying consolidated balance sheets at the gross outstanding amount adjusted for a provision for credit losses. The Company determines the provision for credit losses by regularly evaluating expected loss as well as individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. As of December 31, 2023 and 2022, the Company provided a provision for credit losses of $0.1 million for amounts that may ultimately be uncollectible. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
| F-91 |
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is primarily determined based on standard cost and approximates actual cost on a first-in, first-out basis. Work-in-process and finished goods include materials, labor and allocated overhead. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. Reductions to the carrying value of inventory are charged to cost of revenue and a new, lower cost basis for that inventory is established. Subsequent changes to facts or circumstances do not result in the restoration or increase in the related inventory value. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Fair Value Measurements
The Company applies the requirements of the fair value measurements framework, which establishes a hierarchy for measuring fair value and requires enhanced disclosures about fair value measurements. The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement guidance also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy in which these assets and liabilities must be grouped based on significant levels of inputs as follows:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2: | Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability. | |
| Level 3: | Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following is a summary of the financial liabilities measured at fair value on a recurring basis by caption and by level within the fair value hierarchy as of December 31, 2023 and 2022:
| Fair value as of December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Debt | $ | - | $ | - | $ | 19,426,848 | $ | 19,426,848 | ||||||||
| Contingent consideration | - | - | 45,182,276 | 45,182,276 | ||||||||||||
| Total financial liabilities | $ | - | $ | - | $ | 64,609,124 | $ | 64,609,124 | ||||||||
| Fair value as of December 31 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Debt | $ | - | $ | - | $ | 19,098,741 | $ | 19,098,741 | ||||||||
| Contingent consideration | - | - | 54,807,319 | 54,807,319 | ||||||||||||
| Total financial liabilities | $ | - | $ | - | $ | 73,906,060 | $ | 73,906,060 | ||||||||
There were no financial assets measured at fair value on a recurring basis as of December 31, 2023 and 2022. There were no transfers between Levels 1, 2, or 3 within the fair value hierarchy during the years ended December 31, 2023 and 2022.
| F-92 |
Debt
As discussed in Note 4. Revolving Lines of Credit and Long-Term Debt, the Company modified certain debt arrangements as of March 31, 2022. The debt was recorded at present value to estimate the fair value of the debt obligation as of December 31, 2023 and 2022. The effective interest rate in the fair value shown above for December 31, 2023 and 2022 was 12.5%.
Contingent Consideration
As of December 31, 2023, the contingent consideration includes an obligation assumed from the Jaunt acquisition that is contingent on future cash receipts and promissory notes issued in conjunction with the mergers as described in Note 2. Business Combinations. As of December 31, 2022, contingent consideration also included an earnout liability payable associated with the Sky-Watch acquisition contingent upon certain revenue milestones over a period of time.
The contingent consideration liability is measured at fair value on a recurring basis for which there was no available quoted market prices or principal markets. The inputs for this measurement were unobservable and were, therefore, classified as Level 3 inputs.
The obligation assumed from Jaunt was valued using discounted cash flow models. As of December 31, 2023, the significant inputs included discount factors ranging from 21% to 45% and a 67% initial public offering (“IPO”) likelihood to arrive at a total fair value of $35.8 million. As of December 31, 2022, the significant inputs included discount factors ranging from 15% to 45% and a 67% IPO likelihood to arrive at a total fair value of $32.4 million.
The Sky-Watch earnout liability was originally payable up to $6.5 million, of which up to a maximum of $3.0 million was payable on a dollar-for-dollar basis on revenue earned within the first two-year anniversary of the acquisition and $3.5 million would become due and payable if and only if Sky-Watch earns a minimum of $13.8 million in revenue during the period from the acquisition date through June 2024. During the year ended December 31, 2022, the first tranche of the earnout was fully earned. In December 2022, the Equity Purchase Agreement was amended to increase the second earnout amount to $7.5 million and to extend the earnout period to include the full fiscal year periods of 2022 through 2024. In March 2023, the Equity Purchase Agreement was further amended to add a third earnout of $4.0 million if revenue during the full fiscal year periods of 2022 through 2024 reaches $17.0 million. During the year ended December 31, 2023, the remaining tranches of the earnout were fully earned, resolving the contingency, and the earnout liability was recorded to the full amount owed net of $3.0 million in payments made to date totaling $11.5 million and was reclassified to due to seller. As of December 31, 2023, the total amount included in due to seller and owed under the Sky-Watch earnout liability was $11.5 million. As of December 31, 2022, the fair value of the Sky-watch earnout liability was $5.9 million. As described in Note 21. Subsequent Events, in March 2024 the parties further amended the Equity Purchase Agreement, pursuant to which the former shareholders of Sky-Watch became eligible for an additional earnout of $1.0 million if Sky-Watch achieves Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of DKK 127,107,500 or above for fiscal year 2024.
During the first quarter of 2023, the contingent promissory note issued in conjunction with the acquisition of Sky-Watch, as further discussed in Note 2. Business Combinations, was amended such that it was payable no later than December 31, 2023. As the contingency was resolved, the difference between the December 31, 2022 fair value of $7.8 million and the face value of the promissory note of $12.9 million was recorded to other expense, net during the year ended December 31, 2023 and the $12.9 million liability was reclassed to due to seller. The fair value of the Sky-Watch promissory note as of December 31, 2022 was based on a 67% probability of the transaction closing with a 9% discount due to the proximity of estimated closing. During the year ended December 31, 2023, payments totaling $6.0 million were made on the promissory note. As of December 31, 2023, the total amount included in due to seller and owed under this promissory note was $7.3 million. As of December 31, 2022, the fair value of the promissory note was $7.8 million. In December 2023, the Company changed the terms of the promissory note due to Sky-Watch whereas the remaining balance of $11.4 million was payable no later than March 31, 2024. As described in Note 21. Subsequent Events, in March 2024, the Company changed the terms of the promissory note due to Sky-Watch whereas the remaining balance of $6.8 million was payable no later than June 30, 2024.
The fair value of the contingent consideration promissory notes issued to the former equity holders of Agile Defense, AIRO Drone and Coastal Defense totaled $9.4 million and $8.8 million as of December 31, 2023 and 2022, respectively. Valuations were based on a 67% probability of an IPO closing and a discount rate of 3% and 9% as of December 31, 2023 and 2022, respectively, based on proximity to an estimated closing date. In October 2023, the Company signed various agreements with certain promissory note holders pursuant to which 90% of the total amounts payable in cash, or approximately $11.9 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $1.3 million shall be paid at closing of the business combination.
| F-93 |
Derivative Liability - Investor Convertible Subordinated Notes – End-of-Term-Payments
Investor convertible subordinated notes issued prior to 2018 included a provision that stated that upon a liquidation event (as defined in Aspen Avionics’ articles of incorporation, including among other terms, an equity exit event), the holders of the notes have the option to receive an end-of-term payment that is a multiple of principal and accrued interest in exchange as full payment for the cancelation of the notes. The end-of-term payment related to notes was 200% and 100% of principal and accrued interest for the notes issued in 2015 and the notes issued after 2015 but prior to 2018, respectively. The end-of-term payment was in addition to the principal and accrued interest due. This option provision met the definition of an embedded derivative and is accounted for as a standalone liability that was measured at fair value on a recurring basis. As there was no available quoted market price or principal markets, the derivative is classified as a Level 3 liability. The fair value was determined based on discounted cash flow of a range of possible future expected enterprise values from a liquidation event reduced by senior debt obligations. During the year ended December 31, 2022, the derivative liability was derecognized as all of the notes issued prior to 2018 were converted to equity. The fair value of the end-of-term payments derivative liability was $9.7 million as of January 1, 2022.
The Company estimated the fair value of the derivative liability using a binomial model to estimate enterprise values. Inputs into the binomial model included the estimated value of the Company using a weighted-average probability analysis, the risk-free interest rate, volatility, and the expected settlement period. As of March 31, 2022, the date of derecognition, to determine the estimated value the Company used various value scenarios weighted between 10% to 40%, a risk-free interest rate of 0.52%, volatility of 50% and an expected settlement period of 0.3 years.
Preferred Stock Warrant Liability
The preferred stock warrant liability is a standalone liability that is measured at fair value on a recurring basis for which there were no available quoted market prices or principal markets. The inputs for this measurement were unobservable and were, therefore, classified as Level 3 inputs. The fair value is determined based on a Black-Scholes option valuation model to value the initial liability and subsequent changes in fair value at each reporting date. In connection with the warrant exercises and cancellations as discussed in Note 5. Common Stock, Redeemable Convertible Preferred Stock and Warrants, the warrants were revalued immediately before the exercises and cancellations and the remaining fair value was reclassified to stockholders’ equity (deficit).
The remaining preferred stock warrants were cancelled on April 1, 2022 in connection with the merger of Aspen Avionics with Holdings.
The fair value of the preferred stock warrant liability was determined using the following assumptions as of April 1, 2022, the cancellation date:
| April 1, 2022 | ||||
| Fair value of redeemable convertible preferred stock | $ | 1.64 | ||
| Expected volatility | 50.2 | % | ||
| Remaining term (years) | 0.1 | |||
| Risk-free interest rate | 0.15 | % | ||
| Dividend yield | 0 | % | ||
| F-94 |
The changes in fair value of the Level 3 financial liabilities for the years ended December 31, 2023 and 2022 were as follows:
| Investor | ||||||||||||||||
| Convertible | ||||||||||||||||
| Subordinated | Preferred | |||||||||||||||
| Notes - | Stock | |||||||||||||||
| Contingent | End-of Term | Warrant | ||||||||||||||
| Debt | Consideration | Payments | Liability | |||||||||||||
| Balance as of January 1, 2022 | $ | - | $ | - | $ | 9,652,930 | $ | 5,592,794 | ||||||||
| Additions | 17,622,258 | 48,857,739 | - | - | ||||||||||||
| Change in fair value | 1,476,483 | 6,015,433 | 1,358,160 | (2,023,907 | ) | |||||||||||
| Settlement | - | (65,853 | ) | (11,011,090 | ) | (3,568,887 | ) | |||||||||
| Balance as of December 31, 2022 | 19,098,741 | 54,807,319 | - | - | ||||||||||||
| Change in fair value | 328,107 | 17,764,957 | - | - | ||||||||||||
| Settlement | - | (3,010,000 | ) | - | - | |||||||||||
| Transfers to due to seller liability | - | (24,380,000 | ) | - | - | |||||||||||
| Balance as of December 31, 2023 | $ | 19,426,848 | $ | 45,182,276 | $ | - | $ | - | ||||||||
The change in the fair value of the debt is included in “Interest expense, net” on the consolidated statements of operations and represents the amortization of the debt discount. The change in the fair value of the contingent consideration, which includes the effect of translating the contingent consideration with Sky-Watch from local currency to reporting currency, is included in “Other expense, net” on the consolidated statements of operations. The change in fair value of the end-of-term payments and preferred stock warrant liability derivatives are included in “Change in fair value of derivative liabilities” on the consolidated statements of operations.
Fair Value of Financial Instruments
The carrying value of accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate fair value due to the short time to maturity. The carrying value of the Company’s borrowings approximates fair value based on current rates offered to the Company.
Deferred Offering Costs
The Company capitalizes certain legal, professional, accounting, and other third-party fees that are directly associated with in-process equity issuances as deferred offering costs until such equity issuances are consummated. After consummation of the equity issuance, these costs are recorded as a reduction in the capitalized amount associated with the equity issuance. Should the equity issuance be delayed or abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations. During the year ended December 31, 2022, $2.1 million of deferred offering costs were expensed due to them being associated with an IPO that was subsequently abandoned.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability approach method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases, as well as for net operating losses and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more-likely-than-not to be realized.
| F-95 |
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will more-likely-than-not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as income tax expense. No interest or penalties have been accrued for as of December 31, 2023 or 2022.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation of property and equipment is provided primarily utilizing the straight-line method for consolidated financial statement purposes at rates based on the following useful lives:
| Aircraft equipment | 5 - 20 years | |
| Machinery and equipment | 2 - 15 years | |
| Furniture and fixtures | 3 - 10 years | |
| Leasehold improvements | The shorter of the useful life or term of the lease | |
| Software | 3 - 7 years |
Additions, improvements, and expenditures that significantly add to the productivity or extend the economic life of assets are capitalized. Any amounts incurred as recurring expenditures or that do not extend or improve the economic life of the asset are expensed as incurred.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested at the reporting unit level for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has selected October 1st as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment for these assets. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if an impairment test is necessary. Management may choose to proceed directly to the evaluation, bypassing the initial qualitative assessment. The impairment test involves comparing the fair value of the reporting unit to which goodwill is allocated to its net book value, including goodwill. A goodwill impairment loss would be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. No goodwill impairment charges have been recorded for any period presented.
Definite-lived Intangible Assets
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of the acquired business to the respective net tangible and intangible assets. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed. The Company capitalizes third-party legal costs and filing fees, if any, associated with obtaining patents. Once the patent asset has been placed in service, the Company amortizes these costs over the shorter of the asset’s legal life, generally 20 years from the initial filing date, or its estimated economic life using the straight-line method.
| F-96 |
The estimated useful lives for the Company’s intangible assets are as follows:
| Estimated useful life | ||
| Developed technology | 8 to 13 years | |
| Tradenames - definite-lived | 4 to 8 years | |
| Customer relationships | 3 to 7 years | |
| Patents | up to 20 years |
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. There was no impairment recorded during the year ended December 31, 2023. During the year ended December 31, 2022, the Company wrote off $0.2 million of patent costs.
Revenue Recognition
The Company recognizes revenue when, or as, it satisfies performance obligations by transferring promised products or services to its customers in an amount that reflects the consideration the Company expects to receive. The Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company accounts for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable.
For certain sales, the Company has contracts with customers that include multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, by allocating the contract’s total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”) of each distinct good or service in the contract. The Company determines the SSP based on its overall pricing objectives, taking into consideration market conditions. Determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is recognized when control of the promised services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. The Company’s contracts do not include highly variable components. The timing of revenue recognition, billings, and cash collections can result in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities). The costs to obtain contracts, primarily commission expenses, are expensed when incurred.
Amounts that are invoiced are recorded in accounts receivable and revenues or deferred revenue, depending on whether the revenue recognition criteria have been met. A large portion of the Company’s sale result in partial prepayments from customers. Otherwise customer invoices generally have payment terms of net 30 days and do not have a significant financing component.
The Company’s revenues are derived from various sources: (i) avionics products consisting primarily of hardware with embedded firmware sold to an authorized dealer network and avionics and global navigation satellite system technologies (“GNSS”) products sold to original equipment manufacturers (“OEMs”), (ii) research and development (“R&D”) projects, (iii) sales-based royalties related to GNSS technology licensed to OEMs, (iv) consultation and training services related to aerial integration and close air support providing the latest tactics, technique, and procedures (“TTP”) to incorporate contract close air support/intelligence surveillance reconnaissance (“CCAS/ISR”) with video downlink systems into tactical operations, (v) technology and equipment sales (vi) mini unmanned aerial systems (“MUAS” or “commercial drones”) sales, including hardware, software, training, support and product service, and (vii) drone services, including surveys, imaging, security, and other drone applications.
| F-97 |
The Company expenses costs to obtain a contract as incurred when the amortization period is one year or less.
In general, revenue is disaggregated by segment and geography. See Note 15. Segment Information.
Product Revenue
Product revenue, which includes avionics, MUAS/commercial drones and other equipment sales, is recognized upon the transfer of control of promised products to the customer in an amount that depicts the consideration the Company is entitled to for the related products. Product revenue is recognized upon shipment or delivery and title and risk of loss have transferred to the customer.
Service and Extended Warranty Revenue
Service revenue includes drone services, training, consultations, and out-of-warranty repairs. Revenue from services rendered is recognized over time in amounts that correspond directly with the value to the customer when performance is completed. Support revenue is recognized on a straight line basis over the support period, which is generally one year.
Extended warranties are service-type warranties and are typically sold under separate contracts. Revenue for those extended warranties is recognized over the contractual service period, which is typically two years.
Research and Development Contracts
Revenue from engineering development projects is recognized over a period of time based on the input method and is measured by the percentage of total labor and materials cost incurred to date to estimated total labor and materials cost at completion for each contract. The input method of accounting involves considerable use of estimates in determining revenues, costs, and profits and in assigning the amounts to accounting periods; as a result, there can be a significant disparity between earnings as reported and actual cash received by the Company during any reporting period.
Sales-based Royalties
Revenue for sales-based royalties is recognized at a point in time. Revenue from sales-based royalties is recognized as subsequent sales occur.
The following table summarizes the revenue recognition based on time periods:
| Year ended December 31, 2023 | ||||||||
| 2023 | 2022 | |||||||
| Point in time | $ | 41,979,671 | $ | 16,656,357 | ||||
| Over time | 1,274,144 | 424,684 | ||||||
| $ | 43,253,815 | $ | 17,081,041 | |||||
The contract liabilities as of December 31, 2023 and 2022 were $11.1 million and $0.7 million, respectively. The majority of contract liabilities are expected to be recognized as revenue through 2025. The majority of Company had no significant contract assets as of December 31, 2023 and 2022.
| F-98 |
Cost of Revenue
Cost of revenue includes labor cost and direct material cost, including freight and duties. Indirect production costs comprising of consumables, cost of sales freight, quality related costs and production maintenance costs are also included in cost of revenue.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2023 and 2022 was $0.1 million and $0.2 million, respectively.
Shipping and Handling
Shipping charges billed to customers are included in revenue and related costs are included in cost of revenue.
Research and Development
Research and development costs are expensed when incurred.
Product Warranty
Drone Product Warranty
The Company provides a one-year warranty on certain drone sales provided the customer enters into a one-year service-and-support contract. Estimated future warranty obligations related to those products are recorded during the period of sale.
Avionics Product Warranty
The Company establishes warranty reserves based on estimates of avionics product warranty return rates and expected costs to repair or to replace the avionics products under warranty. The warranty provision is recorded as a component of cost of revenue in the consolidated statements of operations. The Company does not offer returns unless special circumstances exist and the return is approved by the Company.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards based on the grant-date estimated fair value of the awards. Options and restricted stock awards may be granted as time-based awards, performance-based awards or combinations of the time-based and performance-based awards. The Company expenses the fair value of its options to employees and non-employees on a straight-line basis over the associated service period for time-based awards, which is generally the vesting period. The performance-based awards begin their period of ratable vesting at the time that the Company determines that the achievement of the performance thresholds is probable. The Company accounts for forfeitures as they occur and does not estimate forfeitures at the time of grant. Ultimately, the actual expense recognized over the vesting period will be for only those options that vest.
Comprehensive Loss
Comprehensive loss generally represents all changes in the equity of a business except those resulting from investments or contributions by stockholders. Unrealized gains and losses on foreign currency translation adjustments are included in the Company’s components of comprehensive loss, which are excluded from net loss.
Lease Accounting
At contract inception, the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease and reassesses that conclusion if the contract is modified. Operating leases are recorded in operating lease right-of-use (“ROU”) assets, lease liability, current and lease liability, noncurrent on the consolidated balance sheets. The Company did not have any finance leases during the periods presented.
| F-99 |
The Company recognizes operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The lease ROU asset is reduced for tenant incentives, if any, and excludes any initial direct costs incurred, if any. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. The Company defines the initial lease term to include renewal options determined to be reasonably certain. If the Company determines the option to extend or terminate is reasonably certain, it is included in the determination of lease assets and liabilities. The Company reassesses the lease term if and when a significant event or change in circumstances occurs within the control of the Company, such as construction of significant leasehold improvements that are expected to have economic value when the option becomes exercisable.
The Company recognizes a single lease cost on a straight-line basis over the term of the lease, and the Company classifies all cash payments within operating activities in the consolidated statements of cash flows.
The Company has lease agreements with lease and non-lease components, which it has elected to not combine for all asset classes. In addition, the Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less of all asset classes.
Redeemable Convertible Preferred Stock Warrant Liability
The Company’s warrants to purchase redeemable convertible preferred stock were classified as a liability on the consolidated balance sheets and held at fair value because the warrants were exercisable for contingently redeemable preferred stock, which is classified outside of stockholders’ equity (deficit). The warrants were subject to remeasurement to fair value at each balance sheet date, and any change in fair value was recognized in the consolidated statements of operations. The Company adjusts the liability for changes in fair value until the earlier of the exercise, the expiration of the warrants, or the conversion of the underlying shares of redeemable convertible preferred stock. Upon the exercise, expiration, or the completion of a liquidation event, the related warrant liability will be reclassified to additional paid-in capital.
The holders of redeemable convertible preferred stock have no voluntary rights to redeem their shares. The redeemable convertible preferred stock has deemed liquidation provisions which require the shares to be redeemed upon a change in control or other deemed liquidation events. Although the redeemable convertible preferred stock is not mandatorily or currently redeemable, a deemed liquidation event would constitute a redemption event outside the Company’s control. As a result of these liquidation features, all shares of redeemable convertible preferred stock have been classified outside of stockholders’ equity (deficit) as temporary equity on the consolidated balance sheets. The carrying values of the Company’s redeemable convertible preferred stock have not been accreted to their redemption values as these events are not considered probable of occurring. Subsequent adjustments of the carrying values to redemption values will be made only if and when it becomes probable the preferred shares will become redeemable.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the treasury stock method and computed by dividing net loss available to common stockholders by the diluted weighted-average shares of common stock outstanding during each period. The potentially dilutive shares are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when the effect is dilutive.
| F-100 |
The potentially dilutive shares of common stock that have been excluded from the calculation of net loss per share because of the anti-dilutive effect are as follows as of December 31:
2023 | 2022 | |||||||
| Outstanding stock options | 605,236 | 605,236 | ||||||
| Warrants to purchase common stock | 112,246 | 112,246 | ||||||
| Contingent restricted stock awards | 431,818 | 431,818 | ||||||
| Potential stock issuable for contingent interest payment | 253,120 | 159,036 | ||||||
| Potential shares issuable under debt conversion agreements | 3,622,316 | - | ||||||
| Total anti-dilutive securities | 5,024,736 | 1,308,336 | ||||||
The number of potentially dilutive shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of the period end. Such amounts have not been adjusted for the treasury stock method or weighted-average outstanding calculations as required if the securities were dilutive. Common stock equivalents as of December 31, 2022 have been adjusted by the merger exchange ratio.
Debt Discounts
Debt issuance costs are presented as a discount to the related debt and are amortized over the term of the related loan for which the fees were incurred using the straight-line method, which approximates the effective interest method.
The Company has issued convertible debt together with detachable warrants and other equity incentives. The Company allocates the proceeds from the related debt between the debt and the equity classified incentives using the relative fair value method. The amount of proceeds allocated to incentives and the fair value of the warrants is recorded as a discount against the debt and amortized over the term of the related debt using the effective interest method.
Foreign Currency
The functional currency of the Company’s foreign subsidiary is its local currency. As such, assets and liabilities are translated to U.S. dollars at the exchange rates on the date of consolidation and related revenues and expenses are generally translated at average exchange rates prevailing during the period included in results of operations. Adjustments resulting from foreign currency translation are recorded in accumulated other comprehensive loss on the consolidated balance sheets. Foreign currency transaction gains and losses are included in other income (expense), net on the consolidated statements of operations. Losses from foreign currency transactions were not significant for the years ended December 31, 2023 and 2022, respectively.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 amended the impairment model to utilize an expected loss methodology in place of the previously used incurred loss methodology. The Company adopted ASU 2016-13 on January 1, 2023.
Current expected credit losses (“CECL”) requires the measurement of expected credit losses on a collective (pool) basis when similar risk characteristics exist. The Company has experienced an insignificant amount of write downs of receivables as a large portion of its sales result in prepayments from customers. In addition to the Company’s review of expected credit losses, the Company also performs a monthly analysis of aged accounts receivable to determine how much, if any, of the accounts receivable balance should be reserved as potential credit loss. The Company reviews all balances over 90 days past due for a possible reserve and considers any specific factors or information for balances aged under 90 days if there are indicators that the balance should be reserved, such as other aged balances with the customer or bankruptcy as well as any economic issues with a customer industry or region. The adoption of ASU 2016-13 did not result in a material impact to the Company’s consolidated financial statements.
| F-101 |
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024 and requires retrospective application to all prior periods presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on the consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024. Entities are permitted to early adopt the standard for “annual financial statements that have not yet been issued or made available for issuance.” Adoption is either prospectively or retrospectively, the Company will adopt this ASU on a prospective basis. The Company is currently evaluating the impact of the new standard on the consolidated financial statements and related disclosures.
| 2. | Business Combinations |
On March 10, 2022, Holdings, as described in Note 1. The Company and Summary of Significant Accounting Policies, completed the acquisition of Jaunt, a Delaware limited liability company, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Jaunt, AIRO Group, Holdings, Jaunt Merger Sub, LLC and Martin Peryea as member representative dated as of October 6, 2021, as amended, in exchange for consideration in the form of i) 5.3 million shares of the Company’s common stock with a fair value of $135 million, ii) warrants and stock options assumed with a fair value totaling $12.8 million and iii) contingent consideration assumed from Jaunt with a fair value of $29.2 million.
The Company determined the overall enterprise valuation of Holdings as of March 10, 2022 to be $580.2 million, or $25.27 per share, using both a discounted cash flow (“DCF”) approach and a DCF approach with a market derived exit multiple. The DCF method involves forecasting future cash flows of the AIRO Drone, Agile Defense, Holdings and Jaunt entities and terminal value, discounted to present value using a weighted average cost of capital (“WACC”) of 34% that reflects the risk profile of the Company and the inherent risk related to the Company’s forecasted cash flows given the early stage of the Company’s segments. The WACC and the Company’s cost of equity were derived from historical market rate of return studies and published data.
The fair value of the stock options and warrants assumed by the Company was determined using the Black-Scholes option pricing model using a volatility rate of 59.0% which was derived from selected public company comparable group data. A share conversion ratio of 11.2246 was applied to convert Jaunt’s outstanding stock options and warrants into equity awards for shares of the Company’s common stock.
Using the marketable values of the common stock issued, the stock options and warrants assumed and the estimated fair value of the contingent consideration, the Company determined the total purchase consideration of $177.0 million. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill by Holdings as of March 10, 2022.
The Jaunt contingent obligation originated from Jaunt’s acquisition of certain patents, licenses, and other intellectual property from Carter Aviation Technologies, LLC (“Carter Aviation”), a former member of Jaunt, in April 2019 (the “Jaunt Contingent Arrangement”). Under the Jaunt Contingent Arrangement, 10% of any cash receipt, including all income, receipts, proceeds, debt or equity investment, earnings, sales, or winnings, up to $50 million is payable to Carter Aviation. As of the acquisition date, $49.6 million in future payments remained on this obligation. Upon the completion of the SPAC transaction, the contingent consideration assumed from Jaunt will be replaced by promissory notes, the first of which will be for $23.0 million due one day after the closing of the Company’s SPAC transaction, and the second will be for the remaining portion of the contingent consideration at the closing of the Company’s SPAC transaction that will be paid over three years subsequent to the closing of the Company’s SPAC transaction. The obligation assumed from Jaunt was recorded at fair value using discounted cash flow models. As of the acquisition date, the significant inputs included discount factors ranging from 15% to 45%, reflecting the risk profile of the payments due under scenarios where an IPO does and does not occur, and a probability of 51% of an IPO closing as of March 10, 2022, which contemplated the subsequent closings required as part of the Merger Agreements and Equity Purchase Agreement.
Intangible assets requiring recognition apart from goodwill were determined under ASC 805 through application of both a cost and income approach, and a reconciliation of these methods to result in a final value. The income approaches for the intangible assets were based on forecasts that were reconciled to the purchase consideration paid for Jaunt under a DCF method.
| F-102 |
The results of the purchase price allocation as of March 10, 2022 are as follows:
| Jaunt | ||||
| Assets Acquired: | ||||
| Cash and cash equivalents | $ | 336,525 | ||
| Prepaid expenses | 13,125 | |||
| Property and equipment | 5,524 | |||
| Intangible assets | 97,100,000 | |||
| Accounts payable | (14,617 | ) | ||
| Accrued liabilities | (176,747 | ) | ||
| Deferred revenue | (93,117 | ) | ||
| Deferred compensation | (5,169,432 | ) | ||
| Deferred tax liability | (5,628,964 | ) | ||
| Net Assets Acquired | 86,372,297 | |||
| Goodwill | 90,662,445 | |||
| Total Purchase Allocation | $ | 177,034,742 | ||
| Purchase Consideration: | ||||
| Equity issued | $ | 147,813,568 | ||
| Contingent consideration | 29,221,174 | |||
| Total Purchase Consideration | $ | 177,034,742 | ||
On March 28, 2022, Holdings, as described in Note 1. The Company and Summary of Significant Accounting Policies, completed the acquisition of Sky-Watch, a company organized under the laws of Denmark, pursuant to the terms and conditions of an Equity Purchase Agreement by and among Sky-Watch, AIRO Group, Holdings, Dangroup ApS and Mekan I/S v/Per Pedersen & Claus Bo Jensen, dated as of October 6, 2021, as amended, in exchange for consideration in the form of i) a promissory note in the amount of $12.9 million with a fair value of $6.1 million, ii) 0.9 million shares of the Company’s common stock with a fair value of $23.0 million and iii) contingent consideration in the form of an earnout with a fair value of $2.9 million.
The Company determined the overall valuation of Holdings as of March 28, 2022 to be $615.2 million, or $25.79 per share, using both a DCF approach and a DCF approach with a market derived exit multiple. The DCF method involves forecasting future cash flows of the AIRO Drone, Agile Defense, Holdings, Jaunt and Sky-Watch entities and terminal value, discounted to present value using a WACC of 34% that reflects the risk profile of the Company and the inherent risk related to the Company’s forecasted cash flows given the early stage of the Company’s segments.
Using the marketable values of the common stock issued and the estimated fair value of the contingent consideration, the Company determined the total purchase consideration of $31.9 million. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill by Holdings as of March 28, 2022.
The fair value of the contingent promissory note was determined with a probability of 56% of an IPO closing as of March 28, 2022 which contemplated the subsequent closings required as part of the Merger Agreements and Equity Purchase Agreement and a discount rate of 15% which was based on proximity to an estimated closing date. Under the terms of the original Equity Purchase Agreement, the contingent earnout is payable up to $6.5 million, of which up to a maximum of $3.0 million is payable on a dollar-for-dollar basis on revenue earned within the first two-year anniversary of the acquisition and $3.5 million will become due and payable if and only if Sky-Watch earns a minimum of $13.8 million in revenue during the period from the acquisition date through June 2024. The fair value of the contingent earnout consideration at the acquisition date was valued using a Monte Carlo simulation with the following key assumptions: volatility of 62.6%, term of 2 years, risk-free rate of 2.4%, cost of debt of 15.0%, and credit risk spread of 29.2%.
| F-103 |
Intangible assets requiring recognition apart from goodwill were determined under ASC 805 through application of both a cost and income approach, and a reconciliation of these methods to result in a final value. The income approaches for the intangible assets were based on forecasts that were reconciled to the purchase consideration paid for Sky-Watch under a DCF method.
The results of the purchase price allocation as of March 28, 2022 are as follows:
| Sky-Watch | ||||
| Assets Acquired: | ||||
| Cash and cash equivalents | $ | 11,885 | ||
| Accounts receivable | 76,560 | |||
| Prepaid expenses | 352,696 | |||
| Inventories | 886,946 | |||
| Other current assets | 595,447 | |||
| Property and equipment | 68,947 | |||
| Operating lease right-of-use asset | 201,834 | |||
| Intangible assets | 9,290,000 | |||
| Accounts payable | (358,518 | ) | ||
| Accrued liabilities | (764,783 | ) | ||
| Operating lease liabilities | (105,809 | ) | ||
| Deferred revenue | (1,429,741 | ) | ||
| Deferred tax liability | (292,519 | ) | ||
| Notes payable and long-term debt | (313,137 | ) | ||
| Other liabilities | (96,025 | ) | ||
| Net Assets Acquired | 8,123,783 | |||
| Goodwill | 23,803,217 | |||
| Total Purchase Allocation | $ | 31,927,000 | ||
| Purchase Consideration: | ||||
| Equity issued | $ | 22,977,000 | ||
| IPO Contingent Payments | 6,054,000 | |||
| Contingent consideration | 2,896,000 | |||
| Total Purchase Consideration | $ | 31,927,000 | ||
On April 1, 2022, the Company completed the acquisition of Aspen Avionics, a Delaware corporation, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Aspen Avionics, AIRO Group, Holdings, Aspen Merger Sub, Inc. and John Uczekaj as target representative dated as of October 6, 2021, as amended, in exchange for consideration in the form of 2.6 million shares of the Company’s common stock. As described in Note 1. The Company and Summary of Significant Accounting Policies, the acquisition of Aspen Avionics was accounted for as a reverse acquisition as it was determined that Aspen Avionics is the accounting acquirer. As part of this transaction, the Company agreed to assume $25.3 million of obligations as defined within the merger agreement of which $1.9 million is attributable to future allowable services or to be payable to the former Aspen Avionics shareholders at the closing of an IPO. This $1.9 million contingent amount will be expensed as incurred or when an IPO or SPAC transaction is deemed probable. In October 2023, the Company signed various agreements with certain debt holders pursuant to which 90% of the total amounts payable in cash, or approximately $1.7 million, shall be converted to equity at a rate of $23.3595 per share in the Company no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $0.1 million shall be paid at closing of the business combination. On the acquisition date, the assets and liabilities of Aspen Avionics were recognized and measured at the precombination carrying amounts while the assets and liabilities of Holdings were recognized and measured at fair value in accordance with ASC 805.
| F-104 |
Holdings determined that, in accordance with ASC 805-30 and ASC 805-40-30-2, the acquisition-date fair value of the acquiree’s (Holdings) equity interests and contingent consideration assumed represented the purchase consideration in conjunction with the reverse acquisition of Aspen. The Company determined the overall purchase consideration to be $659.2 million, which was comprised of i) the fair value of the outstanding common stock of Holdings as of April 1, 2022 of $605.9 million, or $25.82 per share, ii) the fair value of vested stock options and warrants assumed of $10.1 million and iii) contingent consideration in the form of an earnout and contingent promissory notes which had a fair value of $43.1 million. The enterprise value was determined using a combination of a DCF approach based on projections of the AIRO Drone, Agile Defense, Holdings, Jaunt, Sky-Watch and Aspen entities using a WACC rate of 34% that reflects the risk profile of the Company and the inherent risk related to the Company’s forecasted cash flows given the early stage of the Company’s segments with a market derived exit multiple for the common stock and a Black-Scholes option pricing model for the stock options and warrants.
The fair value of the contingent promissory notes were determined with a probability of 61% of an IPO closing as of April 1, 2022 which contemplated the subsequent closings which would be required as part of the Merger Agreements and Equity Purchase Agreement and a discount rate of 15% which was based on the proximity to an estimated closing date.
The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill. As part of the purchase price allocation, goodwill of $358.3 million was allocated to the Electric Air Mobility segment and $89.3 million was allocated to the Uncrewed Air Systems segment using the relative fair value of the reporting unit.
The following table summarizes the final allocation of the purchase price over the estimated fair value of the assets acquired and liabilities assumed as part of the April 1, 2022 reverse acquisition.
| Agile Defense | Airo Drone | Jaunt | Sky-Watch | Airo Group Holdings | Total | |||||||||||||||||||
| Assets Acquired: | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 184 | $ | 2,757 | $ | 256,685 | $ | 21,200 | $ | 5 | $ | 280,831 | ||||||||||||
| Accounts receivable | - | 15,001 | - | 76,560 | - | 91,561 | ||||||||||||||||||
| Prepaid expenses | - | 3,347 | 12,313 | 482,775 | - | 498,435 | ||||||||||||||||||
| Inventories | - | - | - | 944,381 | - | 944,381 | ||||||||||||||||||
| Deferred offering costs | - | - | - | - | 639,220 | 639,220 | ||||||||||||||||||
| Other current assets | - | - | - | 600,554 | - | 600,554 | ||||||||||||||||||
| Shareholder loan | - | - | - | - | 5 | 5 | ||||||||||||||||||
| Property and equipment | - | - | 5,451 | 69,282 | - | 74,733 | ||||||||||||||||||
| Operating lease right-of-use assets | - | - | - | 201,834 | - | 201,834 | ||||||||||||||||||
| Intangible assets | - | - | 97,100,000 | 9,290,000 | - | 106,390,000 | ||||||||||||||||||
| Accounts payable | (27,683 | ) | (116,851 | ) | (2,932 | ) | (205,138 | ) | (863,432 | ) | (1,216,036 | ) | ||||||||||||
| Related party payable | (11,393 | ) | (283,221 | ) | - | - | - | (294,614 | ) | |||||||||||||||
| Accrued liabilities | - | (2,578 | ) | (202,893 | ) | (768,100 | ) | (2,050,912 | ) | (3,024,483 | ) | |||||||||||||
| Operating lease liabilities, current | - | - | - | (105,809 | ) | - | (105,809 | ) | ||||||||||||||||
| Related party borrowings | - | - | - | (372,190 | ) | - | (372,190 | ) | ||||||||||||||||
| Deferred revenue | - | - | (44,665 | ) | (1,441,831 | ) | - | (1,486,496 | ) | |||||||||||||||
| Deferred compensation | - | - | (5,169,432 | ) | - | - | (5,169,432 | ) | ||||||||||||||||
| Deferred tax liability | - | 5,168 | (5,628,964 | ) | (292,519 | ) | (361,302 | ) | (6,277,617 | ) | ||||||||||||||
| Notes payable and long-term debt | - | - | - | (315,823 | ) | (10,000 | ) | (325,823 | ) | |||||||||||||||
| Other liabilities | - | - | - | (96,025 | ) | - | (96,025 | ) | ||||||||||||||||
| Net Assets Acquired | (38,892 | ) | (376,377 | ) | 86,325,563 | 8,089,151 | (2,646,416 | ) | 91,353,029 | |||||||||||||||
| Goodwill | 1,263,024 | 1,433,814 | 93,077,124 | 24,483,717 | 447,573,031 | 567,830,710 | ||||||||||||||||||
| Total Purchase Allocation | $ | 1,224,132 | $ | 1,057,437 | $ | 179,402,687 | $ | 32,572,869 | $ | 444,926,615 | $ | 659,183,739 | ||||||||||||
| Purchase Consideration: | ||||||||||||||||||||||||
| Equity issued | $ | - | $ | - | $ | 148,098,862 | $ | 23,005,800 | $ | 444,935,338 | $ | 616,040,000 | ||||||||||||
| IPO Contingent Payments | 1,197,902 | 1,074,944 | - | 6,641,068 | - | 8,913,914 | ||||||||||||||||||
| Contingent consideration | - | - | 31,303,825 | 2,926,000 | - | 34,229,825 | ||||||||||||||||||
| Effective settlement of intercompany balances | 26,230 | (17,507 | ) | - | - | (8,723 | ) | - | ||||||||||||||||
| Total Purchase Consideration | $ | 1,224,132 | $ | 1,057,437 | $ | 179,402,687 | $ | 32,572,868 | $ | 444,926,615 | $ | 659,183,739 | ||||||||||||
| F-105 |
On April 26, 2022, the Company completed the acquisition of Coastal Defense, a Pennsylvania corporation, pursuant to the terms and conditions of an Agreement and Plan of Merger by and among Coastal Defense, AIRO Group, Holdings, Coastal Merger Sub, Inc., and Jeffrey Parker as target company representative dated as of October 6, 2021, as amended, in exchange for consideration in the form of i) a promissory note in the amount of $10.1 million that is contingently payable upon the closing of the Company’s SPAC transaction with a fair value of $5.7 million and ii) 1.8 million shares of Holdings common stock with a fair value of $44.9 million. The amount of the promissory note is payable five (5) business days after the public trading of the Company’s common stock begins. The acquisition of Coastal Defense was accounted for as a business combination.
The Company determined the overall valuation of the enterprise as of April 26, 2022 to be $697.2 million, or $24.68 per share, using both a DCF approach based on projections of the AIRO Drone, Agile Defense, Holdings, Jaunt, Sky-Watch, Aspen and Coastal Defense entities and a DCF approach with a market derived exit multiple with a WACC of 34% that reflects the risk profile of the Company and the inherent risk related to the Company’s forecasted cash flows given the early stage of the Company’s segments.
Using the marketable values per share and the estimated fair value of the contingent consideration, the Company determined the total purchase consideration of $50.6 million. The fair value of the contingent promissory note was determined with a probability of 67% of an IPO closing as of April 26, 2022 which contemplates that all closings have been completed as required by the Merger Agreements and Equity Purchase Agreement and a discount rate of 15% which was based on proximity to an estimated closing date.
Intangible assets requiring recognition apart from goodwill were determined under ASC 805 through application of both a cost and income approach, and a reconciliation of these methods to result in a final value. The income approaches for the intangible assets were based on forecasts that were reconciled to the purchase consideration paid for Coastal Defense under a DCF method.
The results of the purchase price allocation as of April 26, 2022 are as follows:
| Coastal Defense | ||||
| Assets Acquired: | ||||
| Cash and cash equivalents | $ | 592,427 | ||
| Accounts receivable | 241,173 | |||
| Accounts receivable – related party | 338,482 | |||
| Prepaid expenses | 153,411 | |||
| Inventories | 17,654 | |||
| Property and equipment | 9,002,064 | |||
| Intangible assets | 15,490,000 | |||
| Operating lease right-of-use asset | 140,006 | |||
| Other assets | 141,062 | |||
| Accounts payable | (481,547 | ) | ||
| Accrued liabilities | (129,246 | ) | ||
| Operating lease liability | (140,006 | ) | ||
| Related party borrowings | (899,996 | ) | ||
| Deferred tax liability | (5,442,848 | ) | ||
| Notes payable and long-term debt | (3,614,348 | ) | ||
| Other liabilities | (70,000 | ) | ||
| Net Assets Acquired | 15,338,228 | |||
| Goodwill | 35,248,444 | |||
| Total Purchase Allocation | $ | 50,586,732 | ||
| Purchase Consideration: | ||||
| Equity issued | $ | 44,872,732 | ||
| IPO Contingent Payments | 5,714,000 | |||
| Total Purchase Consideration | $ | 50,586,732 | ||
At each valuation date, the market derived exit multiples in the hybrid income / market valuation approach were derived from a peer group of guideline public companies with elements of similarity to the Company as of the future exit date. Guideline public companies were selected based on competitors and a screening conducted in S&P Capital IQ. Using the two methodologies (DCF with a conventional terminal value (income approach) and a DCF with market derived exit multiple (hybrid income / market approach)), the Company assigned a weighting of 40% and 60%, respectively. The greater reliance on the DCF using the market exit multiple reflects the shorter-term projection time horizon reflected in the method as compared to the Gordon Growth method which has a significantly longer-term projection horizon of 14 years before calculating its terminal value. The shorter projection time horizon and the comparison with public companies provides greater reliability. Management has greater visibility on near term projections, and comparable public companies provide some observable inputs to the analysis.
In the absence of a public trading market for the common stock, the Company exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of the equity issued in the merger transactions on their respective acquisition dates. These factors included historical and projected operating and financial performance, the valuation of comparable companies, the industry outlook, the likelihood and timing of achieving a liquidity event, and the U.S. and global economic and capital market conditions and outlook. Projected cashflows for the Company as of the various dates included forecasts from entities that had made up the Company as of each given valuation date and were developed by division based on their markets, product features, acquisition candidates and economic and market dynamics. The forecasts make use of contractual orders (both commercial and military), letters of intent, historical performance where available and market data coupled with budgeted R&D investment and production resources to forecast both short and long-term revenues and profits.
Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangible assets was determined using valuation techniques including cost and DCF analysis, which were based on the Company’s best estimate of future sales, earnings, and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
| F-106 |
The goodwill arising from each acquisition is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, and intellectual capital of the acquired workforces and expected future customers. The acquired businesses provide the Company experts and professional staff having specialized knowledge of specific markets and regulations in the broad aviation and defense industries. For tax purposes the acquisitions were treated as stock purchases and the goodwill is principally not tax deductible.
The contribution by entity for the year ended December 31, 2022 is shown in the table below:
| Revenue | Net Loss | |||||||
| AIRO Drone | $ | - | $ | (251,534 | ) | |||
| Agile Defense | - | (234,783 | ) | |||||
| Jaunt | 370,279 | (9,976,353 | ) | |||||
| Sky-Watch | 3,795,475 | (5,916,184 | ) | |||||
| Holdings | - | (5,000,322 | ) | |||||
| Coastal Defense | 2,418,659 | (2,859,653 | ) | |||||
| $ | 6,584,413 | $ | (24,238,829 | ) | ||||
Supplemental Pro Forma Information
The following unaudited proforma results of operations are presented for information purposes only. The unaudited proforma results of operations are not intended to present actual results that would have been attained had the mergers been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods:
Year ended December 31, | ||||
| 2022 | ||||
| (unaudited) | ||||
| Total revenue | $ | 19,420,963 | ||
| Net loss | $ | (30,093,265 | ) | |
| Net loss per share - basic and diluted | $ | (1.11 | ) | |
| Weighted-average shares outstanding - basic and diluted | 27,224,621 | |||
The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.
These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred prior to the year ended December 31, 2022, and reflects the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from January 1, 2022 with the consequential tax effects and including the results of the Merger Entities prior to acquisition.
The Company incurred $1.2 million of acquisition-related expenses for the year ended December 31, 2022. These expenses are included in general and administrative expense on the Company’s consolidated statements of operations.
The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisition been consolidated in the tables above, nor are they indicative of results of operations that may occur in the future.
| 3. | Restructuring Plan |
On March 31, 2022, prior to the merger between Aspen Avionics and Holdings, Aspen Avionics executed a Plan of Restructuring (the “Restructuring”) that resulted in:
| a) | The increase of authorized shares of redeemable convertible preferred stock to 69.5 million, which includes 12.0 million shares authorized for Series F convertible preferred stock (“Series F”) and 6.2 million shares authorized for Series G redeemable convertible preferred stock (“Series G”), and common stock to 2.9 million, as adjusted for the merger exchange ratio; |
| F-107 |
| b) | The conversion of $10.0 million in principal, interest and the end-of-term payment of the convertible promissory notes under the 2018 Note and Warrant Purchase Agreement (“2018 Notes”) to 5.0 million shares of newly created Series G; | |
| c) | The conversion of $4.9 million and $13.0 million in principal, interest and end-of-term payments on the convertible promissory notes under the 2016 Note and Warrant Purchase Agreement (“2016 Notes”) and under the 2015 Note and Warrant Purchase Agreement (“2015 Notes”), respectively, and $4.3 million in principal and interest due to Accord Global, a former stockholder of Aspen Avionics, to 11.1 million shares of newly created Series F totaling $22.2 million; | |
| d) | The modification of the terms of the convertible promissory notes not converted to equity to a fixed obligation; and | |
| e) | The conversion of 41.0 million shares of redeemable convertible preferred stock to 2.6 million shares of common stock, after the effect of the convertible notes above and the exercise of Series E warrants in March 2022 (“Conversion to Common”) and as adjusted for the merger exchange ratio. |
For further discussion on the Restructuring, refer to Note 4. Revolving Lines of Credit and Long-Term Debt.
| 4. | Revolving Lines of Credit and Long-Term Debt |
Revolving Lines of Credit
In February 2020, Aspen Avionics entered into a Loan and Security Agreement for an asset-based loan facility (the “Facility”) with Crestmark, a Division of Pathward (formerly known as Metabank), with a maximum advance limit of $2.5 million. The Facility is due on demand. The Facility carries variable interest at the greater of 9% or prime plus 4.25% (12.75% as of December 31, 2023 and 11.75% as of December 31, 2022) and is collateralized by substantially all assets of Aspen Avionics. Cash receipts of Aspen Avionics are submitted to a lockbox, which is subject to a control agreement whereby all cash receipts are received by the lender and applied against the balance of the loan. Aspen Avionics obtains additional advances on the Facility based on eligible accounts receivable and inventory collateral.
The terms of the Facility include reporting requirements and a tangible net worth covenant, which Aspen Avionics was not in compliance with as of December 31, 2023 or 2022. Subsequent to December 31, 2022, Aspen Avionics entered into an amendment to the Facility which waived the covenant violation. This amendment also updated the borrowing base formula, removing inventory from the borrowing base, and lowered the net tangible worth threshold. As of December 31, 2023, Aspen Avionics was out of compliance with the amended tangible net worth threshold and is in discussions with the bank regarding an additional amendment waiving the violation. The Facility is guaranteed by three subsidiaries of Aspen Avionics: Accord Technology, LLC, Accord Software and Systems, Inc., and AvValues, LLC.
As of December 31, 2023 and 2022, the outstanding balance on the Facility, net of unamortized debt issuance costs was $0.3 million and $0.6 million, respectively.
In November 2018, Coastal Defense obtained two variable rate non-disclosable revolving lines of credit of up to $0.5 million and $0.2 million, due on demand, from First Citizens Community Bank (“FCCB”). These arrangements are collateralized by aircraft security agreements, assignments of life insurance, an assignment of a deposit account, and commercial security agreements dated November 15, 2018, and all associated financing statements. Interest was initially set at the prime rate as published in the Wall Street Journal plus 0.50 percentage points. In 2023, the Company was in default on these facilities, resulting in an additional 4% in interest per annum. The annual interest rate was 13% as of December 31, 2023 and 8% as of December 31, 2022. Jeffrey F. Parker, Coastal Defense’s Vice-President, Treasurer, and stockholder of Holdings; Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, Coastal Defense’s President and stockholder of Holdings; have guaranteed these notes. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2069. No withdrawals or significant repayments were made during the years ended December 31, 2023 and 2022 or through the date of issuance. The total amount outstanding on the lines of credit as of December 31, 2023 and 2022 was $0.5 million and $0.6 million, respectively.
The two lines of credit with First Citizens Community Bank contain certain financial covenants. As of December 31, 2023 and 2022, the Company was not in compliance with these financial covenants. The lines of credit are due on demand and are shown as a current liability under “Revolving lines of credit” on the consolidated balance sheets.
| F-108 |
Current Maturities of Debt and Long-Term Debt
Current maturities of debt and long-term debt consist of the following as of December 31:
| 2023 | 2022 | |||||||
| First Citizens Community Bank 2018 | $ | 535,041 | $ | 839,696 | ||||
| IPO Bridge Loans | 3,609,500 | 2,425,000 | ||||||
| Muncy Bank & Trust Company 2021-1 | 651,000 | 651,000 | ||||||
| SBA COVID-19 Economic Injury Disaster Loan (“EIDL”) | 500,000 | 500,000 | ||||||
| Muncy Bank & Trust Company 2021-2 | 450,000 | 450,000 | ||||||
| Financed Insurance Premiums | 185,619 | 186,304 | ||||||
| First Citizens Community Bank 2019-1 | 81,729 | 103,646 | ||||||
| First Citizens Community Bank 2019-2 | 74,414 | 94,269 | ||||||
| Danish tax agency loans | - | 152,202 | ||||||
| 2022 Notes | 2,066,396 | 2,066,396 | ||||||
| 2019 Notes | 5,022,353 | 5,022,353 | ||||||
| 2018 Notes | 12,351,771 | 12,351,771 | ||||||
| 25,527,823 | 24,842,637 | |||||||
| Less: unamortized debt discount | (13,672 | ) | (341,779 | ) | ||||
| Less: current maturities of long-term debt | (25,014,151 | ) | (4,902,117 | ) | ||||
| Long-term debt, net of current maturities | $ | 500,000 | $ | 19,598,741 | ||||
Aggregate maturities required on long-term debt as of December 31, 2023 are due in future years as follows:
| Amount | ||||
| 2024 | $ | 25,027,823 | ||
| 2025 | - | |||
| 2026 | - | |||
| 2027 | 6,974 | |||
| 2028 | 10,891 | |||
| Thereafter | 482,135 | |||
| Total | $ | 25,527,823 | ||
| F-109 |
First Citizens Community Bank 2018
On November 15, 2018, Coastal Defense entered into a $2.6 million note payable agreement with First Citizens Community Bank. This arrangement is collateralized by aircraft security agreements, assignments of life insurance, an assignment of a deposit account, a commercial security agreement dated November 15, 2018, and all associated financing statements. The loan includes a provision for a prepayment penalty in the amount of 5% on the current principal balance in year one, 4% of the current principal balance in year two, 3% of the current principal balance in year three, and 2% of the current principal balance in year four. The loan requires that Coastal Defense maintain a debt service coverage ratio of 1.20 to 1.00 and had an initial interest rate of 5.75% per year. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2023. As of December 31, 2023 and 2022, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note became due on demand and is shown as a component of “Current maturities of debt” on the consolidated balance sheets. In 2023, the Company was in default on these facilities, resulting in an additional 4% in interest per annum. The annual interest rate was 10.49% as of December 31, 2023 and 6.49% as of December 31, 2022. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company has negotiated forbearance agreements to prevent FCCB from enforcing the judgments through June 30, 2024. Jeffrey F. Parker, Coastal Defense’s Vice President and Treasurer and stockholder of Holdings; the estate of Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, Coastal Defense’s President and stockholder of Holdings; have guaranteed this note.
Bridge Loans
During the years ended December 31, 2023 and 2022, the Company issued unsecured promissory notes for total principal of $1.2 million and $2.4 million, respectively, with no collateral or guarantees. As of December 31, 2023, notes totaling $5.4 million, as amended, accrue an interest charge equal to 100% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination with Kernel, with 110% of the principal paid 190 days following closing plus 12% interest per annum accruing from the closing date. Notes totaling $0.3 million carry the same terms except only 100% of the principal is paid 190 days following closing. Notes totaling $0.6 million accrue an interest charge equal to 50% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination with Kernel with 100% of the principal paid 190 days following closing plus 12% interest per annum accruing from the closing date. Notes totaling $0.2 million accrue an interest charge equal to 115% of the principal amount, payable in shares of common stock immediately prior to closing of the business combination, with 100% of the principal paid 190 days following closing plus 15% interest per annum accruing from the closing date. The remaining note totaling $0.2 million, as amended, accrues an interest charge equal to $50,000, payable in shares of common stock immediately prior to closing of the business combination, with $25,000 due on April 10, 2024 and the remaining principal due by April 30, 2024.
Muncy Bank & Trust Company 2021-1
On September 15, 2021, Coastal Defense entered into a $0.7 million commercial promissory note agreement with the Muncy Bank & Trust Company (“Muncy”) for continuing operations. The loan carries an annual interest rate of 4.5% per year and originally matured in March 2022. The maturity date of this promissory note was extended and the principal amount of $0.7 million is due and payable on June 15, 2024 with interest payments due monthly. This arrangement is collateralized by a life insurance policy and a contract with the Air Force. Jeffrey F. Parker, Coastal Defense’s Vice President and Treasurer and stockholder of Holdings, and Alison D. Parker, Corporate Secretary of Coastal Defense, have guaranteed this note. The note payable may be prepaid without penalty.
Muncy Bank & Trust Company 2021-2
On January 21, 2021, Coastal Defense entered into a $0.4 million commercial promissory note agreement with the Muncy for continuing operations and for the execution of the Naval Special Warfare task orders. The loan carries an annual interest rate of 4.5% per year and originally matured in October 2021. The maturity date of this promissory note was extended and the principal amount of $0.4 million is due and payable on June 20, 2024 with interest payments due monthly. This arrangement is collateralized by a contract with the Naval Special Warfare Command. Jeffrey F. Parker, Coastal Defense’s Vice President, Treasurer, and stockholder of Holdings has guaranteed this note. The note payable may be prepaid without penalty.
SBA COVID-19 Economic Injury Disaster Loan (“EIDL”)
On May 28, 2020, the Coastal Defense entered into a $0.5 million EIDL agreement with the SBA. The loan matures on May 28, 2050 and has an interest rate of 3.75% per year. The SBA granted a payment deferral and amended the first payment due date to November 2022. These payments first reduce the interest accrued prior to reducing the principal owed. As such, the outstanding loan balance was included as a component of “Long-term debt, net of current maturities” on the consolidated balance sheets. The EIDL is collateralized by all assets of Coastal Defense. Jeffrey F. Parker, Coastal Defense’s Vice President and stockholder of Holdings; Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, Coastal Defense’s President and stockholder of Holdings; have guaranteed this note.
Financed Insurance Premiums
During 2021 and 2022, Coastal Defense entered into financing agreements which totaled $0.2 and $0.3 million, respectively, in relation to financing its aviation insurance and workers compensation premiums with interest rates ranging from 7.95% - 12.5% per year. These financing agreements matured between 2022 and 2023.
During 2023, Coastal Defense entered into financing agreements which totaled $0.4 million in relation to financing its insurance premiums. The financings have various maturity dates during 2023 and 2024 and have interest rates ranging from 8.0% - 13.3% per year. These agreements are collateralized by a security interest in the premium refund due under the policies being purchased.
| F-110 |
First Citizens Community Bank 2019-1
On February 25, 2019, Coastal Defense entered into a $0.2 million note payable agreement with First Citizens Community Bank with an initial interest rate of 5.75% per year. The loan is collateralized by aircraft security agreements, an assignment of life insurance, an assignment on a deposit account, commercial security agreements dated February 25, 2019, and all associated financing statements. The loan includes a provision for a prepayment penalty in the amount of 5% on the current principal balance in year one, 4% of the current principal balance in year two, 3% of the current principal balance in year three and 2% of the current principal balance in year four. The loan requires that Coastal Defense maintain a debt service coverage ratio of 1.20 to 1.00. As part of the Coastal Defense acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2026. As of December 31, 2023 and 2022, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note became due on demand and is shown as a component of “Current maturities of debt” on the consolidated balance sheets as of December 31, 2023 and 2022. In 2023, the Company was in default on these facilities, resulting in an additional 4% in interest per annum. The annual interest rate was 10.49% as of December 31, 2023 and 6.49% as of December 31, 2022. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company has negotiated forbearance agreements to prevent FCCB from enforcing the judgments through June 30, 2024. Jeffrey F. Parker, Coastal Defense’s Vice President, Treasurer, and stockholder of Holdings; the estate of Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, stockholder of Holdings; have guaranteed this note.
First Citizens Community Bank 2019-2
On May 15, 2019, Coastal Defense entered into a $0.2 million note payable agreement with First Citizens Community Bank. The loan is collateralized by aircraft security agreements, an assignment of life insurance, an assignment on a deposit account, commercial security agreements dated May 15, 2019 and all associated financing statements. The loan includes a provision for a prepayment penalty in the amount of 5% on the current principal balance in year one, 4% of the current principal balance in year two, 3% of the current principal balance in year three and 2% of the current principal balance in year four. The loan requires that Coastal Defense maintain a debt service coverage ratio of 1.20 to 1.00 and had an initial interest rate of 5.75% per year. As part of the CDI acquisition, the maturity dates of these notes were modified to be in 2022 as opposed to the original maturity date in 2026. As of December 31, 2023 and 2022, Coastal Defense was in default on the debt service coverage ratio covenant, and the term note became due on demand and is shown as a component of “Current maturities of debt” on the consolidated balance sheets as of December 31, 2023 and 2022. In 2023, the Company was in default on these facilities, resulting in an additional 4% in interest per annum. The annual interest rate was 10.49% as of December 31, 2023 and 6.49% as of December 31, 2022. Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company has negotiated forbearance agreements to prevent FCCB from enforcing the judgments through June 30, 2024. Jeffrey F. Parker, Coastal Defense’s Vice President, Treasurer, and stockholder of Holdings; the estate of Kenneth Parker, stockholder of Holdings; and Kyle Stanbro, stockholder of Holdings; have guaranteed this note.
Danish Tax Agency Loans
Between April and June 2021, Sky-Watch received three interest free loans from the Danish Tax Agency for total proceeds of $0.3 million (DKK 2.1 million). In September 2022, $0.2 million (DKK 1.1 million) was repaid. Two loans, which totaled $0.2 million (DKK 1.0 million), were outstanding as of December 31, 2022. These amounts were fully repaid during the year ended December 31, 2023 and the total outstanding balance was $0 at December 31, 2023.
Notes Issued under the 2022 Note Purchase Agreement
During the year ended December 31, 2022, Aspen Avionics entered into convertible promissory notes under the 2022 Note Purchase Agreement (“2022 Notes”) and received cash proceeds of $0.5 million and converted other obligations previously included in other long-term liabilities of $0.5 million for a total of $1.0 million. The holders were entitled to an end-of-term payment of 100% of principal and accrued interest. The 2022 Notes accrued interest at 10% per annum, compounded monthly.
Interest expense on the 2022 Notes, including the interest from the end-of-term payment and debt discount amortization, was $0.9 million for the year ended December 31, 2022. On March 31, 2022, the 2022 Notes were exchanged for fixed payment obligations as discussed below under Impact of Restructuring – Debt Conversions.
Notes Issued under the 2019 Note Purchase Agreement
During the year ended December 31, 2022, additional convertible promissory notes under the 2019 Note Purchase Agreement (“2019 Notes”) were issued for total principal of $0.1 million.
| F-111 |
Interest expense on the 2019 Notes, including the interest from the end-of-term payment, was $0.5 million for the year ended December 31, 2022. On March 31, 2022, the 2019 Notes were exchanged for fixed payment obligations as discussed below under Impact of Restructuring – Debt Conversions.
Notes Issued Under the 2018 Note and Warrant Purchase Agreement
Interest expense on the 2018 Notes, including the interest from the end-of-term payment, was $0.6 million for the year ended December 31, 2022. On March 31, 2022, the 2018 Notes were exchanged for fixed payment obligations as discussed below under Impact of Restructuring – Debt Conversions and Series G Preferred Stock as discussed under Impact of Restructuring – Preferred Stock Conversions.
Notes Issued Under the 2016 and 2015 Notes and Warrant Purchase Agreement
Interest expense on the 2016 and 2015 Notes was $0.1 million for the year ended December 31, 2022. On March 31, 2022, the 2016 and 2015 Notes were exchanged for Series F Preferred Stock as discussed under Impact of Restructuring – Preferred Stock Conversions.
Impact of Restructuring – Debt Conversions
As a part of the Restructuring, the terms of the unconverted 2022 Notes, 2019 Notes and 2018 Notes to be assumed in the merger with Holdings (“Indebtedness Assumed”) were modified so that the holders would receive a fixed cash payment at the closing of an IPO or a merger with a SPAC equal to the principal, end-of-term payments and interest accrued that would be outstanding through June 30, 2022 and were no longer convertible into Aspen Avionics’ redeemable convertible preferred stock. The changes in the Indebtedness Assumed were accounted for as a debt modification and reflected at fair value on the debt modification date of March 31, 2022 as follows:
| Modified Debt Face Value | Discount | Modified Investor Debt Fair Value | ||||||||||
| 2022 Notes | $ | 2,066,396 | $ | 994,962 | $ | 1,071,434 | ||||||
| 2019 Notes | 5,022,353 | 527,687 | 4,494,666 | |||||||||
| 2018 Notes | 12,351,771 | 295,613 | 12,056,158 | |||||||||
| Total | $ | 19,440,520 | $ | 1,818,262 | $ | 17,622,258 | ||||||
The discount on the fixed payment debt represents an effective interest rate of 12.5% per annum to the maturity date of January 15, 2024. The discount is being amortized on a straight-line basis to interest expense and is materially consistent with the effective interest method. The discount amortized to interest expense, net was $0.3 and $1.5 million for the year ended December 31, 2023 and 2022, respectively.
In October 2023, the Company signed various agreements with debt holders of the 2018, 2019 and 2022 Notes pursuant to which 90% of the total amounts payable in cash, or approximately $17.5 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $1.9 million shall be paid at closing of the business combination. As this contingency was not probable as of the modification date nor as of December 31, 2023, there was no charge as of a result of this modification. In January 2024, the maturity date of the $19.4 million of debt related to the 2018, 2019 and 2022 Notes was extended to June 30, 2024.
Impact of Restructuring – Preferred Stock Conversions
The above convertible notes not included in the Indebtedness Assumed, along with certain other liabilities, were converted to Series F and G at an amount equal to the principal, interest accrued and end-of-term payments, as applicable, through June 30, 2022 as per the terms of the Merger Agreement (the “Conversion to Preferred”). The Conversion to Preferred was accounted for as a debt extinguishment and a loss on extinguishment of $0.5 million was recorded during the year ended December 31, 2022 equal to the difference between the value of the Conversion to Preferred and the carrying value of the liabilities as of March 31, 2022, the date of the Conversion to Preferred.
| F-112 |
Upon the Conversion to Preferred and prior to the Conversion to Common, the balances were as follows:
| Value of | ||||||||||||
| Preferred Stock | ||||||||||||
| Converted to | Loss on | Converted from | ||||||||||
| Preferred Stock | Extinguishment | Debt | ||||||||||
| Series G: | ||||||||||||
| 2018 Notes | $ | 9,670,604 | $ | 346,678 | $ | 10,017,282 | ||||||
| Series F: | ||||||||||||
| 2015 Notes | 12,919,124 | 60,703 | 12,979,827 | |||||||||
| 2016 Notes | 4,881,328 | 30,522 | 4,911,850 | |||||||||
| Accrued consideration for shares repurchased | 4,131,129 | 102,970 | 4,234,099 | |||||||||
| Other | 106,797 | - | 106,797 | |||||||||
| 22,038,378 | 194,195 | 22,232,573 | ||||||||||
| Total Conversion to Preferred | $ | 31,708,982 | $ | 540,873 | $ | 32,249,855 | ||||||
| 5. | Common Stock, Redeemable Convertible Preferred Stock and Warrants |
Common Stock
The Company has reserved the following shares of authorized but unissued common stock as of December 31, 2023: 0.6 million stock options, 0.1 million warrants, 0.4 million of contingent restricted stock awards, 3.6 million shares to be issued in connection with the debt conversion agreements, 0.3 million of potential shares that are issuable for contingent interest on investor notes based on estimated trading price of when shares would become publicly traded.
| F-113 |
Conversion to Common
Following the Aspen Avionics Conversion to Preferred, the Conversion to Common was executed as of March 31, 2022 under the terms of the Restructuring and pursuant to the terms of the Preferred Stock Conversion Agreement. Conversion to Common converted each individual series of redeemable convertible preferred stock into Aspen Avionic common stock as of March 31, 2022 based on a conversion ratio of 52.3437 as an interim step prior to the exchange of the Aspen Avionics common shares for Holdings common shares in the merger with Holdings. In connection with the merger, the Aspen Avionics common shares were converted to Holdings common shares in the order of liquidation preference as follows: (1) the Management Carveout Plan, which is described further in Note 6. Management Carveout Plan, (2) former holders of Series G up to the liquidation value amount, (3) former holders of Series F up to the liquidation values amount, (4) to the former holders of Series E, Series D, Series C, Series A and Series B up to the amount of shares that they would have received pursuant to the Aspen Avionics Amended Certificate immediately prior to the conversion of the Aspen Avionics preferred shares to Aspen Avionics common stock and (5) to the former holders of Aspen Avionics common stock for any remaining shares.
Warrants
As discussed in Note 2. Business Combinations, the Company assumed warrants to purchase 0.1 million shares of the Company’s common stock as part of the merger with Jaunt. These warrants expire ten years from the date of issuance, March 10, 2022, have an exercise price of $9.90 per share and were outstanding as of December 31, 2023 and 2022. The Company determined that these warrants are equity classified.
During the year ended December 31, 2022, warrants to purchase 2.8 million shares of Aspen Avionics’ Series E, and warrants to purchase 327 shares of Aspen Avionics’ common stock were exercised and warrants to purchase 2.3 million shares of Series E were cancelled.
On April 1, 2022, all of the outstanding warrants to purchase shares of Aspen Avionics redeemable convertible preferred stock and common stock were cancelled under the terms of the merger with Aspen Avionics.
| F-114 |
| 6. | Management Carveout Plan |
In December 2021, the Company adopted the 2021 Management Carveout Plan (the “Carveout Plan”), which establishes a benefit pool for designated employees and consultants payable upon the occurrence of a change in control, which is defined as two steps consisting of 1) the closing of the merger with Holdings and 2) an IPO of Holdings or merger with a SPAC by June 30, 2023. The amount to be paid as benefits under the Carveout Plan are determined based upon percentages of the total net proceeds calculated at the closing of the Holdings’ IPO or a SPAC merger, ranging from 0% to 5%. The net proceeds are calculated as the net sum of cash and the fair value of equity securities available for distribution to the stockholders of the Company after all liabilities, exclusive of the subordinated convertible notes or other loans from the stockholders and transaction costs are paid, capped at $2.3 billion. The benefit payments to the participants in the Carveout Plan are to be made in the form or forms of payment and in the same proportions as the consideration paid by the purchaser. The Company estimates amounts payable to be $0.9 million in cash and $2.3 million in stock. In October 2023, the Company executed an agreement with the creditors under the Carveout Plan pursuant to which 90% of the total amounts payable in cash under the Carveout Plan, or approximately $0.8 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $0.1 million shall be paid at closing of the business combination. The Carveout Plan was amended to extend the termination date to June 30, 2024. As of December 31, 2023 and 2022, no amounts have been expensed or accrued for in connection with the Carveout Plan as a change in control was not deemed probable as of December 31, 2023 and 2022.
| 7. | Goodwill |
The changes in the carrying value of goodwill were as follows:
Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| Balance as of January 1, 2022 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Additional (restarted) | - | 115,197,166 | 451,370,520 | 36,511,468 | 603,079,154 | |||||||||||||||
| Effect of exchange rate | - | (3,636,686 | ) | - | - | (3,636,686 | ) | |||||||||||||
| Balance as of December 31, 2022 | - | 111,560,480 | 451,370,520 | 36,511,468 | 599,442,468 | |||||||||||||||
| Effect of exchange rate | - | 3,160,033 | - | - | 3,160,033 | |||||||||||||||
| Balance as of December 31, 2023 | $ | - | $ | 114,720,513 | $ | 451,370,520 | $ | 36,511,468 | $ | 602,602,501 | ||||||||||
| F-115 |
| 8. | Intangible Assets, Net |
Intangible assets acquired through business combinations were as follows:
| As of December 31, 2023 | ||||||||||||||||
| Weighted Average Remaining Life (Years) | Gross | Accumulated Amortization | Carrying Value | |||||||||||||
| Developed technology-definite lived | 10.8 | $ | 99,779,550 | $ | 16,922,028 | $ | 82,857,522 | |||||||||
| Developed technology-indefinite lived | N/A | 83,713 | - | 83,713 | ||||||||||||
| Tradenames - definite lived | 4.9 | 1,911,000 | 519,006 | 1,391,994 | ||||||||||||
| Tradenames - indefinite lived | N/A | 8,737,607 | - | 8,737,607 | ||||||||||||
| Customer Relationships | 5.0 | 20,175,918 | 8,511,311 | 11,664,607 | ||||||||||||
| Patents | 7.3 | 652,310 | 333,508 | 318,802 | ||||||||||||
| $ | 131,340,098 | $ | 26,285,853 | $ | 105,054,245 | |||||||||||
| As of December 31, 2022 | ||||||||||||||||
| Weighted Average Remaining Life (Years) | Gross | Accumulated Amortization | Carrying Value | |||||||||||||
| Developed technology - definite lived | 11.8 | $ | 99,600,482 | $ | 8,886,012 | $ | 90,714,470 | |||||||||
| Patents pending | N/A | 71,083 | - | 71,083 | ||||||||||||
| Tradenames - definite-lived | 5.9 | 1,902,046 | 209,935 | 1,692,111 | ||||||||||||
| Tradenames - indefinite-lived | N/A | 8,737,607 | - | 8,737,607 | ||||||||||||
| Customer relationships | 5.8 | 20,104,010 | 5,648,315 | 14,455,695 | ||||||||||||
| Patents | 8.2 | 670,179 | 286,794 | 383,385 | ||||||||||||
| $ | 131,085,407 | $ | 15,031,056 | $ | 116,054,351 | |||||||||||
Amortization expense related to intangible assets was $11.2 million and $8.5 million for the years ended December 31, 2023 and 2022, respectively.
Amortization expense is reported on the consolidated statements of operations line items as shown in the table below for the years ended December 31:
| 2023 | 2022 | |||||||
| Cost of revenue | $ | 426,667 | $ | 457,442 | ||||
| Research and development | 7,600,294 | 5,657,621 | ||||||
| Sales and marketing | 2,828,058 | 1,920,945 | ||||||
| General and administrative | 352,529 | 498,247 | ||||||
| $ | 11,207,548 | $ | 8,534,255 | |||||
Total estimated future amortization expense as of December 31, 2023 is as follows:
| 2024 | $ | 11,233,600 | ||
| 2025 | 10,549,120 | |||
| 2026 | 10,234,106 | |||
| 2027 | 10,027,204 | |||
| 2028 | 9,844,939 | |||
| Thereafter | 44,343,956 | |||
| $ | 96,232,925 |
| F-116 |
| 9. | Inventory |
Inventory consisted of the following as of December 31:
| 2023 | 2022 | |||||||
| Raw materials | $ | 2,292,513 | $ | 1,047,668 | ||||
| Work in process | 355,052 | 155,507 | ||||||
| Finished goods | 216,605 | 953,285 | ||||||
| Total | $ | 2,864,170 | $ | 2,156,460 | ||||
For the year ended December 31, 2022, the Company recorded an inventory markdown of $2.9 million reflected in cost of revenue in the consolidated statements of operations to reduce inventory to estimated net realizable value as a result of significant changes in demand for remanufactured legacy avionics displays.
| 10. | Property and Equipment, Net |
Property and equipment, net consisted of the following as of December 31:
| 2023 | 2022 | |||||||
| Aircraft equipment | $ | 5,220,983 | $ | 5,220,983 | ||||
| Equipment | 8,426,113 | 7,763,527 | ||||||
| Furniture and fixtures | 244,016 | 244,016 | ||||||
| Leasehold improvements | 328,018 | 174,988 | ||||||
| 14,219,130 | 13,403,514 | |||||||
| Less: accumulated depreciation | (4,087,027 | ) | (2,581,754 | ) | ||||
| $ | 10,132,103 | $ | 10,821,760 | |||||
Depreciation expense for the years ended December 31, 2023 and 2022 was $1.5 million and $1.0 million, respectively.
| 11. | Balance Sheet Components |
Prepaid expenses and other current assets consisted of the following as of December 31:
| 2023 | 2022 | |||||||
| Prepaid insurance | $ | 334,333 | $ | 414,079 | ||||
| Value added tax | 416,167 | - | ||||||
| Other | 617,623 | 337,416 | ||||||
| $ | 1,368,123 | $ | 751,495 | |||||
Accrued expenses consisted of the following as of December 31:
| 2023 | 2022 | |||||||
| Accrued legal and professional fees | $ | 1,444,470 | $ | 1,773,985 | ||||
| Payroll related expenses | 1,693,475 | 963,447 | ||||||
| Accrued warranty | 159,610 | 197,405 | ||||||
| Accrued taxes | 1,368,971 | - | ||||||
| Other accrued expenses | 2,307,648 | 1,743,301 | ||||||
| $ | 6,974,174 | $ | 4,678,138 | |||||
| F-117 |
| 12. | Deferred Compensation |
The Company has deferred salary arrangements with various employees that allow for a portion of their compensation to be deferred and paid upon a single outside investment of no less than $25 million, or such earlier time as the Company determines in its sole discretion that sufficient funds are available to commence payment of the deferred amounts. Employees must be actively employed, including approved leave, or if a consultant, providing services to the Company. The Company does not expect the deferred salary arrangements will be paid out in the next 12 months unless the business combination with Kernel Group Holdings is consummated. As of December 31, 2023 and 2022, the accrued deferred compensation was $9.3 million and $7.4 million, respectively. Any unpaid amounts are forfeited upon termination of employment or consultancy with the Company. In October 2023, the Company signed various agreements with the employees with deferred compensation pursuant to which 90% of the total amounts accrued as deferred compensation, or approximately $6.7 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel. The remaining $0.7 million shall be paid at closing of the business combination.
| 13. | Warranty |
The following table summarizes the Company’s accrued warranty during the years ended December 31:
| 2023 | 2022 | |||||||
| Accrued warranty - beginning of period | $ | 197,405 | $ | 354,159 | ||||
| Assumed in business combinations | - | 19,750 | ||||||
| Warranty cost incurred | (61,490 | ) | (370,790 | ) | ||||
| Provision for warranty | 23,695 | 194,286 | ||||||
| Accrued warranty - end of period | $ | 159,610 | $ | 197,405 | ||||
| 14. | Commitments and Contingencies |
Consulting Agreement
In October 2020, the Company entered into an agreement for market analysis and business strategy consulting. The services were performed in prior periods. The agreement states a fee of $0.5 million for the services, due upon the completion of an IPO, SPAC merger, financing raise of at least $100 million or an acquisition of at least 50% of the equity of the Company. The fee for these consulting services was included in “Accrued expenses” on the consolidated balance sheets.
Contingent Fee Arrangement
In June 2022, the Company executed a previously arranged contingent fee agreement with New Generation Aerospace, Inc. (“NGA”) to compensate NGA for past services rendered and future services rendered through December 31, 2022 related to the acquisitions and financing of the Merger Entities in the amount of $1.5 million (the “Contingent Fee”). The Contingent Fee is payable upon the closing of an IPO. In October 2023, the Company signed various agreements with certain debt holders pursuant to which 90% of the Contingent Fee, or approximately $1.4 million, shall be converted to equity in the Company at a rate of $23.3595 per share no later than two days prior to closing of the Company’s business combination with Kernel Group Holdings, Inc. The remaining $0.1 million shall be paid at closing of the business combination. As the payment of the Contingent Fee is not deemed probable as of December 31, 2023, the Contingent Fee has not been accrued in accordance with ASC 450, Contingencies (“ASC 450”).
KDC IPO Payment Agreement
In April 2022, Aspen Avionics and KippsDeSanto & Co. (“KDC”) entered into an amendment (the “KDC IPO Payment Agreement”) to the parties’ prior engagement letter dated August 7, 2018 (the “KDC Agreement”), pursuant to which Aspen Avionics engaged KDC to provide financial advisory services in connection with AIRO’s potential acquisition of Aspen Avionics. Pursuant to the terms of the KDC IPO Payment Agreement upon the closing of an IPO, Aspen Avionics is obligated to cause a one-time, final payment of $1.0 million to be made to KDC in satisfaction of Aspen Avionics obligations under the KDC Agreement. As the payment of the KDC IPO Payment Agreement is not deemed probable as of December 31, 2023, the KDC IPO Payment Agreement has not been accrued in accordance with ASC 450.
Non-binding Letters of Intent
In November 2023, the Company signed non-binding letters of intent to acquire two flight training schools. The parties have undertaken due diligence to determine whether a binding purchase agreement will be negotiated. The total anticipated purchase price for the acquisitions is expected to range from $5.1 million to $7.7 million, which would be paid in a combination of cash and the issuance of equity.
Litigation
A civil action was filed against AIRO Group in the Circuit Court of Cook County, State of Illinois in February 2022. The claimant alleges that an agreement for certain services entered into in March 2020 was breached and resulted in damages to claimant. This case was dismissed on July 5, 2022. However, the court allowed the claimant to amend its complaint. On August 5, 2022, the claimant filed its amended complaint, and the Company filed its response on October 12, 2022. The parties have exchanged written discovery and are in the process of taking depositions. The court ordered the parties to mandatory arbitration which will take place in the third or fourth quarter of 2024. The Company intends to continue to vigorously defend against the complaint.
Civil actions were filed against Coastal Defense and individual guarantors in the Tioga County Court, State of Pennsylvania, in July 2023. The claimant, FCCB, alleges that payment under certain promissory notes is due, and FCCB seeks recovery of the outstanding amounts. FCCB obtained judgments against all named defendants. The Company intends to negotiate a resolution with FCCB and, in the meantime, has negotiated forbearance agreements to prevent FCCB from enforcing the judgments.
A civil action was filed against Holdings, AIRO Group., AIRO Group, Inc. (Illinois), AIRO Drone, Agile Defense, Joseph Burns, Chirinjeev Kathuria and John Uczekaj in Chancery Court in Delaware in September 2023. The claimant, Robert Perrin, a Company shareholder, alleges that the Company’s entities failed to pay him for services allegedly rendered under an Employment Agreement with AIRO Group, Inc. (Illinois), that the individual defendants have breached their fiduciary duties as the Company’s board members, and that defendants violated the Computer Fraud and Abuse Act. On November 17, 2023, the Company filed a motion to dismiss. In response, the claimant filed an Amended Complaint on February 22, 2024 in which he dropped AIRO Group, Inc. (Illinois) as a defendant, dropped the breach of contract claim and added a wage claim under Delaware statute. On April 5, 2024, the Company filed a Partial Answer and Affirmative Defenses as well as a Partial Motion to Dismiss. The Company intends to continue to vigorously defend against all claims asserted in the complaint.
| F-118 |
Aside from the above matters, the Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss or the measurement of a loss can be complex. We will accrue losses that are both probable and reasonably estimable. As of December 31, 2023 and 2022, there were no accruals related to litigation.
| 15. | Segment Information |
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s chief operating decision-maker (“CODM”) has been identified as the chief executive officer. The Company will continue to reevaluate reportable and operating segments. The Company expects to manage its business primarily based upon four operating segments, Advanced Avionics, Uncrewed Air Systems, Electric Air Mobility and Training. Each of these operating segments represents a reportable segment.
| ● | Advanced Avionics: This segment develops, manufactures, and sells avionics and GPS sensors for the GA, UAS and eVTOL market segments. The Company’s advanced avionics products are focused on GA aftermarket, OEM display, integration and connected panel solutions. |
| ● | Uncrewed Air Systems: This segment offers direct operation of drones and drone systems, provision of drone-derived information, and the development of drone-optimized communication services. Additionally, it consists of development and commercialization of market leading MUAS for professional users, primarily in the defense and security markets. The MUAS includes internally developed software, hardware, and mechanical system components. Operations cover sourcing, manufacturing, assembly, quality assurance testing activities and logistics. |
| ● | Electric Air Mobility: This segment includes designing, licensing and ultimately the manufacturing of air vehicles incorporating slowed rotor compound technology that is capable of transporting people and packages operated by pilots or autonomous flight systems. |
| ● | Training: This segment provides and operates military aircraft for U.S. military services and Department of Defense (“DOD”) contractors. Segment revenues are earned from 1) flying training missions as part of armed forces training groups, and 2) providing aircraft and support services to DOD contractors. |
The Company evaluates the performance of its reportable segments based on the revenue and gross profit for each reporting segment. The Company does not report total assets, capital expenditures or operating expenses by operating segment as such information is not used by the CODM for purposes of assessing performance or allocating resources.
The following tables shows information by reportable segment for the years ended December 31:
| Year ended December 31, 2023 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| Revenue | $ | 9,387,326 | $ | 27,975,073 | $ | 258,869 | $ | 5,632,547 | $ | 43,253,815 | ||||||||||
| Cost of revenue | 5,931,393 | 8,313,356 | 182,394 | 3,912,772 | 18,339,915 | |||||||||||||||
| Gross profit | $ | 3,455,933 | $ | 19,661,717 | $ | 76,475 | $ | 1,719,775 | $ | 24,913,900 | ||||||||||
| Year ended December 31, 2022 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| Revenue | $ | 10,496,628 | $ | 3,795,475 | $ | 370,280 | $ | 2,418,658 | $ | 17,081,041 | ||||||||||
| Cost of revenue | 9,658,033 | 1,444,911 | 309,719 | 1,540,749 | 12,953,412 | |||||||||||||||
| Gross profit | $ | 838,595 | $ | 2,350,564 | $ | 60,561 | $ | 877,909 | $ | 4,127,629 | ||||||||||
| F-119 |
The following table presents revenues by geographic area for the years ended December 31:
| Year ended December 31, 2023 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 9,387,326 | $ | - | $ | 258,869 | $ | 5,632,547 | $ | 15,278,742 | ||||||||||
| Europe | - | 27,975,073 | - | - | 27,975,073 | |||||||||||||||
| $ | 9,387,326 | $ | 27,975,073 | $ | 258,869 | $ | 5,632,547 | $ | 43,253,815 | |||||||||||
| Year ended December 31, 2022 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 10,496,628 | $ | - | $ | 370,280 | $ | 2,418,658 | $ | 13,285,566 | ||||||||||
| Europe | - | 3,795,475 | - | - | 3,795,475 | |||||||||||||||
| $ | 10,496,628 | $ | 3,795,475 | $ | 370,280 | $ | 2,418,658 | $ | 17,081,041 | |||||||||||
The following table presents tangible long-lived assets by geographic area as of December 31:
| As of December 31, 2023 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 218,291 | $ | - | $ | 3,142 | $ | 9,089,428 | $ | 9,310,861 | ||||||||||
| Europe | - | 821,242 | - | - | 821,242 | |||||||||||||||
| $ | 218,291 | $ | 821,242 | $ | 3,142 | $ | 9,089,428 | $ | 10,132,103 | |||||||||||
| As of December 31, 2022 | ||||||||||||||||||||
| Advanced Avionics | Uncrewed Air Systems | Electric Air Mobility | Training | Total | ||||||||||||||||
| United States | $ | 237,658 | $ | - | $ | 4,462 | $ | 10,526,180 | $ | 10,768,300 | ||||||||||
| Europe | - | 53,460 | - | - | 53,460 | |||||||||||||||
| $ | 237,658 | $ | 53,460 | $ | 4,462 | $ | 10,526,180 | $ | 10,821,760 | |||||||||||
| 16. | Employee Benefit Plan |
The employees of Aspen Avionics and Coastal Defense in the U.S. are eligible to participate in a profit-sharing plan under Internal Revenue Code Section 401(k). Participants in the profit-sharing plan may elect to have Aspen Avionics and Coastal Defense contribute a portion of their compensation to the profit-sharing plan. Contributions to be made by Aspen Avionics and Coastal Defense will be at their discretion. No significant contributions were made for the years ended December 31, 2023 and 2022.
| 17. | Stock-Based Compensation |
Option Plans
In 2018, the Board of Directors of Aspen Avionics adopted the 2018 Stock Option Plan to grant stock options and other awards to purchase Aspen Avionics common stock to directors, officers, employees and consultants. On April 1, 2022, the 2018 Stock Plan was terminated and the options outstanding on that date were cancelled in connection with the reverse acquisition with Holdings. The total stock-based compensation expense for the 2018 Stock Plan during the year ended December 31, 2022 was not significant.
On April 1, 2022, as part of the reverse acquisition with Holdings, the Company adopted the AIRO Group Holdings, Inc. Option Plan (the “Plan”), and assumed the outstanding options previously granted prior to the acquisition. The option agreements provide for a purchase a total 0.6 million shares of the Company’s common stock with an exercise price of $5.05 per share. There were no additional common shares available for future grants under the Plan. The options vesting periods range from immediate to four years and expire as determined by the Board of Directors, but not more than 10 years from the date of grant. The exercise price and grant amounts are determined in accordance with the provisions of the Plan and by the Board of Directors.
The total stock-based compensation expense for the Plan during the year ended December 31, 2023 and 2022 was $1.8 million and $2.8 million, respectively.
| F-120 |
The weighted-average grant date fair value of options awarded in the Holdings business combination was $21.92 per share. Unamortized expense as of December 31, 2023 was $0.9 million and will be recognized over an estimated weighted-average period of 1.1 years.
A summary of option activity under the Plan for the years ended December 31, 2023 and 2022:
| Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | ||||||||||
| Options outstanding, January 1, 2022 | - | $ | - | - | ||||||||
| Options assumed | 605,236 | $ | 5.05 | |||||||||
| Options outstanding, December 31, 2022 | 605,236 | $ | 5.05 | 7.4 | ||||||||
| Options granted | - | $ | - | |||||||||
| Options outstanding, December 31, 2023 | 605,236 | $ | 5.05 | 6.4 | ||||||||
| Vested and exercisable, December 31, 2023 | 436,868 | $ | 5.05 | 6.0 | ||||||||
| Vested and exercisable and expected to vest, December 31, 2023 | 605,236 | $ | 5.05 | 6.4 | ||||||||
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the use of a number of complex assumptions including expected volatility, expected term, risk-free interest rate, and expected dividends of the option.
The expected volatility assumption used in the Black-Scholes option pricing model are based on estimates derived from both historical and implied volatility from a group of comparable public companies operating in the same or similar lines of businesses as the Company.
The expected term of employee options represents the weighted-average period the options are expected to remain outstanding and was derived using the simplified method for awards that qualify as its “plain-vanilla” options. All awards that are outstanding are qualified for “plain-vanilla” options.
The risk-free rate is based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option.
The dividend yield is set to zero as the Company has never paid cash dividends and has no present intention to pay cash dividends.
The following weighted-average assumptions are used in the Black-Scholes option pricing model to estimate fair value of option awards at the Jaunt acquisition date for the stock options assumed:
| 2022 | ||||
| Market value | $ | 25.82 | ||
| Average volatility | 60.00 | % | ||
| Expected term (in years) | 5.00 | |||
| Risk-free interest rate | 2.55 | % | ||
| Dividend yield | 0.00 | % | ||
| F-121 |
Restricted Stock Awards
In May 2022, the Company granted restricted stock awards for 0.4 million shares of common stock with performance-based vesting criteria with a grant date fair value of $24.68 per share. The recognition of vesting on the restricted stock awards can vary by reporting period as the recognition of vesting expense is based on the probable outcome of the performance threshold condition and the cumulative progress to those performance conditions. The Company reassesses at each reporting date whether the achievement of the performance threshold condition is probable and accrues compensation expense if and when achievement of the performance threshold condition is probable and the expected achievement and vesting date for the performance tranche.
The restricted stock awards granted in May 2022 were granted with three separate performance thresholds with specific amounts of restricted shares attached that vest based on the probable achievement of those performance thresholds. The performance thresholds are attached to contract dollar volumes on Adversary Air task orders from the United States Department of Defense. The restricted stock awards vest ratably at each performance tranche level of aggregate amounts of (1) $25.0 million, (2) $50.0 million and (3) $75.0 million.
As of December 31, 2022, the Company had concluded that the achievement of the performance thresholds within the measurement period is not probable. Accordingly, during the period from the grant date to December 31, 2022, no compensation expense was recognized. On August 2, 2023, the terms of the restricted stock awards were modified whereby the vesting of the 0.4 million shares of common stock became contingent upon the Company’s common stock being publicly traded. As this contingency was not probable as of the modification date nor as of December 31, 2023, there was no compensation expense recognized and no charge recorded as of a result of the modification.
| 18. | Leases |
Commercial real estate
Sky-Watch leases two commercial real estate locations used primarily as office space and for production. One location is leased month to month while the other has terms extending through September 30, 2024.
Aspen Avionics leases facilities and equipment under non-cancelable operating leases. Aspen Avionics has a lease for its office and assembly facility in Albuquerque, New Mexico, with terms extending through 2024. Aspen Avionics had an additional office lease that was terminated in April 2023 and a hangar lease that is on a month-to-month lease.
Coastal Defense leases various hangars with lease periods up to one year. Other hangar leases are leased on a month-to-month basis.
Additional office leases are leased on a month-to-month basis.
All of the commercial real estate leases with lease terms greater than one year described above are classified as operating leases and are included within ROU assets and lease liabilities on the Company’s consolidated balance sheets.
Automobiles and Aircraft
Sky-Watch leases one automobile with a term ending in 2026 and an additional five automobile leases with lease terms of less than one year. Additionally, Aspen Avionics leases aircraft under month-to-month agreements. All of the automobile and aircraft leases with lease terms greater than one year described above are classified as operating leases and are included within ROU assets and lease liabilities on the Company’s consolidated balance sheets.
| F-122 |
The following table presents supplemental cash flow information related to the Company’s operating leases:
| Year ended | Year ended | |||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | 516,801 | $ | 487,591 | ||||
Maturities of operating lease liabilities as of December 31, 2023 were as follows:
| 2024 | $ | 336,514 | ||
| 2025 | 4,724 | |||
| 2026 | 4,724 | |||
| Total | 345,962 | |||
| Less: interest | (8,549 | ) | ||
| Present value of lease liabilities | $ | 337,413 |
Total lease expense was $0.5 million for the years ended December 31, 2023 and 2022. As of December 31, 2023, the weighted-average remaining lease term for the operating leases was 0.9 years and the weighted-average discount rate was 5.21%. As of December 31, 2022, the weighted-average remaining lease term for the operating leases was 2.56 years and the weighted-average discount rate was 5.23%. Short-term lease expense for 2023 and 2022 was not significant.
| 19. | Income Taxes |
For the year ended December 31, 2023, the Company’s income tax expense was $2.3 million and the effective tax rate was 7.6%. For the year ended December 31, 2022, the Company’s income tax benefit was $11.2 million and the effective tax rate was 30.5%. The income tax benefit in 2022 included the release of the accounting acquirer’s valuation allowance resulting from the available taxable temporary differences of the acquired entities.
The sources of loss before income tax benefit (expense) are as follows for the years ended December 31:
| 2023 | 2022 | |||||||
| United States | $ | (27,196,215 | ) | $ | (30,182,220 | ) | ||
| International | (2,966,401 | ) | (6,580,653 | ) | ||||
| Loss before income tax benefit (expense) | $ | (30,162,616 | ) | $ | (36,762,873 | ) | ||
Income tax benefit (expense) is comprised of the following for the years ended December 31:
| 2023 | 2022 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| International | (1,307,908 | ) | - | |||||
| Total current | (1,307,908 | ) | - | |||||
| Deferred: | ||||||||
| Federal | (30,606 | ) | 9,805,065 | |||||
| State | (5,134 | ) | 1,274,816 | |||||
| International | (950,159 | ) | 131,629 | |||||
| Total deferred | (985,899 | ) | 11,211,510 | |||||
| Total income tax benefit (expense) | $ | (2,293,807 | ) | $ | 11,211,510 | |||
| F-123 |
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows for the years ended December 31:
| 2023 | 2022 | |||||||
| Federal tax at statutory rate | $ | 6,334,161 | $ | 7,720,203 | ||||
| State income taxes | (5,134 | ) | 1,129,735 | |||||
| Stock compensation | (381,198 | ) | (575,260 | ) | ||||
| Foreign rate differential | (88,725 | ) | (1,348,246 | ) | ||||
| Fair value change in contingent liability | (2,944,588 | ) | 868,300 | |||||
| GILTI inclusion | (2,890,555 | ) | - | |||||
| Transaction costs | (824,875 | ) | - | |||||
| Return to provision | (466,925 | ) | 108,774 | |||||
| Valuation allowance | (939,629 | ) | 3,616,735 | |||||
| Other | (86,339 | ) | (308,731 | ) | ||||
| Income tax benefit (expense) | $ | (2,293,807 | ) | $ | 11,211,510 | |||
Under the acquisition method of accounting for business combinations, if changes are identified to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period, and they are related to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement-period adjustment, and offsets to goodwill are recorded.
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered the nature of the Company’s deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Deferred tax assets and liabilities are as follows as of December 31:
| 2023 | 2022 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 10,617,277 | $ | 13,615,256 | ||||
| Accruals and reserves | 2,394,971 | 2,402,759 | ||||||
| Excess interest expense 163(j) | 685,309 | - | ||||||
| Capitalized research and experimental expenses | 679,496 | 421,721 | ||||||
| Other | 672,952 | 161,518 | ||||||
| Gross deferred tax assets | 15,050,005 | 16,601,254 | ||||||
| Valuation allowance | (4,573,011 | ) | (3,610,105 | ) | ||||
| Net deferred tax assets | 10,476,994 | 12,991,149 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | (10,305,720 | ) | (12,623,847 | ) | ||||
| Property and equipment | (1,465,355 | ) | (828,450 | ) | ||||
| ROU assets | (181,021 | ) | (39,200 | ) | ||||
| Total deferred tax liabilities | (11,952,096 | ) | (13,491,497 | ) | ||||
| Net deferred tax liabilities | $ | (1,475,102 | ) | $ | (500,347 | ) | ||
The acquired domestic companies (AIRO Drone, Agile Defense, Coastal Defense, and Jaunt) recorded deferred tax liabilities primarily related to acquired intangibles other than goodwill in purchase accounting. As a result, Aspen Avionics, the accounting acquirer, released $5.0 million of its federal valuation allowance during the year ended December 31, 2022.
| F-124 |
As of December 31, 2023, the Company has federal, state, and foreign net operating loss carryforwards (“NOL”) totaling $43.2 million, $24.1 million and $0.8 million, respectively. If not utilized, federal NOLs of $22.3 million will expire at various dates from 2027 through 2037, and $20.9 million of federal NOLs have indefinite lives. State NOLs of $6.0 million will expire at various dates from 2023 through 2043, and $18.1 million of state NOLs have indefinite lives. Canada NOLs of $0.8 million begin to expire in 2042.
Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of all available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction-by-jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. The Company’s management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended December 31, 2023, the Company has provided a valuation allowance for certain deferred tax assets that are expected to be unrealized against the Company’s U.S. and Canada net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2023 and 2022 was an increase of $1.0 million and a decrease of $9.4 million, respectively.
The merger of Aspen Avionics with Holdings resulted in an ownership change in control as defined under Internal Revenue Code (“IRC”) Section 382. Therefore, Aspen Avionics’ NOLs are subject to an annual limitation. Aspen Avionics’ affected tax attribute(s) exceeded the fair market value assigned to its assets. Aspen Avionics’ acquired federal NOLs were reduced by $25.2 million to $32.6 million from $57.7 million. Aspen Avionics’ New Mexico state NOLs were reduced by $8.6 million to $10.7 million from $19.3 million.
Domestic net operating loss carryforwards are subject to an annual limitation as a result of multiple changes of ownership as defined under IRC Section 382. Federal NOLs of $13.5 million and state NOLs of $12.7 million originating after the most recent change are not subject to limitation. IRC §163(j) interest expense carryforwards have indefinite lives and are generally limited to an annual utilization limitation of thirty percent of adjusted taxable income plus business interest income. California net operating loss deductions are limited to a member’s contribution to combined California taxable income. We have reduced our federal and New Mexico NOLs by the amount expected to be unavailable and expire unutilized as a result of any IRC §382 limitation.
The Company had no unrecognized tax benefits for the years ended December 31, 2023 or 2022. The Company recognizes interest and penalties related to unrecognized tax benefits in operating expenses. No such interest and penalties were recognized during the years ended December 31, 2023 and 2022.
The Company expects to file income tax returns in the United States, Canada and Denmark. As of December 31, 2023, Holdings’ tax years 2020 through 2022 remain open to examination. Prior to closing of the acquisitions, AIRO Drone, Agile Defense, and Jaunt were taxed as partnerships and, as a result, the Company is not responsible for pre-acquisition tax authority examinations. All of Aspen Avionics’ tax years remain open to examination. Coastal Defense’s tax years 2020 through 2022 remain open to examination. Denmark’s statute of limitations expires May 1st in the fourth calendar year following the end of the relevant accounting period, and therefore the 2020 through 2022 tax years remain open to tax examination.
| 20. | Related Party Transactions |
Related party transactions include the following:
| ● | During 2022, Sky-Watch entered into a Credit Facility Agreement, which was subsequently amended, with Dangroup ApS, a stockholder, for a revolving line of credit of up to DKK 33.0 million ($4.7 million) that is due at the earlier of closing of the Business Combination or June 30, 2023. Interest is fixed at 12% per annum. The outstanding balance due on this credit facility was $1.6 million as of December 31, 2022 and was repaid during 2023. |
| F-125 |
| ● | Aspen Avionics has a Commercialization Agreement with Centro Italiano Richerche Aerospaziali S.c.p.A (“CIRA”), a stockholder of Aspen Avionics, whereby CIRA licensed certain technology to Aspen Avionics. As consideration for the license, CIRA will receive a royalty based on each unit sold by Aspen Avionics. In March 2020, Aspen Avionics entered into an agreement with CIRA to settle unpaid royalty amounts due under a development agreement. The Company owed $0.5 million to CIRA as of December 31, 2023 and 2022. | |
| ● | Aspen Avionics incurred expenses of $0.1 million and $0.2 million and earned immaterial revenues in the years ended December 31, 2023 and 2022, respectively, resulting from transactions with Accord Global, a stockholder. Expenses incurred relate primarily to engineering services provided to Aspen Avionics and per unit product support costs related to a manufacturing supply agreement. Aspen Avionics owed $0.2 million to Accord Global as of December 31, 2023 and 2022, related to such expenditures and had immaterial receivables as of December 31, 2023 and 2022, respectively. | |
| ● | As of December 31, 2023 and 2022, Coastal Defense had net receivables due from Failor Services, Inc. (“Failor”), which is owned by a stockholder of the Company, of $0.4 million and $0.3 million, respectively, which are included in “Related party receivables” on the consolidated balance sheets. No purchases were made from Failor during period from the Coastal Defense acquisition date through December 31, 2023. Coastal Defense also pays for certain expenses on Failor’s behalf, which are reimbursable to Coastal Defense. | |
| ● | During the year ended December 31, 2022, the Company issued promissory notes to an employee and stockholders for total principal of $1.5 million. The notes mature 190 days following closing of the business combination with Kernel Group Holdings, Inc. (the “Maturity Date”). At the business combination closing, a one-time interest charge (the “Interest Charge”) shall be paid in shares of common stock of the post-combination company. Following the business combination closing, simple interest shall accrue at the rate of twelve percent (12%) per annum through the Maturity Date. These notes have an Interest Charge equal to 100% of the principal amount, and each lender shall be paid 110% of the principal amount, plus accrued interest, at the Maturity Date.
During the year ended December 31, 2023, the Company issued promissory notes to employees and stockholders for total principal of $1.6 million on terms similar to those notes issued in 2022. Notes totaling $0.9 million have an Interest Charge equal to 100% of the principal amount, and each lender shall be paid 110% of the principal amount, plus simple interest accruing at twelve percent (12%) per annum commencing on the closing date, at the Maturity Date. Notes totaling $0.5 million have an Interest Charge equal to 50% of the principal amount, and each lender shall be paid the principal amount, plus simple interest accruing at twelve percent (12%) per annum commencing on the closing date, at the Maturity Date. Notes totaling $0.2 million have an Interest Charge equal to 115% of the principal amount, and each lender shall be paid the principal amount, plus simple interest accruing at fifteen percent (15%) per annum commencing on the closing date, at the Maturity Date. | |
| ● | Coastal Defense entered into unsecured due on demand notes with two stockholders (the “Stockholder Notes”). Interest is charged at 7.00% per year. As of December 31, 2023 and 2022, the total outstanding balance of the Stockholder Notes was $1.0 million and $0.9 million, respectively. No specific repayment schedules have been determined. |
| F-126 |
| 21. | Subsequent Events |
The Company has evaluated subsequent events through April 9, 2024, which represents the date the consolidated financial statements were available for issuance. Other than the items listed below, there were no subsequent events that would require adjustment to or disclosure in these consolidated financial statements.
In January 2024, the maturity date of the $19.4 million of debt related to the 2018, 2019 and 2022 Notes was extended to June 30, 2024.
In January 2024, the Company entered into a loan agreement and promissory note with Dangroup ApS, a former Sky-Watch shareholder, in the principal amount of $0.5 million. Interest accrues at a rate of 10.5% per annum, and the note matures on the earlier of the fifth business day following the Company’s business combination or July 1, 2024.
In January 2024 and February 2024, the Company, Kernel and the other parties to the Business Combination Agreement amended the Business Combination Agreement to revise the terms of the earnout provisions and remove the $5,000,001 net tangible assets closing condition.
From January through April 2024, the Company raised $1.8 million in the form of unsecured promissory notes with no collateral and no guarantees. Notes totaling $0.1 million accrue an interest charge equal to 100% of the principal amount, payable in shares of Company Common Stock immediately prior to closing of the business combination with Kernel with the principal due 190 days following closing plus twelve percent interest accruing from the closing date. Notes totaling $1.6 million accrue an interest charge equal to 150% of the principal amount, payable in shares of Company common stock immediately prior to closing of the business combination, with the principal due on the earlier of 190 days following closing and the date at which the Company closes at least $10 million in additional financing. The notes accrue interest at a rate of twelve percent per annum accruing from the closing date. An additional note totaling $0.1 million accrues an interest charge equal to 150% of the principal amount, payable in shares of Company Common Stock immediately prior to closing of the business combination with Kernel Group Holdings, with the principal due 190 days following closing plus twelve percent interest accruing from the closing date.
In March 2024, the Company amended the terms of the promissory note due to the former shareholders of Sky-Watch whereas the remaining principal balance of $6.8 million, plus accrued interest, is now payable no later than June 30, 2024. In addition, the amendment made the former shareholders of Sky-Watch eligible for an additional earnout payment in the amount of $1.0 million in the event that Sky-Watch achieves EBITDA of DKK 127,107,500 or above for fiscal year 2024. If earned, such earnout will be payable no later than five (5) business days following the issuance of the ordinary audit of the 2024 Sky-Watch financial statements.
In March 2024, the Carveout Plan was amended to extend the termination date to June 30, 2024.
| F-127 |
Execution Version
BUSINESS COMBINATION AGREEMENT
by and among
KERNEL GROUP HOLDINGS, INC.,
as Kernel,
AIRO GROUP, INC.,
as ParentCo,
kernel MERGER SUB, Inc.,
as Kernel Merger Sub,
AIRO MERGER SUB, Inc.,
as AIRO Merger Sub,
VKSS CAPITAL, LLC,
as the Sponsor and ParentCo Representative,
Dr. Chirinjeev Kathuria,
in the capacity as the Seller Representative,
and
AIRO GROUP HOLDINGS, INC.,
as the Company,
Dated as of March 3, 2023
TABLE OF CONTENTS
| Page | |
| I. FIRST MERGER | 3 |
| 1.1. First Merger | 3 |
| 1.2. First Effective Time | 3 |
| 1.3. Effect of the First Merger | 3 |
| 1.4. Certificate of Incorporation and Bylaws | 3 |
| 1.5. Directors and Officers of the Surviving Corporation | 3 |
| 1.6. Amended Kernel Charter | 4 |
| 1.7. First Merger Consideration | 4 |
| 1.8. Effect of First Merger on Kernel Securities | 4 |
| 1.9. Surrender of Kernel Common Stock and Disbursement of Kernel Merger Consideration | 5 |
| 1.10. Effect of Transaction on Kernel Merger Sub Stock | 7 |
| 1.11. Taking of Necessary Action; Further Action | 7 |
| 1.12. Appraisal and Dissenter’s Rights | 7 |
| II. SECOND MERGER | 8 |
| 2.1. Second Merger | 8 |
| 2.2. Second Effective Time | 8 |
| 2.3. Effect of the Second Merger | 8 |
| 2.4. Certificate of Incorporation and Bylaws | 8 |
| 2.5. Directors and Officers of the Surviving Corporation | 8 |
| 2.6. Amended Company Charter | 9 |
| 2.7. Second Merger Consideration | 9 |
| 2.8. Effect of Second Merger on Company Securities | 10 |
| 2.9. Surrender of Company Securities and Disbursement of AIRO Merger Consideration | 10 |
| 2.10. Effect of Transaction on AIRO Merger Sub Stock | 12 |
| 2.11. Closing Calculations | 13 |
| 2.12. Taking of Necessary Action; Further Action | 13 |
| 2.13. Appraisal and Dissenter’s Rights | 13 |
| 2.14. Earnouts | 14 |
| III. CLOSING | 16 |
| 3.1. Closing | 16 |
| IV. representations and warranties of PARENTCO, KERNEL, Kernel merger sub and airo merger sub | 16 |
| 4.1. Organization and Standing | 16 |
| 4.2. Authorization; Binding Agreement | 17 |
| 4.3. Governmental Approvals | 17 |
| 4.4. Non-Contravention | 18 |
| 4.5. Capitalization | 18 |
| 4.6. SEC Filings and Kernel Financials | 20 |
| 4.7. Absence of Certain Changes | 21 |
| 4.8. Compliance with Laws | 21 |
| 4.9. Actions; Orders; Permits | 21 |
| 4.10. Taxes and Returns | 22 |
| 4.11. Employees and Employee Benefit Plans | 22 |
| 4.12. Properties | 22 |
| 4.13. Material Contracts | 22 |
| 4.14. Transactions with Affiliates | 23 |
| 4.15. Merger Sub Activities | 23 |
| i |
| 4.16. Investment Company Act | 23 |
| 4.17. Finders and Brokers | 23 |
| 4.18. Ownership of Merger Consideration | 23 |
| 4.19. Certain Business Practices | 24 |
| 4.20. Insurance | 24 |
| 4.21. Independent Investigation | 25 |
| Iv. representations and warranties of THE COMPANY | 25 |
| 5.1. Organization and Standing | 25 |
| 5.2. Authorization; Binding Agreement | 26 |
| 5.3. Capitalization | 26 |
| 5.4. Subsidiaries | 27 |
| 5.5. Governmental Approvals | 28 |
| 5.6. Non-Contravention | 28 |
| 5.7. Financial Statements | 29 |
| 5.8. Absence of Certain Changes | 30 |
| 5.9. Compliance with Laws including Privacy Laws | 30 |
| 5.10. Company Permits | 31 |
| 5.11. Litigation | 31 |
| 5.12. Material Contracts | 32 |
| 5.13. Intellectual Property | 34 |
| 5.14. Taxes and Returns | 37 |
| 5.15. Real Property | 39 |
| 5.16. Personal Property | 39 |
| 5.17. Title to and Sufficiency of Assets | 39 |
| 5.18. Employee Matters | 40 |
| 5.19. Benefit Plans | 41 |
| 5.20. Environmental Matters | 43 |
| 5.21. Transactions with Related Persons | 45 |
| 5.22. Insurance | 45 |
| 5.23. Books and Records | 45 |
| 5.24. Top Customers and Suppliers | 46 |
| 5.25. Certain Business Practices | 46 |
| 5.26. Investment Company Act | 47 |
| 5.27. Finders and Brokers | 47 |
| 5.28. Independent Investigation | 47 |
| 5.29. Information Supplied | 48 |
| 5.30. Disclosure | 48 |
| V. COVENANTS | 48 |
| 6.1. Access and Information | 48 |
| 6.2. Conduct of Business of the Company | 49 |
| 6.3. Conduct of Business of Kernel | 53 |
| 6.4. Annual and Interim Financial Statements | 55 |
| 6.5. Kernel Public Filings | 55 |
| 6.6. No Solicitation | 56 |
| 6.7. No Trading | 57 |
| 6.8. Notification of Certain Matters | 57 |
| 6.9. Efforts | 57 |
| 6.10. Tax Matters | 59 |
| 6.11. Further Assurances | 59 |
| ii |
| 6.12. The Registration Statement | 59 |
| 6.13. Company Stockholder Meeting | 60 |
| 6.14. Public Announcements | 60 |
| 6.15. Confidential Information | 61 |
| 6.16. Documents and Information | 62 |
| 6.17. Post-Closing Board of Directors and Executive Officers | 63 |
| 6.18. Indemnification of Directors and Officers; Tail Insurance | 64 |
| 6.19. Trust Account Proceeds | 64 |
| 6.20. Additional Financing | 65 |
| 6.21. Post-Closing Assumption or Creation of Benefit Plans | 65 |
| 6.22. Extension | 65 |
| 6.23. Non-Competition Agreements | 65 |
| 6.24. Termination and Replacement of the Company Warrants | 65 |
| 6.25. Assumption and Conversion of Company Options | 66 |
| 6.26. Updating Disclosure Schedules | 66 |
| 6.27. Audited Consolidated Financials | 66 |
| VII. Closing conditions | 66 |
| 7.1. Conditions of Each Party’s Obligations | 66 |
| 7.2. Conditions to Obligations of the Company | 68 |
| 7.3. Conditions to Obligations of Kernel | 69 |
| 7.4. Frustration of Conditions | 71 |
| VIII. TERMINATION AND EXPENSES | 71 |
| 8.1. Termination | 71 |
| 8.2. Effect of Termination | 73 |
| 8.3. Fees and Expenses | 73 |
| Ix. WAIVERS and releases | 73 |
| 9.1. Waiver of Claims Against Trust | 73 |
| x. MISCELLANEOUS | 74 |
| 10.1. Notices | 74 |
| 10.2. Binding Effect; Assignment | 75 |
| 10.3. Third Parties | 75 |
| 10.4. Arbitration | 75 |
| 10.5. Governing Law; Jurisdiction | 76 |
| 10.6. Waiver of Jury Trial | 76 |
| 10.7. Specific Performance | 76 |
| 10.8. Severability | 76 |
| 10.9. Amendment | 76 |
| 10.10. Waiver | 77 |
| 10.11. Entire Agreement | 77 |
| 10.12. Interpretation | 77 |
| 10.13. Counterparts | 78 |
| 10.14. ParentCo Representative | 78 |
| 10.15. Seller Representative | 80 |
| 10.16. Legal Representation | 82 |
| 10.17. Non-Survival of Representations, Warranties | 82 |
| XI DEFINITIONS | 83 |
| 11.1. Certain Definitions | 83 |
| 11.2. Section References | 96 |
| iii |
BUSINESS COMBINATION AGREEMENT
This Business Combination Agreement (this “Agreement”) is made and entered into as of March 3, 2023 by and among (i) Kernel Group Holdings, Inc., a Cayman Islands exempted company (which shall domesticate as a Delaware corporation prior to Closing) (together with its successors, “Kernel”), (ii) AIRO Group, Inc., a Delaware corporation (“ParentCo”), (iii) Kernel Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of ParentCo (“Kernel Merger Sub”), (iv) AIRO Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of ParentCo (“AIRO Merger Sub”), (v) VKSS Capital, LLC, a Delaware limited liability company, in the capacity as the representative from and after the First Effective Time (as defined below) for the stockholders of Kernel and ParentCo (other than the Company Security Holders (as defined below) as of immediately prior to the Second Effective Time and their successors and assignees) in accordance with the terms and conditions of this Agreement (the “ParentCo Representative”) and also in the capacity as Kernel’s Sponsor (“Sponsor”), (vi) Dr. Chirinjeev Kathuria, in the capacity as the representative from and after the Effective Time for the Company Stockholders (as defined below) as of immediately prior to the Effective Time in accordance with the terms and conditions of this Agreement (the “Seller Representative”), and (vii) AIRO Group Holdings, Inc., a Delaware corporation (the “Company”). ParentCo, Kernel, Kernel Merger Sub, AIRO Merger Sub, ParentCo Representative, the Sponsor, the Seller Representative and the Company are sometimes referred to herein individually as a “Party” and, collectively, as the “Parties”.
RECITALS:
A. The Company, directly and indirectly through its subsidiaries, is a multi-faceted air mobility, autonomy and aerospace platform with differentiated technologies and capabilities dynamically addressing high growth market trends across the entire drone ecosystem with a compelling range of drone technologies and services, avionics and defense training;
B. Each of ParentCo, Kernel Merger Sub and AIRO Merger Sub is a corporation newly formed for the purposes of the transaction proposed herein;
C. ParentCo is a wholly-owned direct subsidiary of Kernel and each of Kernel Merger Sub and AIRO Merger Sub is a wholly-owned direct subsidiary of ParentCo;
D. Prior to the Closing Date and subject to the satisfaction or waiver of the conditions of this Agreement, Kernel shall migrate out of the Cayman Islands and domesticate (the “Domestication”) as a Delaware corporation in accordance with Section 388 of the DGCL, and Part XII of the Cayman Islands Companies Act (2021 Revision) (the “Companies Act”);
E. Following the Domestication, Kernel shall adopt a certificate of incorporation, in a form mutually agreeable to ParentCo and the Company (the “Kernel Certificate of Incorporation”), and bylaws, in a form mutually agreeable to Kernel and the Company (the “Kernel Bylaws”);
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F. (i) In connection with the Domestication, each issued and outstanding share of Old Kernel Preferred Stock, each issued and outstanding share of Old Kernel Class A Stock, each issued and outstanding share of Old Kernel Class B Stock, each issued and outstanding Old Kernel Private Warrant, each issued and outstanding Old Kernel Public Warrant and each issued and outstanding Old Kernel Unit shall convert automatically, on a one-for-one basis, into one share of Kernel Preferred Stock, one share of Kernel Class A Common Stock, one share of Kernel Class B Common Stock, one Kernel Private Warrant, one Kernel Public Warrant and one Kernel Public Unit, respectively, and (ii) immediately following the Domestication, (a) each share of Kernel Parent Class B Common Stock shall convert automatically, on a one-for-one basis, into one share of Kernel Class A Common Stock, (b) the Kernel Class A Common Stock will be reclassified as Kernel Common Stock and (c) each Kernel Public Unit will be separated into Kernel Common Stock and Kernel Public Warrants (collectively, the “Conversion”);
G. On the Closing Date, upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware General Corporation Law (“DGCL”), Kernel Merger Sub will merge with and into Kernel (the “First Merger”), with Kernel surviving the First Merger as a wholly owned subsidiary of ParentCo;
H. On the Closing Date, immediately following the First Merger, upon the terms and subject to the conditions of this Agreement and in accordance with the DGCL, AIRO Merger Sub will merge with and into the Company (the “Second Merger”), with the Company surviving the Second Merger as a wholly-owned subsidiary of ParentCo;
I. The boards of directors of ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub have each (i) determined that the First Merger and Second Merger are fair, advisable and in the best interests of their respective companies and stockholders, (ii) approved this Agreement and the transactions contemplated hereby, including the Domestication, Conversion, First Merger and Second Merger, upon the terms and subject to the conditions set forth herein, and (iii) determined to recommend to their respective stockholders the approval and adoption of this Agreement and the transactions contemplated hereby, including the Domestication, Conversion, First Merger and Second Merger;
J. The board of directors of the Company has unanimously (i) determined that it is in the best interests of the Company and the Subsidiaries, and declared it advisable, to enter into this Agreement, and (ii) approved this Agreement and the transactions (including the Second Merger), on the terms and subject to the conditions of this Agreement;
K. As a condition to Closing, the Significant Company Holders and Sponsor shall each enter into a Lock-Up Agreement with ParentCo and ParentCo Representative, the terms of which are pari passu with Sponsor’s Lock-Up Agreement with Kernel (each a “Lock-Up Agreement”), and shall become effective as of the Closing;
L. The Parties intend the First Merger and the Second Merger be treated as part of an integrated transaction that qualifies as a contribution pursuant to Section 351 of the Code (as defined below); and
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M. Certain capitalized terms used herein are defined in Article XI hereof.
NOW, THEREFORE, in consideration of the premises set forth above, which are incorporated in this Agreement as if fully set forth below, and the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound hereby, the Parties agree as follows:
Article I
FIRST MERGER
1.1 First Merger. At the First Effective Time, and subject to and upon the terms and conditions of this Agreement, and in accordance with the applicable provisions of the DGCL, Kernel Merger Sub and Kernel shall consummate the First Merger, pursuant to which Kernel Merger Sub shall be merged with and into Kernel, following which the separate corporate existence of Kernel Merger Sub shall cease and Kernel shall continue as the surviving corporation. Kernel, as the surviving corporation after the First Merger, is hereinafter sometimes referred to as the “Kernel Surviving Corporation” (provided, that references to Kernel for periods after the Effective Time shall include the Kernel Surviving Corporation).
1.2 First Effective Time. The Parties shall cause the First Merger to be consummated by filing the Certificate of Merger for the merger of Kernel Merger Sub with and into Kernel (the “Kernel Certificate of Merger”) with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL (the time of such filing, or such later time as may be specified in the Kernel Certificate of Merger, being the “First Effective Time”).
1.3 Effect of the First Merger. At the First Effective Time, the effect of the First Merger shall be as provided in this Agreement, the Kernel Certificate of Merger and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the First Effective Time, all the property, rights, privileges, agreements, powers and franchises, debts, Liabilities, duties and obligations of Kernel Merger Sub and Kernel shall become the property, rights, privileges, agreements, powers and franchises, debts, Liabilities, duties and obligations of the Kernel Surviving Corporation, which shall include the assumption by the Kernel Surviving Corporation of any and all agreements, covenants, duties and obligations of Kernel Merger Sub and Kernel set forth in this Agreement to be performed after the First Effective Time.
1.4 Certificate of Incorporation and Bylaws. At the First Effective Time, the Certificate of Incorporation and Bylaws of Kernel, each as in effect immediately prior to the Effective Time, shall automatically be amended and restated in their entirety to read identically to the Certificate of Incorporation and Bylaws of Kernel Merger Sub, as in effect immediately prior to the First Effective Time, and such amended and restated Certificate of Incorporation and Bylaws shall become the respective Certificate of Incorporation and Bylaws of the Kernel Surviving Corporation.
1.5 Directors and Officers of the Surviving Corporation. At the First Effective Time, the board of directors and executive officers of the Kernel Surviving Corporation shall be the board of directors and executive officers of Kernel, after giving effect to Section 6.17, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Kernel Surviving Corporation until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal.
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1.6 Amended Kernel Charter. Effective upon the First Effective Time, Kernel shall amend and restate its Certificate of Incorporation in a form mutually agreeable to the Company and Kernel (the “Kernel Amended Charter”) which shall, among other matters, (i) provide for size and structure of the Post-Closing Kernel Board in accordance with Section 6.17, and (ii) remove and change certain provisions in the Certificate of Incorporation related to Kernel’s status as a blank check company.
1.7 First Merger Consideration.
(a) Each share of Kernel Common Stock issued and outstanding immediately prior to the First Effective Time shall automatically be converted into and exchanged for one validly issued, fully paid and nonassessable share of ParentCo Common Stock (“Kernel Merger Consideration”).
(b) Each share of ParentCo Common Stock held by Kernel issued and outstanding immediately prior to the First Effective Time shall automatically be cancelled and shall cease to exist as of the First Effective Time.
(c) Each share of Kernel Merger Sub Common Stock issued and outstanding as of immediately prior to the First Effective Time shall automatically be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Kernel Surviving Company.
1.8 Effect of First Merger on Kernel Securities. At the First Effective Time, by virtue of the First Merger and without any action on the part of any Party or the holders of any shares of Kernel Common Stock or the holders of any shares of capital stock of ParentCo or Merger Sub:
(a) Kernel Common Stock. Subject to clause (b) below, all shares of Kernel Common Stock issued and outstanding immediately prior to the First Effective Time will automatically be cancelled and cease to exist in exchange for the right to receive the Kernel Merger Consideration, with each Kernel Stockholder being entitled to receive its Pro Rata Share of the Kernel Merger Consideration, without interest, upon delivery of the Kernel Transmittal Documents in accordance with Section 1.9. As of the First Effective Time, each Kernel Stockholder shall cease to have any other rights in and to Kernel or the Kernel Surviving Corporation (other than the rights set forth in Section 1.12 below).
(b) Treasury Stock. Notwithstanding clause (a) above or any other provision of this Agreement to the contrary, at the First Effective Time, if there are any shares of Kernel Common Stock that are owned by Kernel as treasury shares or any shares of Kernel Common Stock owned by any direct or indirect Subsidiary of Kernel immediately prior to the First Effective Time, such shares of Kernel Common Stock shall be cancelled and shall cease to exist without any conversion thereof or payment therefor.
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(c) Dissenting Shares. Each of the Kernel Dissenting Shares issued and outstanding immediately prior to the First Effective Time shall be cancelled and cease to exist in accordance with Section 1.12 and shall thereafter represent only the right to receive the applicable payments set forth in Section 1.12.
1.9 Surrender of Kernel Common Stock and Disbursement of Kernel Merger Consideration.
(a) Prior to the First Effective Time, ParentCo shall appoint its transfer agent, Continental Stock Transfer & Trust Company, or another agent reasonably acceptable to Kernel and the Company (the “Exchange Agent”), for the purpose of exchanging the certificates representing Kernel Common Stock (“Kernel Certificates”). At or prior to the First Effective Time, ParentCo shall deposit, or cause to be deposited, with the Exchange Agent the Kernel Merger Consideration. At or prior to the First Effective Time, ParentCo shall send, or shall cause the Exchange Agent to send, to each Kernel Stockholder, a letter of transmittal for use in such exchange, in the form mutually agreed to by ParentCo and Kernel (a “Letter of Transmittal”) (which shall specify that the delivery of Kernel Certificates in respect of the Kernel Merger Consideration shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Kernel Certificates to the Exchange Agent (or a Lost Certificate Affidavit)) for use in such exchange.
(b) Each Kernel Stockholder shall be entitled to receive its Pro Rata Share of the Kernel Merger Consideration in respect of the Kernel Common Stock represented by the Kernel Certificate(s) (excluding any Kernel Common Stock described in Sections 1.8(b) or 1.8(c)), as soon as reasonably practicable after the First Effective Time, but subject to the delivery to the Exchange Agent of the following items prior thereto (collectively, the “Kernel Transmittal Documents”): (i) the Certificate(s) for its Kernel Common Stock (or a Lost Certificate Affidavit), together with a properly completed and duly executed Letter of Transmittal and (ii) such other documents as may be reasonably requested by the Exchange Agent or ParentCo. Until so surrendered, each Kernel Certificate shall represent after the First Effective Time for all purposes only the right to receive such portion of the Kernel Merger Consideration attributable to such Kernel Certificate.
(c) If any portion of the Kernel Merger Consideration is to be delivered or issued to a Person other than the Person in whose name the surrendered Kernel Certificate is registered immediately prior to the First Effective Time, it shall be a condition to such delivery that (i) the transfer of such Kernel Common Stock shall have been permitted in accordance with the terms of Kernel’s Organizational Documents and any stockholders agreement with respect to Kernel, each as in effect immediately prior to the First Effective Time, (ii) such Kernel Certificate shall be properly endorsed or shall otherwise be in proper form for transfer and, (iii) the recipient such portion of the Kernel Merger Consideration, or the Person in whose name such portion of the Kernel Merger Consideration is delivered or issued, shall have already executed and delivered, if Sponsor, counterparts to a Lock-Up Agreement, and such other Kernel Transmittal Documents as are reasonably deemed necessary by the Exchange Agent or ParentCo and (iv) the Person requesting such delivery shall pay to the Exchange Agent any transfer or other Taxes required as a result of such delivery to a Person other than the registered holder of such Kernel Certificate or establish to the satisfaction of the Exchange Agent that such Tax has been paid or is not payable.
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(d) Notwithstanding anything to the contrary contained herein, in the event that any Kernel Certificate shall have been lost, stolen or destroyed, in lieu of delivery of a Kernel Certificate to the Exchange Agent, the Kernel Stockholder may instead deliver to the Exchange Agent an affidavit of lost certificate and indemnity of loss in form and substance reasonably acceptable to ParentCo (a “Lost Certificate Affidavit”), which at the reasonable discretion of ParentCo may include a requirement that the owner of such lost, stolen or destroyed Kernel Certificate deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against ParentCo or the Kernel Surviving Corporation with respect to the shares of Kernel Common Stock represented by the Kernel Certificates alleged to have been lost, stolen or destroyed. Any Lost Certificate Affidavit properly delivered in accordance with this Section 1.9(d) shall be treated as a Kernel Certificate for all purposes of this Agreement.
(e) After the First Effective Time, there shall be no further registration of transfers of Kernel Common Stock. If, after the First Effective Time, Kernel Certificates are presented to the Kernel Surviving Corporation, ParentCo or the Exchange Agent, they shall be cancelled and exchanged for the applicable portion of the Kernel Merger Consideration provided for, and in accordance with the procedures set forth in this Section 1.9. No dividends or other distributions declared or made after the date of this Agreement with respect to ParentCo Common Stock with a record date after the First Effective Time will be paid to the holders of any Kernel Certificates that have not yet been surrendered with respect to ParentCo Common Stock to be issued upon surrender thereof until the holders of record of such Kernel Certificates shall surrender such certificates (or provide a Lost Certificate Affidavit), if applicable, and provide the other Kernel Transmittal Documents. Subject to applicable Law, following surrender of any such Kernel Certificates (or delivery of a Lost Certificate Affidavit), if applicable, and delivery of the other Kernel Transmittal Documents, ParentCo shall promptly deliver to the record holders thereof, without interest, the certificates representing ParentCo Common Stock issued in exchange therefor and the amount of any such dividends or other distributions with a record date after the First Effective Time theretofore paid with respect to such ParentCo Common Stock.
(f) All securities issued upon the surrender of Kernel Common Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Kernel Common Stock. Any portion of the Kernel Merger Consideration made available to the Exchange Agent pursuant to Section 1.9(a) that remains unclaimed by Kernel Stockholders two (2) years after the First Effective Time shall be returned to ParentCo, upon demand, and any such Kernel Stockholder who has not exchanged its Kernel Stock for the applicable portion of the Kernel Merger Consideration in accordance with this Section 1.9 prior to that time shall thereafter look only to ParentCo for payment of the portion of the Kernel Merger Consideration in respect of such shares of Kernel Common Stock without any interest thereon (but with any dividends paid with respect thereto). Notwithstanding the foregoing, none of the Kernel Surviving Corporation, ParentCo or any Party shall be liable to any Person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.
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(g) Notwithstanding anything to the contrary contained herein, no fraction of a share of ParentCo Common Stock will be issued by virtue of the First Merger or the transactions contemplated hereby, and each Person who would otherwise be entitled to a fraction of a share of ParentCo Common Stock (after aggregating all fractional shares of ParentCo Common Stock that otherwise would be received by such holder) shall instead have the number of shares of ParentCo Common Stock issued to such Person rounded down in the aggregate to the nearest whole share of ParentCo Common Stock.
1.10 Effect of Transaction on Kernel Merger Sub Stock. At the First Effective Time, by virtue of the First Merger and without any action on the part of any Party or the holders of any Kernel Common Stock or the holders of any shares of capital stock of ParentCo or Kernel Merger Sub, each share of Kernel Merger Sub Common Stock outstanding immediately prior to the First Effective Time shall be converted into an equal number of shares of common stock of the Kernel Surviving Corporation, with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of capital stock of the Kernel Surviving Corporation.
1.11 Taking of Necessary Action; Further Action. If, at any time after the First Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Kernel Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Kernel and Kernel Merger Sub, the officers and directors of Kernel and Kernel Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement.
1.12 Appraisal and Dissenter’s Rights. No Kernel Stockholder who has validly exercised its appraisal rights pursuant to Section 262 of the DGCL (a “Kernel Dissenting Stockholder”) with respect to its Kernel Common Stock (such shares, “Kernel Dissenting Shares”) shall be entitled to receive any portion of the Kernel Merger Consideration with respect to the Kernel Dissenting Shares owned by such Kernel Dissenting Stockholder unless and until such Kernel Dissenting Stockholder shall have effectively withdrawn or lost its appraisal rights under the DGCL. Each Kernel Dissenting Stockholder shall be entitled to receive only the payment resulting from the procedure set forth in Section 262 of the DGCL with respect to the Kernel Dissenting Shares owned by such Kernel Dissenting Stockholder. Kernel shall give ParentCo and ParentCo Representative (i) prompt notice of any written demands for appraisal, attempted withdrawals of such demands, and any other instruments served pursuant to applicable Laws that are received by Kernel relating to any Kernel Dissenting Stockholder’s rights of appraisal and (ii) the opportunity to direct all negotiations and proceedings with respect to demand for appraisal under the DGCL. Kernel shall not, except with the prior written consent of ParentCo and ParentCo Representative, voluntarily make any payment with respect to any demands for appraisal, offer to settle or settle any such demands or approve any withdrawal of any such demands. Notwithstanding anything to the contrary contained in this Agreement, for all purposes of this Agreement, the Kernel Merger Consideration shall be reduced by the Pro Rata Share of any Kernel Dissenting Stockholders attributable to any Kernel Dissenting Shares and the Kernel Dissenting Stockholders shall have no rights to any portion of the Kernel Merger Consideration with respect to any Kernel Dissenting Shares.
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Article II
second merger
2.1 Second Merger. At the Second Effective Time, and subject to and upon the terms and conditions of this Agreement, and in accordance with the applicable provisions of the DGCL, AIRO Merger Sub and the Company shall consummate the Second Merger, pursuant to which AIRO Merger Sub shall be merged with and into the Company, following which the separate corporate existence of AIRO Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company, as the surviving corporation after the Second Merger, is hereinafter sometimes referred to as the “AIRO Surviving Corporation” (provided, that references to the Company for periods after the Effective Time shall include the AIRO Surviving Corporation).
2.2 Second Effective Time. The Parties shall cause the Second Merger to be consummated by filing the Certificate of Merger for the merger of AIRO Merger Sub with and into the Company (the “AIRO Certificate of Merger”) with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL (the time of such filing, or such later time as may be specified in the AIRO Certificate of Merger, being the “Second Effective Time”).
2.3 Effect of the Second Merger. At the Second Effective Time, the effect of the Second Merger shall be as provided in this Agreement, the AIRO Certificate of Merger and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Second Effective Time, all the property, rights, privileges, agreements, powers and franchises, debts, Liabilities, duties and obligations of AIRO Merger Sub and the Company shall become the property, rights, privileges, agreements, powers and franchises, debts, Liabilities, duties and obligations of the AIRO Surviving Corporation, which shall include the assumption by the AIRO Surviving Corporation of any and all agreements, covenants, duties and obligations of AIRO Merger Sub and the Company set forth in this Agreement to be performed after the Second Effective Time.
2.4 Certificate of Incorporation and Bylaws. At the Second Effective Time, the Certificate of Incorporation and Bylaws of the Company, each as in effect immediately prior to the Effective Time, shall automatically be amended and restated in their entirety to read identically to the Certificate of Incorporation and Bylaws of AIRO Merger Sub, as in effect immediately prior to the Second Effective Time, and such amended and restated Certificate of Incorporation and Bylaws shall become the respective Certificate of Incorporation and Bylaws of the AIRO Surviving Corporation.
2.5 Directors and Officers of the Surviving Corporation. At the Second Effective Time, the board of directors and executive officers of the AIRO Surviving Corporation shall be the board of directors and executive officers of AIRO, after giving effect to Section 6.17, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the AIRO Surviving Corporation until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal.
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2.6 Amended Company Charter. Effective upon the Second Effective Time, the Company shall amend and restate its Certificate of Incorporation in a form mutually agreeable to the Company and Kernel (the “AIRO Amended Charter”) which shall, among other matters, provide for size and structure of the Company Board post-Closing in accordance with Section 6.17.
2.7 Second Merger Consideration.
(a) As consideration for the Second Merger, the Company Security Holders 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 (a) $770,000,000 minus (b) the amount, if any, by which the Target Net Working Capital Amount exceeds the Net Working Capital by more than $500,000, plus (c) the amount, if any, by which the Net Working Capital exceeds the Target Net Working Capital Amount by more than $500,000 (but not less than zero), minus (d) the amount, if any, by which the Closing Net Debt exceeds the Target Net Debt, by more than $500,000 (but not less than zero), plus (e) the amount, if any, by which the Target Net Debt exceeds Closing Net Debt, minus (f) the amount, if any, by which the Company Transaction Expenses exceed the Target Company Transaction Expenses (but not less than zero)(such resulting amount, the “AIRO Merger Consideration”), with each share of ParentCo Common Stock valued at the Per Share Price. The AIRO Merger Consideration shall be allocated among the Company Stockholders in accordance with their respective Pro Rata Shares.
(b) Additionally, after the Closing, subject to the terms and conditions set forth in this Agreement, the Company Stockholders and the Sponsor shall have the contingent right to receive Earnout Shares as additional consideration if the requirements for receipt of such Earnout Share Payments as set forth in Section 2.14 are satisfied.
(c) Additionally, after the Closing, subject to the terms and conditions set forth in this Agreement, ParentCo shall assume the Benefit Plans of the Company or create new Benefit Plans, including, but not limited to, equity incentive plans.
(d) Additionally, at Closing, subject to the terms and conditions set forth in this Agreement, ParentCo shall assume the Company Options, and convert them to options for ParentCo Common Stock with substantially similar economic terms.
(e) Additionally, (i) for each Extension obtained by Sponsor, Sponsor will be entitled to receive from ParentCo at Closing 1.00 additional share of ParentCo Common Stock for each dollar Sponsor deposited into the Trust Account necessary to obtain each Extension; and (ii) Sponsor will be entitled to receive from ParentCo at Closing 1.00 additional share of ParentCo Common Stock for each dollar Sponsor deposited into the Trust Account to be used by ParentCo as working capital. Any such deposits, whether for an Extension or for working capital purposes, would be made by Sponsor in the form of a loan to ParentCo, and any such loans will be non-interest bearing and payable by ParentCo upon the Closing in accordance with ParentCo’s Organizational Documents and the IPO Prospectus.
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(f) Finally, Sponsor will be entitled to receive from the ParentCo upon the Closing $1,500,000 in cash as consideration for advisory services provided to ParentCo by the Sponsor.
2.8 Effect of Second Merger on Company Securities. At the Second Effective Time, by virtue of the Second Merger and without any action on the part of any Party or the holders of any Company Securities or the holders of any shares of capital stock of ParentCo or AIRO Merger Sub:
(a) Company Stock. Subject to clause (b) below, all shares of Company Stock issued and outstanding immediately prior to the Second Effective Time will automatically be cancelled and cease to exist in exchange for the right to receive the AIRO Merger Consideration (as it may be adjusted after the Closing pursuant to Section 2.11), with each Company Stockholder being entitled to receive its Pro Rata Share of the AIRO Merger Consideration, without interest, upon delivery of the AIRO Transmittal Documents in accordance with Section 2.9. As of the Second Effective Time, each Company Stockholder shall cease to have any other rights in and to the Company or the AIRO Surviving Corporation (other than the rights set forth in Section 2.13 below).
(b) Treasury Stock. Notwithstanding clause (a) above or any other provision of this Agreement to the contrary, at the Second Effective Time, if there are any Company Securities that are owned by the Company as treasury shares or any Company Securities owned by any direct or indirect Subsidiary of the Company immediately prior to the Second Effective Time, such Company Securities shall be cancelled and shall cease to exist without any conversion thereof or payment therefor.
(c) Dissenting Shares. Each of the Dissenting Shares issued and outstanding immediately prior to the Second Effective Time shall be cancelled and cease to exist in accordance with Section 2.13 and shall thereafter represent only the right to receive the applicable payments set forth in Section 2.13.
(d) Company Convertible Securities. Any Company Convertible Security, if not exercised or converted prior to the Effective Time, shall be cancelled, retired and terminated and cease to represent a right to acquire, be exchanged for or convert into shares of Company Stock.
2.9 Surrender of Company Securities and Disbursement of AIRO Merger Consideration.
(a) Prior to the Second Effective Time, ParentCo shall engage the Exchange Agent for the purpose of exchanging the certificates representing Company Stock (“Company Certificates”). At or prior to the Second Effective Time, ParentCo shall deposit, or cause to be deposited, with the Exchange Agent the AIRO Merger Consideration. At or prior to the Second Effective Time, ParentCo shall send, or shall cause the Exchange Agent to send, to each Company Stockholder, a Letter of Transmittal (which shall specify that the delivery of Company Certificates in respect of the AIRO Merger Consideration shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Company Certificates to the Exchange Agent (or a Lost Certificate Affidavit)) for use in such exchange.
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(b) Each Company Stockholder shall be entitled to receive its Pro Rata Share of the AIRO Merger Consideration in respect of the Company Stock represented by the Company Certificate(s) (excluding any Company Securities described in Sections 2.8(b) or 2.8(c)), as soon as reasonably practicable after the Second Effective Time, but subject to the delivery to the Exchange Agent of the following items prior thereto (collectively, the “AIRO Transmittal Documents”): (i) the Company Certificate(s) for its Company Stock (or a Lost Certificate Affidavit), together with a properly completed and duly executed Letter of Transmittal and (ii) such other documents as may be reasonably requested by the Exchange Agent or ParentCo. Until so surrendered, each Company Certificate shall represent after the Second Effective Time for all purposes only the right to receive such portion of the AIRO Merger Consideration (as it may be adjusted after the Closing pursuant to Section 2.11) attributable to such Company Certificate.
(c) If any portion of the AIRO Merger Consideration is to be delivered or issued to a Person other than the Person in whose name the surrendered Company Certificate is registered immediately prior to the Second Effective Time, it shall be a condition to such delivery that (i) the transfer of such Company Stock shall have been permitted in accordance with the terms of the Company’s Organizational Documents and any stockholders agreement with respect to the Company, each as in effect immediately prior to the Second Effective Time, (ii) such Company Certificate shall be properly endorsed or shall otherwise be in proper form for transfer and, (iii) the recipient such portion of the AIRO Merger Consideration, or the Person in whose name such portion of the AIRO Merger Consideration is delivered or issued, shall have already executed and delivered, if a Significant Company Holder, counterparts to a Lock-Up Agreement, and such other AIRO Transmittal Documents as are reasonably deemed necessary by the Exchange Agent or ParentCo and (iv) the Person requesting such delivery shall pay to the Exchange Agent any transfer or other Taxes required as a result of such delivery to a Person other than the registered holder of such Company Certificate or establish to the satisfaction of the Exchange Agent that such Tax has been paid or is not payable.
(d) Notwithstanding anything to the contrary contained herein, in the event that any Company Certificate shall have been lost, stolen or destroyed, in lieu of delivery of a Company Certificate to the Exchange Agent, the Company Stockholder may instead deliver to the Exchange Agent a Lost Certificate Affidavit, which at the reasonable discretion of ParentCo may include a requirement that the owner of such lost, stolen or destroyed Company Certificate deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against ParentCo or the AIRO Surviving Corporation with respect to the shares of Company Stock represented by the Company Certificates alleged to have been lost, stolen or destroyed. Any Lost Certificate Affidavit properly delivered in accordance with this Section 2.9(d) shall be treated as a Company Certificate for all purposes of this Agreement.
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(e) After the Second Effective Time, there shall be no further registration of transfers of Company Stock. If, after the Second Effective Time, Company Certificates are presented to the AIRO Surviving Corporation, ParentCo or the Exchange Agent, they shall be cancelled and exchanged for the applicable portion of the AIRO Merger Consideration provided for, and in accordance with the procedures set forth in this Section 2.9. No dividends or other distributions declared or made after the date of this Agreement with respect to ParentCo Common Stock with a record date after the Second Effective Time will be paid to the holders of any Company Certificates that have not yet been surrendered with respect to ParentCo Common Stock to be issued upon surrender thereof until the holders of record of such Company Certificates shall surrender such certificates (or provide a Lost Certificate Affidavit), if applicable, and provide the other AIRO Transmittal Documents. Subject to applicable Law, following surrender of any such Company Certificates (or delivery of a Lost Certificate Affidavit), if applicable, and delivery of the other Transmittal Documents, ParentCo shall promptly deliver to the record holders thereof, without interest, the certificates representing ParentCo Common Stock issued in exchange therefor and the amount of any such dividends or other distributions with a record date after the Second Effective Time theretofore paid with respect to such ParentCo Common Stock.
(f) All securities issued upon the surrender of Company Securities in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Company Securities. Any portion of the AIRO Merger Consideration made available to the Exchange Agent pursuant to Section 2.9(a) that remains unclaimed by Company Stockholders two (2) years after the Second Effective Time shall be returned to ParentCo, upon demand, and any such Company Stockholder who has not exchanged its Company Stock for the applicable portion of the AIRO Merger Consideration in accordance with this Section 2.9 prior to that time shall thereafter look only to ParentCo for payment of the portion of the AIRO Merger Consideration in respect of such shares of Company Stock without any interest thereon (but with any dividends paid with respect thereto). Notwithstanding the foregoing, none of the AIRO Surviving Corporation, ParentCo or any Party shall be liable to any Person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.
(g) Notwithstanding anything to the contrary contained herein, no fraction of a share of ParentCo Common Stock will be issued by virtue of the Second Merger or the transactions contemplated hereby (including the Earnout Payments), and each Person who would otherwise be entitled to a fraction of a share of ParentCo Common Stock (after aggregating all fractional shares of ParentCo Common Stock that otherwise would be received by such holder) shall instead have the number of shares of ParentCo Common Stock issued to such Person rounded down in the aggregate to the nearest whole share of ParentCo Common Stock.
2.10 Effect of Transaction on AIRO Merger Sub Stock. At the Second Effective Time, by virtue of the Second Merger and without any action on the part of any Party or the holders of any Company Securities or the holders of any shares of capital stock of ParentCo or AIRO Merger Sub, each share of AIRO Merger Sub Common Stock outstanding immediately prior to the Second Effective Time shall be converted into an equal number of shares of common stock of the AIRO Surviving Corporation, with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of capital stock of the AIRO Surviving Corporation.
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2.11 Closing Calculations. At least three (3) Business Days prior to the Closing Date, the Company shall deliver to Kernel a statement (the “Closing Statement”) certified by the Company’s chief financial officer (the “CFO”) setting forth (i) a consolidated balance sheet of the Target Companies as of the Reference Time; and (ii) a calculation of the Company’s Closing Net Debt, Imminent Closing Net Debt, Net Working Capital and Company Transaction Expenses, in each case, as of the Reference Time, and the resulting AIRO Merger Consideration and AIRO Merger Consideration Shares based on these calculations, in reasonable detail including for each component thereof, along with the amount owed to each creditor of any of the Target Companies, and bank statements and other evidence reasonably necessary to confirm such calculations. Promptly upon delivering the Closing Statement to Kernel, if requested by Kernel, the Company will meet with Kernel to review and discuss the Closing Statement and the Company will consider in good faith Kernel’s comments to the Closing Statement and make any appropriate adjustments to the Closing Statement prior to the Closing, which adjusted Closing Statement, as mutually approved by the Company and Kernel both acting reasonably and in good faith, shall thereafter become the Closing Statement for all purposes of this Agreement. The Closing Statement and the determinations contained therein shall be prepared in accordance with the Accounting Principles and otherwise in accordance with this Agreement.
2.12 Taking of Necessary Action; Further Action. If, at any time after the Second Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the AIRO Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and AIRO Merger Sub, the officers and directors of the Company and AIRO Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement.
2.13 Appraisal and Dissenter’s Rights. No Company Stockholder who has validly exercised its appraisal rights pursuant to Section 262 of the DGCL (an “AIRO Dissenting Stockholder”) with respect to its Company Stock (such shares, “AIRO Dissenting Shares”) shall be entitled to receive any portion of the AIRO Merger Consideration with respect to the AIRO Dissenting Shares owned by such AIRO Dissenting Stockholder unless and until such AIRO Dissenting Stockholder shall have effectively withdrawn or lost its appraisal rights under the DGCL. Each AIRO Dissenting Stockholder shall be entitled to receive only the payment resulting from the procedure set forth in Section 262 of the DGCL with respect to the AIRO Dissenting Shares owned by such AIRO Dissenting Stockholder. The Company shall give ParentCo and ParentCo Representative (i) prompt notice of any written demands for appraisal, attempted withdrawals of such demands, and any other instruments served pursuant to applicable Laws that are received by the Company relating to any AIRO Dissenting Stockholder’s rights of appraisal and (ii) the opportunity to direct all negotiations and proceedings with respect to demand for appraisal under the DGCL. The Company shall not, except with the prior written consent of ParentCo and ParentCo Representative, voluntarily make any payment with respect to any demands for appraisal, offer to settle or settle any such demands or approve any withdrawal of any such demands. Notwithstanding anything to the contrary contained in this Agreement, for all purposes of this Agreement, the AIRO Merger Consideration shall be reduced by the Pro Rata Share of any AIRO Dissenting Stockholders attributable to any AIRO Dissenting Shares and the AIRO Dissenting Stockholders shall have no rights to any portion of the AIRO Merger Consideration with respect to any AIRO Dissenting Shares.
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2.14 Earnouts.
(a) After the Closing, subject to the terms and conditions set forth herein, (I) the Company Stockholders shall have the contingent right to receive shares of ParentCo Common Stock with an aggregate value of up to $330,000,000 (II) the Sponsor shall have the contingent right to receive shares of ParentCo Common Stock with an aggregate value of up to $33,000,000 (in the case of each of (I) and (II), subject to adjustment for share splits, share dividends, combinations, recapitalizations and the like after the Closing, including to account for any equity securities into which such shares are exchanged or converted) (the “Earnout Shares”), as additional consideration from ParentCo based on ParentCo’s revenue and EBITDA performance, as follows:
(i) In the event ParentCo’s revenue 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”) is greater than or equal to $42,600,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company 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.
(ii) In the event ParentCo’s revenue for any Earnout Period is greater than or equal to $141,400,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company 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.
(iii) In the event ParentCo’s revenue for any Earnout Period is greater than or equal to $358,900,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company 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.
(iv) In the event ParentCo’s EBITDA for any Earnout Period is greater than or equal to $(19,300,000) for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company 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.
(v) In the event ParentCo’s EBITDA for any Earnout Period is greater than or equal to $4,000,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company 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.
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(vi) In the event ParentCo’s EBITDA for any Earnout Period is greater than or equal to $98,600,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company 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.
(b) The CFO will monitor ParentCo’s revenue and EBITDA regularly, and as soon as practicable (and in any event within ten (10) Business Days) after the end of each month following the Effective Date through the earlier of (x) ten (10) Business Days following the end of the Earnout Eligibility Period and (y) the date, if any, as of which all of the Earnout Shares have been finally determined pursuant to this Section 2.14 to have been earned, the CFO will prepare and deliver to each Representative Party a written statement (each, an “Earnout Statement”) that sets forth (i) the Company’s revenue for the most recently completed Earnout Period, (ii) the Company’s EBITDA for the previous Earnout Period and (ii) whether any Earnout Shares have been earned as a result of the Company’s performance during the most recently completed Earnout Period. Each Representative Party will have ten (10) Business Days after its receipt of an Earnout Statement to review it. Each Representative Party, and its Representatives on its behalf, may make inquiries to the CFO and related ParentCo and Company personnel and advisors regarding questions concerning or disagreements with the Earnout Statement arising in the course of their review thereof, and ParentCo and the Company shall provide reasonable cooperation in connection therewith. If either Representative Party has any objections to an Earnout Statement, such Representative Party shall deliver to ParentCo (to the attention of the CFO) and the other Representative Party a statement setting forth its objections thereto (in reasonable detail). If such written statement is not delivered by a Representative Party within twenty (20) Business Days following the date of delivery of each Earnout Statement, then such Representative Party will have waived its right to contest such Earnout Statement and the calculation of the revenue and EBITDA calculations during the applicable portion of the Earnout Period (and whether the Earnout Shares have been earned) as set forth therein. If such written statement is delivered by a Representative Party within such twenty (20) Business Day period, then the Seller Representative and ParentCo Representative shall negotiate in good faith to resolve any such objections for a period of ten (10) Business Day thereafter. If the Representative Parties do not reach a final resolution within such ten (10) Business Day period, then upon the written request of either Representative Party, the Representative Parties will refer the dispute to arbitration in accordance with the provision of Section 10.4.
(c) If there is a final determination in accordance with Section 2.14(b) that the Company Stockholders have earned Earnout Shares, the applicable Earnout Shares, will become due upon such final determination and ParentCo will deliver such shares within ten (10) Business Days thereafter.
(d) Following the Closing, ParentCo and its Subsidiaries, including the Target Companies, will be entitled to operate their respective businesses based upon their respective business requirements. Each of ParentCo and its Subsidiaries, including the Target Companies, will be permitted, following the Closing, to make changes at its sole discretion to its operations, organization, personnel, accounting practices and other aspects of its business, including actions that may have an impact on, the share price of ParentCo Common Stock and the ability of the Company Stockholders to earn the Earnout Shares, and no Person will have any right to claim the loss of all or any portion of any Earnout Shares or other damages as a result of such decisions.
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Article III
CLOSING
3.1 Closing. Subject to the satisfaction or waiver of the conditions set forth in Article VII, the consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place at such place (including remotely), date and time to be agreed upon by ParentCo and the Company, which date shall be no later than the second (2nd) Business Day after all the Closing conditions to this Agreement have been satisfied or waived (the date and time at which the Closing is actually held being the “Closing Date”).
Article IV
REPRESENTATIONS AND WARRANTIES OF PARENTCO, KERNEL, Kernel merger sub and airo merger sub
Except as set forth in (a) Kernel’s SEC Reports filed or submitted on or prior to the date hereof (excluding any disclosures in any risk factors section that do not constitute statements of fact or factual matters, disclosures in any forward-looking statements disclaimer and other disclosures that are generally cautionary, predictive or forward-looking in nature, (b) as otherwise explicitly contemplated by this Agreement and (c) the disclosure schedules delivered by Kernel to the Company on the date hereof (the “Kernel Disclosure Schedules”), the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub represent and warrant to the Company, as of the date hereof and as of the Closing, as follows:
4.1 Organization and Standing. Each of ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub is a company duly incorporated, validly existing and in good standing under the Laws its jurisdiction of incorporation. ParentCo, Kernel Merger Sub and AIRO Merger Sub were organized with the express purposes of completing the transactions contemplated herein and have not conducted any other business since their organization. Kernel has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Kernel is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed or in good standing would not reasonably be expected to have a Material Adverse Effect on Kernel. Kernel has heretofore made available to the Company accurate and complete copies of ParentCo’s, Kernel’s, Kernel Merger Sub’s and AIRO Merger Sub’s Organizational Documents, as currently in effect. Neither ParentCo, Kernel, Kernel Merger Sub nor AIRO Merger Sub are in violation of any provision of their applicable Organizational Documents in any material respect.
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4.2 Authorization; Binding Agreement. ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub have all requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Document to which they are a party, to perform their obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby, subject to obtaining the Required Kernel Stockholder Approval. The execution and delivery of this Agreement and each Ancillary Document to which they are a party and the consummation of the transactions contemplated hereby and thereby (a) have been duly and validly authorized by the board of directors of ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub, and (b) other than the Required Kernel Stockholder Approval, no other corporate proceedings, other than as set forth elsewhere in the Agreement, on the part of Kernel are necessary to authorize the execution and delivery of this Agreement and each Ancillary Document to which it is a party or to consummate the transactions contemplated hereby and thereby. This Agreement has been, and each Ancillary Document to which ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub is a party shall be when delivered, duly and validly executed and delivered by Kernel and, assuming the due authorization, execution and delivery of this Agreement and such Ancillary Documents by the other Parties hereto and thereto, constitutes, or when delivered shall constitute, the valid and binding obligation of ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub (as applicable), enforceable against ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub (as applicable) in accordance with its terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting the enforcement of creditors’ rights generally or by any applicable statute of limitation or by any valid defense of set-off or counterclaim, and the fact that equitable remedies or relief (including the remedy of specific performance) are subject to the discretion of the court from which such relief may be sought (collectively, the “Enforceability Exceptions”).
4.3 Governmental Approvals. Except as otherwise described in Schedule 4.3, no Consent of or with any Governmental Authority, on the part of ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub is required to be obtained or made in connection with the execution, delivery or performance by Kernel of this Agreement and each Ancillary Document to which they are a party or the consummation by ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub of the transactions contemplated hereby and thereby, other than (a) pursuant to Antitrust Laws, (b) such filings as contemplated by this Agreement, (c) any filings required with Nasdaq or the SEC with respect to the transactions contemplated by this Agreement, (d) applicable requirements, if any, of the Securities Act, the Exchange Act, and/ or any state “blue sky” securities Laws, and the rules and regulations thereunder, and (e) where the failure to obtain or make such Consents or to make such filings or notifications, would not reasonably be expected to have a Material Adverse Effect on ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub.
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4.4 Non-Contravention. Except as otherwise described in Schedule 4.4, the execution and delivery by ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub of this Agreement and each Ancillary Document to which they are a party, the consummation by ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub of the transactions contemplated hereby and thereby, and compliance by ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub with any of the provisions hereof and thereof, will not (a) conflict with or violate any provision of ParentCo’s, Kernel’s, Kernel Merger Sub’s and AIRO Merger Sub’s Organizational Documents, (b) subject to obtaining the Consents from Governmental Authorities referred to in Section 4.3 hereof, and the waiting periods referred to therein having expired, and any condition precedent to such Consent or waiver having been satisfied, conflict with or violate any Law, Order or Consent applicable to ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub or any of their properties or assets, or (c) (i) violate, conflict with or result in a breach of, (ii) constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, (iii) result in the termination, withdrawal, suspension, cancellation or modification of, (iv) accelerate the performance required by Kernel under, (v) result in a right of termination or acceleration under, (vi) give rise to any obligation to make payments or provide compensation under, (vii) result in the creation of any Lien upon any of the properties or assets of Kernel under, (viii) give rise to any obligation to obtain any third party Consent or provide any notice to any Person or (ix) give any Person the right to declare a default, exercise any remedy, claim a rebate, chargeback, penalty or change in delivery schedule, accelerate the maturity or performance, cancel, terminate or modify any right, benefit, obligation or other term under, any of the terms, conditions or provisions of, any Kernel Material Contract, except for any deviations from any of the foregoing clauses (a), (b) or (c) that would not reasonably be expected to have a Material Adverse Effect on ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub.
4.5 Capitalization.
(a) Kernel is authorized to issue (i) 1,000,000 shares of Old Kernel Preferred Stock, (ii) 500,000,000 shares of Old Kernel Class A Stock and (iii) 50,000,000 shares of Old Kernel Class B Stock. The issued and outstanding Kernel Securities as of the date of this Agreement are set forth on Schedule 4.5(a). All outstanding Kernel Securities are duly authorized, validly issued, fully paid and non-assessable and are not subject to or issued in violation of any purchase option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the Companies Act, Kernel’s Organizational Documents or any Contract to which Kernel is a party. None of the outstanding Kernel Securities have been issued in violation of any applicable securities Laws. Prior to giving effect to the transactions contemplated by this Agreement, other than Kernel Merger Sub, AIRO Merger Sub and ParentCo, Kernel does not have any Subsidiaries or own any equity interests in any other Person.
(b) Prior to giving effect to the First Merger, ParentCo is authorized to issue 10,000 shares of Kernel Merger Sub Common Stock, par value $0.001, of which all 10,000 shares are issued and outstanding, and all of which are owned by Kernel. There are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii) bonds, debentures, notes or other Indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights or (iii) subscriptions or other rights, agreements, arrangements, Contracts or commitments of any character (other than this Agreement and the Ancillary Documents), (A) relating to the issued or unissued shares of ParentCo or (B) obligating ParentCo to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options or shares or securities convertible into or exchangeable for such shares, or (C) obligating ParentCo to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such capital shares. There are no outstanding obligations of ParentCo to repurchase, redeem or otherwise acquire any shares of ParentCo or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Person. There are no shareholders agreements, voting trusts or other agreements or understandings to which ParentCo is a party with respect to the voting of any shares of ParentCo.
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(c) Prior to giving effect to the First Merger, Kernel Merger Sub is authorized to issue 10,000 shares of Kernel Merger Sub Common Stock, par value $0.001, of which all 10,000 shares are issued and outstanding, and all of which are owned by Kernel. There are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii) bonds, debentures, notes or other Indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights or (iii) subscriptions or other rights, agreements, arrangements, Contracts or commitments of any character (other than this Agreement and the Ancillary Documents), (A) relating to the issued or unissued shares of Kernel Merger Sub or (B) obligating Kernel Merger Sub to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options or shares or securities convertible into or exchangeable for such shares, or (C) obligating Kernel Merger Sub to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such capital shares. There are no outstanding obligations of Kernel Merger Sub to repurchase, redeem or otherwise acquire any shares of Kernel Merger Sub or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Person. There are no shareholders agreements, voting trusts or other agreements or understandings to which Kernel Merger Sub is a party with respect to the voting of any shares of Kernel Merger Sub.
(d) Prior to giving effect to the Second Merger, AIRO Merger Sub is authorized to issue 10,000 shares of AIRO Merger Sub Common Stock, par value $0.001, of which all 10,000 shares are issued and outstanding, and all of which are owned by Kernel. There are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii) bonds, debentures, notes or other Indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights or (iii) subscriptions or other rights, agreements, arrangements, Contracts or commitments of any character (other than this Agreement and the Ancillary Documents), (A) relating to the issued or unissued shares of AIRO Merger Sub or (B) obligating AIRO Merger Sub to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options or shares or securities convertible into or exchangeable for such shares, or (C) obligating AIRO Merger Sub to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such capital shares. There are no outstanding obligations of AIRO Merger Sub to repurchase, redeem or otherwise acquire any shares of AIRO Merger Sub or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Person. There are no shareholders agreements, voting trusts or other agreements or understandings to which AIRO Merger Sub is a party with respect to the voting of any shares of AIRO Merger Sub.
(e) Except as set forth in Schedule 4.5(a) there are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii) bonds, debentures, notes or other Indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights or (iii) subscriptions or other rights, agreements, arrangements, Contracts or commitments of any character (other than this Agreement and the Ancillary Documents), (A) relating to the issued or unissued shares of Kernel or (B) obligating Kernel to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options or shares or securities convertible into or exchangeable for such shares, or (C) obligating Kernel to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such capital shares. Other than the Redemption or as expressly set forth in this Agreement, there are no outstanding obligations of Kernel to repurchase, redeem or otherwise acquire any shares of Kernel or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Person. Except as set forth in Schedule 4.5(e), there are no shareholders agreements, voting trusts or other agreements or understandings to which Kernel is a party with respect to the voting of any shares of Kernel.
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(f) All Indebtedness of Kernel as of the date of this Agreement is disclosed on Schedule 4.5(f). No Indebtedness of Kernel contains any restriction upon (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by Kernel or (iii) the ability of Kernel to grant any Lien on its properties or assets.
(g) Since the date of formation of Kernel, and except as contemplated by this Agreement, Kernel has not declared or paid any distribution or dividend in respect of its shares and has not repurchased, redeemed or otherwise acquired any of its shares, and Kernel’s board of directors has not authorized any of the foregoing.
4.6 SEC Filings and Kernel Financials.
(a) Kernel, since the IPO, has filed all forms, reports, schedules, statements, registration statements, prospectuses and other documents required to be filed or furnished by Kernel with the SEC under the Securities Act and/or the Exchange Act, together with any amendments, restatements or supplements thereto, and will file all such forms, reports, schedules, statements and other documents required to be filed subsequent to the date of this Agreement. Except to the extent available on the SEC’s web site through EDGAR, Kernel has delivered to the Company copies in the form filed with the SEC of all of the following: (i) Kernel’s annual reports on Form 10-K for each fiscal year of Kernel beginning with the first year Kernel was required to file such a form, (ii) Kernel’s quarterly reports on Form 10-Q for each fiscal quarter that Kernel filed such reports to disclose its quarterly financial results in each of the fiscal years of Kernel referred to in clause (i) above, (iii) all other forms, reports, registration statements, prospectuses and other documents (other than preliminary materials) filed by Kernel with the SEC since the beginning of the first fiscal year referred to in clause (i) above (the forms, reports, registration statements, prospectuses and other documents referred to in clauses (i), (ii) and (iii) above, whether or not available through EDGAR, are, collectively, the “SEC Reports”) and (iv) all certifications and statements required by (A) Rules 13a-14 or 15d-14 under the Exchange Act, and (B) 18 U.S.C. §1350 (Section 906 of SOX) with respect to any report referred to in clause (i) above (collectively, the “Public Certifications”). The SEC Reports (x) were prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (y) did not, as of their respective effective dates (in the case of SEC Reports that are registration statements filed pursuant to the requirements of the Securities Act) and at the time they were filed with the SEC (in the case of all other SEC Reports) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The Public Certifications are each true as of their respective dates of filing. As used in this Section 4.6(a), the term “file” shall be broadly construed to include any manner permitted by SEC rules and regulations in which a document or information is furnished, supplied or otherwise made available to the SEC. As of the date of this Agreement, (A) the Old Kernel Public Units, the shares of Old Kernel Class A Common Stock and the Old Kernel Public Warrants are listed on Nasdaq, (B) Kernel has not received any written deficiency notice from Nasdaq relating to the continued listing requirements of such Kernel Securities, (C) there are no Actions pending or, to the Knowledge of Kernel, threatened against Kernel by the Financial Industry Regulatory Authority with respect to any intention by such entity to suspend, prohibit or terminate the quoting of such Kernel Securities on Nasdaq and (D) such Kernel Securities are in compliance with all of the applicable corporate governance rules of Nasdaq.
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(b) The financial statements and notes of Kernel contained or incorporated by reference in the SEC Reports (the “Kernel Financials”), fairly present in all material respects the financial position and the results of operations, changes in shareholders’ equity, and cash flows of Kernel at the respective dates of and for the periods referred to in such financial statements, all in accordance with (i) GAAP methodologies applied on a consistent basis throughout the periods involved and (ii) Regulation S-X or Regulation S-K, as applicable (except as may be indicated in the notes thereto and for the omission of notes and audit adjustments in the case of unaudited quarterly financial statements to the extent permitted by Regulation S-X or Regulation S-K, as applicable).
(c) Except as and to the extent reflected or reserved against in Kernel Financials, Kernel has not incurred any Liabilities or obligations of the type required to be reflected on a balance sheet in accordance with GAAP that are not adequately reflected or reserved on or provided for in Kernel Financials, other than Liabilities of the type required to be reflected on a balance sheet in accordance with GAAP that have been incurred since Kernel’s formation in the ordinary course of business.
4.7 Absence of Certain Changes. As of the date of this Agreement, except as set forth in Schedule 4.7, Kernel has, (a) to the Knowledge of Kernel, since its formation, conducted no business other than its formation, the public offering of its securities (and the related private offerings), public reporting and its search for an initial Business Combination as described in the IPO Prospectus (including the investigation of the Target Companies and the negotiation and execution of this Agreement) and related activities and (b) since its formation, not been subject to a Material Adverse Effect on Kernel.
4.8 Compliance with Laws. Kernel is, and has since its formation been, in compliance with all Laws applicable to it and the conduct of its business except for such noncompliance which would not reasonably be expected to have a Material Adverse Effect on Kernel, and Kernel has not received written notice alleging any violation of applicable Law in any material respect by Kernel.
4.9 Actions; Orders; Permits. There is no pending or, to the Knowledge of Kernel, threatened material Action to which Kernel is subject which would reasonably be expected to have a Material Adverse Effect on Kernel. There is no material Action that Kernel has pending against any other Person. Kernel is not subject to any material Orders of any Governmental Authority, nor are any such Orders pending. Kernel holds all material Permits necessary to lawfully conduct its business as presently conducted, and to own, lease and operate its assets and properties, all of which are in full force and effect, except where the failure to hold such Consent or for such Consent to be in full force and effect would not reasonably be expected to have a Material Adverse Effect on Kernel.
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4.10 Taxes and Returns.
(a) Kernel has timely filed, or caused to be timely filed, all material Tax Returns required to be filed by it, which such Tax Returns are accurate and complete in all material respects, and has paid, collected or withheld, or caused to be paid, collected or withheld, all material Taxes required to be paid, collected or withheld, other than such Taxes for which adequate reserves in Kernel Financials have been established in accordance with GAAP. Schedule 4.10(a) sets forth each jurisdiction where Kernel files or is required to file a Tax Return. There are no audits, examinations, investigations or other proceedings pending against Kernel in respect of any Tax, and Kernel has not been notified in writing of any proposed Tax claims or assessments against Kernel (other than, in each case, claims or assessments for which adequate reserves in Kernel Financials have been established in accordance with GAAP or are immaterial in amount). There are no Liens with respect to any Taxes upon any of Kernel’s assets, other than Permitted Liens. Kernel has no outstanding waivers or extensions of any applicable statute of limitations to assess any material amount of Taxes. There are no outstanding requests by Kernel for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any Tax Return.
(b) Since the date of its formation, Kernel has not (i) changed any Tax accounting methods, policies or procedures except as required by a change in Law, (ii) made, revoked, or amended any material Tax election, (iii) filed any amended Tax Returns or claim for refund or (iv) entered into any closing agreement affecting or otherwise settled or compromised any material Tax Liability or refund.
4.11 Employees and Employee Benefit Plans. Kernel does not (a) have any paid employees or (b) maintain, sponsor, contribute to or otherwise have any Liability under, any Benefit Plans.
4.12 Properties. Kernel does not own, license or otherwise have any right, title or interest in any material Intellectual Property. Kernel does not own or lease any material real property or material Personal Property.
4.13 Material Contracts.
(a) Except as set forth on Schedule 4.13(a), other than this Agreement and the Ancillary Documents, there are no Contracts to which Kernel is a party or by which any of its properties or assets may be bound, subject or affected, which (i) creates or imposes a Liability greater than $100,000, (ii) may not be cancelled by Kernel on less than sixty (60) days’ prior notice without payment of a material penalty or termination fee or (iii) prohibits, prevents, restricts or impairs in any material respect any business practice of Kernel as its business is currently conducted, any acquisition of material property by Kernel, or restricts in any material respect the ability of Kernel to engage in business as currently conducted by it or compete with any other Person (each, a “Kernel Material Contract”). All Kernel Material Contracts have been made available to the Company.
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(b) With respect to each Kernel Material Contract: (i) Kernel Material Contract was entered into at arms’ length and in the ordinary course of business; (ii) Kernel Material Contract is legal, valid, binding and enforceable in all material respects against Kernel and, to the Knowledge of Kernel, the other parties thereto, and is in full force and effect (except, in each case, as such enforcement may be limited by the Enforceability Exceptions); (iii) Kernel is not in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default in any material respect by Kernel, or permit termination or acceleration by the other party, under such Kernel Material Contract; and (iv) to the Knowledge of Kernel, no other party to any Kernel Material Contract is in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default by such other party, or permit termination or acceleration by Kernel under any Kernel Material Contract.
4.14 Transactions with Affiliates. Schedule 4.14 sets forth a true, correct and complete list of the Contracts and arrangements that are in existence as of the date of this Agreement under which there are any existing or future Liabilities or obligations between Kernel and any (a) present or former director, officer or employee or Affiliate of Kernel, or any immediate family member of any of the foregoing, or (b) record or beneficial owner of more than five percent (5%) of Kernel’s outstanding capital stock as of the date hereof.
4.15 Merger Sub Activities. Since its formation, Merger Sub has not engaged in any business activities other than as contemplated by this Agreement, does not own directly or indirectly any ownership, equity, profits or voting interest in any Person and has no assets or Liabilities except those incurred in connection with this Agreement and the Ancillary Documents to which it is a party and the Transactions, and, other than this Agreement and the Ancillary Documents to which it is a party, Merger Sub is not party to or bound by any Contract.
4.16 Investment Company Act. Kernel is not an “investment company” or a Person directly or indirectly “controlled” by or acting on behalf of an “investment company”, or required to register as an “investment company”, in each case within the meaning of the Investment Company Act of 1940, as amended.
4.17 Finders and Brokers. Except as set forth on Schedule 4.17, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission from Kernel, the Target Companies or any of their respective Affiliates in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Kernel.
4.18 Ownership of Merger Consideration. All shares of Kernel Common Stock to be issued and delivered to the Company Stockholders as Merger Consideration in accordance with Article I shall be, upon issuance and delivery of such Kernel Common Stock, fully paid and non-assessable, free and clear of all Liens, other than restrictions arising from applicable securities Laws, any applicable Lock-Up Agreement, and any Liens incurred by any Company Stockholder, and the issuance and sale of such Kernel Common Stock pursuant to this Agreement will not be subject to or give rise to any preemptive rights or rights of first refusal.
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4.19 Certain Business Practices.
(a) Neither Kernel, nor any of its Representatives acting on its behalf, has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees, to foreign or domestic political parties or campaigns or violated any provision of the U.S. Foreign Corrupt Practices Act of 1977 or any other local or foreign anti-corruption or bribery Law, (iii) made any other unlawful payment or (iv) since the formation of Kernel, directly or indirectly, given or agreed to give any unlawful gift or similar benefit in any material amount to any customer, supplier, governmental employee or other Person who is or may be in a position to help or hinder Kernel or assist it in connection with any actual or proposed transaction.
(b) The operations of Kernel are and have been conducted at all times in material compliance with money laundering statutes in all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Authority, and no Action involving Kernel with respect to any of the foregoing is pending or, to the Knowledge of Kernel, threatened.
(c) None of Kernel or any of its directors or officers, or, to the Knowledge of Kernel, any other Representative acting on behalf of Kernel is currently identified on the specially designated nationals or other blocked person list or otherwise currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”), and Kernel has not, in the last five (5) fiscal years, directly or indirectly, used any funds, or loaned, contributed or otherwise made available such funds to any Subsidiary, joint venture partner or other Person, in connection with any sales or operations in any other country sanctioned by OFAC or for the purpose of financing the activities of any Person currently subject to, or otherwise in violation of, any U.S. sanctions administered by OFAC.
4.20 Insurance. Schedule 4.20 lists all insurance policies held by Kernel relating to Kernel or its business, properties, assets, directors, officers and employees, copies of which have been provided to the Company. All premiums due and payable under all such insurance policies have been timely paid and Kernel is otherwise in material compliance with the terms of such insurance policies. All such insurance policies are in full force and effect, and to the Knowledge of Kernel, there is no threatened termination of, or material premium increase with respect to, any of such insurance policies. There have been no insurance claims made by Kernel. Kernel has each reported to its insurers all claims and pending circumstances that would reasonably be expected to result in a claim, except where such failure to report such a claim would not be reasonably likely to have a Material Adverse Effect on Kernel.
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4.21 Independent Investigation. Kernel has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Target Companies, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of the Target Companies for such purpose. Kernel acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of the Company set forth in this Agreement (including the related portions of the Company Disclosure Schedules) and in any certificate delivered to Kernel pursuant to this Agreement, and the information provided by or on behalf of the Company for the Registration Statement; and (b) none of the Company nor its respective Representatives have made any representation or warranty as to the Target Companies, or this Agreement, except as expressly set forth in this Agreement (including the related portions of the Company Disclosure Schedules) or in any certificate delivered to Kernel pursuant hereto, or with respect to the information provided by or on behalf of the Company for the Registration Statement.
Article V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedules delivered by the Company to Kernel on the date hereof and as updated in accordance with Section 6.26 (the “Company Disclosure Schedules”), the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, the Company hereby represents and warrants to Kernel, as of the date hereof and as of the Closing, as follows:
5.1 Organization and Standing. The Company is a corporation duly incorporated, validly existing and in good standing under the DGCL and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each Subsidiary of the Company is a corporation or other entity duly formed, validly existing and in good standing under the Laws of its jurisdiction of organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted except as would not have a Material Adverse Effect on the business and operations of the Target Companies taken as a whole. Each Target Company is duly qualified or licensed and in good standing in the jurisdiction in which it is incorporated or registered and in each other jurisdiction where it does business or operates to the extent that the character of the property owned, or leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary. Schedule 5.1 lists all jurisdictions in which any Target Company is qualified to conduct business and all names other than its legal name under which any Target Company does business. The Company has provided to ParentCo accurate and complete copies of its Organizational Documents and the Organizational Documents of each of its Subsidiaries, each as amended to date and as currently in effect. A correct and complete list of the directors and officers of each Target Company is set forth on Schedule 5.1. Except as set forth in Schedule 5.1, no Person has any right to designate any director or officer of any Target Company. No Target Company is in violation of any provision of its Organizational Documents.
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5.2 Authorization; Binding Agreement. The Company has all requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Document to which it is or is required to be a party, to perform the Company’s obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby, subject to obtaining the Required Company Stockholder Approval. The execution and delivery of this Agreement and each Ancillary Document to which the Company is or is required to be a party and the consummation of the transactions contemplated hereby and thereby, (a) have been duly and validly authorized by the Company’s board of directors in accordance with the Company’s Organizational Documents, the DGCL, any other applicable Law or any Contract to which the Company or any of its stockholders is a party or by which it or its securities are bound and (b) other than the Required Company Stockholder Approval, no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement and each Ancillary Document to which it is a party or to consummate the transactions contemplated hereby and thereby. This Agreement has been, and each Ancillary Document to which the Company is or is required to be a party shall be when delivered, duly and validly executed and delivered by the Company and assuming the due authorization, execution and delivery of this Agreement and any such Ancillary Document by the other parties hereto and thereto, constitutes, or when delivered shall constitute, the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. The Company’s board of directors, by resolutions duly adopted at a meeting duly called and held (i) determined that this Agreement and the Merger and the other transactions contemplated hereby are advisable, fair to, and in the best interests of, the Company, its Subsidiaries and its stockholders, (ii) approved this Agreement and the Merger and the other transactions contemplated by this Agreement in accordance with the DGCL, (iii) directed that this Agreement be submitted to the Company’s stockholders for adoption and (iv) resolved to recommend that the Company stockholders adopt this Agreement.
5.3 Capitalization.
(a) The Company is authorized to issue 35,000,000 shares of Company Common Stock, 27,858,276 of which shares are issued and outstanding. Additionally, (i) pursuant to the Warrant to Purchase Equity, dated March 10, 2022 (the “Stephenson Warrant”) between the Company and Stephenson Management Inc. (“Stephenson”), Stephenson has the right to subscribe for 56,123 shares of Company Common Stock, (ii) pursuant to the Warrant to Purchase Equity, dated March 10, 2022 (the “Scarsdale Warrant”, and collectively with the Stephenson Warrant, the “Company Warrants”) between the Company and Scarsdale Capital Inc. (“Scarsdale”), Scarsdale has the right to subscribe for 56,123 shares of Company Common Stock, (iii) there are 605,236 shares of Company Common Stock reserved for issuance under the AIRO Group Holdings, Inc. Option Plan, all of which are issued and outstanding (the “Company Options”); (iv) 431,818 shares of Company Common Stock issued and outstanding pursuant to restricted stock awards (the “RSUs”) and (v) shares of Company Common Stock payable as IPO Interest Charges, as defined in those certain Unsecured Promissory Notes listed on Schedule 5.3(a) (the “Bridge Financing Notes”). Besides the foregoing, there are no other series or class of Company Stock (including preferred stock), or other warrants, options or rights entitling any other Person to Company Stock. Prior to giving effect to the transactions contemplated by this Agreement, all of the issued and outstanding Company Stock and other equity interests of the Company are set forth on Schedule 5.3(a), along with the record owners thereof, all of which shares and other equity interests are owned free and clear of any Liens other than those imposed under the Company Charter. All of the outstanding shares and other equity interests of the Company have been duly authorized, are fully paid and non-assessable and not in violation of any purchase option, right of first refusal or first offer, preemptive right, subscription right or any similar right under any provision of the DGCL, any other applicable Law, the Company’s Organizational Documents or any Contract to which the Company is a party or by which it or its securities are bound. The Company holds no shares or other equity interests of the Company in its treasury. None of the outstanding shares or other equity interests of the Company were issued in violation of any applicable securities Laws.
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(b) Other than as set forth on Schedule 5.3(b), there are no Company Convertible Securities, or preemptive rights or rights of first refusal or first offer, nor are there any Contracts, commitments, arrangements or restrictions to which the Company or, to the Knowledge of the Company, any of its stockholders is a party or bound relating to any equity securities of the Company, whether or not outstanding. There are no outstanding or authorized equity appreciation, phantom equity or similar rights with respect to the Company. Except as set forth on Schedule 5.3(b), there are no voting trusts, proxies, shareholder agreements or any other agreements or understandings with respect to the voting of the Company’s equity interests. Except as set forth in the Company’s Organizational Documents, there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any equity interests or securities of the Company, nor has the Company granted any registration rights to any Person with respect to the Company’s equity securities. All of the Company’s securities have been granted, offered, sold and issued in compliance with all applicable securities Laws. As a result of the consummation of the transactions contemplated by this Agreement, no equity interests of the Company are issuable and no rights in connection with any interests, warrants, rights, options or other securities of the Company accelerate or otherwise become triggered (whether as to vesting, exercisability, convertibility or otherwise).
(c) Except as disclosed in the Company Financials, since its formation, the Company has not declared or paid any distribution or dividend in respect of its equity interests and has not repurchased, redeemed or otherwise acquired any equity interests of the Company, and the board of directors of the Company has not authorized any of the foregoing.
5.4 Subsidiaries. Schedule 5.4 sets forth the name of each Subsidiary of the Company, and with respect to each Subsidiary of the Company (a) its jurisdiction of organization, (b) its authorized shares or other equity interests (if applicable), (c) the number of issued and outstanding shares or other equity interests and the record holders and beneficial owners thereof, (d) its Tax election to be treated as a corporate or a disregarded entity under the Code and any state or applicable non-U.S. Tax laws, if any, and (e) any limitation on the ability of the Company to exercise voting control of its Subsidiary, if any. All of the outstanding equity securities of each Subsidiary of the Company are duly authorized and validly issued, fully paid and non-assessable (if applicable), and were offered, sold and delivered in compliance with all applicable securities Laws, and are owned by the Company free and clear of all Liens. There are no Contracts to which the Company or any of its Affiliates is a party or bound with respect to the voting (including voting trusts or proxies) of the equity interests of any Subsidiary of the Company other than the Organizational Documents of any such Subsidiary, and consummating the transactions contemplated by this Agreement will not result in a change in control or otherwise give rights to any equity holder in any Company Subsidiary. There are no outstanding or authorized options, warrants, rights, agreements, subscriptions, convertible securities or commitments to which any Subsidiary of the Company is a party or which are binding upon any Subsidiary of the Company providing for the issuance or redemption of any equity interests of any Subsidiary of the Company. The Company owns all of the outstanding equity securities of its Subsidiaries directly free and clear of all Liens. There are no outstanding equity appreciation, phantom equity, profit participation or similar rights granted by any Subsidiary of the Company. No Subsidiary of the Company has any limitation, whether by Contract, Order or applicable Law, on its ability to make any distributions or dividends to its equity holders or repay any debt owed to another Target Company. Except for the equity interests of the Company’s Subsidiaries listed on Schedule 5.4, no Target Company owns or has the right to acquire, directly or indirectly, any equity interests of, or otherwise Control, any Person. Except as set forth on Schedule 5.4, neither the Company nor its Subsidiaries is a participant in any joint venture, partnership or similar arrangement. There are no outstanding contractual obligations of the Company or its Subsidiaries to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other Person.
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5.5 Governmental Approvals. Except as otherwise described in Schedule 5.5, no Consent of or with any Governmental Authority on the part of any Target Company is required to be obtained or made, nor are any novation agreements required to be entered into with any Governmental Authority relating to any material government contract or otherwise, in connection with the execution, delivery or performance by the Company of this Agreement or any Ancillary Documents or the consummation by the Company of the transactions contemplated hereby or thereby other than (a) such filings as are expressly contemplated by this Agreement or (b) pursuant to Antitrust Laws.
5.6 Non-Contravention. Except as otherwise described in Schedule 5.6, the execution and delivery by the Company (or any other Target Company, as applicable) of this Agreement and each Ancillary Document to which any Target Company is or is required to be a party or otherwise bound, and the consummation by any Target Company of the transactions contemplated hereby and thereby and compliance by any Target Company with any of the provisions hereof and thereof, will not (a) conflict with or violate any provision of any Target Company’s Organizational Documents, (b) subject to obtaining the Consents from Governmental Authorities referred to in Section 4.3 hereof, the waiting periods referred to therein having expired, and any condition precedent to such Consent or waiver having been satisfied, conflict with or violate any Law, Order or Consent applicable to any Target Company or any of its properties or assets, or (c) (i) violate, conflict with or result in a breach of, (ii) constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, (iii) result in the termination, withdrawal, suspension, cancellation or modification of, (iv) accelerate the performance required by any Target Company under, (v) result in a right of termination or acceleration under, (vi) give rise to any obligation to make payments or provide compensation under, (vii) result in the creation of any Lien upon any of the properties or assets of any Target Company under, (viii) give rise to any obligation to obtain any third party Consent or provide any notice to any Person or (ix) give any Person the right to declare a default, exercise any remedy, claim a rebate, chargeback, penalty or change in delivery schedule, accelerate the maturity or performance, cancel, terminate or modify any right, benefit, obligation or other term under, any of the terms, conditions or provisions of any Company Material Contract.
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5.7 Financial Statements.
(a) As used herein, the term “Company Financials” means the (i) audited consolidated financial statements of the Target Companies (including, in each case, any related notes thereto), consisting of the consolidated balance sheets of the Target Companies as of December 31, 2021 and December 31, 2020, and the related consolidated audited income statements, changes in stockholder equity and statements of cash flows for the fiscal years then ended, each audited by a PCAOB qualified auditor in accordance with GAAP and PCAOB standards (the “Audited Company Financials”), (ii) the Company prepared unaudited financial statements, consisting of the consolidated balance sheet of the Target Companies as of December 31, 2022 (the “Interim Balance Sheet Date”) and the related consolidated income statement, changes in stockholder equity and statement of cash flows for the twelve (12) months then ended. True and correct copies of the Company Financials have been provided to ParentCo. The Company Financials (i) accurately reflect the books and records of the Target Companies as of the times and for the periods referred to therein, (ii) were prepared in accordance with GAAP, consistently applied throughout and among the periods involved (except that the unaudited statements exclude the footnote disclosures and other presentation items required for GAAP and exclude year-end adjustments which will not be material in amount), (iii) comply with all applicable accounting requirements under the Securities Act and the rules and regulations of the SEC thereunder, and (iv) fairly present in all material respects the consolidated financial position of the Target Companies as of the respective dates thereof and the consolidated results of the operations and cash flows of the Target Companies for the periods indicated in accordance with GAAP. No Target Company has ever been subject to the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act.
(b) Each Target Company maintains accurate books and records reflecting its assets and Liabilities and maintains proper and adequate internal accounting controls that provide reasonable assurance that the following is done in accordance with GAAP: (i) such Target Company does not maintain any off-the-book accounts and that such Target Company’s assets are used only in accordance with such Target Company’s management directives, (ii) transactions are executed with management’s authorization, (iii) transactions are recorded as necessary to permit preparation of the financial statements of such Target Company and to maintain accountability for such Target Company’s assets, (iv) access to such Target Company’s assets is permitted only in accordance with management’s authorization, (v) the reporting of such Target Company’s assets is compared with existing assets at regular intervals and verified for actual amounts, and (vi) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection of accounts, notes and other receivables on a current and timely basis. All of the financial books and records of the Target Companies are complete and accurate in all material respects and have been maintained in the ordinary course consistent with past practice and in accordance with applicable Laws. No Target Company has been subject to or involved in any material fraud that involves management or other employees who have a significant role in the internal controls over financial reporting of any Target Company. No Target Company or any of its Representatives has ever received any written complaint, allegation, assertion or claim regarding the accounting or auditing practices, procedures, methodologies or methods of any Target Company or its internal accounting controls, including any material written complaint, allegation, assertion or claim that any Target Company has engaged in questionable accounting or auditing practices.
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(c) The Target Companies do not have any Indebtedness other than the Indebtedness set forth on Schedule 5.7(c), which schedule sets forth the amounts (including principal and any accrued but unpaid interest or other obligations) and maturity date with respect to such Indebtedness. Except as disclosed on Schedule 5.7(c), no Indebtedness of any Target Company contains any restriction upon (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by any Target Company, or (iii) the ability of the Target Companies to grant any Lien on their respective properties or assets.
(d) Except as set forth on Schedule 5.7(d), no Target Company is subject to any Liabilities or obligations (whether or not required to be reflected on a balance sheet prepared in accordance with GAAP), including any off-balance sheet obligations, except for those that are either (i) adequately reflected or reserved on or provided for in the consolidated balance sheet of the Company and its Subsidiaries as of the Interim Balance Sheet Date contained in the Company Financials in accordance with GAAP or (ii) not material and that were incurred after the Interim Balance Sheet Date in the ordinary course of business consistent with past practice (other than Liabilities for breach of any Contract or violation of any Law).
(e) All financial projections with respect to the Target Companies that were delivered by or on behalf of the Company to ParentCo or its Representatives were prepared in good faith using assumptions that the Company believes to be reasonable.
(f) All accounts, notes and other receivables, whether or not accrued, and whether or not billed, of the Target Companies (the “Accounts Receivable”) arose from sales actually made or services actually performed in the ordinary course of business and represent valid obligations to a Target Company arising from its business. None of the Accounts Receivable are subject to any right of recourse, defense, deduction, return of goods, counterclaim, offset, or set off on the part of the obligor in excess of any amounts reserved therefore on the Company Financials. All of the Accounts Receivable are, to the Knowledge of the Company, fully collectible according to their terms in amounts not less than the aggregate amounts thereof carried on the books of the Target Companies (net of reserves) within ninety (90) days.
5.8 Absence of Certain Changes. Except as set forth on Schedule 5.8, since September 30, 2022, each Target Company has (a) conducted its business only in the ordinary course of business consistent with past practice, (b) not been subject to a Material Adverse Effect and (c) has not taken any action or committed or agreed to take any action that would be prohibited by Section 6.2 (without giving effect to Schedule 6.2(b)) if such action were taken on or after the date hereof without the consent of Kernel.
5.9 Compliance with Laws including Privacy Laws. Except as set forth on Schedule 5.9, no Target Company is or has been in material conflict or material non-compliance with, or in material default or violation of, nor has any Target Company received, since January 1, 2017, any written or, to the Knowledge of the Company, oral notice of any material conflict or non-compliance with, or material default or violation of, any applicable Laws by which it or any of its properties, assets, officers or directors, employees or consultants, business or operations are or were bound or affected including, without limitation, all applicable laws regarding the handling of Personal Data. Except as set forth on Schedule 5.9:
(a) No Target Company has experienced any loss, damage or unauthorized access, use, disclosure or modification, or breach of security of Personal Data maintained by or on behalf of any Target Company (including, to the Knowledge of the Company, by any agent, subcontractor or vendor of a Target Company);
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(b) To the Knowledge of the Company, all activities conducted by a Target Company with respect to any Personal Data are permitted under the Contracts relating to Personal Data.
5.10 Company Permits. Except as described on Schedule 5.10, each Target Company (and its employees who are legally required to be licensed by a Governmental Authority in order to perform his or her duties with respect to his or her employment with any Target Company), holds all Permits necessary to lawfully conduct in all material respects its business as presently conducted and as currently contemplated to be conducted, and to own, lease and operate its assets and properties (collectively, the “Company Permits”). The Company has made available, or shall make available at least fifteen (15) days prior to Closing, to ParentCo true, correct and complete copies of all Company Permits, all of which Company Permits are listed on Schedule 5.10. All of the Company Permits are in full force and effect, and no suspension or cancellation of any of the Company Permits is pending or, to the Company’s Knowledge, threatened. No Target Company is in violation in any material respect of the terms of any Company Permit, and no Target Company has received any written or, to the Knowledge of the Company, oral notice of any Actions relating to the revocation or modification of any Company Permit.
5.11 Litigation. Except as described on Schedule 5.11, there is no (a) Action of any nature currently pending or, to the Company’s Knowledge, threatened, nor is there any reasonable basis for any Action to be made (and no such Action has been brought or, to the Company’s Knowledge, threatened in the past five (5) years); or (b) Order now pending or outstanding or that was rendered by a Governmental Authority in the past five (5) years, in either case of (a) or (b) by or against any Target Company, its current or former directors, officers or equity holders (provided, that any litigation involving the directors, officers or equity holders of a Target Company must be related to the Target Company’s business, equity securities or assets), its business, equity securities or assets. Except as described on Schedule 5.11, the items listed on Schedule 5.11, if finally determined adversely to the Target Companies, will not have, either individually or in the aggregate, a Material Adverse Effect upon any Target Company. In the past five (5) years, none of the current or former officers, senior management or directors of any Target Company have been charged with, indicted for, arrested for, or convicted of any felony or any crime involving fraud or been assessed any administrative fines following an investigation by a Governmental Authority.
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5.12 Material Contracts.
(a) Schedule 5.12(a) sets forth a true, correct and complete list of, and the Company has made available, or shall make available at least fifteen (15) days prior to Closing, to ParentCo (including written summaries of oral Contracts), true, correct and complete copies of, each Contract to which any Target Company is a party or by which any Target Company, or any of its properties or assets are bound or affected (each Contract required to be set forth on Schedule 5.12(a), a “Company Material Contract”) that:
(i) contains covenants that limit the ability of any Target Company (A) to compete in any line of business or with any Person or in any geographic area or to sell, or provide any service or product or solicit any Person, including any non-competition covenants, employee and customer non-solicit covenants, exclusivity restrictions, rights of first refusal or most-favored pricing clauses or (B) to purchase or acquire an interest in any other Person;
(ii) involves any joint venture, strategic partnership, profit-sharing, partnership, limited liability company or other similar agreement or arrangement relating to the formation, creation, operation, management or control of any partnership or joint venture;
(iii) involves any agreement relating to the supply of product to, the purchase of product for, or the performance of services by or to any Target Company, in each instance, which are material to the business and operations of the Company and Target Companies, taken as a whole;
(iv) involves any exchange traded, over the counter or other swap, cap, floor, collar, futures contract, forward contract, option or other derivative financial instrument or Contract, based on any commodity, security, instrument, asset, rate or index of any kind or nature whatsoever, whether tangible or intangible, including currencies, interest rates, foreign currency and indices;
(v) evidences Indebtedness (whether incurred, assumed, guaranteed or secured by any asset) of any Target Company having an outstanding principal amount in excess of $100,000;
(vi) involves the acquisition or disposition, directly or indirectly (by merger or otherwise), of assets with an aggregate value in excess of $100,000 (other than in the ordinary course of business consistent with past practice) or shares or other equity interests of any Target Company or another Person;
(vii) relates to any merger, consolidation or other business combination with any other Person or the acquisition or disposition of any other entity or its business or material assets or the sale of any Target Company, its business or material assets;
(viii) by its terms, individually or with all related Contracts, calls for aggregate payments or receipts by the Target Companies under such Contract or Contracts of at least $100,000 per year or $250,000 in the aggregate;
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(ix) is with any Top Customer or Top Supplier;
(x) obligates the Target Companies to provide continuing indemnification or a guarantee of obligations of a third party after the date hereof in excess of $100,000.
(xi) is between any Target Company and any directors, officers or employees of a Target Company (other than at-will employment arrangements with employees entered into in the ordinary course of business consistent with past practice), including all non-competition, severance and indemnification agreements, or any Related Person;
(xii) obligates the Target Companies to make any capital commitment or expenditure in excess of $100,000 (including pursuant to any joint venture);
(xiii) relates to a material settlement entered into within three (3) years prior to the date of this Agreement or under which any Target Company has outstanding obligations (other than customary confidentiality obligations);
(xiv) provides another Person (other than another Target Company or any manager, director or officer of any Target Company) with a power of attorney;
(xv) relates to the development, ownership, licensing or use of any Intellectual Property by, to or from any Target Company, other than Off-the-Shelf Software;
(xvi) that will be required to be filed with the Registration Statement under applicable SEC requirements or would otherwise be required to be filed by the Company as an exhibit for a Form S-1 pursuant to Items 601(b)(1), (2), (4), (9) or (10) of Regulation S-K under the Securities Act as if the Company was the registrant; or
(xvii) is otherwise material to any Target Company and not described in clauses 5.12(a)(i) through 5.12(a)(xvii) above.
(b) Except as disclosed in Schedule 5.12(b), with respect to each Company Material Contract: (i) such Company Material Contract is valid and binding and enforceable in all respects against the Target Company party thereto and, to the Knowledge of the Company, each other party thereto, and is in full force and effect (except, in each case, as such enforcement may be limited by the Enforceability Exceptions); (ii) the consummation of the transactions contemplated by this Agreement will not affect the validity or enforceability of any Company Material Contract; (iii) no Target Company is in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute a material breach or default by any Target Company, or permit termination or acceleration by the other party thereto, under such Company Material Contract; (iv) to the Knowledge of the Company, no other party to such Company Material Contract is in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a material breach or default by such other party, or permit termination or acceleration by any Target Company, under such Company Material Contract; (v) no Target Company has received written or, to the Knowledge of the Company, oral notice of an intention by any party to any such Company Material Contract that provides for a continuing obligation by any party thereto to terminate such Company Material Contract or amend the terms thereof, other than modifications in the ordinary course of business that do not adversely affect any Target Company in any material respect; and (vi) no Target Company has waived any rights under any such Company Material Contract.
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5.13 Intellectual Property.
(a) Schedule 5.13(a)(i) sets forth: (i) all U.S. and foreign registered Patents, Trademarks, Copyrights and Internet Assets and applications owned or licensed by a Target Company or otherwise used or held for use by a Target Company in which a Target Company is the owner, applicant or assignee (“Company Registered IP”), specifying as to each item, as applicable: (A) the nature of the item, including the title, (B) the owner of the item, (C) the jurisdictions in which the item is issued or registered or in which an application for issuance or registration has been filed and (D) the issuance, registration or application numbers and dates; and (ii) all material unregistered Intellectual Property owned or purported to be owned by a Target Company. Schedule 5.13(a)(ii) sets forth all Intellectual Property licenses, sublicenses and other agreements or permissions (“Company IP Licenses”) (other than “shrink wrap,” “click wrap,” and “off the shelf” software agreements and other agreements for Software commercially available on reasonable terms to the public generally with license, maintenance, support and other fees of less than $20,000 per year (collectively, “Off-the-Shelf Software”), which are not required to be listed, although such licenses are “Company IP Licenses” as that term is used herein), under which a Target Company is a licensee or otherwise is authorized to use or practice any Intellectual Property, and describes (A) the applicable Intellectual Property licensed, sublicensed or used and (B) any royalties, license fees or other compensation due from a Target Company, if any. Each Target Company owns, free and clear of all Liens (other than Permitted Liens), has valid and enforceable rights in, and has the unrestricted right to use, sell, license, transfer or assign, all Intellectual Property currently used, licensed or held for use by such Target Company, and previously used or licensed by such Target Company, except for the Intellectual Property that is the subject of the Company IP Licenses. No item of Company Registered IP that consists of a pending Patent application fails to identify all pertinent inventors, and for each Patent and Patent application in the Company Registered IP, the Target Companies have obtained valid assignments of inventions from each inventor. Except as set forth on Schedule 5.13(a)(iii), all Company Registered IP is owned exclusively by the applicable Target Company without obligation to pay royalties, licensing fees or other fees, or otherwise account to any third party with respect to such Company Registered IP, and such Target Company has recorded assignments of all Company Registered IP.
(b) Each Target Company has a valid and enforceable license to use all Intellectual Property that is the subject of the Company IP Licenses applicable to such Target Company. The Company IP Licenses include all of the licenses, sublicenses and other agreements or permissions necessary to operate the Target Companies as presently conducted. Each Target Company has performed all obligations imposed on it in the Company IP Licenses, has made all payments required to date, and such Target Company is not, nor, to the Knowledge of the Company, is any other party thereto, in breach or default thereunder, nor has any event occurred that with notice or lapse of time or both would constitute a default thereunder. The continued use by the Target Companies of the Intellectual Property that is the subject of the Company IP Licenses in the same manner that it is currently being used is not restricted by any applicable license of any Target Company. All registrations for Copyrights, Patents, Trademarks and Internet Assets that are owned by or exclusively licensed to any Target Company are valid, in force and in good standing with all required fees and maintenance fees having been paid with no Actions pending, and all applications to register any Copyrights, Patents and Trademarks are pending and in good standing, all without challenge of any kind. No Target Company is party to any Contract that requires a Target Company to assign to any Person all of its rights in any Intellectual Property developed by a Target Company under such Contract.
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(c) Schedule 5.13(c) sets forth all licenses, sublicenses and other agreements or permissions under which a Target Company is the licensor (each, an “Outbound IP License”), and for each such Outbound IP License, describes (i) the applicable Intellectual Property licensed, (ii) the licensee under such Outbound IP License, and (iii) any royalties, license fees or other compensation due to a Target Company, if any. Each Target Company has performed all obligations imposed on it in the Outbound IP Licenses, and such Target Company is not, nor, to the Knowledge of the Company, is any other party thereto, in breach or default thereunder, nor has any event occurred that with notice or lapse of time or both would constitute a default thereunder.
(d) No Action is pending or, to the Company’s Knowledge, threatened against a Target Company that challenges the validity, enforceability, ownership, or right to use, sell, license or sublicense, or that otherwise relates to, any Intellectual Property currently owned, licensed, used or held for use by the Target Companies, nor, to the Knowledge of the Company, is there any reasonable basis for any such Action. No Target Company has received any written or, to the Knowledge of the Company, oral notice or claim asserting or suggesting that any infringement, misappropriation, violation, dilution or unauthorized use of the Intellectual Property of any other Person is or may be occurring or has or may have occurred, as a consequence of the business activities of any Target Company, nor to the Knowledge of the Company is there a reasonable basis therefor. There are no Orders to which any Target Company is a party or its otherwise bound that (i) restrict the rights of a Target Company to use, transfer, license or enforce any Intellectual Property owned by a Target Company, (ii) restrict the conduct of the business of a Target Company in order to accommodate a third Person’s Intellectual Property, or (iii) other than the Outbound IP Licenses, grant any third Person any right with respect to any Intellectual Property owned by a Target Company. No Target Company is currently infringing, or has, in the past, infringed, misappropriated or violated any Intellectual Property of any other Person in any material respect in connection with the ownership, use or license of any Intellectual Property owned or purported to be owned by a Target Company or, to the Knowledge of the Company, otherwise in connection with the conduct of the respective businesses of the Target Companies. To the Company’s Knowledge, no third party is currently, or in the past five (5) years has been, infringing upon, misappropriating or otherwise violating any Intellectual Property owned, licensed by, licensed to, or otherwise used or held for use by any Target Company (“Company IP”) in any material respect.
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(e) Except as set forth in Schedule 5.13(e), all officers, directors, employees and independent contractors of a Target Company (and each of their respective Affiliates) have assigned to the Target Companies all Intellectual Property arising from the services performed for a Target Company by such Persons and all such assignments of Company Registered IP have been recorded. Except as set forth in Schedule 5.13(e), no current or former officers, employees or independent contractors of a Target Company have claimed any ownership interest in any Intellectual Property owned by a Target Company. To the Knowledge of the Company, there has been no violation of a Target Company’s policies or practices related to protection of Company IP or any confidentiality or nondisclosure Contract relating to the Intellectual Property owned by a Target Company. The Company has made available, or shall make available at least fifteen (15) days prior to Closing, to ParentCo true and complete copies of all written Contracts referenced in subsections under which employees and independent contractors assigned their Intellectual Property to a Target Company. To the Company’s Knowledge, none of the employees of any Target Company is obligated under any Contract, or subject to any Order, that would materially interfere with the use of such employee’s best efforts to promote the interests of the Target Companies, or that would materially conflict with the business of any Target Company as presently conducted or contemplated to be conducted. Each Target Company has taken reasonable security measures in order to protect the secrecy, confidentiality and value of the material Company IP.
(f) To the Knowledge of the Company, no Person has obtained unauthorized access to third party information and data (including personally identifiable information) in the possession of a Target Company, nor has there been any other material compromise of the security, confidentiality or integrity of such information or data, and no written or, to the Knowledge of the Company, oral complaint relating to an improper use or disclosure of, or a breach in the security of, any such information or data has been received by a Target Company. Each Target Company has complied in all material respects with all applicable Laws and Contract requirements relating to privacy, personal data protection, and the collection, processing and use of personal information and its own privacy policies and guidelines. The operation of the business of the Target Companies has not and does not violate any right to privacy or publicity of any third person, or constitute unfair competition or trade practices under applicable Law.
(g) Except as set forth in Schedule 5.13(g), the consummation of any of the transactions contemplated by this Agreement will not result in the material breach, material modification, cancellation, termination, suspension of, or acceleration of any payments with respect to, or release of source code because of (i) any Contract providing for the license or other use of Intellectual Property owned by a Target Company, or (ii) any Company IP License. Following the Closing, the Company shall be permitted to exercise, directly or indirectly through its Subsidiaries, all of the Target Companies’ rights under such Contracts or Company IP Licenses to the same extent that the Target Companies would have been able to exercise had the transactions contemplated by this Agreement not occurred, without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Target Companies would otherwise be required to pay in the absence of such transactions.
(h) Schedule 5.13(h) contains a correct, current, and complete list of all social media accounts used in the Target Companies’ business. The Target Companies have complied with all terms of use, terms of service, and other Contracts and all associated policies and guidelines relating to its use of any social media platforms, sites, or services (collectively, “Platform Agreements”). There are no Actions, whether settled, pending, or threatened, alleging any (A) breach or other violation of any Platform Agreement by the Company; or (B) defamation, violation of publicity rights of any Person, or any other violation by the Company in connection with its use of social media.
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(i) All Target Company IT Systems are in good working condition and are sufficient for the operation of the Target Companies’ business as currently conducted and as proposed to be conducted. In the past five (5) years, there has been no malfunction, failure, continued substandard performance, denial-of-service, or other cyber incident, including any cyberattack, or other impairment of the Target Company IT Systems that has resulted or is reasonably likely to result in disruption or damage to the business of any of the Target Companies. The Target Companies have taken all commercially reasonable steps to safeguard the confidentiality, availability, security, and integrity of the Target Company IT Systems, including implementing and maintaining appropriate backup, disaster recovery, and Software and hardware support arrangements.
5.14 Taxes and Returns.
(a) Each Target Company has or will have timely filed, or caused to be timely filed, all federal, state, local and foreign Tax Returns required to be filed by it (taking into account all available extensions), which Tax Returns are true, accurate, correct and complete in all material respects, and has paid, collected or withheld, or caused to be paid, collected or withheld, all Taxes required to be paid, collected or withheld, other than such Taxes for which adequate reserves in the Company Financials have been established. Each Target Company has complied with all applicable Laws relating to Tax.
(b) There is no Action currently pending or, to the Knowledge of the Company, threatened against a Target Company by a Governmental Authority in a jurisdiction where the Target Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.
(c) No Target Company is being audited by any Tax authority or has been notified in writing or, to the Knowledge of the Company, orally by any Tax authority that any such audit is contemplated or pending. There are no claims, assessments, audits, examinations, investigations or other Actions pending against a Target Company in respect of any Tax, and no Target Company has been notified in writing of any proposed Tax claims or assessments against it (other than, in each case, claims or assessments for which adequate reserves in the Company Financials have been established).
(d) There are no Liens with respect to any Taxes upon any Target Company’s assets, other than Permitted Liens.
(e) Each Target Company has collected or withheld all Taxes currently required to be collected or withheld by it, and all such Taxes have been paid to the appropriate Governmental Authorities or set aside in appropriate accounts for future payment when due.
(f) No Target Company has any outstanding waivers or extensions of any applicable statute of limitations to assess any amount of Taxes. There are no outstanding requests by a Target Company for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any Tax Return.
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(g) No Target Company has made any change in accounting method (except as required by a change in Law) or received a ruling from, or signed an agreement with, any taxing authority that would reasonably be expected to have a material impact on its Taxes following the Closing.
(h) No Target Company has participated in, or sold, distributed or otherwise promoted, any “reportable transaction,” as defined in U.S. Treasury Regulation section 1.6011-4.
(i) No Target Company has any Liability or potential Liability for the Taxes of another Person (other than another Target Company) that are not adequately reflected in the Company Financials (i) under any applicable Tax Law, (ii) as a transferee or successor, or (iii) by contract, indemnity or otherwise (excluding commercial agreements entered into in the ordinary course of business the primary purpose of which is not the sharing of Taxes). No Target Company is a party to or bound by any Tax indemnity agreement, Tax sharing agreement or Tax allocation agreement or similar agreement, arrangement or practice (excluding commercial agreements entered into in the ordinary course of business the primary purpose of which is not the sharing of Taxes) with respect to Taxes (including advance pricing agreement, closing agreement or other agreement relating to Taxes with any Governmental Authority) that will be binding on any Target Company with respect to any period following the Closing Date.
(j) No Target Company has requested, or is the subject of or bound by any private letter ruling, technical advice memorandum, closing agreement or similar ruling, memorandum or agreement with any Governmental Authority with respect to any Taxes, nor is any such request outstanding.
(k) No Target Company: (i) has constituted either a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of securities (to any Person or entity that is not a member of the consolidated group of which the Company is the common parent corporation) qualifying for, or intended to qualify for, Tax-free treatment under Section 355 of the Code (A) within the two-year period ending on the date hereof or (B) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement; or (ii) is or has ever been (A) a U.S. real property holding corporation within the meaning of Section 897(c)(2) of the Code, or (B) a member of any consolidated, combined, unitary or affiliated group of corporations for any Tax purposes other than a group of which the Company is or was the common parent corporation.
(l) No Target Company is aware of any fact or circumstance that would reasonably be expected to prevent the Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code.
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5.15 Real Property. Schedule 5.15 contains a complete and accurate list of all premises currently leased or subleased or otherwise used or occupied by a Target Company for the operation of the business of a Target Company, and of all current leases, lease guarantees, agreements and documents related thereto, including all amendments, terminations and modifications thereof or waivers thereto (collectively, the “Company Real Property Leases”). The Company has provided to ParentCo a true and complete copy of each of the Company Real Property Leases. The Company Real Property Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. To the Knowledge of the Company, no event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default on the part of a Target Company or any other party under any of the Company Real Property Leases, and no Target Company has received notice of any such condition. No Target Company owns or has ever owned any real property or any interest in real property (other than the leasehold interests in the Company Real Property Leases).
5.16 Personal Property. Each item of Personal Property which is currently owned, used or leased by a Target Company with a book value or fair market value of greater than One Hundred Thousand Dollars ($100,000) is set forth on Schedule 5.16, along with, to the extent applicable, a list of lease agreements, lease guarantees, security agreements and other agreements related thereto, including all amendments, terminations and modifications thereof or waivers thereto (“Company Personal Property Leases”). Except as set forth in Schedule 5.16, all such items of Personal Property are in good operating condition and repair (reasonable wear and tear excepted consistent with the age of such items), and are suitable for their intended use in the business of the Target Companies. The operation of each Target Company’s business as it is now conducted or presently proposed to be conducted is not dependent upon the right to use the Personal Property of Persons other than a Target Company, except for such Personal Property that is owned, leased or licensed by or otherwise contracted to a Target Company. The Company has provided to ParentCo a true and complete copy of each of the Company Personal Property Leases, and in the case of any oral Company Personal Property Lease, a written summary of the material terms of such Company Personal Property Lease. The Company Personal Property Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. To the Knowledge of the Company, no event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default on the part of a Target Company or any other party under any of the Company Personal Property Leases, and no Target Company has received notice of any such condition.
5.17 Title to and Sufficiency of Assets. Each Target Company has good and marketable title to, or a valid leasehold interest in or right to use, all of its assets, free and clear of all Liens other than (a) Permitted Liens, (b) the rights of lessors under leasehold interests, (c) Liens specifically identified on the balance sheet as of the Interim Balance Sheet Date included in the Company Financials and (d) Liens set forth on Schedule 5.17. The assets (including Intellectual Property rights and contractual rights) of the Target Companies constitute all of the assets, rights and properties that are used in the operation of the businesses of the Target Companies as it is now conducted.
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5.18 Employee Matters.
(a) Except as set forth in Schedule 5.18(a), no Target Company is a party to any collective bargaining agreement or other Contract covering any group of employees, labor organization or other representative of any of the employees of any Target Company, and the Company has no Knowledge of any activities or proceedings of any labor union or other party to organize or represent such employees. There has not occurred or, to the Knowledge of the Company, been threatened any strike, slow-down, picketing, work-stoppage, or other similar labor activity with respect to any such employees, consultant, independent contractor, officer or manager of any of the Target Companies. Schedule 5.18(a) sets forth all unresolved labor controversies (including unresolved grievances and age or other discrimination claims), if any, that are pending or, to the Knowledge of the Company, threatened between any Target Company and Persons employed by or providing services as independent contractors to a Target Company. No current officer or employee of a Target Company has provided any Target Company written or, to the Knowledge of the Company, oral notice of his or her plan to terminate his or her employment with any Target Company or go on leave of absence.
(b) Except as set forth in Schedule 5.18(b), each Target Company (i) is and has been in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety and wages and hours, and other Laws relating to discrimination, sexual harassment, disability, labor relations, classification and payment of employees and independent contractors, hours of work, payment of wages and overtime wages, pay equity, immigration, workers compensation, working conditions, employee scheduling, occupational safety and health, family and medical leave, and employee terminations, and has not received written or, to the Knowledge of the Company, oral notice that there is any pending Action involving unfair labor practices against a Target Company, (ii) is not liable for any material past due arrears of wages or any material penalty for failure to comply with any of the foregoing, and (iii) is not liable for any material payment to any Governmental Authority with respect to unemployment compensation benefits, social security or other benefits or obligations for employees, independent contractors or consultants (other than routine payments to be made in the ordinary course of business and consistent with past practice). There are no Actions pending or, to the Knowledge of the Company, threatened against a Target Company brought by or on behalf of any applicant for employment, any current or former employee, any Person alleging to be a current or former employee, or any Governmental Authority, relating to any such Law or regulation, or alleging breach of any express or implied contract of employment, wrongful termination of employment, or alleging any other discriminatory, wrongful or tortious conduct in connection with the employment relationship.
(c) Schedule 5.18(c) hereto sets forth a complete and accurate list as of the date hereof of all employees of the Target Companies showing for each as of such date (i) the employee’s name, job title or description, employer, location, salary level (including any bonus, commission, deferred compensation or other remuneration payable (other than any such arrangements under which payments are at the discretion of the Target Companies)), (ii) any bonus, commission or other remuneration other than salary paid during the fiscal year ended December 31, 2021, and (iii) any wages, salary, bonus, commission or other compensation due and owing to each employee during or for the fiscal year ending December 31, 2022. Except as set forth on Schedule 5.18(c), (A) no employee is a party to a written employment Contract with a Target Company and each is employed “at will”, and (B) the Target Companies have paid in full to all their employees all wages, salaries, commission, bonuses and other compensation due to their employees, including overtime compensation, and no Target Company has any obligation or Liability (whether or not contingent) with respect to severance payments to any such employees under the terms of any written or, to the Company’s Knowledge, oral agreement, or commitment or any applicable Law, custom, trade or practice. Except as set forth in Schedule 5.18(c), each Target Company employee has entered into the Company’s standard form of employee non-disclosure, inventions and restrictive covenants agreement with a Target Company (whether pursuant to a separate agreement or incorporated as part of such employee’s overall employment agreement), a copy of which has been made available, or shall make available at least fifteen (15) days prior to Closing, to ParentCo by the Company.
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(d) Schedule 5.18(d) contains a list of all independent contractors (including consultants) currently engaged by any Target Company, along with the position, the entity engaging such Person, date of retention and rate of remuneration, most recent increase (or decrease) in remuneration and amount thereof, for each such Person. Except as set forth on Schedule 5.18(d), all of such independent contractors are a party to a written Contract with a Target Company. Except as set forth on Schedule 5.18(d), each such independent contractor has entered into customary covenants regarding confidentiality, non-competition and assignment of inventions and copyrights in such Person’s agreement with a Target Company, a copy of which has been provided to ParentCo by the Company. For the purposes of applicable Law, including the Code, all independent contractors who are currently, or within the last six (6) years have been, engaged by a Target Company are bona fide independent contractors and not employees of a Target Company. Each independent contractor is terminable on fewer than thirty (30) days’ notice, without any obligation of any Target Company to pay severance or a termination fee.
5.19 Benefit Plans.
(a) Set forth on Schedule 5.19 is a true and complete list of each Company Benefit Plan of a Target Company. With respect to each Company Benefit Plan, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations that have not been accounted for by reserves, or otherwise properly footnoted in accordance with GAAP on the Company Financials. No Target Company is or has in the past been a member of a “controlled group” for purposes of Section 414(b), (c), (m) or (o) of the Code, nor does any Target Company have any Liability with respect to any collectively-bargained for plans, whether or not subject to the provisions of ERISA. No statement, either written or oral, has been made by any Target Company to any Person with regard to any Company Benefit Plan that was not in accordance with the Company Benefit Plan in any material respect.
(b) Each Company Benefit Plan is and has been operated at all times in compliance with all applicable Laws in all material respects, including ERISA and the Code. Each Company Benefit Plan which is intended to be “qualified” within the meaning of Section 401(a) of the Code (i) has been determined by the IRS to be so qualified (or is based on a prototype plan which has received a favorable opinion letter) during the period from its adoption to the date of this Agreement and (ii) its related trust has been determined to be exempt from taxation under Section 501(a) of the Code or the Target Companies have requested an initial favorable IRS determination of qualification and/or exemption within the period permitted by applicable Law. No fact exists which could adversely affect the qualified status of such Company Benefit Plans or the exempt status of such trusts.
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(c) With respect to each Company Benefit Plan which covers any current or former officer, director, consultant or employee (or beneficiary thereof) of a Target Company, the Company has provided to ParentCo accurate and complete copies, if applicable, of: (i) all Company Benefit Plan texts and agreements and related trust agreements or annuity Contracts (including any amendments, modifications or supplements thereto); (ii) all summary plan descriptions and material modifications thereto; (iii) the three (3) most recent Forms 5500, if applicable, and annual report, including all schedules thereto; (iv) the most recent annual and periodic accounting of plan assets; (v) the three (3) most recent nondiscrimination testing reports; (vi) the most recent determination letter received from the IRS, if any; (vii) the most recent actuarial valuation; and (viii) all material communications with any Governmental Authority.
(d) With respect to each Company Benefit Plan: (i) such Company Benefit Plan has been administered and enforced in all material respects in accordance with its terms, the Code and ERISA; (ii) no breach of fiduciary duty has occurred; (iii) no Action is pending, or to the Company’s Knowledge, threatened (other than routine claims for benefits arising in the ordinary course of administration); (iv) no prohibited transaction, as defined in Section 406 of ERISA or Section 4975 of the Code, has occurred, excluding transactions effected pursuant to a statutory or administration exemption; and (v) all contributions and premiums due through the Closing Date have been made in all material respects as required under ERISA or have been fully accrued in all material respects on the Company Financials.
(e) No Company Benefit Plan is a “defined benefit plan” (as defined in Section 414(j) of the Code), a “multiemployer plan” (as defined in Section 3(37) of ERISA) or a “multiple employer plan” (as described in Section 413(c) of the Code) or is otherwise subject to Title IV of ERISA or Section 412 of the Code, and no Target Company has incurred any Liability or otherwise could have any Liability, contingent or otherwise, under Title IV of ERISA and no condition presently exists that is expected to cause such Liability to be incurred. No Company Benefit Plan will become a multiple employer plan with respect to any Target Company immediately after the Closing Date. No Target Company currently maintains or has ever maintained, or is required currently or has ever been required to contribute to or otherwise participate in, a multiple employer welfare arrangement or voluntary employees’ beneficiary association as defined in Section 501(c)(9) of the Code.
(f) There is no arrangement under any Company Benefit Plan with respect to any employee that would result in the payment of any amount that by operation of Sections 280G or 162(m) of the Code would not be deductible by the Target Companies and no arrangement exists pursuant to which a Target Company will be required to “gross up” or otherwise compensate any person because of the imposition of any excise tax on a payment to such person.
(g) With respect to each Company Benefit Plan which is a “welfare plan” (as described in Section 3(1) of ERISA): (i) no such plan provides medical or death benefits with respect to current or former employees of a Target Company beyond their termination of employment (other than coverage mandated by Law, which is paid solely by such employees); and (ii) there are no reserves, assets, surplus or prepaid premiums under any such plan. Each Target Company has complied with the provisions of Section 601 et seq. of ERISA and Section 4980B of the Code.
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(h) Except as set forth in Schedule 5.19(g), the consummation of the transactions contemplated by this Agreement and the Ancillary Documents will not: (i) entitle any individual to severance pay, unemployment compensation or other benefits or compensation; (ii) accelerate the time of payment or vesting, or increase the amount of any compensation due, or in respect of, any individual; or (iii) result in or satisfy a condition to the payment of compensation that would, in combination with any other payment, result in an “excess parachute payment” within the meaning of Section 280G of the Code. No Target Company has incurred any Liability for any Tax imposed under Chapter 43 of the Code or civil liability under Section 502(i) or (l) of ERISA.
(i) Except to the extent required by Section 4980B of the Code or similar state Law, no Target Company provides health or welfare benefits to any former or retired employee or is obligated to provide such benefits to any active employee following such employee’s retirement or other termination of employment or service.
(j) All Company Benefit Plans can be terminated at any time as of or after the Closing Date without resulting in any Liability to the Surviving Corporation or ParentCo or their respective Affiliates for any additional contributions, penalties, premiums, fees, fines, excise taxes or any other charges or liabilities.
(k) Each Company Benefit Plan that is subject to Section 409A of the Code (each, a “Section 409A Plan”) as of the Closing Date is indicated as such on Schedule 5.19(j). No options or other equity-based awards have been issued or granted by the Company that are, or are subject to, a Section 409A Plan. Each Section 409A Plan has been administered in compliance, and is in documentary compliance, with the applicable provisions of Section 409A of the Code, the regulations thereunder and other official guidance issued thereunder. No Target Company has any obligation to any employee or other service provider with respect to any Section 409A Plan that may be subject to any Tax under Section 409A of the Code. No payment to be made under any Section 409A Plan is, or to the Knowledge of the Company will be, subject to the penalties of Section 409A(a)(1) of the Code. There is no Contract or plan to which any Target Company is a party or by which it is bound to compensate any employee, consultant or director for penalty taxes paid pursuant to Section 409A of the Code.
5.20 Environmental Matters. Except as set forth in Schedule 5.20:
(a) Each Target Company is and has been in compliance in all material respects with all applicable Environmental Laws, including obtaining, maintaining in good standing, and complying in all material respects with all Permits required for its business and operations by Environmental Laws (“Environmental Permits”), no Action is pending or, to the Company’s Knowledge, threatened to revoke, modify, or terminate any such Environmental Permit, and, to the Company’s Knowledge, no facts, circumstances, or conditions currently exist that could adversely affect such continued compliance with Environmental Laws and Environmental Permits or require capital expenditures to achieve or maintain such continued compliance with Environmental Laws and Environmental Permits.
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(b) No Target Company is the subject of any outstanding Order or Contract with any Governmental Authority or other Person in respect of any (i) Environmental Laws, (ii) Remedial Action, or (iii) Release or threatened Release of a Hazardous Material. No Target Company has assumed, contractually or by operation of Law, any Liabilities or obligations under any Environmental Laws.
(c) No Action has been made or is pending, or to the Company’s Knowledge, threatened against any Target Company or any assets of a Target Company alleging either or both that a Target Company may be in material violation of any Environmental Law or Environmental Permit or may have any material Liability under any Environmental Law.
(d) No Target Company has manufactured, treated, stored, disposed of, arranged for or permitted the disposal of, generated, handled or Released any Hazardous Material, or owned or operated any property or facility, in a manner that has given or would reasonably be expected to give rise to any material Liability or obligation under applicable Environmental Laws. No fact, circumstance, or condition exists in respect of any Target Company or any property currently or formerly owned, operated, or leased by any Target Company or any property to which a Target Company arranged for the disposal or treatment of Hazardous Materials that could reasonably be expected to result in a Target Company incurring any material Environmental Liabilities.
(e) There is no investigation of the business, operations, or currently owned, operated, or leased property of a Target Company or, to the Company’s Knowledge, previously owned, operated, or leased property of a Target Company pending or, to the Company’s Knowledge, threatened that could lead to the imposition of any Liens under any Environmental Law or Environmental Liabilities.
(f) To the Knowledge of the Company, there is not located at any of the properties of a Target Company any (i) underground storage tanks, (ii) asbestos-containing material, or (iii) equipment containing polychlorinated biphenyls.
(g) The Company has provided to ParentCo all environmentally related site assessments, audits, studies, reports, analysis and results of investigations that have been performed in respect of the currently or previously owned, leased, or operated properties of any Target Company.
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5.21 Transactions with Related Persons. Except as set forth on Schedule 5.21, no Target Company nor any of its Affiliates, nor any officer, director, or beneficial owner of 5% or more of the equity of a Target Company, manager, employee, trustee or beneficiary of a Target Company or any of its Affiliates, nor any immediate family member of any of the foregoing (whether directly or indirectly through an Affiliate of such Person) (each of the foregoing, a “Related Person”) is presently, or in the past three (3) years, has been, a party to any transaction with a Target Company, including any Contract or other arrangement (a) providing for the furnishing of services by (other than as officers, directors or employees of the Target Company), (b) providing for the rental of real property or Personal Property or the license of Intellectual Property from, (c) granting or receiving any right or interest in any asset of a Target Company to or from, or (d) otherwise requiring payments to (other than for services or expenses as directors, officers or employees of the Target Company in the ordinary course of business consistent with past practice) any Related Person or any Person in which any Related Person has an interest as an owner, officer, manager, director, trustee or partner or in which any Related Person has any direct or indirect interest (other than the ownership of securities representing no more than two percent (2%) of the outstanding voting power or economic interest of a publicly traded company). Except as set forth on Schedule 5.21, no Target Company has outstanding any Contract or other arrangement or commitment with any Related Person, and no Related Person owns any real property or Personal Property, or right, tangible or intangible (including Intellectual Property) which is used in the business of any Target Company. The assets of the Target Companies do not include any receivable or other obligation from a Related Person, and the liabilities of the Target Companies do not include any payable or other obligation or commitment to any Related Person.
5.22 Insurance.
(a) Schedule 5.22(a) lists all insurance policies held by a Target Company relating to a Target Company or its business, properties, assets, directors, officers and employees, copies of which have been provided to ParentCo. All premiums due and payable under all such insurance policies have been timely paid and the Target Companies are otherwise in material compliance with the terms of such insurance policies. Each such insurance policy (i) is legal, valid, binding, enforceable and in full force and effect and (ii) will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the Closing. To the Knowledge of the Company, there is no threatened termination of, or material premium increase with respect to, any Target Companies’ insurance policies. No Target Company has any self-insurance or co-insurance programs. In the past five (5) years, no Target Company has received any notice from, or on behalf of, any insurance carrier relating to or involving any adverse change or any change other than in the ordinary course of business, in the conditions of insurance, any refusal to issue an insurance policy or non-renewal of a policy.
(b) Schedule 5.22(b) identifies each individual insurance claim in excess of $50,000 made by a Target Company in the past five (5) years. Each Target Company has reported to its insurers all claims and pending circumstances that would reasonably be expected to result in a claim, except where such failure to report such a claim would not be reasonably likely to be material to the Target Companies. To the Knowledge of the Company, no event has occurred, and no condition or circumstance exists, that would reasonably be expected to (with or without notice or lapse of time) give rise to or serve as a basis for the denial of any such insurance claim. No Target Company has made any claim against an insurance policy as to which the insurer is denying coverage.
5.23 Books and Records. All of the financial books and records of the Target Companies are complete and accurate in all material respects and have been maintained in the ordinary course consistent with past practice and in accordance with applicable Laws.
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5.24 Top Customers and Suppliers. Schedule 5.24 lists, by dollar volume received or paid, as applicable, for each of (a) the twelve (12) months ended on December 31, 2021 and (b) the period from January 1, 2020 through the Interim Balance Sheet Date, the ten (10) largest customers of the Target Companies (the “Top Customers”) and the ten largest suppliers of goods or services to the Target Companies (the “Top Suppliers”), along with the amounts of such dollar volumes. The relationships of each Target Company with such suppliers and customers are good commercial working relationships and (i) no Top Supplier or Top Customer within the last twelve (12) months has materially modified (in a negative way), cancelled or otherwise terminated, or, to the Company’s Knowledge, intends to materially modify (in a negative way), cancel or otherwise terminate, any material relationships of such Person with a Target Company, (ii) no Top Supplier or Top Customer has during the last twelve (12) months decreased materially or, to the Company’s Knowledge, threatened to stop, decrease or limit materially, or intends to modify materially its material relationships with a Target Company or intends to stop, decrease or limit materially its products or services to any Target Company or its usage or purchase of the products or services of any Target Company, (iii) to the Company’s Knowledge, no Top Supplier or Top Customer intends to refuse to pay any amount due to any Target Company or seek to exercise any remedy against any Target Company, (iv) no Target Company has within the past two (2) years been engaged in any material dispute with any Top Supplier or Top Customer, and (v) to the Company’s Knowledge, the consummation of the transactions contemplated in this Agreement and the Ancillary Documents will not adversely affect the relationship of any Target Company with any Top Supplier or Top Customer.
5.25 Certain Business Practices.
(a) No Target Company, nor any of their respective Representatives acting on their behalf has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees, to foreign or domestic political parties or campaigns or violated any provision of the U.S. Foreign Corrupt Practices Act of 1977 or any other local or foreign anti-corruption or bribery Law or (iii) made any other unlawful payment. No Target Company, nor any of their respective Representatives acting on their behalf has directly or indirectly, given or agreed to give any unlawful gift or similar benefit in any material amount to any customer, supplier, governmental employee or other Person who is or may be in a position to help or hinder any Target Company or assist any Target Company in connection with any actual or proposed transaction.
(b) The operations of each Target Company are and have been conducted at all times in compliance with money laundering statutes in all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Authority, and no Action involving a Target Company with respect to any of the foregoing is pending or, to the Knowledge of the Company, threatened.
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(c) No Target Company or any of their respective directors or officers, or, to the Knowledge of the Company, any other Representative acting on behalf of a Target Company is currently identified on the specially designated nationals or other blocked person, organization or entity list currently subject to any U.S. sanctions administered by OFAC, identified by the Consolidated Screening List of the U.S. International Trade Administration (“ITA”) or identified on the Denied Persons List, the Entity List, Unverified List, or the Military End User List of the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) and no Target Company has in the last five (5) fiscal years, directly or indirectly, used any funds, or loaned, contributed or otherwise made available such funds to any Subsidiary, joint venture partner, agent, or other Person, in connection with any sales or operations in Cuba, Iran, Syria, Sudan, Myanmar or any other country sanctioned by OFAC, BIS, ITA, the U.S. Department of Treasury or U.S. Department of Justice or for the purpose of financing the activities of any Person currently subject to, or otherwise in violation of any U.S. sanctions, Law or regulation.
(d) To the Knowledge of each Target Company and of their respective directors or officers, or, to the Knowledge of the Company, any other Representative acting on behalf of a Target Company, their Affiliates, and their respective Representative and distributors in their capacity as such, have complied in all material respects at all times and are in compliance in all respects with all applicable export trade control Laws, including but not limited to (i) each of the Target Companies and Affiliates (A) who or which has not directly or indirectly, exported, re-exported, sold, disclosed or otherwise transferred to (including transfers to foreign nationals located in the United States) any goods, equipment, materials, software, technology, technical data or services in violation of such trade control Laws; and (B) has not unlawfully engaged in any other transactions or disclosures, with any person with whom U.S. persons are prohibited from dealing under U.S trade Laws; (ii) there is no charge, proceeding or, to the Knowledge of the Company, investigation by any Governmental Authority with respect to a violation of any applicable trade compliance Laws that is now pending or, to the Knowledge of the Company, has been asserted or threatened with respect to the Company or its Affiliates; and (iii) the Company or Affiliates have not made, nor need to make a voluntary self-disclosure with respect to a possible violation of any trade compliance Laws to any Governmental Authority.
5.26 Investment Company Act. No Target Company is an “investment company” or a Person directly or indirectly “controlled” by or acting on behalf of an “investment company”, or required to register as an “investment company”, in each case within the meaning of the Investment Company Act of 1940, as amended.
5.27 Finders and Brokers. Except as set forth in Schedule 5.27, no Target Company has incurred or will incur any Liability for any brokerage, finder’s or other fee or commission in connection with the transactions contemplated hereby.
5.28 Independent Investigation. The Company has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of Kernel, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of Kernel for such purpose. The Company acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of Kernel set forth in Agreement (including the related portions of Kernel Disclosure Schedules) and in any certificate delivered to the Company pursuant hereto; and (b) neither Kernel nor any of its Representatives have made any representation or warranty as to Kernel or this Agreement, except as expressly set forth in this Agreement (including the related portions of Kernel Disclosure Schedules) or in any certificate delivered to the Company pursuant hereto.
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5.29 Information Supplied. None of the information supplied or to be supplied by the Company expressly for inclusion or incorporation by reference: (a) in any current report on Form 8-K, and any exhibits thereto or any other report, form, registration or other filing made with any Governmental Authority or stock exchange with respect to the transactions contemplated by this Agreement or any Ancillary Documents; (b) in the Registration Statement; or (c) in the mailings or other distributions to Kernel’s stockholders and/or prospective investors with respect to the consummation of the transactions contemplated by this Agreement or in any amendment to any of documents identified in (a) through (c), will, when filed, made available, mailed or distributed, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by the Company expressly for inclusion or incorporation by reference in any of the Signing Press Release, the Signing Filing, the Closing Press Release and the Closing Filing will, when filed or distributed, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Company makes no representation, warranty or covenant with respect to any information supplied by or on behalf of Kernel or its Affiliates.
5.30 Disclosure. No representations or warranties by the Company in this Agreement (as modified by the Company Disclosure Schedules) or the Ancillary Documents, (a) contains or will contain any untrue statement of a material fact, or (b) omits or will omit to state, when read in conjunction with all of the information contained in this Agreement, the Company Disclosure Schedules and the Ancillary Documents, any fact necessary to make the statements or facts contained therein not materially misleading.
Article VI
COVENANTS
6.1 Access and Information.
(a) During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement in accordance with Section 8.1 or the Closing (the “Interim Period”), subject to Section 6.15, the Company shall give, and shall cause its Representatives to give, Kernel and its Representatives, at reasonable times during normal business hours and upon reasonable intervals and notice, reasonable access to all offices and other facilities and to all employees, properties, Contracts, agreements, commitments, books and records, financial and operating data and other information (including Tax Returns, internal working papers, client files, client Contracts and director service agreements), of or pertaining to the Target Companies, as Kernel or its Representatives may reasonably request regarding the Target Companies and their respective businesses, assets, Liabilities, financial condition, prospects, operations, management, employees and other aspects (including unaudited quarterly financial statements, including a consolidated quarterly balance sheet and income statement, a copy of each material report, schedule and other document filed with or received by a Governmental Authority pursuant to the requirements of applicable securities Laws, and independent public accountants’ work papers (subject to the consent or any other conditions required by such accountants, if any)) and cause each of the Company’s Representatives to reasonably cooperate with Kernel and its Representatives in their investigation; provided, however, that Kernel and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of the Target Companies. No information or knowledge obtained by Kernel in any investigation conducted pursuant to the access contemplated by this Section 6.1 shall affect or be deemed to modify any representation or warranty of the Company set forth in this Agreement or otherwise impair the rights and remedies available to Kernel hereunder.
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(b) During the Interim Period, subject to Section 6.15, Kernel shall give, and shall cause its Representatives to give, the Company and its Representatives, at reasonable times during normal business hours and upon reasonable intervals and notice, reasonable access to all offices and other facilities and to all employees, properties, Contracts, agreements, commitments, books and records, financial and operating data and other information (including Tax Returns, internal working papers, client files, client Contracts and director service agreements), of or pertaining to Kernel or its Subsidiaries, as the Company or its Representatives may reasonably request regarding Kernel, its Subsidiaries and their respective businesses, assets, Liabilities, financial condition, prospects, operations, management, employees and other aspects (including unaudited quarterly financial statements, including a consolidated quarterly balance sheet and income statement, a copy of each material report, schedule and other document filed with or received by a Governmental Authority pursuant to the requirements of applicable securities Laws, and independent public accountants’ work papers (subject to the consent or any other conditions required by such accountants, if any)) and cause each of Kernel’s Representatives to reasonably cooperate with the Company and its Representatives in their investigation; provided, however, that the Company and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of Kernel or any of its Subsidiaries. No information or knowledge obtained by the Company in any investigation conducted pursuant to the access contemplated by this Section 6.1 shall affect or be deemed to modify any representation or warranty of Kernel set forth in this Agreement or otherwise impair the rights and remedies available to the Company hereunder.
6.2 Conduct of Business of the Company.
(a) Unless Kernel shall otherwise consent in writing (such consent not to be unreasonably withheld, conditioned or delayed), during the Interim Period, except as expressly contemplated by this Agreement or the Ancillary Documents or as set forth on Schedule 6.2, the Company shall, and shall cause its Subsidiaries to, (i) conduct their respective businesses, in all material respects, in the ordinary course of business consistent with past practice, (ii) comply with all Laws applicable to the Target Companies and their respective businesses, assets and employees, and (iii) take all commercially reasonable measures necessary or appropriate to preserve intact, in all material respects, their respective business organizations, to keep available the services of their respective managers, directors, officers, employees and consultants, and to preserve the possession, control and condition of their respective material assets, all as consistent with past practice.
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(b) Without limiting the generality of Section 6.2(a) and except as contemplated by the terms of this Agreement or the Ancillary Documents as set forth on Schedule 6.2, during the Interim Period, without the prior written consent of Kernel (such consent not to be unreasonably withheld, conditioned or delayed), the Company shall not, and shall cause its Subsidiaries to not:
(i) amend, waive or otherwise change, in any respect, its Organizational Documents;
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any of its equity securities or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any of its equity securities, or other securities, including any securities convertible into or exchangeable for any of its shares or other equity securities or securities of any class and any other equity-based awards, or engage in any hedging transaction with a third Person with respect to such securities;
(iii) split, combine, recapitalize or reclassify any of its shares or other equity interests or issue any other securities in respect thereof or pay or set aside any dividend or other distribution (whether in cash, equity or property or any combination thereof) in respect of its equity interests, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any of its securities;
(iv) incur, create, assume, prepay or otherwise become liable for any Indebtedness (directly, contingently or otherwise) in excess of $100,000 individually or $250,000 in the aggregate, make a loan or advance to or investment in any third party (other than advancement of expenses to employees in the ordinary course of business), or guarantee or endorse any Indebtedness, Liability or obligation of any Person in excess of $100,000 individually or $250,000 in the aggregate;
(v) increase the wages, salaries or compensation of its employees other than in the ordinary course of business, consistent with past practice, and in any event not in the aggregate by more than five percent (5%), or make or commit to make any bonus payment (whether in cash, property or securities) to any employee, or materially increase other benefits of employees generally, or enter into, establish, materially amend or terminate any Company Benefit Plan with, for or in respect of any current consultant, officer, manager director or employee, in each case other than as required by applicable Law, pursuant to the terms of any Company Benefit Plans or in the ordinary course of business consistent with past practice;
(vi) make or rescind any material election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, or make any material change in its accounting or Tax policies or procedures, in each case except as required by applicable Law or in compliance with GAAP;
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(vii) transfer or license to any Person or otherwise extend, materially amend or modify, permit to lapse or fail to preserve any material Company Registered IP, Company Licensed IP or other Company IP (excluding non-exclusive licenses of Company IP to Target Company customers in the ordinary course of business consistent with past practice), or disclose to any Person who has not entered into a confidentiality agreement any Trade Secrets;
(viii) terminate, or waive or assign any material right under, any Company Material Contract or enter into any Contract that would be a Company Material Contract, in any case outside of the ordinary course of business consistent with past practice;
(ix) fail to maintain its books, accounts and records in all material respects in the ordinary course of business consistent with past practice;
(x) establish any Subsidiary or enter into any new line of business;
(xi) fail to use commercially reasonable efforts to keep in force insurance policies or replacement or revised policies providing insurance coverage with respect to its assets, operations and activities in such amount and scope of coverage substantially similar to that which is currently in effect;
(xii) revalue any of its material assets or make any material change in accounting methods, principles or practices, except to the extent required to comply with GAAP and after consulting with the Company’s outside auditors;
(xiii) waive, release, assign, settle or compromise any claim, action or proceeding (including any suit, action, claim, proceeding or investigation relating to this Agreement or the transactions contemplated hereby), other than waivers, releases, assignments, settlements or compromises that involve only the payment of monetary damages (and not the imposition of equitable relief on, or the admission of wrongdoing by, a Target Company or its Affiliates) not in excess of $100,000 (individually or in the aggregate), or otherwise pay, discharge or satisfy any Actions, Liabilities or obligations, unless such amount has been reserved in the Company Financials;
(xiv) close or materially reduce its activities, or effect any layoff or other personnel reduction or change, at any of its facilities;
(xv) acquire, including by merger, consolidation, acquisition of equity interests or assets, or any other form of business combination, any corporation, partnership, limited liability company, other business organization or any division thereof, or any material amount of assets outside the ordinary course of business consistent with past practice;
(xvi) make capital expenditures in excess of $100,000 (individually for any project (or set of related projects) or $250,000 in the aggregate);
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(xvii) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization;
(xviii) voluntarily incur any Liability or obligation (whether absolute, accrued, contingent or otherwise) in excess of $100,000 individually or $250,000 in the aggregate other than pursuant to the terms of a Company Material Contract or Company Benefit Plan;
(xix) sell, lease, license, transfer, exchange or swap, mortgage or otherwise pledge or encumber (including securitizations), or otherwise dispose of any material portion of its properties, assets or rights;
(xx) enter into any agreement, understanding or arrangement with respect to the voting of equity securities of the Company;
(xxi) take any action that would reasonably be expected to significantly delay or impair the obtaining of any Consents of any Governmental Authority to be obtained in connection with this Agreement;
(xxii) accelerate the collection of any trade receivables or delay the payment of trade payables or any other liabilities other than in the ordinary course of business consistent with past practice;
(xxiii) enter into, amend, waive or terminate (other than terminations in accordance with their terms) any transaction with any Related Person (other than compensation and benefits and advancement of expenses, in each case, provided in the ordinary course of business consistent with past practice);
(xxiv) maintain the existing relations and goodwill of the Target Companies with customers, suppliers, distributors and creditors of the Target Companies and use commercially reasonable efforts to maintain all insurance policies of the Target Companies or equivalent substitutes therefor; or
(xxv) authorize or agree to do any of the foregoing actions.
(c) Notwithstanding the foregoing, Kernel hereby consents to the Company engaging in, executing and closing the following transactions, and waives any violations of the restrictions set forth in Sections 6.2(a) and Section 6.2(b) above related thereto:
(i) The acquisition of Airgility, Inc., a Delaware corporation, and any ancillary documents related thereto; and
(ii) The raising of capital, whether in the form of equity, convertible security or other form of financing, and any ancillary documents related thereto.
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6.3 Conduct of Business of Kernel.
(a) Unless the Company shall otherwise consent in writing (such consent not to be unreasonably withheld, conditioned or delayed), during the Interim Period, except as expressly contemplated by this Agreement or the Ancillary Documents or as set forth on Schedule 6.3(a), Kernel shall, and shall cause its Subsidiaries to, (i) conduct their respective businesses, in all material respects, in the ordinary course of business consistent with past practice, (ii) comply with all Laws applicable to Kernel and its Subsidiaries and their respective businesses, assets and employees, and (iii) take all commercially reasonable measures necessary or appropriate to preserve intact, in all material respects, their respective business organizations, to keep available the services of their respective managers, directors, officers, employees and consultants, and to preserve the possession, control and condition of their respective material assets, all as consistent with past practice. Notwithstanding anything to the contrary in this Section 6.3(a), nothing in this Agreement shall prohibit or restrict Kernel from extending, in accordance with Kernel’s Organizational Documents and the IPO Prospectus, the deadline by which it must complete its Business Combination (an “Extension” and, together, the “Extensions”), and no consent of any other Party shall be required in connection therewith.
(b) Without limiting the generality of Section 6.3(a) and except as contemplated by the terms of this Agreement or the Ancillary Documents (including as contemplated by any PIPE/Convertible Note Investment) or as set forth on Schedule 6.3(b), during the Interim Period, without the prior written consent of the Company (such consent not to be unreasonably withheld, conditioned or delayed), Kernel shall not, and shall cause its Subsidiaries to not:
(i) amend, waive or otherwise change, in any respect, its Organizational Documents other than in connection with the Domestication;
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any of its equity securities or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any of its equity securities, or other securities, including any securities convertible into or exchangeable for any of its equity securities or other security interests of any class and any other equity-based awards, or engage in any hedging transaction with a third Person with respect to such securities;
(iii) split, combine, recapitalize or reclassify any of its shares or other equity interests or issue any other securities in respect thereof or pay or set aside any dividend or other distribution (whether in cash, equity or property or any combination thereof) in respect of its shares or other equity interests, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any of its securities;
(iv) incur, create, assume, prepay or otherwise become liable for any Indebtedness (directly, contingently or otherwise) in excess of $100,000 individually or $250,000 in the aggregate, make a loan or advance to or investment in any third party, or guarantee or endorse any Indebtedness, Liability or obligation of any Person (provided, that this Section 6.3(b)(iv) shall not prevent Kernel from borrowing funds necessary to finance its ordinary course administrative costs and expenses and Expenses incurred in connection with the consummation of the Merger and the other transactions contemplated by this Agreement (including any costs and expenses necessary for Extensions (such expenses, “Extension Expenses”), up to aggregate additional Indebtedness during the Interim Period of $5,000,000);
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(v) make or rescind any material election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, or make any material change in its accounting or Tax policies or procedures, in each case except as required by applicable Law or in compliance with GAAP;
(vi) amend, waive or otherwise change the Trust Agreement in any manner adverse to Kernel;
(vii) terminate, waive or assign any material right under any Kernel Material Contract;
(viii) fail to maintain its books, accounts and records in all material respects in the ordinary course of business consistent with past practice;
(ix) establish any Subsidiary or enter into any new line of business;
(x) fail to use commercially reasonable efforts to keep in force insurance policies or replacement or revised policies providing insurance coverage with respect to its assets, operations and activities in such amount and scope of coverage substantially similar to that which is currently in effect;
(xi) revalue any of its material assets or make any material change in accounting methods, principles or practices, except to the extent required to comply with GAAP and after consulting Kernel’s outside auditors;
(xii) waive, release, assign, settle or compromise any claim, action or proceeding (including any suit, action, claim, proceeding or investigation relating to this Agreement or the transactions contemplated hereby), other than waivers, releases, assignments, settlements or compromises that involve only the payment of monetary damages (and not the imposition of equitable relief on, or the admission of wrongdoing by, Kernel or its Subsidiary) not in excess of $100,000 (individually or in the aggregate), or otherwise pay, discharge or satisfy any Actions, Liabilities or obligations, unless such amount has been reserved in Kernel Financials;
(xiii) acquire, including by merger, consolidation, acquisition of equity interests or assets, or any other form of business combination, any corporation, partnership, limited liability company, other business organization or any division thereof, or any material amount of assets outside the ordinary course of business;
(xiv) make capital expenditures in excess of $100,000 individually for any project (or set of related projects) or $250,000 in the aggregate (excluding for the avoidance of doubt, incurring any Expenses);
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(xv) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization (other than with respect to the Merger);
(xvi) voluntarily incur any Liability or obligation (whether absolute, accrued, contingent or otherwise) in excess of $100,000 individually or $250,000 in the aggregate (excluding the incurrence of any Expenses) other than pursuant to the terms of a Contract in existence as of the date of this Agreement or entered into in the ordinary course of business or in accordance with the terms of this Section 6.3 during the Interim Period;
(xvii) sell, lease, license, transfer, exchange or swap, mortgage or otherwise pledge or encumber (including securitizations), or otherwise dispose of any material portion of its properties, assets or rights;
(xviii) enter into any agreement, understanding or arrangement with respect to the voting of Kernel Securities;
(xix) take any action that would reasonably be expected to significantly delay or impair the obtaining of any Consents of any Governmental Authority to be obtained in connection with this Agreement; or
(xx) authorize or agree to do any of the foregoing actions.
6.4 Annual and Interim Financial Statements. During the Interim Period, within thirty (30) calendar days following the end of each calendar month, each three-month quarterly period and each fiscal year (or such earlier date as such financial statements need to be available for inclusion in the Registration Statement), the Company shall deliver to Kernel unaudited consolidated financial statements, including an income statement an unaudited consolidated balance sheet, changes in shareholders’ equity, and consolidated statement of cash flows of the Target Companies for the period from the Interim Balance Sheet Date through the end of such calendar month, quarterly period or fiscal year and the applicable comparative period in the preceding fiscal year, in each case accompanied by a certificate of the Chief Financial Officer of the Company to the effect that all such financial statements fairly present the consolidated financial position and results of operations of the Target Companies as of the date or for the periods indicated, in accordance with GAAP, subject to year-end audit adjustments and excluding footnotes. From the date hereof through the Closing Date, the Company will also promptly deliver to Kernel copies of any audited consolidated financial statements of the Target Companies that the Target Companies’ certified public accountants may issue.
6.5 Kernel Public Filings. During the Interim Period, Kernel will keep current and timely file all of its public filings with the SEC and otherwise comply in all material respects with applicable securities Laws and shall use its commercially reasonable efforts prior to the Closing to maintain the listing of the Old Kernel Public Units, the Old Kernel Preferred Stock, the Old Kernel Class A Stock, the Old Kernel Class B Stock and the Old Kernel Public Warrants on Nasdaq; provided, that the Parties acknowledge and agree that from and after the Closing, the Parties intend to list on Nasdaq only Kernel Common Stock and Kernel Public Warrants.
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6.6 No Solicitation.
(a) For purposes of this Agreement, (i) an “Acquisition Proposal” means any inquiry, proposal or offer, or any indication of interest in making an offer or proposal, from any Person or group at any time relating to an Alternative Transaction, and (ii) an “Alternative Transaction” means (A) with respect to the Company and its Affiliates, a transaction (other than the transactions contemplated by this Agreement) concerning the sale of (x) all or any material part of the business or assets of the Target Companies (other than in the ordinary course of business consistent with past practice) or (y) any of the shares or other equity interests or profits of the Target Companies, in any case, whether such transaction takes the form of a sale of shares or other equity interests, assets, merger, consolidation, issuance of debt securities, management Contract, joint venture or partnership, or otherwise and (B) with respect to Kernel and its Affiliates, a transaction (other than the transactions contemplated by this Agreement) concerning a Business Combination involving Kernel.
(b) During the Interim Period, in order to induce the other Parties to continue to commit to expend management time and financial resources in furtherance of the transactions contemplated hereby, each Party shall not, and shall cause its Representatives to not, without the prior written consent of the Company and Kernel, directly or indirectly, (i) solicit, assist, initiate or facilitate the making, submission or announcement of, or intentionally encourage, any Acquisition Proposal, (ii) furnish any non-public information regarding such Party or its Affiliates or their respective businesses, operations, assets, Liabilities, financial condition, prospects or employees to any Person or group (other than a Party to this Agreement or their respective Representatives) in connection with or in response to an Acquisition Proposal, (iii) engage or participate in discussions or negotiations with any Person or group with respect to, or that could reasonably be expected to lead to, an Acquisition Proposal, (iv) approve, endorse or recommend, or publicly propose to approve, endorse or recommend, any Acquisition Proposal, (v) negotiate or enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Acquisition Proposal, or (vi) release any third Person from, or waive any provision of, any confidentiality agreement to which such Party is a party.
(c) Each Party shall notify the others as promptly as practicable (and in any event within 48 hours) in writing of the receipt by such Party or any of its Representatives of (i) any bona fide inquiries, proposals or offers, requests for information or requests for discussions or negotiations regarding or constituting any Acquisition Proposal or any bona fide inquiries, proposals or offers, requests for information or requests for discussions or negotiations that could be expected to result in an Acquisition Proposal, and (ii) any request for non-public information relating to such Party or its Affiliates in connection with any Acquisition Proposal, specifying in each case, the material terms and conditions thereof (including a copy thereof if in writing or a written summary thereof if oral) and the identity of the party making such inquiry, proposal, offer or request for information. Each Party shall keep the others promptly informed of the status of any such inquiries, proposals, offers or requests for information. During the Interim Period, each Party shall, and shall cause its Representatives to, immediately cease and cause to be terminated any solicitations, discussions or negotiations with any Person with respect to any Acquisition Proposal and shall, and shall direct its Representatives to, cease and terminate any such solicitations, discussions or negotiations.
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6.7 No Trading. The Company acknowledges and agrees that it is aware, and that the Company’s Affiliates are aware (and each of their respective Representatives is aware or, upon receipt of any material nonpublic information of Kernel, will be advised) of the restrictions imposed by U.S. federal securities laws and the rules and regulations of the SEC and Nasdaq promulgated thereunder or otherwise (the “Federal Securities Laws”) and other applicable foreign and domestic Laws on a Person possessing material nonpublic information about a publicly traded company. The Company hereby agrees that, while it is in possession of such material nonpublic information, it shall not purchase or sell any securities of Kernel (other than to engage in the Merger in accordance with Article I), communicate such information to any third party, take any other action with respect to Kernel in violation of such Laws, or cause or encourage any third party to do any of the foregoing.
6.8 Notification of Certain Matters. During the Interim Period, each Party shall give prompt notice to the other Parties if such Party or its Affiliates: (a) fails to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it or its Affiliates hereunder in any material respect; (b) receives any notice or other communication in writing from any third party (including any Governmental Authority) alleging (i) that the Consent of such third party is or may be required in connection with the transactions contemplated by this Agreement or (ii) any non-compliance with any Law by such Party or its Affiliates; (c) receives any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; (d) discovers any fact or circumstance that, or becomes aware of the occurrence or non-occurrence of any event the occurrence or non-occurrence of which, would reasonably be expected to cause or result in any of the conditions to the Closing set forth in Article VII not being satisfied or the satisfaction of those conditions being materially delayed; or (e) becomes aware of the commencement or threat, in writing, of any Action against such Party or any of its Affiliates, or any of their respective properties or assets, or, to the Knowledge of such Party, any officer, director, partner, member or manager, in his, her or its capacity as such, of such Party or of its Affiliates with respect to the consummation of the transactions contemplated by this Agreement. No such notice shall constitute an acknowledgement or admission by the Party providing the notice regarding whether or not any of the conditions to the Closing have been satisfied or in determining whether or not any of the representations, warranties or covenants contained in this Agreement have been breached.
6.9 Efforts.
(a) Subject to the terms and conditions of this Agreement, each Party shall use its commercially reasonable efforts, and shall cooperate fully with the other Parties, to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable Laws and regulations to consummate the transactions contemplated by this Agreement (including the receipt of all applicable Consents of Governmental Authorities) and to comply as promptly as practicable with all requirements of Governmental Authorities applicable to the transactions contemplated by this Agreement.
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(b) In furtherance and not in limitation of Section 6.9(a), to the extent required under any Laws that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (“Antitrust Laws”), each Party hereto agrees to make any required filing or application under Antitrust Laws, as applicable, at such Party’s sole cost and expense, with respect to the transactions contemplated hereby as promptly as practicable, to supply as promptly as reasonably practicable any additional information and documentary material that may be reasonably requested pursuant to Antitrust Laws and to take all other actions reasonably necessary, proper or advisable to cause the expiration or termination of the applicable waiting periods under Antitrust Laws as soon as practicable, including by requesting early termination of the waiting period provided for under the Antitrust Laws. Each Party shall, in connection with its efforts to obtain all requisite approvals and authorizations for the transactions contemplated by this Agreement under any Antitrust Law, use its commercially reasonable efforts to: (i) cooperate in all respects with each other Party or its Affiliates in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private Person; (ii) keep the other Parties reasonably informed of any communication received by such Party or its Representatives from, or given by such Party or its Representatives to, any Governmental Authority and of any communication received or given in connection with any proceeding by a private Person, in each case regarding any of the transactions contemplated by this Agreement; (iii) permit a Representative of the other Parties and their respective outside counsel to review any communication given by it to, and consult with each other in advance of any meeting or conference with, any Governmental Authority or, in connection with any proceeding by a private Person, with any other Person, and to the extent permitted by such Governmental Authority or other Person, give a Representative or Representatives of the other Parties the opportunity to attend and participate in such meetings and conferences; (iv) in the event a Party’s Representative is prohibited from participating in or attending any meetings or conferences, the other Parties shall keep such Party promptly and reasonably apprised with respect thereto; and (v) use commercially reasonable efforts to cooperate in the filing of any memoranda, white papers, filings, correspondence or other written communications explaining or defending the transactions contemplated hereby, articulating any regulatory or competitive argument, and/or responding to requests or objections made by any Governmental Authority.
(c) As soon as reasonably practicable following the date of this Agreement, the Parties shall reasonably cooperate with each other and use (and shall cause their respective Affiliates to use) their respective commercially reasonable efforts to prepare and file with Governmental Authorities requests for approval of the transactions contemplated by this Agreement and shall use all commercially reasonable efforts to have such Governmental Authorities approve the transactions contemplated by this Agreement. Each Party shall give prompt written notice to the other Parties if such Party or any of its Representatives receives any notice from such Governmental Authorities in connection with the transactions contemplated by this Agreement, and shall promptly furnish the other Parties with a copy of such Governmental Authority notice. If any Governmental Authority requires that a hearing or meeting be held in connection with its approval of the transactions contemplated hereby, whether prior to the Closing or after the Closing, each Party shall arrange for Representatives of such Party to be present for such hearing or meeting. If any objections are asserted with respect to the transactions contemplated by this Agreement under any applicable Law or if any Action is instituted (or threatened to be instituted) by any applicable Governmental Authority or any private Person challenging any of the transactions contemplated by this Agreement or any Ancillary Document as violative of any applicable Law or which would otherwise prevent, materially impede or materially delay the consummation of the transactions contemplated hereby or thereby, the Parties shall use their commercially reasonable efforts to resolve any such objections or Actions so as to timely permit consummation of the transactions contemplated by this Agreement and the Ancillary Documents, including in order to resolve such objections or Actions which, in any case if not resolved, could reasonably be expected to prevent, materially impede or materially delay the consummation of the transactions contemplated hereby or thereby. In the event any Action is instituted (or threatened to be instituted) by a Governmental Authority or private Person challenging the transactions contemplated by this Agreement, or any Ancillary Document, the Parties shall, and shall cause their respective Representatives to, reasonably cooperate with each other and use their respective commercially reasonable efforts to contest and resist any such Action and to have vacated, lifted, reversed or overturned any Order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement or the Ancillary Documents.
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(d) Prior to the Closing, each Party shall use its commercially reasonable efforts to obtain any Consents of Governmental Authorities or other third Persons as may be necessary for the consummation by such Party or its Affiliates of the transactions contemplated by this Agreement or required as a result of the execution or performance of, or consummation of the transactions contemplated by, this Agreement by such Party or its Affiliates, and the other Parties shall provide reasonable cooperation in connection with such efforts.
6.10 Tax Matters. Each of the Parties shall use its reasonable best efforts to cause the First Merger and the Second Merger to be treated as part of an integrated transaction that qualifies as a reorganization pursuant to Section 368 of the Code and/or a contribution pursuant to Section 351 of the Code (collectively, the “Intended Tax Treatment”). Each Party shall file all Tax Returns consistent with, and take no position inconsistent with, such treatment (whether in audits, Tax Returns or otherwise) unless required to do so pursuant to a “determination” within the meaning of Section 1313(a) of the Code. From and after the date of this Agreement, none of the Parties shall, nor shall they permit any of their Affiliates to, knowingly take any action, cause any action to be taken or omit to take any action which could cause the transactions to fail to qualify for, or fail to be reported in a manner consistent with, the Intended Tax Treatment.
6.11 Further Assurances. The Parties shall further cooperate with each other and use their respective commercially reasonable efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable on their part under this Agreement and applicable Laws to consummate the transactions contemplated by this Agreement as soon as reasonably practicable, including preparing and filing as soon as practicable all documentation to effect all necessary notices, reports and other filings.
6.12 The Registration Statement.
(a) As promptly as practicable after the date hereof, Kernel shall prepare with the reasonable assistance of the Company, and file with the SEC a registration statement on Form S-4 (as amended or supplemented from time to time, and including the Proxy Statement contained therein, the “Registration Statement”) in connection with the registration under the Securities Act of Kernel Common Stock to be issued under this Agreement as the Merger Consideration, which Registration Statement will also contain a proxy statement (as amended, the “Proxy Statement”) for the purpose of soliciting proxies from Kernel stockholders for the matters to be acted upon at Kernel Special Meeting and providing the Public Stockholders an opportunity in accordance with Kernel’s Organizational Documents and the IPO Prospectus to have their shares of Old Kernel Class A Stock redeemed (the “Redemption”) in conjunction with the stockholder vote on Kernel Stockholder Approval Matters. The Proxy Statement shall include proxy materials for the purpose of soliciting proxies from Kernel stockholders to vote, at a special meeting of Kernel stockholders to be called and held for such purpose (the “Kernel Special Meeting”), in favor of resolutions approving (i) the adoption and approval of this Agreement and the transactions contemplated hereby or referred to herein, including the Merger (and, to the extent required, the issuance of any shares in connection with any PIPE/Convertible Note Investment), by the holders of shares of Old Kernel Class A Stock and Old Kernel Class B Stock in accordance with Kernel’s Organizational Documents, the Companies Act and the rules and regulations of the SEC and Nasdaq, (ii) the adoption and approval of the Amended Kernel Charter, (iii) the appointment of the members of the post-Closing Kernel Board in accordance with Section 6.17 hereof, (iv) such other matters as the Company and Kernel shall hereafter mutually determine to be necessary or appropriate in order to effect the Merger and the other transactions contemplated by this Agreement (the approvals described in foregoing clauses (i) through (iv), collectively, the “Kernel Stockholder Approval Matters”), and (v) the adjournment of Kernel Special Meeting, if necessary or desirable in the reasonable determination of Kernel. If on the date for which Kernel Special Meeting is scheduled, Kernel has not received proxies representing a sufficient number of shares to obtain the Required Kernel Stockholder Approval, whether or not a quorum is present, Kernel may make one or more successive postponements or adjournments of Kernel Special Meeting. In connection with the Registration Statement, Kernel will file with the SEC financial and other information about the transactions contemplated by this Agreement in accordance with applicable Law and applicable proxy solicitation and registration statement rules set forth in Kernel’s Organizational Documents, the Companies Act and the rules and regulations of the SEC and Nasdaq. Kernel shall cooperate and provide the Company (and its counsel) with a reasonable opportunity to review and comment on the Registration Statement and any amendment or supplement thereto prior to filing the same with the SEC. The Company shall provide Kernel with such information concerning the Target Companies and their stockholders, officers, directors, employees, assets, Liabilities, condition (financial or otherwise), business and operations that may be required or appropriate for inclusion in the Registration Statement, or in any amendments or supplements thereto, which information provided by the Company shall be true and correct and not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not materially misleading.
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(b) Kernel shall take any and all reasonable and necessary actions required to satisfy the requirements of the Securities Act, the Exchange Act and other applicable Laws in connection with the Registration Statement, Kernel Special Meeting and the Redemption. Each of Kernel and the Company shall, and shall cause each of its Subsidiaries to, make their respective directors, officers and employees, upon reasonable advance notice, available to the Company, Kernel and, after the Closing, Kernel Representative, and their respective Representatives in connection with the drafting of the public filings with respect to the transactions contemplated by this Agreement, including the Registration Statement, and responding in a timely manner to comments from the SEC. Each Party shall promptly correct any information provided by it for use in the Registration Statement (and other related materials) if and to the extent that such information is determined to have become false or misleading in any material respect or as otherwise required by applicable Laws. Kernel shall amend or supplement the Registration Statement and cause the Registration Statement, as so amended or supplemented, to be filed with the SEC and to be disseminated to Kernel stockholders, in each case as and to the extent required by applicable Laws and subject to the terms and conditions of this Agreement and Kernel’s Organizational Documents.
(c) Kernel, with the assistance of the other Parties, shall promptly respond to any SEC comments on the Registration Statement and shall otherwise use its commercially reasonable efforts to cause the Registration Statement to “clear” comments from the SEC and become effective. Kernel shall provide the Company with copies of any written comments, and shall inform the Company of any material oral comments, that Kernel or its Representatives receive from the SEC or its staff with respect to the Registration Statement, Kernel Special Meeting and the Redemption promptly after the receipt of such comments and shall give the Company a reasonable opportunity under the circumstances to review and comment on any proposed written or material oral responses to such comments.
(d) As soon as practicable following the Registration Statement “clearing” comments from the SEC and becoming effective, Kernel shall distribute the Registration Statement to Kernel’s stockholders and the Company Stockholders, and, pursuant thereto, shall call Kernel Special Meeting in accordance with the Companies Act for a date no later than thirty (30) days following the effectiveness of the Registration Statement.
(e) Kernel shall comply with all applicable Laws, any applicable rules and regulations of Nasdaq, Kernel’s Organizational Documents and this Agreement in the preparation, filing and distribution of the Registration Statement, any solicitation of proxies thereunder, the calling and holding of Kernel Special Meeting and the Redemption.
6.13 Company Stockholder Meeting. As promptly as practicable after the Registration Statement has become effective, the Company will call a meeting of its stockholders in order to obtain the Required Company Stockholder Approval (the “Company Special Meeting”), and the Company shall use its reasonable best efforts to solicit from the Company Stockholders proxies in favor of the Required Company Stockholder Approval prior to such Company Special Meeting, and to take all other actions necessary or advisable to secure the Required Company Stockholder Approval.
6.14 Public Announcements.
(a) The Parties agree that during the Interim Period no public release, filing or announcement concerning this Agreement or the Ancillary Documents or the transactions contemplated hereby or thereby shall be issued by any Party or any of their Affiliates without the prior written consent of Kernel and the Company (which consent shall not be unreasonably withheld, conditioned or delayed), except as such release or announcement may be required by applicable Law or the rules or regulations of any securities exchange, in which case the applicable Party shall use commercially reasonable efforts to allow the other Parties reasonable time to comment on, and arrange for any required filing with respect to, such release or announcement in advance of such issuance.
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(b) The Parties shall mutually agree upon and, as promptly as practicable after the execution of this Agreement (but in any event within four (4) Business Days thereafter), issue a press release announcing the execution of this Agreement (the “Signing Press Release”). Promptly after the issuance of the Signing Press Release, Kernel shall file a current report on Form 8-K (the “Signing Filing”) with the Signing Press Release and a description of this Agreement as required by Federal Securities Laws, which the Company shall review, comment upon and approve (which approval shall not be unreasonably withheld, conditioned or delayed) prior to filing (with the Company reviewing, commenting upon and approving such Signing Filing in any event no later than the third (3rd) Business Day after the execution of this Agreement). The Parties shall mutually agree upon and, as promptly as practicable after the Closing (but in any event within four (4) Business Days thereafter), issue a press release announcing the consummation of the transactions contemplated by this Agreement (the “Closing Press Release”). Promptly after the issuance of the Closing Press Release, Kernel shall file a current report on Form 8-K (the “Closing Filing”) with the Closing Press Release and a description of the Closing as required by Federal Securities Laws which the Seller Representative and Kernel Representative shall review, comment upon and approve (which approval shall not be unreasonably withheld, conditioned or delayed) prior to filing. In connection with the preparation of the Signing Press Release, the Signing Filing, the Closing Filing, the Closing Press Release, or any other report, statement, filing notice or application made by or on behalf of a Party to any Governmental Authority or other third party in connection with the transactions contemplated hereby, each Party shall, upon request by any other Party, furnish the Parties with all information concerning themselves, their respective directors, officers and equity holders, and such other matters as may be reasonably necessary or advisable in connection with the transactions contemplated hereby, or any other report, statement, filing, notice or application made by or on behalf of a Party to any third party and/ or any Governmental Authority in connection with the transactions contemplated hereby.
6.15 Confidential Information.
(a) The Company and the Seller Representative hereby agrees that during the Interim Period and, in the event that this Agreement is terminated in accordance with Article VIII, for a period of two (2) years after such termination, they shall, and shall cause their respective Representatives to: (i) treat and hold in strict confidence any Kernel Confidential Information, and will not use for any purpose (except in connection with the consummation of the transactions contemplated by this Agreement or the Ancillary Documents, performing their obligations hereunder or thereunder, enforcing their rights hereunder or thereunder, or in furtherance of their authorized duties on behalf of Kernel or its Subsidiaries), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of Kernel Confidential Information without Kernel’s prior written consent; and (ii) in the event that the Company, the Seller Representative or any of their respective Representatives, during the Interim Period or, in the event that this Agreement is terminated in accordance with Article VIII, for a period of two (2) years after such termination, becomes legally compelled to disclose any Kernel Confidential Information, (A) provide Kernel to the extent legally permitted with prompt written notice of such requirement so that Kernel or an Affiliate thereof may seek, at Kernel’s cost, a protective Order or other remedy or waive compliance with this Section 6.15(a), and (B) in the event that such protective Order or other remedy is not obtained, or Kernel waives compliance with this Section 6.15(a), furnish only that portion of such Kernel Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Kernel Confidential Information. In the event that this Agreement is terminated and the transactions contemplated hereby are not consummated, the Company and the Seller Representative shall, and shall cause their respective Representatives to, promptly deliver to Kernel or destroy (at Kernel’s election) any and all copies (in whatever form or medium) of Kernel Confidential Information and destroy all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon; provided, however, that the Company and the Seller Representative and their respective Representatives shall be entitled to keep any records required by applicable Law or bona fide record retention policies; and provided, further, that any Kernel Confidential Information that is not returned or destroyed shall remain subject to the confidentiality obligations set forth in this Agreement.
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(b) Kernel hereby agrees that during the Interim Period and, in the event that this Agreement is terminated in accordance with Article VIII, for a period of two (2) years after such termination, it shall, and shall cause its Representatives to: (i) treat and hold in strict confidence any Company Confidential Information, and will not use for any purpose (except in connection with the consummation of the transactions contemplated by this Agreement or the Ancillary Documents, performing its obligations hereunder or thereunder or enforcing its rights hereunder or thereunder), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the Company Confidential Information without the Company’s prior written consent; and (ii) in the event that Kernel or any of its Representatives, during the Interim Period or, in the event that this Agreement is terminated in accordance with Article VIII, for a period of two (2) years after such termination, becomes legally compelled to disclose any Company Confidential Information, (A) provide the Company to the extent legally permitted with prompt written notice of such requirement so that the Company may seek, at the Company’s sole expense, a protective Order or other remedy or waive compliance with this Section 6.15(b) and (B) in the event that such protective Order or other remedy is not obtained, or the Company waives compliance with this Section 6.15(b), furnish only that portion of such Company Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Company Confidential Information. In the event that this Agreement is terminated and the transactions contemplated hereby are not consummated, Kernel shall, and shall cause its Representatives to, promptly deliver to the Company or destroy (at Kernel’s election) any and all copies (in whatever form or medium) of Company Confidential Information and destroy all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon; provided, however, that Kernel and its Representatives shall be entitled to keep any records required by applicable Law or bona fide record retention policies; and provided, further, that any Company Confidential Information that is not returned or destroyed shall remain subject to the confidentiality obligations set forth in this Agreement. Notwithstanding the foregoing, Kernel and its Representatives shall be permitted to disclose any and all Company Confidential Information to the extent required by the Federal Securities Laws.
6.16 Documents and Information. After the Closing Date, ParentCo and the Company shall, and shall cause their respective Subsidiaries to, until the seventh (7th) anniversary of the Closing Date, retain all books, records and other documents pertaining to the business of the Target Companies in existence on the Closing Date and make the same available for inspection and copying by ParentCo Representative during normal business hours of the Company and its Subsidiaries, as applicable, upon reasonable request and upon reasonable notice. No such books, records or documents shall be destroyed after the seventh (7th) anniversary of the Closing Date by ParentCo or its Subsidiaries (including any Target Company) without first advising ParentCo Representative in writing and giving ParentCo Representative a reasonable opportunity to obtain possession thereof.
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6.17 Post-Closing Board of Directors and Executive Officers.
(a) The Parties shall take all necessary action, including causing the directors of ParentCo to resign, so that effective as of the Closing, ParentCo’s board of directors (the “Post-Closing ParentCo Board”) will consist of nine (9) individuals. Immediately after the Closing, the Parties shall take all necessary action to designate and appoint to the Post-Closing ParentCo Board (i) the two (2) persons that are designated by ParentCo prior to the Closing (the “ParentCo Directors”), and (ii) the seven (7) persons that are designated by the Company prior to the Closing (the “Company Directors”), at least four (4) of whom shall be required to qualify as an independent director under Nasdaq rules. The Post-Closing ParentCo Board directors shall be classified, with respect to the term for which they severally hold office, into three classes. The initial Class I Directors shall serve for a term expiring at the first annual meeting of stockholders to be held following the Closing; the initial Class II Directors shall serve for a term expiring at the second annual meeting of stockholders following the Closing; and the initial Class III Directors shall serve for a term expiring at the third annual meeting of stockholders to be held following the Closing. At each succeeding annual meeting of stockholders, beginning with the first annual meeting of stockholders following the Closing, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Three (3) of the Company Directors shall be Class I, two (2) of the Company Directors shall be Class II and two (2) of the Company Directors shall be Class III. One (1) of ParentCo Directors shall be Class II and one (1) of ParentCo Directors shall be Class III. The board of directors of the Surviving Corporation immediately after the Closing shall be the same as the Post-Closing ParentCo Board. At or prior to the Closing, ParentCo will provide each ParentCo Director with a customary director indemnification agreement, in form and substance reasonably acceptable to such ParentCo Director.
(b) The Parties shall take all action necessary, including causing the executive officers of ParentCo to resign, so that the individuals serving as the chief executive officer and chief financial officer, respectively, of ParentCo immediately after the Closing will be the same individuals (in the same office) as that of the Company immediately prior to the Closing.
(c) The Parties shall take all action necessary, including causing the directors and officers of Kernel to resign, so that the individuals serving as directors, chief executive officer and chief financial officer, respectively, of Kernel immediately after the Closing will be the same individuals (in the same office) as that of ParentCo immediately following the Closing.
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(d) The Parties shall take all action necessary, including causing the directors of the Company to resign, so that the individuals serving as directors of the Company immediately after the Closing will be the same individuals (in the same office) as that of ParentCo immediately following the Closing.
6.18 Indemnification of Directors and Officers; Tail Insurance.
(a) The Parties agree that all rights to exculpation, indemnification and advancement of expenses existing in favor of the current or former directors and officers of ParentCo, Kernel, Kernel Merger Sub, AIRO Merger Sub and each Person who served as a director, officer, member, trustee or fiduciary of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or enterprise at the request of ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub (the “D&O Indemnified Persons”) as provided in their respective Organizational Documents or under any indemnification, employment or other similar agreements between any D&O Indemnified Person and ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub, in each case as in effect on the date of this Agreement, shall survive the Closing and continue in full force and effect in accordance with their respective terms to the extent permitted by applicable Law. For a period of six (6) years after the Second Effective Time, ParentCo shall cause the Organizational Documents of ParentCo and the Kernel Surviving Corporation and AIRO Surviving Corporation to contain provisions no less favorable with respect to exculpation and indemnification of and advancement of expenses to D&O Indemnified Persons than are set forth as of the date of this Agreement in the Organizational Documents of ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub to the extent permitted by applicable Law. The provisions of this Section 6.18(a) shall survive the consummation of the First Merger and Second Merger and are intended to be for the benefit of, and shall be enforceable by, each of the D&O Indemnified Persons and their respective heirs and representatives, each of whom shall be a third-party beneficiary of the provisions of this Section 6.18(a).
(b) For the benefit of ParentCo’s, Kernel’s, Kernel Merger Sub’s and AIRO Merger Sub’s directors and officers, ParentCo shall be permitted prior to the First Effective Time to obtain and fully pay from the capital of the Kernel Surviving Company upon release of funds from the Trust Account the premium for a “tail” insurance policy that provides coverage for up to a six-year period from and after the First Effective Time for events occurring prior to the First Effective Time (the “D&O Tail Insurance”) that is substantially equivalent to and in any event not less favorable in the aggregate than ParentCo’s existing policy or, if substantially equivalent insurance coverage is unavailable, the best available coverage. If obtained, ParentCo shall maintain the D&O Tail Insurance in full force and effect, and continue to honor the obligations thereunder, and ParentCo shall timely pay or caused to be paid all premiums with respect to the D&O Tail Insurance.
6.19 Unencumbered Cash Proceeds. The Parties agree that after the Closing, the Unencumbered Cash shall first be used to pay (in the following order until paid in full): (i) Company Transaction Expenses, (ii) ParentCo Expenses, (iii) deferred Kernel Expenses (including cash amounts payable to the IPO Underwriter and any legal fees) of the IPO, (iv) any loans owed by ParentCo to the Sponsor for any ParentCo Expenses (including deferred ParentCo Expenses), other administrative costs and expenses incurred by or on behalf of ParentCo, and then (v) any other Liabilities of ParentCo as of the Closing. Such ParentCo Expenses and Company Transaction Expenses, as well as any ParentCo Expenses and Company Transaction Expenses that are required to be paid by delivery of ParentCo’s securities, will be paid at the Closing. Any remaining cash will be used for working capital and general corporate purposes of ParentCo and the Surviving Corporation.
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6.20 Additional Financing.
(a) PIPE/Convertible Note Investment. Without limiting anything to the contrary contained herein, during the Interim Period, Kernel shall use its best efforts to enter into and consummate subscription agreements and/or convertible note purchase agreements with investors relating to an investment in Kernel to purchase shares of Kernel in connection with a private placement, and/or relating to a private investment in Kernel in the form a convertible note, in either case on terms mutually agreeable to the Company and Kernel, acting reasonably (a “PIPE/Convertible Note Investment”), and, if Kernel consummates a PIPE/Convertible Note Investment, Kernel and the Company shall, and shall cause their respective Representatives to, cooperate with each other and their respective Representatives in connection with such PIPE/Convertible Note Investment and use their respective commercially reasonable efforts to cause such PIPE/Convertible Note Investment to occur (including having the Company’s senior management participate in any investor meetings and roadshows as reasonably requested by Kernel).
6.21 Post-Closing Assumption or Creation of Benefit Plans. After the Closing, subject to the terms and conditions set forth in this Agreement, ParentCo shall assume the Benefit Plans of the Company or create new Benefit Plans, including, but not limited to, equity incentive plans, that are substantially similar to the Benefit Plans previously approved by the board of directors of the Company.
6.22 Extension. Kernel shall timely obtain all Extensions necessary and permissible under Kernel’s charter (as in effect on the date hereof or as amended prior to the Closing Date) and applicable Law so that the First Merger and Second Merger can be completed prior to Kernel’s deadline to complete a Business Combination.
6.23 Non-Competition Agreements. On or prior to the Closing Date, the Significant Company Holders shall have each entered into a non-competition and non-solicitation agreement in favor of ParentCo and Company (each, a “Non-Competition Agreement”), in form and substance mutually acceptable to Kernel and the Company, which will become effective as of the Closing.
6.24 Termination and Replacement of the Company Warrants. The Company and Kernel shall attempt to negotiate in good faith with Stephenson and Scarsdale in order to obtain prior to Closing executed agreements in which Stephenson and Scarsdale terminate the Company Warrants in exchange for warrants for shares of ParentCo on terms of substantially similar economic value as the Company Warrants as of the time of Closing (the “Replacement Warrants”).
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6.25 Assumption and Conversion of Company Options. The Company and Kernel shall attempt to negotiate in good faith with holders of the Company Options in order to obtain prior to Closing executed agreements in which ParentCo assumes the Company Options, and converts them to options for ParentCo Common Stock with substantially similar economic terms (the “Replacement Options”).
6.26 Updating Disclosure Schedules. The Company shall have the right to update or otherwise amend the Company Disclosure Schedules prior to Closing so long as such changes to the Company Disclosure Schedules do not, in the aggregate, result in a Material Adverse Effect; however, any reference in the Company Disclosure Schedules (as of the date hereof) to any agreement or item that has not been made available to Kernel shall be deemed excluded from the Company Disclosure Schedules until such agreement or item is provided to Kernel. Notwithstanding the foregoing, in no event shall the Company providing Kernel the agreement or item referenced in the Company Disclosure Schedules as of the date hereof at some time after the date hereof be considered for the purposes of determining if a Material Adverse Effect has occurred, so long as the aforementioned agreement or item is provided to Kernel no later than fifteen (15) days prior to the Closing Date. For the avoidance of doubt, Kernel shall not be deemed to have conducted legal due diligence on any agreement or item referenced in the Company Disclosure Schedules but not made available to Kernel as of the date hereof.
6.27 Audited Consolidated Financials. Within 60 calendar days of the date hereof, the Company shall provide audited consolidated financial statements of the Target Companies (including, in each case, any notes thereto), consisting of the consolidated balance sheets of the Target Companies as of December 31, 2022, and the related consolidated audited income statements, changes in stockholders equity and statements of cash flows for the fiscal year then ended, audited by a PCAOB qualified auditor in accordance with GAAP and PCAOB standards (the “2022 Audited Financials”).
Article VII
CLOSING CONDITIONS
7.1 Conditions to Each Party’s Obligations. The obligations of each Party to consummate the First Merger and Second Merger and the other transactions described herein shall be subject to the satisfaction or written waiver (where permissible) by the Company and Kernel of the following conditions:
(a) Required Kernel Stockholder Approval. Kernel Stockholder Approval Matters that are submitted to the vote of the stockholders of Kernel at Kernel Special Meeting in accordance with the Proxy Statement shall have been approved by the requisite vote of the stockholders of Kernel at Kernel Special Meeting in accordance with Kernel’s Organizational Documents, applicable Law and the Proxy Statement (the “Required Kernel Stockholder Approval”).
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(b) Required Company Stockholder Approval. The Company Special Meeting shall have been held in accordance with the DGCL and the Company’s Organizational Documents, and at such meeting, the requisite vote of the Company Stockholders (including any separate class or series vote that is required, whether pursuant to the Company’s Organizational Documents, any stockholder agreement or otherwise) shall have authorized, approved and consented to, the execution, delivery and performance of this Agreement and each of the Ancillary Documents to which the Company is or is required to be a party or bound, and the consummation of the transactions contemplated hereby and thereby, including the Merger (the “Required Company Stockholder Approval”).
(c) Antitrust Laws. Any waiting period (and any extension thereof) applicable to the consummation of this Agreement under any Antitrust Laws shall have expired or been terminated.
(d) Requisite Regulatory Approvals. All Consents required to be obtained from or made with any Governmental Authority in order to consummate the transactions contemplated by this Agreement shall have been obtained or made.
(e) Requisite Consents. The Consents required to be obtained from or made with any third Person (other than a Governmental Authority) in order to consummate the transactions contemplated by this Agreement that are set forth in Schedule 7.1(e) shall have each been obtained or made.
(f) No Adverse Law or Order. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary or permanent) or Order that is then in effect and which has the effect of making the transactions or agreements contemplated by this Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by this Agreement.
(g) Net Tangible Assets Test. Upon the Closing, after giving effect to the Redemption, Kernel shall have net tangible assets of at least $5,000,001.
(h) Appointment to the Board. The members of the Post-Closing ParentCo Board, Kernel Board and Company Board shall have been elected or appointed as of the Closing consistent with the requirements of Section 6.17.
(i) Registration Statement. The Registration Statement shall have been declared effective by the SEC and shall remain effective as of the Closing, and no stop order or similar order shall be in effect with respect to the Registration Statement.
(j) Nasdaq Listing. ParentCo Common Stock to be issued in connection with this Agreement shall have been approved for listing on Nasdaq, subject to official notice of issuance.
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7.2 Conditions to Obligations of the Company. In addition to the conditions specified in Section 7.1, the obligations of the Company to consummate the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by the Company) of the following conditions:
(a) Representations and Warranties. All of the representations and warranties of Kernel, ParentCo, Kernel Merger Sub and AIRO Merger Sub set forth in this Agreement and in any certificate delivered by or on behalf of Kernel, ParentCo, Kernel Merger Sub and AIRO Merger Sub pursuant hereto shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, Kernel.
(b) Agreements and Covenants. Kernel, ParentCo, Kernel Merger Sub and AIRO Merger Sub shall have performed in all material respects all of their obligations and complied in all material respects with all of their agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) No Kernel Material Adverse Effect. No Material Adverse Effect shall have occurred with respect to Kernel since the date of this Agreement which is continuing and uncured.
(d) Closing Deliveries.
(i) Officer Certificate. Kernel shall have delivered to the Company a certificate, dated the Closing Date, signed by an executive officer of Kernel in such capacity, certifying as to the satisfaction of the conditions specified in Sections 7.2(a), 7.2(b), and 7.2(c).
(ii) Secretary Certificate. Kernel shall have delivered to the Company a certificate from its secretary or other executive officer certifying as to, and attaching, (A) copies of Kernel’s Organizational Documents as in effect as of the Closing Date, (B) the resolutions of Kernel’s board of directors authorizing and approving the execution, delivery and performance of this Agreement and each of the Ancillary Documents to which it is a party or by which it is bound, and the consummation of the transactions contemplated hereby and thereby, (C) evidence that the Required Kernel Stockholder Approval has been obtained and (D) the incumbency of officers authorized to execute this Agreement or any Ancillary Document to which Kernel is or is required to be a party or otherwise bound.
(iii) Good Standing. Kernel shall have delivered to the Company a good standing certificate (or similar documents applicable for such jurisdictions) for Kernel certified as of a date no earlier than thirty (30) days prior to the Closing Date from the proper Governmental Authority of Kernel’s jurisdiction of organization and from each other jurisdiction in which Kernel is qualified to do business as a foreign entity as of the Closing, in each case to the extent that good standing certificates or similar documents are generally available in such jurisdictions.
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(iv) Company Stockholder Registration Rights Agreement. The Company Stockholders shall have received a copy of the Company Stockholder Registration Rights Agreement in a form mutually agreed to by the Company and Kernel, duly executed by ParentCo.
(v) Replacement Warrants and Replacement Options. ParentCo shall have delivered to the Company the Replacement Warrants and Replacement Options duly executed by ParentCo.
(d) Minimum Unencumbered Cash Condition. Upon the Closing, Kernel shall have Unencumbered Cash in an amount no less than Fifty Million U.S. Dollars ($50,000,000).
7.3 Conditions to Obligations of Kernel. In addition to the conditions specified in Section 7.1, the obligations of Kernel, ParentCo, Kernel Merger Sub and AIRO Merger Sub to consummate the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by Kernel) of the following conditions:
(a) Representations and Warranties. All of the representations and warranties of the Company set forth in this Agreement and in any certificate delivered by or on behalf of the Company pursuant hereto shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, the Target Companies, taken as a whole.
(b) Agreements and Covenants. The Company shall have performed in all material respects all of its obligations and complied in all material respects with all of its agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) No Material Adverse Effect. No Material Adverse Effect shall have occurred with respect to the Target Companies taken as a whole since the date of this Agreement which is continuing and uncured.
(d) Certain Ancillary Documents. Each Lock-Up Agreement and Non-Competition Agreement shall be in full force and effect in accordance with the terms thereof as of the Closing.
(e) Imminent Closing Net Debt. Imminent Closing Net Debt shall be no more than $50,000,000.
(f) Completion of Legal Due Diligence. Kernel shall have completed its legal due diligence of the Target Companies to its reasonable satisfaction and shall be satisfied with the results thereof in its reasonable discretion.
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(g) Closing Deliveries.
(i) Officer Certificate. Kernel shall have received a certificate from the Company, dated as the Closing Date, signed by an executive officer of the Company in such capacity, certifying as to the satisfaction of the conditions specified in Sections 7.3(a), 7.3(b), and 7.3(c).
(ii) Secretary Certificate. The Company shall have delivered to Kernel a certificate executed by the Company’s secretary certifying as to the validity and effectiveness of, and attaching, (A) copies of the Company’s Organizational Documents as in effect as of the Closing Date (immediately prior to the Second Effective Time), (B) the requisite resolutions of the Company’s board of directors authorizing and approving the execution, delivery and performance of this Agreement and each Ancillary Document to which the Company is or is required to be a party or bound, and the consummation of the Merger and the other transactions contemplated hereby and thereby, and the adoption of the Surviving Corporation Organizational Documents, and recommending the approval and adoption of the same by the Company Stockholders at a duly called meeting of stockholders, (C) evidence that the Required Company Stockholder Approval has been obtained and (D) the incumbency of officers of the Company authorized to execute this Agreement or any Ancillary Document to which the Company is or is required to be a party or otherwise bound.
(iii) Good Standing. The Company shall have delivered to Kernel good standing certificates (or similar documents applicable for such jurisdictions) for each Target Company certified as of a date no earlier than thirty (30) days prior to the Closing Date from the proper Governmental Authority of the Target Company’s jurisdiction of organization and from each other jurisdiction in which the Target Company is qualified to do business as a foreign corporation or other entity as of the Closing, in each case to the extent that good standing certificates or similar documents are generally available in such jurisdictions.
(iv) Certified Charter. The Company shall have delivered to Kernel a copy of the Company Charter, as in effect as of immediately prior to the Second Effective Time, certified by the Secretary of State of the State of Delaware as of a date no more than ten (10) Business Days prior to the Closing Date.
(v) Employment Agreements. Kernel shall have received employment agreements, in each case effective as of the Closing, in form and substance reasonably acceptable to the Company and Kernel, between each of the persons set forth Schedule 1.1(d)(v) hereto and the applicable Target Company or Kernel, as noted in Schedule 1.1(d)(v), each such employment agreement duly executed by the parties thereto.
(vi) Non-Competition Agreements. Kernel shall have received non-competition and non-solicitation agreement in favor of ParentCo and Company, in a form mutually agreed-to by Kernel and the Company, fully executed by the Significant Company Holders, which will become effective as of the Closing.
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(vii) Transmittal Documents. The Exchange Agent shall have received from each Company Stockholder the Transmittal Documents, each in form reasonably acceptable for transfer on the books of the Company.
(viii) Resignations. Subject to the requirements of Section 6.18, Kernel shall have received written resignations, effective as of the Closing, of each of the directors and officers of the Company as requested by Kernel prior to the Closing.
(ix) Lock-Up Agreements. Kernel shall have received a Lock-Up Agreement for each Significant Company Holder, duly executed by such Significant Company Holder.
(x) Termination of Certain Contracts. Kernel shall have received evidence reasonably acceptable to Kernel that the Contracts involving the Target Companies and/or Company Security Holders or other Related Persons set forth on Schedule 5.21 shall have been terminated with no further obligation or Liability of the Target Companies thereunder.
(xi) Replacement Warrants and Replacement Options. The Company shall have delivered to Kernel the Replacement Warrants and Replacement Options duly executed by the Company and the holders of the Company Warrants and Company Options.
7.4 Frustration of Conditions. Notwithstanding anything contained herein to the contrary, no Party may rely on the failure of any condition set forth in this Article VII to be satisfied if such failure was caused by the failure of such Party or its Affiliates (or with respect to the Company, any Target Company or Company Stockholder) failure to comply with or perform any of its covenants or obligations set forth in this Agreement.
Article VIII
TERMINATION AND EXPENSES
8.1 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing as follows:
(a) by mutual written consent of Kernel and the Company;
(b) by written notice by Kernel or the Company if any of the conditions to the Closing set forth in Article VII have not been satisfied or waived by August 2, 2023 (the “Outside Date”); provided, however, the right to terminate this Agreement under this Section 8.1(b) shall not be available to a Party if the breach or violation by such Party or its Affiliates of any representation, warranty, covenant or obligation under this Agreement was the cause of, or resulted in, the failure of the Closing to occur on or before the Outside Date;
(c) by written notice by either Kernel or the Company if a Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such Order or other action has become final and non-appealable; provided, however, that the right to terminate this Agreement pursuant to this Section 8.1(c) shall not be available to a Party if the failure by such Party or its Affiliates to comply with any provision of this Agreement has been a substantial cause of, or substantially resulted in, such action by such Governmental Authority;
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(d) by written notice by the Company to Kernel, if (i) there has been a breach by Kernel of any of its representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of Kernel shall have become untrue or inaccurate, in any case, which would result in a failure of a condition set forth in Section 7.2(a) or Section 7.2(b) to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty (20) days after written notice of such breach or inaccuracy is provided to Kernel or (B) the Outside Date; provided, that the Company shall not have the right to terminate this Agreement pursuant to this Section 8.1(d) if at such time the Company is in material uncured breach of this Agreement;
(e) by written notice by Kernel to the Company, if (i) there has been a breach by the Company of any of its representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of such Parties shall have become untrue or inaccurate, in any case, which would result in a failure of a condition set forth in Section 7.3(a) or Section 7.3(b) to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty (20) days after written notice of such breach or inaccuracy is provided to the Company or (B) the Outside Date; provided, that Kernel shall not have the right to terminate this Agreement pursuant to this Section 8.1(e) if at such time Kernel is in material uncured breach of this Agreement;
(f) by written notice by Kernel to the Company, if there shall have been a Material Adverse Effect on the Target Companies taken as a whole following the date of this Agreement which is uncured and continuing;
(g) by written notice by either Kernel or the Company to the other, if Kernel Special Meeting is held (including any adjournment or postponement thereof) and has concluded, Kernel’s stockholders have duly voted, and the Required Kernel Stockholder Approval was not obtained;
(h) by written notice by either Kernel or the Company to the other, if the Company Special Meeting is held (including any adjournment or postponement thereof) and has concluded, the Company Stockholders have duly voted, and the Required Company Stockholder Approval was not obtained; or
(i) by written notice by Kernel to the Company, if the Company shall have failed to provide the 2022 Audited Financials in accordance with Section 6.27.
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8.2 Effect of Termination. This Agreement may only be terminated in the circumstances described in Section 8.1 and pursuant to a written notice delivered by the applicable Party to the other applicable Parties, which sets forth the basis for such termination, including the provision of Section 8.1 under which such termination is made. In the event of the valid termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void, and there shall be no Liability on the part of any Party or any of their respective Representatives, and all rights and obligations of each Party shall cease, except: (i) Sections 6.14, 6.15, 8.3, 9.1, Article X and this Section 8.2 shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any Party from Liability for any willful breach of any representation, warranty, covenant or obligation under this Agreement or any Fraud Claim against such Party, in either case, prior to termination of this Agreement (in each case of clauses (i) and (ii) above, subject to Section 9.1). Without limiting the foregoing, and except as provided in Sections 8.3 and this Section 8.2 (but subject to Section 9.1) and subject to the right to seek injunctions, specific performance or other equitable relief in accordance with Section 10.7, the Parties’ sole right prior to the Closing with respect to any breach of any representation, warranty, covenant or other agreement contained in this Agreement by another Party or with respect to the transactions contemplated by this Agreement shall be the right, if applicable, to terminate this Agreement pursuant to Section 8.1.
(a) In the event this Agreement is validly terminated pursuant to Section 8.1, within seven (7) days of the termination, Kernel shall change the name of ParentCo to a name that does not contain the word “Airo”, and shall promptly provide the Company evidence of a successful name change for ParentCo.
8.3 Fees and Expenses. Subject to Sections 6.19, 9.1, 10.14 and 10.15 all Company Transaction Expenses and Kernel Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses; provided, however, that if the Closing occurs, all remaining Company Transaction Expenses and Kernel Expenses shall be paid from the capital of Kernel upon release of funds from the Trust Account.
Article IX
WAIVERS AND RELEASES
9.1 Waiver of Claims Against Trust. Reference is made to the IPO Prospectus. The Company, Merger Sub and the Seller Representative each hereby represents and warrants that it has read the IPO Prospectus and understands that Kernel has established the Trust Account containing the proceeds of the IPO and the overallotment shares acquired by Kernel’s underwriters and from certain private placements occurring simultaneously with the IPO (including interest accrued from time to time thereon) for the benefit of Kernel’s public stockholders (including overallotment shares acquired by Kernel’s underwriters) (the “Public Stockholders”) and that, except as otherwise described in the IPO Prospectus, Kernel may disburse monies from the Trust Account only: (a) to the Public Stockholders in the event they elect to redeem their shares of Old Kernel Class A Stock in connection with the consummation of its initial business combination (as such term is used in the IPO Prospectus) (“Business Combination”) or in connection with an amendment to Kernel’s Organizational Documents to extend Kernel’s deadline to consummate a Business Combination, (b) to the Public Stockholders if Kernel fails to consummate a Business Combination within 18 months after the closing of the IPO, subject to extension by amendment to Kernel’s Organizational Documents, (c) with respect to any interest earned on the amounts held in the Trust Account, amounts necessary to pay for any taxes and up to $100,000 in dissolution expenses, and (d) to Kernel after or concurrently with the consummation of a Business Combination. For and in consideration of Kernel entering into this Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each of the Company, Merger Sub and the Seller Representative hereby agrees on behalf of itself and its Affiliates that, notwithstanding anything to the contrary in this Agreement, none of the Company, Merger Sub or the Seller Representative nor any of their respective Affiliates do now or shall at any time hereafter have any right, title, interest or claim of any kind in or to any monies in the Trust Account or distributions therefrom, or make any claim against the Trust Account (including any distributions therefrom), regardless of whether such claim arises as a result of, in connection with or relating in any way to, this Agreement or any proposed or actual business relationship between Kernel or any of its Representatives, on the one hand, and the Company, Merger Sub, the Seller Representative or any of their respective Representatives, on the other hand, or any other matter, and regardless of whether such claim arises based on contract, tort, equity or any other theory of legal liability (collectively, the “Released Claims”). Each of the Company, Merger Sub and the Seller Representative on behalf of itself and its Affiliates hereby irrevocably waives any Released Claims that any such Party or any of its Affiliates may have against the Trust Account (including any distributions therefrom) now or in the future and will not seek recourse against the Trust Account (including any distributions therefrom) for any reason whatsoever (including for an alleged breach of this Agreement or any other agreement with Kernel or its Affiliates). The Company, Merger Sub and the Seller Representative each agrees and acknowledges that such irrevocable waiver is material to this Agreement and specifically relied upon by Kernel and its Affiliates to induce Kernel to enter in this Agreement, and each of the Company, Merger Sub and the Seller Representative further intends and understands such waiver to be valid, binding and enforceable against such Party and each of its Affiliates under applicable Law. To the extent that the Company, Merger Sub or the Seller Representative or any of their respective Affiliates commences any Action based upon, in connection with, relating to or arising out of any matter relating to Kernel or its Representatives, which proceeding seeks, in whole or in part, monetary relief against Kernel or its Representatives, each of the Company, Merger Sub and the Seller Representative hereby acknowledges and agrees that its and its Affiliates’ sole remedy shall be against funds held outside of the Trust Account and that such claim shall not permit such Party or any of its Affiliates (or any Person claiming on behalf or in lieu of any of them) to have any claim against the Trust Account (including any distributions therefrom) or any amounts contained therein. In the event that the Company, Merger Sub or the Seller Representative or any of their respective Affiliates commences Action based upon, in connection with, relating to or arising out of any matter relating to Kernel or its Representatives which proceeding seeks, in whole or in part, relief against the Trust Account (including any distributions therefrom) or the Public Stockholders, whether in the form of money damages or injunctive relief, Kernel and its Representatives, as applicable, shall be entitled to recover from the Company, Merger Sub, the Seller Representative and their respective Affiliates, as applicable, the associated legal fees and costs in connection with any such Action, in the event Kernel or its Representatives, as applicable, prevails in such Action. This Section 9.1 shall survive termination of this Agreement for any reason and continue indefinitely.
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Article X
MISCELLANEOUS
10.1 Notices. All notices, consents, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by email, (iii) one Business Day after being sent, if sent by reputable, nationally recognized overnight courier service or (iv) three (3) Business Days after being mailed, if sent by registered or certified mail, pre-paid and return receipt requested, in each case to the applicable Party at the following addresses (or at such other address for a Party as shall be specified by like notice):
If to Kernel, ParentCo, Kernel Merger Sub or AIRO Merger Sub at or prior to the Closing, to:
Kernel Group Holdings, Inc. New York, New York 10022
| with a copy (which will not constitute notice) to:
Nelson Mullins Riley & Scarborough LLP 101 Constitution Avenue, NW Suite 900 | |
If to ParentCo Representative, to:
VKSS Capital, LLC 515 Madison Avenue, Suite 865 New York, New York 10022Attn: Suren Ajjarapu Telephone No.: (646) 908-2658 Email: sa@kernelcap.com | with a copy (which will not constitute notice) to:
Nelson Mullins Riley & Scarborough LLP 101 Constitution Avenue, NW Suite 900
| |
If to the Company or the Surviving Corporation, to:
AIRO Group Holdings, Inc. joe.burns@theairogroup.com | with a copy (which will not constitute notice) to:
Dykema Gossett PLLC Suite 1050 Milwaukee, WI 53202
| |
If to the Seller Representative, to: Dr. Chirinjeev Kathuria 19W060 Avenue Latour Oak Brook, IL 60523 | with a copy (which will not constitute notice) to: Dykema Gossett PLLC Suite 1050 Milwaukee, WI 53202
| |
If to ParentCo after the Closing, to:
AIRO Group Holdings, Inc. joe.burns@theairogroup.com
and
ParentCo Representative | with a copy (which will not constitute notice) to:
Dykema Gossett PLLC Suite 1050 Milwaukee, WI 53202 |
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10.2 Binding Effect; Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. This Agreement shall not be assigned by operation of Law or otherwise without the prior written consent of Kernel and the Company (and after the Closing, Kernel Representative and the Seller Representative), and any assignment without such consent shall be null and void; provided that no such assignment shall relieve the assigning Party of its obligations hereunder.
10.3 Third Parties. Except for the rights of the D&O Indemnified Persons set forth in Section 6.18(a), which the Parties acknowledge and agree are express third party beneficiaries of this Agreement, nothing contained in this Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any Person that is not a Party hereto or thereto or a successor or permitted assign of such a Party.
10.4 Arbitration. Any and all disputes, controversies and claims (other than applications for a temporary restraining order, preliminary injunction, permanent injunction or other equitable relief or application for enforcement of a resolution under this Section 10.4) arising out of, related to, or in connection with this Agreement or the transactions contemplated hereby (a “Dispute”) shall be governed by this Section 10.4. A Party must, in the first instance, provide written notice of any Disputes to the other Parties subject to such Dispute, which notice must provide a reasonably detailed description of the matters subject to the Dispute. The Parties involved in such Dispute shall seek to resolve the Dispute on an amicable basis within ten (10) Business Days of the notice of such Dispute being received by such other Parties subject to such Dispute (the “Resolution Period”); provided, that if any Dispute would reasonably be expected to have become moot or otherwise irrelevant if not decided within sixty (60) days after the occurrence of such Dispute, then there shall be no Resolution Period with respect to such Dispute. Any Dispute that is not resolved during the Resolution Period may immediately be referred to and finally resolved by arbitration pursuant to the then-existing Expedited Procedures (as defined in the AAA Procedures) of the Commercial Arbitration Rules (the “AAA Procedures”) of the AAA. Any Party involved in such Dispute may submit the Dispute to the AAA to commence the proceedings after the Resolution Period. To the extent that the AAA Procedures and this Agreement are in conflict, the terms of this Agreement shall control. The arbitration shall be conducted by one arbitrator nominated by the AAA promptly (but in any event within five (5) Business Days) after the submission of the Dispute to the AAA and reasonably acceptable to each party subject to the Dispute, which arbitrator shall be a commercial lawyer with substantial experience arbitrating disputes under acquisition or merger agreements. The arbitrator shall accept his or her appointment and begin the arbitration process promptly (but in any event within five (5) Business Days) after his or her nomination and acceptance by the Parties subject to the Dispute. The proceedings shall be streamlined and efficient. The arbitrator shall decide the Dispute in accordance with the substantive law of the state of Delaware. Time is of the essence. Each Party subject to the Dispute shall submit a proposal for resolution of the Dispute to the arbitrator within twenty (20) days after confirmation of the appointment of the arbitrator. The arbitrator shall have the power to order any party to do, or to refrain from doing, anything consistent with this Agreement, the Ancillary Documents and applicable Law, including to perform its contractual obligation(s); provided, that the arbitrator shall be limited to ordering pursuant to the foregoing power (and, for the avoidance of doubt, shall order) the relevant Party (or Parties, as applicable) to comply with only one or the other of the proposals. The arbitrator’s award shall be in writing and shall include a reasonable explanation of the arbitrator’s reason(s) for selecting one or the other proposal. The seat of arbitration shall be in New York County, State of New York. The language of the arbitration shall be English.
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10.5 Governing Law; Jurisdiction. This Agreement shall be governed by, construed and enforced in accordance with the Laws of the State of Delaware without regard to the conflict of laws principles thereof. Subject to Section 10.4, all Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any state or federal court located in Delaware (or in any appellate court thereof) (the “Specified Courts”). Subject to Section 10.4, each Party (a) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Action arising out of or relating to this Agreement brought by any Party and (b) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court. Each Party agrees that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each Party irrevocably consents to the service of the summons and complaint and any other process in any other Action relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such Party at the applicable address set forth in Section 10.1. Nothing in this Section 10.5 shall affect the right of any Party to serve legal process in any other manner permitted by Law.
10.6 WAIVER OF JURY TRIAL. EACH PARTY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY (A) CERTIFIES THAT NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.6.
10.7 Specific Performance. Each Party acknowledges that the rights of each Party to consummate the transactions contemplated hereby are unique, recognizes and affirms that in the event of a breach of this Agreement by any Party, money damages may be inadequate and the non-breaching Parties may have not adequate remedy at law, and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by an applicable Party in accordance with their specific terms or were otherwise breached. Accordingly, each Party shall be entitled to seek an injunction or restraining order to prevent breaches of this Agreement and to seek to enforce specifically the terms and provisions hereof, without the requirement to post any bond or other security or to prove that money damages would be inadequate, this being in addition to any other right or remedy to which such Party may be entitled under this Agreement, at law or in equity.
10.8 Severability. In case any provision in this Agreement shall be held invalid, illegal or unenforceable in a jurisdiction, such provision shall be modified or deleted, as to the jurisdiction involved, only to the extent necessary to render the same valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby nor shall the validity, legality or enforceability of such provision be affected thereby in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties will substitute for any invalid, illegal or unenforceable provision a suitable and equitable provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or unenforceable provision.
10.9 Amendment. This Agreement may be amended, supplemented or modified only by execution of a written instrument signed by Kernel, the Company, Kernel Representative and the Seller Representative.
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10.10 Waiver. Kernel on behalf of itself and its Affiliates, the Company on behalf of itself and its Affiliates, and the Seller Representative on behalf of itself and the Company Stockholders, may in its sole discretion (i) extend the time for the performance of any obligation or other act of any other non-Affiliated Party , (ii) waive any inaccuracy in the representations and warranties by such other non-Affiliated Party contained herein or in any document delivered pursuant to this Agreement and (iii) waive compliance by such other non-Affiliated Party with any covenant or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the Party or Parties to be bound thereby (including by Kernel Representative or the Seller Representative in lieu of such Party to the extent provided in this Agreement). Notwithstanding the foregoing, no failure or delay by a Party in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any other right hereunder. Notwithstanding the foregoing, any waiver of any provision of this Agreement after the Closing shall also require the prior written consent of Kernel Representative.
10.11 Entire Agreement. This Agreement and the documents or instruments referred to herein, including any exhibits and schedules attached hereto, which exhibits and schedules are incorporated herein by reference, together with the Ancillary Documents, embody the entire agreement and understanding of the Parties in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or the documents or instruments referred to herein, which collectively supersede all prior agreements and the understandings among the Parties with respect to the subject matter contained herein.
10.12 Interpretation. The table of contents and the Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. In this Agreement, unless the context otherwise requires: (a) any pronoun used shall include the corresponding masculine, feminine or neuter forms, and words in the singular, including any defined terms, include the plural and vice versa; (b) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity; (c) any accounting term used and not otherwise defined in this Agreement or any Ancillary Document has the meaning assigned to such term in accordance with GAAP; (d) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding such term and shall be deemed in each case to be followed by the words “without limitation”; (e) the words “herein,” “hereto,” and “hereby” and other words of similar import shall be deemed in each case to refer to this Agreement as a whole and not to any particular Section or other subdivision of this Agreement; (f) the word “if” and other words of similar import when used herein shall be deemed in each case to be followed by the phrase “and only if”; (g) the term “or” means “and/or”; (h) any reference to the term “ordinary course” or “ordinary course of business” shall be deemed in each case to be followed by the words “consistent with past practice”; (i) any agreement, instrument, insurance policy, Law or Order defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument, insurance policy, Law or Order as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes, regulations, rules or orders) by succession of comparable successor statutes, regulations, rules or orders and references to all attachments thereto and instruments incorporated therein; (j) except as otherwise indicated, all references in this Agreement to the words “Section,” “Article”, “Schedule” and “Exhibit” are intended to refer to Sections, Articles, Schedules and Exhibits to this Agreement; and (k) the term “Dollars” or “$” means United States dollars. Any reference in this Agreement to a Person’s directors shall include any member of such Person’s governing body and any reference in this Agreement to a Person’s officers shall include any Person filling a substantially similar position for such Person. Any reference in this Agreement or any Ancillary Document to a Person’s shareholders or stockholders shall include any applicable owners of the equity interests of such Person, in whatever form, including with respect to Kernel its stockholders under the Companies Act, as then applicable, or its Organizational Documents. The Parties have participated jointly in the negotiation and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any provision of this Agreement. To the extent that any Contract, document, certificate or instrument is represented and warranted to by the Company to be given, delivered, provided or made available by the Company, in order for such Contract, document, certificate or instrument to have been deemed to have been given, delivered, provided and made available to Kernel or its Representatives, such Contract, document, certificate or instrument shall have been posted to the electronic data site maintained on behalf of the Company for the benefit of Kernel and its Representatives and Kernel and its Representatives have been given access to the electronic folders containing such.
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10.13 Counterparts. This Agreement and each Ancillary Document may be executed and delivered (including by facsimile or other electronic transmission) in one or more counterparts, and by the different Parties in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
10.14 ParentCo Representative.
(a) ParentCo and Kernel, on behalf of themselves and their Subsidiaries, successors and assigns, by execution and delivery of this Agreement, hereby irrevocably appoints Sponsor, in the capacity as ParentCo Representative, as each such Person’s agent, attorney-in-fact and representative, with full power of substitution to act in the name, place and stead of such Person, to act on behalf of such Person from and after the Closing in connection with: (i) controlling and making any determinations with respect to the post-Closing AIRO Merger Consideration adjustments under Section 2.11; (ii) terminating, amending or waiving on behalf of such Person any provision of this Agreement or any Ancillary Documents to which ParentCo Representative is a party or otherwise has rights in such capacity (together with this Agreement, the “ParentCo Representative Documents”); (iii) signing on behalf of such Person any releases or other documents with respect to any dispute or remedy arising under any ParentCo Representative Documents; (iv) employing and obtaining the advice of legal counsel, accountants and other professional advisors as ParentCo Representative, in its reasonable discretion, deems necessary or advisable in the performance of its duties as ParentCo Representative and to rely on their advice and counsel; (v) incurring and paying reasonable out-of-pocket costs and expenses, including fees of brokers, attorneys and accountants incurred pursuant to the transactions contemplated hereby, and any other out-of-pocket fees and expenses allocable or in any way relating to such transaction Documents, including giving and receiving all notices and communications hereunder or thereunder on behalf of such Person; provided, that the Parties acknowledge that ParentCo Representative is specifically authorized and directed to act on behalf of, and for the benefit of, the holders of ParentCo Securities (other than the Company Security Holders immediately prior to the Second Effective Time and their respective successors and assigns). All decisions and actions by ParentCo Representative, including any agreement between ParentCo Representative and the Company, Seller Representative, any Company Stockholders, shall be binding upon ParentCo, Kernel and their Subsidiaries, successors and assigns, and neither they nor any other Party shall have the right to object, dissent, protest or otherwise contest the same. The provisions of this Section 10.14(a) are irrevocable and coupled with an interest. ParentCo Representative hereby accepts its appointment and authorization as ParentCo Representative under this Agreement.
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(b) ParentCo Representative shall not be liable for any act done or omitted under any ParentCo Representative Document as ParentCo Representative while acting in good faith and without willful misconduct or gross negligence, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. ParentCo and Kernel shall indemnify, defend and hold harmless ParentCo Representative from and against any and all Losses incurred without gross negligence, bad faith or willful misconduct on the part of ParentCo Representative (in its capacity as such) and arising out of or in connection with the acceptance or administration of ParentCo Representative’s duties under any ParentCo Representative Document, including the reasonable fees and expenses of any legal counsel retained by ParentCo Representative. In no event shall ParentCo Representative in such capacity be liable under or in connection with any ParentCo Representative Document for any indirect, punitive, special or consequential damages. ParentCo Representative shall be fully protected in relying upon any written notice, demand, certificate or document that it in good faith believes to be genuine, including facsimiles or copies thereof, and no Person shall have any Liability for relying on ParentCo Representative in the foregoing manner. In connection with the performance of its rights and obligations hereunder, ParentCo Representative shall have the right at any time and from time to time to select and engage, at the cost and expense of ParentCo and Kernel, attorneys, accountants, investment bankers, advisors, consultants and clerical personnel and obtain such other professional and expert assistance, maintain such records and incur other out-of-pocket expenses, as ParentCo Representative may deem necessary or appropriate from time to time. All of the indemnities, immunities, releases and powers granted to ParentCo Representative under this Section 10.14 shall survive the Closing and continue indefinitely.
(c) The Person serving as ParentCo Representative may resign upon ten (10) days’ prior written notice to ParentCo, Kernel and the Seller Representative, provided, that ParentCo Representative appoints in writing a replacement ParentCo Representative. Each successor ParentCo Representative shall have all of the power, authority, rights and privileges conferred by this Agreement upon the original ParentCo Representative, and the term “ParentCo Representative” as used herein shall be deemed to include any such successor ParentCo Representatives.
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10.15 Seller Representative.
(a) Each Company Stockholder, by delivery of a Letter of Transmittal, on behalf of itself and its successors and assigns, hereby irrevocably constitutes and appoints Dr. Chirinjeev Kathuria, in his capacity as the Seller Representative, as the true and lawful agent and attorney-in-fact of such Persons with full powers of substitution to act in the name, place and stead of thereof with respect to the performance on behalf of such Person under the terms and provisions of this Agreement and the Ancillary Documents to which the Seller Representative is a party or otherwise has rights in such capacity (together with this Agreement, the “Seller Representative Documents”), as the same may be from time to time amended, and to do or refrain from doing all such further acts and things, and to execute all such documents on behalf of such Person, if any, as the Seller Representative will deem necessary or appropriate in connection with any of the transactions contemplated under the Seller Representative Documents, including: (i) controlling and making any determinations with respect to the post-Closing Merger Consideration adjustments under Section 2.11; (ii) terminating, amending or waiving on behalf of such Person any provision of any Seller Representative Document (provided, that any such action, if material to the rights and obligations of the Company Stockholders in the reasonable judgment of the Seller Representative, will be taken in the same manner with respect to all Company Stockholders unless otherwise agreed by each Company Stockholder who is subject to any disparate treatment of a potentially material and adverse nature); (iii) signing on behalf of such Person any releases or other documents with respect to any dispute or remedy arising under any Seller Representative Document; (iv) employing and obtaining the advice of legal counsel, accountants and other professional advisors as the Seller Representative, in its reasonable discretion, deems necessary or advisable in the performance of its duties as the Seller Representative and to rely on their advice and counsel; (v) incurring and paying reasonable costs and expenses, including fees of brokers, attorneys and accountants incurred pursuant to the transactions contemplated hereby, and any other reasonable fees and expenses allocable or in any way relating to such transaction, whether incurred prior or subsequent to Closing; (viii) receiving all or any portion of the consideration provided to the Company Stockholders under this Agreement and to distribute the same to the Company Stockholders in accordance with their Pro Rata Share; and (ix) otherwise enforcing the rights and obligations of any such Persons under any Seller Representative Document, including giving and receiving all notices and communications hereunder or thereunder on behalf of such Person. All decisions and actions by the Seller Representative, including any agreement between the Seller Representative and ParentCo Representative, ParentCo or Kernel shall be binding upon each Company Stockholder and their respective successors and assigns, and neither they nor any other Party shall have the right to object, dissent, protest or otherwise contest the same. The provisions of this Section 10.15(a) are irrevocable and coupled with an interest. The Seller Representative hereby accepts its appointment and authorization as the Seller Representative under this Agreement.
(b) Any other Person, including ParentCo Representative, Kernel and the Company may conclusively and absolutely rely, without inquiry, upon any actions of the Seller Representative as the acts of the Company Stockholders under any Seller Representative Documents. ParentCo Representative, Kernel and the Company shall be entitled to rely conclusively on the instructions and decisions of the Seller Representative as to (i) any payment instructions provided by the Seller Representative or (ii) any other actions required or permitted to be taken by the Seller Representative hereunder, and no Company shall have any cause of action against ParentCo Representative, Kernel or the Company for any action taken by any of them in reliance upon the instructions or decisions of the Seller Representative. ParentCo Representative, Kernel and the Company shall not have any Liability to any Company Stockholder for any allocation or distribution among the Company Stockholders by the Seller Representative of payments made to or at the direction of the Seller Representative. All notices or other communications required to be made or delivered to a Company Stockholder under any Seller Representative Document shall be made to the Seller Representative for the benefit of such Company Stockholder, and any notices so made shall discharge in full all notice requirements of the other parties hereto or thereto to such Company Stockholder with respect thereto. All notices or other communications required to be made or delivered by a Company Stockholder shall be made by the Seller Representative (except for a notice under Section 10.15(d) of the replacement of the Seller Representative).
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(c) The Seller Representative will act for the Company Stockholders on all of the matters set forth in this Agreement in the manner the Seller Representative believes to be in the best interest of the Company Stockholders, but the Seller Representative will not be responsible to the Company Stockholders for any Losses that any Company Stockholder or any Indemnifying Party may suffer by reason of the performance by the Seller Representative of the Seller Representative’s duties under this Agreement, other than Losses arising from the bad faith, gross negligence or willful misconduct by the Seller Representative in the performance of its duties under this Agreement. From and after the Closing, the Company Stockholders shall jointly and severally indemnify, defend and hold the Seller Representative harmless from and against any and all Losses reasonably incurred without gross negligence, bad faith or willful misconduct on the part of the Seller Representative (in its capacity as such) and arising out of or in connection with the acceptance or administration of the Seller Representative’s duties under any Seller Representative Document, including the reasonable fees and expenses of any legal counsel retained by the Seller Representative. In no event shall the Seller Representative in such capacity be liable hereunder or in connection herewith for any indirect, punitive, special or consequential damages. The Seller Representative shall not be liable for any act done or omitted under any Seller Representative Document as the Seller Representative while acting in good faith and without willful misconduct or gross negligence, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The Seller Representative shall be fully protected in relying upon any written notice, demand, certificate or document that it in good faith believes to be genuine, including facsimiles or copies thereof, and no Person shall have any Liability for relying on the Seller Representative in the foregoing manner. In connection with the performance of its rights and obligations hereunder, the Seller Representative shall have the right at any time and from time to time to select and engage, at the reasonable cost and expense of the Company Stockholders, attorneys, accountants, investment bankers, advisors, consultants and clerical personnel and obtain such other professional and expert assistance, maintain such records and incur other reasonable out-of-pocket expenses, as the Seller Representative may reasonably deem necessary or appropriate from time to time. All of the indemnities, immunities, releases and powers granted to the Seller Representative under this Section 10.15 shall survive the Closing and continue indefinitely.
(d) If the Seller Representative shall die, become disabled, dissolve, resign or otherwise be unable or unwilling to fulfill its responsibilities as representative and agent of Company Stockholders, then the Company Stockholders shall, within ten (10) days after such death, disability, dissolution, resignation or other event, appoint a successor Seller Representative (by vote or written consent of the Company Stockholders holding in the aggregate a Pro Rata Share in excess of fifty percent (50%)), and promptly thereafter (but in any event within two (2) Business Days after such appointment) notify ParentCo Representative and Kernel in writing of the identity of such successor. Any such successor so appointed shall become the “Seller Representative” for purposes of this Agreement.
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10.16 Legal Representation. The Parties agree that, notwithstanding the fact that Nelson Mullins Riley & Scarborough LLP may have, prior to Closing, jointly represented Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, ParentCo Representative and/or the Sponsor in connection with this Agreement, the Ancillary Documents and the transactions contemplated hereby and thereby, and has also represented Kernel and/or its Affiliates in connection with matters other than the transaction that is the subject of this Agreement, Nelson Mullins Riley & Scarborough LLP will be permitted in the future, after Closing, to represent the Sponsor, ParentCo Representative or their respective Affiliates in connection with matters in which such Persons are adverse to ParentCo or any of its Affiliates, including any disputes arising out of, or related to, this Agreement. The Company and the Seller Representative, who are or have the right to be represented by independent counsel in connection with the transactions contemplated by this Agreement, hereby agree, in advance, to waive (and to cause their Affiliates to waive) any actual or potential conflict of interest that may hereafter arise in connection with Nelson Mullins Riley & Scarborough LLP’s future representation of one or more of the Sponsor, ParentCo Representative or their respective Affiliates in which the interests of such Person are adverse to the interests of ParentCo, the Company and/or the Seller Representative or any of their respective Affiliates, including any matters that arise out of this Agreement or that are substantially related to this Agreement or to any prior representation by Nelson Mullins Riley & Scarborough LLP of Kernel, ParentCo, Kernel Merger Sub, AIRO Merger Sub, any Sponsor, ParentCo Representative or any of their respective Affiliates. The Parties acknowledge and agree that, for the purposes of the attorney-client privilege, the Sponsor and ParentCo Representative shall be deemed the clients of Nelson Mullins Riley & Scarborough LLP with respect to the negotiation, execution and performance of this Agreement and the Ancillary Documents. All such communications shall remain privileged after the Closing and the privilege and the expectation of client confidence relating thereto shall belong solely to the Sponsor and ParentCo Representative, shall be controlled by the Sponsor and ParentCo Representative and shall not pass to or be claimed by ParentCo or the Surviving Corporation; provided, further, that nothing contained herein shall be deemed to be a waiver by ParentCo or any of its Affiliates (including, as applicable, after the First Effective Time or the Second Effective Time, the Surviving Corporation and its Affiliates) of any applicable privileges or protections that can or may be asserted to prevent disclosure of any such communications to any third party.
10.17 Non-Survival of Representations, Warranties. The representations and warranties of the Company and ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub contained in this Agreement or in any certificate or instrument delivered by or on behalf of the Company or ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub pursuant to this Agreement shall not survive the Closing, and from and after the Closing, the Company and ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub and their respective Representatives shall not have any further obligations, nor shall any claim be asserted or action be brought against the Company or ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub or their respective Representatives with respect thereto. The covenants and agreements made by the Company and ParentCo, Kernel, Kernel Merger Sub and AIRO Merger Sub in this Agreement or in any certificate or instrument delivered pursuant to this Agreement, including any rights arising out of any breach of such covenants or agreements, shall not survive the Closing, except for those covenants and agreements contained herein and therein that by their terms apply or are to be performed in whole or in part after the Closing (which such covenants shall survive the Closing and continue until fully performed in accordance with their terms).
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Article XI
DEFINITIONS
11.1 Certain Definitions. For purpose of this Agreement, the following capitalized terms have the following meanings:
“AAA” means the American Arbitration Association or any successor entity conducting arbitrations.
“Accounting Principles” means in accordance with GAAP as in effect at the date of the financial statement to which it refers or if there is no such financial statement, then as of the Closing Date, using and applying the same accounting principles, practices, procedures, policies and methods (with consistent classifications, judgments, elections, inclusions, exclusions and valuation and estimation methodologies) used and applied by the Target Companies in the preparation of the latest audited Company Financials.
“Action” means any notice of noncompliance or violation, or any claim, demand, charge, action, suit, litigation, audit, settlement, complaint, stipulation, assessment or arbitration, or any request (including any request for information), inquiry, hearing, proceeding or investigation, by or before any Governmental Authority.
“Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person. For the avoidance of doubt, Sponsor shall be deemed to be an Affiliate or Kernel prior to the Closing.
“AIRO Merger Sub Common Stock” means the shares of common stock, par value $0.001 per share, of AIRO Merger Sub.
“Ancillary Documents” means each agreement, instrument or document attached hereto as an Exhibit, and the other agreements, certificates and instruments to be executed or delivered by any of the Parties hereto in connection with or pursuant to this Agreement.
“Benefit Plans” of any Person means any and all deferred compensation, executive compensation, incentive compensation, equity purchase or other equity-based compensation plan, employment or consulting, severance or termination pay, holiday, vacation or other bonus plan or practice, hospitalization or other medical, life or other insurance, supplemental unemployment benefits, profit sharing, pension, or retirement plan, program, agreement, commitment or arrangement, and each other employee benefit plan, program, agreement or arrangement, including each “employee benefit plan” as such term is defined under Section 3(3) of ERISA, maintained or contributed to or required to be contributed to by a Person for the benefit of any employee or terminated employee of such Person, or with respect to which such Person has any Liability, whether direct or indirect, actual or contingent, whether formal or informal, and whether legally binding or not.
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“Business Day” means any day other than a Saturday, Sunday or a legal holiday on which commercial banking institutions in New York, New York are authorized to close for business, excluding as a result of “stay at home”, “shelter-in-place”, “non-essential employee” or any other similar orders or restrictions or the closure of any physical branch locations at the direction of any governmental authority so long as the electronic funds transfer systems, including for wire transfers, of commercial banking institutions in New York, New York are generally open for use by customers on such day.
“Closing Company Cash” means, as of the Reference Time, the aggregate cash and cash equivalents of the Target Companies on hand or in bank accounts, including deposits in transit, minus the aggregate amount of outstanding and unpaid checks issued by or on behalf of the Target Companies as of such time.
“Closing Net Debt” means, as of the Reference Time, (a) the aggregate amount of all Indebtedness of the Target Companies, less (b) the Closing Company Cash, in each case of clauses (a) and (b), on a consolidated basis and as determined in accordance with the Accounting Principles.
“Code” means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as amended. Reference to a specific section of the Code shall include such section and any valid treasury regulation promulgated thereunder.
“Company Benefit Plans” means all contracts, plans, agreements, programs, arrangements, employee benefit plans, compensation arrangements and other benefit arrangements, whether written or unwritten and whether or not providing cash- or equity-based incentives (e.g., restricted stock, stock option, stock appreciation right, phantom stock, etc.), health, medical, dental, disability, accident or life insurance benefits, change in control or retention payments, vacation, severance, salary continuation, or other termination pay, bonus, commissions or other variable compensation, vacation, paid-time-off, sick leave, fringe benefit, retirement, deferred compensation, retirement, pension or savings benefits, that are sponsored, maintained or contributed to by a Target Company for the benefit of any current or former employees, offices, directors, or consultants of a Target Company or under which a Target Company has any liability and all employment or other agreements (other than at will offer letters that do not provide for any severance or termination benefits) providing compensation, vacation, severance or other benefits to any officer, employee, consultant or former employee of a Target Company to which a Target Company is a party.
“Company Charter” means the Certificate of Incorporation of the Company, as amended and effective under the DGCL, prior to the Second Effective Time.
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“Company Common Stock” means the common stock, par value $0.000001 per share, of the Company.
“Company Confidential Information” means all confidential or proprietary documents and information concerning the Target Companies or any of their respective Representatives, furnished in connection with this Agreement or the transactions contemplated hereby; provided, however, that Company Confidential Information shall not include any information which, (i) at the time of disclosure by ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub or their Representatives, is generally available publicly and was not disclosed in breach of this Agreement or (ii) at the time of the disclosure by the Company or its Representatives to ParentCo, Kernel, Kernel Merger Sub or AIRO Merger Sub or their Representatives was previously known by such receiving party without violation of Law or any confidentiality obligation by the Person receiving such Company Confidential Information.
“Company Convertible Securities” means, collectively, any options, warrants or rights to subscribe for or purchase any capital stock of the Company or securities convertible into or exchangeable for, or that otherwise confer on the holder any right to acquire any capital stock of the Company.
“Company IT Systems” means all computer systems, computer software and hardware, communication systems, servers, network equipment and related documentation, in each case, owned, licensed or leased by a Target Company.
“Company Securities” means, collectively, the Company Stock and any Company Convertible Securities.
“Company Security Holders” means, collectively, the holders of Company Securities.
“Company Stock” means any shares of the Company Common Stock.
“Company Stockholders” means, collectively, the holders of Company Stock.
“Company Transaction Expenses” means all fees and expenses of any of the Target Companies incurred or payable as of the Closing and not paid prior to the Closing (i) in connection with the consummation of the transactions contemplated hereby, including any amounts payable to professionals (including investment bankers, brokers, finders, attorneys, accountants and other consultants and advisors) retained by or on behalf of any Target Company, (ii) any change in control bonus, accrued but unpaid salary, transaction bonus, retention bonus, termination or severance payment or payment relating to terminated options, warrants or other equity appreciation, phantom equity, profit participation or similar rights, in any case, to be made to any current or former employee, independent contractor, director or officer of any Target Company at or after the Closing pursuant to any agreement to which any Target Company is a party prior to the Closing which become payable (including if subject to continued employment) as a result of the execution of this Agreement or the consummation of the transactions contemplated hereby, (iii) any sales, use, real property transfer, stamp, stock transfer or other similar transfer Taxes imposed on Target Company in connection with the Merger or the other transactions contemplated by this Agreement, and (iv) in connection with the Company’s prior attempt at completing an initial public offering or SPAC transaction, including any amounts payable to professionals (including investment bankers, brokers, finders, attorneys, accountants and other consultants and advisors) retained by or on behalf of any Target Company in connection with the Company’s attempted initial public offering or SPAC transaction.
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“Consent” means any consent, approval, waiver, authorization or Permit of, or notice to or declaration or filing with any Governmental Authority or any other Person.
“Contracts” means all contracts, agreements, binding arrangements, bonds, notes, indentures, mortgages, debt instruments, purchase order, licenses (and all other contracts, agreements or binding arrangements concerning Intellectual Property), franchises, leases and other instruments or obligations of any kind, written or oral (including any amendments and other modifications thereto).
“Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. “Controlled”, “Controlling” and “under common Control with” have correlative meanings. Without limiting the foregoing a Person (the “Controlled Person”) shall be deemed Controlled by (a) any other Person (i) owning beneficially, as meant in Rule 13d-3 under the Exchange Act, securities entitling such Person to cast ten percent (10%) or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive ten percent (10%) or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a Person described in clause (a) above) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee.
“Copyrights” means any works of authorship, mask works and all copyrights therein, including all renewals and extensions, copyright registrations and applications for registration and renewal, and non-registered copyrights.
“Environmental Law” means any Law in any way relating to (a) the protection of human health and safety, (b) the protection, preservation or restoration of the environment and natural resources (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or (c) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act, 42 USC. Section 9601 et. seq., the Resource Conservation and Recovery Act, 42 USC. Section 6901 et. seq., the Toxic Substances Control Act, 15 USC. Section 2601 et. seq., the Federal Water Pollution Control Act, 33 USC. Section 1151 et seq., the Clean Air Act, 42 USC. Section 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 USC. Section 111 et. seq., Occupational Safety and Health Act, 29 USC. Section 651 et. seq. (to the extent it relates to exposure to Hazardous Substances), the Asbestos Hazard Emergency Response Act, 15 USC. Section 2601 et. seq., the Safe Drinking Water Act, 42 USC. Section 300f et. seq., the Oil Pollution Act of 1990 and analogous state acts.
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“Environmental Liabilities” means, in respect of any Person, all Liabilities, obligations, responsibilities, Remedial Actions, Losses, damages, costs, and expenses (including all reasonable fees, disbursements, and expenses of counsel, experts, and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any other Person or in response to any violation of Environmental Law, whether known or unknown, accrued or contingent, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, to the extent based upon, related to, or arising under or pursuant to any Environmental Law, Environmental Permit, Order, or Contract with any Governmental Authority or other Person, that relates to any environmental, health or safety condition, violation of Environmental Law, or a Release or threatened Release of Hazardous Materials.
“ERISA” means the U.S. Employee Retirement Income Security Act of 1974, as amended.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.
“Fraud Claim” means any claim based in whole or in part upon fraud, willful misconduct or intentional misrepresentation.
“GAAP” means generally accepted accounting principles as in effect in the United States of America.
“Governmental Authority” means any federal, state, local, foreign or other governmental, quasi-governmental or administrative body, instrumentality, department or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.
“Hazardous Material” means any waste, gas, liquid or other substance or material that is defined, listed or designated as a “hazardous substance”, “pollutant”, “contaminant”, “hazardous waste”, “regulated substance”, “hazardous chemical”, or “toxic chemical” (or by any similar term) under any Environmental Law, or any other material regulated, or that could result in the imposition of Liability or responsibility, under any Environmental Law, including petroleum and its by-products, asbestos, polychlorinated biphenyls, radon, mold, and urea formaldehyde insulation.
“Imminent Closing Net Debt” means, as of the Reference Time, (a) the aggregate amount of all Indebtedness of the Target Companies due earlier than 180 days after the Closing, less (b) the Closing Company Cash, in each case of clauses (a) and (b), on a consolidated basis and as determined in accordance with the Accounting Principles.
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“Indebtedness” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money (including the outstanding principal and accrued but unpaid interest), (b) all obligations for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (c) any other indebtedness of such Person that is evidenced by a note, bond, debenture, credit agreement or similar instrument, (d) all obligations of such Person under leases that should be classified as capital leases in accordance with GAAP, (e) all obligations of such Person for the reimbursement of any obligor on any line or letter of credit, banker’s acceptance, guarantee or similar credit transaction, in each case, that has been drawn or claimed against, (f) all obligations of such Person in respect of acceptances issued or created, (g) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (h) all obligations secured by an Lien on any property of such Person, (i) any premiums, prepayment fees or other penalties, fees, costs or expenses associated with payment of any Indebtedness of such Person and (j) all obligation described in clauses (a) through (i) above of any other Person which is directly or indirectly guaranteed by such Person or which such Person has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which it has otherwise assured a creditor against loss.
“Intellectual Property” means all of the following as they exist in any jurisdiction throughout the world: Patents, Trademarks, Copyrights, Trade Secrets, Internet Assets, Software and other intellectual property, and all licenses, sublicenses and other agreements or permissions related to the preceding property.
“Internet Assets” means any and all domain name registrations, web sites and web addresses and related rights, items and documentation related thereto, and applications for registration therefor.
“IPO” means the initial public offering of Old Kernel Public Units pursuant to the IPO Prospectus.
“IPO Prospectus” means the final prospectus of Kernel, dated as of February 2, 2021, and filed with the SEC on February 4, 2021.
“IPO Underwriter” means Citigroup Global Markets Inc., the lead underwriter in the IPO.
“IRS” means the U.S. Internal Revenue Service (or any successor Governmental Authority).
“Kernel Class A Common Stock” means the shares of Class A common stock, par value $0.0001 per share, of Kernel after Domestication.
“Kernel Class B Common Stock” means the shares of Class B common stock, par value $0.0001 per share, of Kernel after Domestication.
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“Kernel Common Stock” means the common stock, par value $0.0001 per share, of Kernel after Domestication and Conversion.
“Kernel Expenses” means all out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, financial advisors, financing sources, experts and consultants to a Kernel hereto or any of its Affiliates) incurred by Kernel or on its behalf in connection with or related to the authorization, preparation, negotiation, execution or performance of this Agreement or any Ancillary Document related hereto and all other matters related to the consummation of this Agreement, including any and all deferred expenses (including fees or commissions payable to the underwriters and any legal fees) of the IPO upon consummation of a Business Combination, any Extension Expenses, and any expenses relating to Hart-Scott-Rodino Act, SEC and Nasdaq filing fees relating to this Transaction.
“Kernel Merger Sub Common Stock” means the shares of common stock, par value $0.001 per share, of Kernel Merger Sub.
“Kernel Preferred Stock” means the shares of preferred stock, par value $0.0001 per share, of Kernel after Domestication.
“Kernel Private Warrant” means, after Domestication and Conversion, one (1) whole private warrant entitling the holder thereof to purchase one (1) share of Kernel Common Stock at a purchase price of $11.50 per share.
“Kernel Public Units” means the units issued in the Domestication consisting of one (1) share of Kernel Class A Common Stock and one-half (1/2) of one (1) Kernel Public Warrant.
“Kernel Public Warrant” means, after Domestication and Conversion, one (1) whole public warrant, entitling the holder thereof to purchase one (1) share of Kernel Common Stock at a purchase price of $11.50 per share.
“Kernel Securities” means the Old Kernel Preferred Stock, Old Kernel Class A Stock, Old Kernel Class B Stock, Old Kernel Private Warrants, Old Kernel Public Warrants and the Old Kernel Units, collectively.
“Knowledge” means, with respect to (i) the Company, the actual knowledge of the executive officers or directors of any Target Company, after reasonable inquiry or (ii) Kernel, the actual knowledge of Suren Ajjarapu or Howard Doss.
“Law” means any federal, state, local, municipal, foreign or other law, statute, legislation, principle of common law, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, directive, requirement, writ, injunction, settlement, Order or Consent that is or has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Authority.
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“Liabilities” means any and all liabilities, Indebtedness, Actions or obligations of any nature (whether absolute, accrued, contingent or otherwise, whether known or unknown, whether direct or indirect, whether matured or unmatured, whether due or to become due and whether or not required to be recorded or reflected on a balance sheet under GAAP or other applicable accounting standards), including Tax liabilities due or to become due.
“Lien” means any mortgage, pledge, security interest, attachment, right of first refusal, option, proxy, voting trust, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof), restriction (whether on voting, sale, transfer, disposition or otherwise), any subordination arrangement in favor of another Person, or any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar Law.
“Material Adverse Effect” means, with respect to any specified Person, any fact, event, occurrence, change or effect that has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect upon (a) the business, assets, Liabilities, results of operations, prospects or condition (financial or otherwise) of such Person and its Subsidiaries, taken as a whole, or (b) the ability of such Person or any of its Subsidiaries on a timely basis to consummate the transactions contemplated by this Agreement or the Ancillary Documents to which it is a party or bound or to perform its obligations hereunder or thereunder; provided, however, that for purposes of clause (a) above, any changes or effects directly or indirectly attributable to, resulting from, relating to or arising out of the following (by themselves or when aggregated with any other, changes or effects) shall not be deemed to be, constitute, or be taken into account when determining whether there has or may, would or could have occurred a Material Adverse Effect: (i) general changes in the financial or securities markets or general economic or political conditions in the country or region in which such Person or any of its Subsidiaries do business; (ii) changes, conditions or effects that generally affect the industries in which such Person or any of its Subsidiaries principally operate; (iii) changes in GAAP or other applicable accounting principles or mandatory changes in the regulatory accounting requirements applicable to any industry in which such Person and its Subsidiaries principally operate; (iv) conditions caused by acts of God, terrorism, war (whether or not declared) or natural disaster; (v) any failure in and of itself by such Person and its Subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period (provided that the underlying cause of any such failure may be considered in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent not excluded by another exception herein) and (vi), with respect to Kernel, the consummation and effects of the Redemption (or any redemption in connection with an Extension); provided further, however, that any event, occurrence, fact, condition, or change referred to in clauses (i) - (iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition, or change has a disproportionate effect on such Person or any of its Subsidiaries compared to other participants in the industries in which such Person or any of its Subsidiaries primarily conducts its businesses. Notwithstanding the foregoing, with respect to Kernel, the amount of the Redemption (or any redemption in connection with an Extension, if any) or the failure to obtain the Required Kernel Stockholder Approval shall not be deemed to be a Material Adverse Effect on or with respect to Kernel.
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“Nasdaq” means the Nasdaq Capital Market.
“Net Working Capital” means, as of the Reference Time, (i) all current assets of the Target Companies (excluding, without duplication, Closing Company Cash), on a consolidated basis, minus (ii) all current liabilities of the Target Companies (excluding, without duplication, Indebtedness and unpaid Company Transaction Expenses), on a consolidated basis and as determined in accordance with the Accounting Principles; provided, that, for purposes of this definition, whether or not the following is consistent with the Accounting Principles, “current assets” will exclude any receivable from a Company Stockholder.
“Old Kernel Class A Stock” means the Class A ordinary stock, par value $0.0001 per share, of Kernel prior to Domestication.
“Old Kernel Class B Stock” means the Class B ordinary stock, par value $0.0001 per share, of Kernel prior to Domestication.
“Old Kernel Preferred Stock” means the preferred stock, par value $0.0001 per share, of Kernel prior to Domestication.
“Old Kernel Private Warrant” means one (1) whole warrant issued as part of the private placement consummated simultaneously with the closing of the IPO, entitling the holder thereof to purchase one (1) share of Old Kernel Class A Stock at a purchase price of $11.50 per share.
“Old Kernel Public Warrant” means one (1) whole warrant, of which one-half (1/2) of one (1) was included as part of each Old Kernel Unit, entitling the holder thereof to purchase one (1) share of Old Kernel Class A Stock at a purchase price of $11.50 per share.
“Old Kernel Unit” means the units issued in the IPO (including overallotment units acquired by Kernel’s underwriter) consisting of one (1) share of Old Kernel Class A Stock and one-half (1/2) of one (1) Old Kernel Public Warrant.
“Order” means any order, decree, ruling, judgment, injunction, writ, determination, binding decision, verdict, judicial award or other action that is or has been made, entered, rendered, or otherwise put into effect by or under the authority of any Governmental Authority.
“Organizational Documents” means, with respect to any Person that is an entity, its certificate of incorporation or formation, bylaws, operating agreement, memorandum and articles of association or similar organizational documents, in each case, as amended.
“ParentCo Confidential Information” means all confidential or proprietary documents and information concerning ParentCo or Kernel or any of its Representatives; provided, however, that ParentCo Confidential Information shall not include any information which, (i) at the time of disclosure by the Company, the Seller Representative or any of their respective Representatives, is generally available publicly and was not disclosed in breach of this Agreement or (ii) at the time of the disclosure by ParentCo, Kernel or their Representatives to the Company, the Seller Representative or any of their respective Representatives, was previously known by such receiving party without violation of Law or any confidentiality obligation by the Person receiving such ParentCo Confidential Information. For the avoidance of doubt, from and after the Closing, ParentCo Confidential Information will include the confidential or proprietary information of the Target Companies.
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“Patents” means any patents, patent applications and the inventions, designs and improvements described and claimed therein, patentable inventions, and other patent rights (including any divisionals, provisionals, continuations, continuations-in-part, substitutions, or reissues thereof, whether or not patents are issued on any such applications and whether or not any such applications are amended, modified, withdrawn, or refiled).
“PCAOB” means the U.S. Public Company Accounting Oversight Board (or any successor thereto).
“Per Share Price” means Ten and No/100 Dollars ($10.00).
“Permits” means all federal, state, local or foreign or other third-party permits, grants, easements, consents, approvals, authorizations, exemptions, licenses, franchises, concessions, ratifications, permissions, clearances, confirmations, endorsements, waivers, certifications, designations, ratings, registrations, qualifications or orders of any Governmental Authority or any other Person.
“Permitted Liens” means (a) Liens for Taxes or assessments and similar governmental charges or levies, which either are (i) not delinquent or (ii) being contested in good faith and by appropriate proceedings, and adequate reserves have been established with respect thereto, (b) other Liens imposed by operation of Law arising in the ordinary course of business for amounts which are not due and payable and as would not in the aggregate materially adversely affect the value of, or materially adversely interfere with the use of, the property subject thereto, (c) Liens incurred or deposits made in the ordinary course of business in connection with social security, (d) Liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the ordinary course of business, or (v) Liens arising under this Agreement or any Ancillary Document.
“Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof.
“Personal Data” means any information relating to an identified or identifiable natural person (data subject); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person.
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“Personal Property” means any machinery, equipment, tools, vehicles, furniture, leasehold improvements, office equipment, plant, parts and other tangible personal property.
“Privacy Laws” means any applicable international, national, federal, provincial, state, or local law, code, rule or regulation that regulates the processing of Personal Data in any way, including data protection laws, laws regulating marketing communications and/or electronic communications, information security regulations and security breach notification rules.
“Pro Rata Share” means (a) with respect to each Company Stockholder, a fraction expressed as a percentage equal to (i) the portion of the AIRO Merger Consideration payable by ParentCo to such Company Stockholder in accordance with the terms of this Agreement, divided by (ii) the total AIRO Merger Consideration payable by ParentCo to all Company Stockholders in accordance with the terms of this Agreement, and (b) with respect to each Kernel Stockholder, a fraction expressed as a percentage equal to (i) the portion of the Kernel Merger Consideration payable by ParentCo to such Kernel Stockholder in accordance with the terms of this Agreement, divided by (ii) the total Kernel Merger Consideration payable by ParentCo to all Kernel Stockholders in accordance with the terms of this Agreement.
“Redemption Price” means an amount equal to the price at which each share of Kernel Common Stock is redeemed or converted pursuant to the Redemption (as equitably adjusted for stock splits, stock dividends, combinations, recapitalizations and the like after the Closing).
“Reference Time” means the close of business of the Company on the Closing Date (but without giving effect to the transactions contemplated by this Agreement, including any payments by ParentCo hereunder to occur at the Closing, but treating any obligations in respect of Indebtedness, Transaction Expenses or other liabilities that are contingent upon the consummation of the Closing as currently due and owing without contingency as of the Reference Time).
“Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, or leaching into the indoor or outdoor environment, or into or out of any property.
“Remedial Action” means all actions to (i) clean up, remove, treat, or in any other way address any Hazardous Material, (ii) prevent the Release of any Hazardous Material so it does not endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (iv) correct a condition of noncompliance with Environmental Laws.
“Representatives” means, as to any Person, such Person’s Affiliates and the respective managers, directors, officers, employees, independent contractors, consultants, advisors (including financial advisors, counsel and accountants), agents and other legal representatives of such Person or its Affiliates.
“SEC” means the U.S. Securities and Exchange Commission (or any successor Governmental Authority).
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“Securities Act” means the Securities Act of 1933, as amended.
“Significant Company Holder” means Company Stockholders that own at least one percent (1%) of Company Stock as of the Reference Time.
“Software” means any computer software programs, including all source code, object code, and documentation related thereto and all software modules, tools and databases.
“SOX” means the U.S. Sarbanes-Oxley Act of 2002, as amended.
“Sponsor” means VKSS Capital, LLC, a Delaware limited liability company.
“Subsidiary” means, with respect to any Person, any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons will be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons will be allocated a majority of partnership, association or other business entity gains or losses or will be or control the managing director, managing member, general partner or other managing Person of such partnership, association or other business entity. A Subsidiary of a Person will also include any variable interest entity which is consolidated with such Person under applicable accounting rules.
“Target Company” means each of the Company and its direct and indirect Subsidiaries.
“Target Company Transaction Expenses” means $14,000,000.
“Target Net Debt” means $75,000,000.
“Target Net Working Capital Amount” means an amount equal to $(5,500,000).
“Tax Return” means any return, declaration, report, claim for refund, information return or other documents (including any related or supporting schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Taxes or the administration of any Laws or administrative requirements relating to any Taxes.
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“Taxes” means (a) all direct or indirect federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, value-added, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, social security and related contributions due in relation to the payment of compensation to employees, excise, severance, stamp, occupation, premium, property, windfall profits, alternative minimum, estimated, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (b) any Liability for payment of amounts described in clause (a) whether as a result of being a member of an affiliated, consolidated, combined or unitary group for any period or otherwise through operation of law and (c) any Liability for the payment of amounts described in clauses (a) or (b) as a result of any tax sharing, tax group, tax indemnity or tax allocation agreement with, or any other express or implied agreement to indemnify, any other Person.
“Trade Secrets” means any trade secrets, confidential business information, concepts, ideas, designs, research or development information, processes, procedures, techniques, technical information, specifications, operating and maintenance manuals, engineering drawings, methods, know-how, data, mask works, discoveries, inventions, modifications, extensions, improvements, and other proprietary rights (whether or not patentable or subject to copyright, trademark, or trade secret protection).
“Trademarks” means any trademarks, service marks, trade dress, trade names, brand names, internet domain names, designs, logos, or corporate names (including, in each case, the goodwill associated therewith), whether registered or unregistered, and all registrations and applications for registration and renewal thereof.
“Trading Day” means any day on which shares of ParentCo Common Stock are actually traded on the principal securities exchange or securities market on which ParentCo Common Stock are then traded.
“Trust Account” means the trust account established by Kernel with the proceeds from the IPO pursuant to the Trust Agreement in accordance with the IPO Prospectus.
“Trust Agreement” means that certain Investment Management Trust Agreement, effective as of February 5, 2021 as it may be amended, by and between Kernel and the Trustee, as well as any other agreements entered into related to or governing the Trust Account.
“Trustee” means Continental Stock Transfer & Trust Company, in its capacity as trustee under the Trust Agreement.
“Unencumbered Cash” means (a) cash remaining in the Trust Account after giving effect to (i) the completion and payment of the Redemption and (ii) any prepayment regarding any forward purchase agreement; (b) the net cash proceeds of any PIPE/Convertible Note Investment; (c) 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 Date of this Agreement and ending on the Closing Date; and (d) 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. For the avoidance of doubt: (x) the calculation of “Unencumbered Cash” shall occur prior to, and shall not consider, the payment of Kernel’s unpaid Expenses or Liabilities or the payment of Company Transaction Expenses; (y) “Unencumbered Cash” shall not include any cash received as a result of a forward purchase agreement other than prepayments; and (z) “Unencumbered Cash” shall not include any cash available or received as a result of an equity line of credit.
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11.2 Section References. The following capitalized terms, as used in this Agreement, have the respective meanings given to them in the Section as set forth below adjacent to such terms:
| Term | Section | |
| AAA Procedures | 10.4 | |
| Accounts Receivable | 5.7(f) | |
| Acquisition Proposal | 6.6(a) | |
| Agreement | Preamble | |
| AIRO Amended Charter | 2.6 | |
| AIRO Certificate of Merger | 2.1 | |
| AIRO Dissenting Shareholder | 2.13 | |
| AIRO Dissenting Shares | 2.13 | |
| AIRO Merger Consideration | 2.7(a) | |
| AIRO Merger Sub | Preamble | |
| AIRO Surviving Corporation | 2.1 | |
| AIRO Transaction Documents | 2.9(b) | |
| Alternative Transaction | 6.6(a) | |
| Amended ParentCo Charter | 1.6 | |
| Antitrust Laws | 6.9(b) | |
| Audited Company Financials | 5.7(a) | |
| Bridge Financing Notes | 5.3(a) | |
| Business Combination | 9.1 | |
| CFO | 2.11 | |
| Closing | 3.1 | |
| Closing Date | 3.1 | |
| Closing Filing | 6.14(b) | |
| Closing Press Release | 6.14(b) | |
| Closing Statement | 2.11 | |
| Companies Act | Recitals | |
| Company | Preamble | |
| Company Benefit Plan | 11.1 | |
| Company Certificates | 2.9(a) | |
| Company Directors | 6.17(a) | |
| Company Disclosure Schedules | Article V | |
| Company Financials | 5.7(a) | |
| Company IP | 5.13(d) | |
| Company IP Licenses | 5.13(a) | |
| Company Material Contract | 5.12(a) | |
| Company Options | 5.3(a) | |
| Company Permits | 5.10 | |
| Company Personal Property Leases | 5.16 |
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| Company Real Property Leases | 5.15 | |
| Company Registered IP | 5.13(a) | |
| Company Special Meeting | 6.13 | |
| Company Warrants | 5.3(a) | |
| Conversion | Recitals | |
| D&O Indemnified Persons | 6.18(a) | |
| D&O Tail Insurance | 6.18(b) | |
| DGCL | Recitals | |
| Dispute | 10.4 | |
| Domestication | Recitals | |
| Earnout Eligibility Period | 2.14(a)(i) | |
| Earnout End Date | 2.14(a)(i) | |
| Earnout Period | 2.14(a)(i) | |
| Earnout Shares | 2.14(a) | |
| Earnout Start Date | 2.14(a)(i) | |
| Earnout Statement | 2.14(b) | |
| Enforceability Exceptions | 4.2 | |
| Environmental Permits | 5.20(a) | |
| Exchange Agent | 1.9(a) | |
| Extension | 6.3(a) | |
| Extension Expenses | 1.1(c)(iv) | |
| Federal Securities Laws | 6.7 | |
| First Effective Time | 1.2 | |
| First Merger | Recitals | |
| Intended Tax Treatment | 6.10 | |
| Interim Balance Sheet Date | 5.7(a) | |
| Interim Period | 6.1(a) | |
| Kernel | Preamble | |
| Kernel Amended Charter | 1.6 | |
| Kernel Bylaws | Recitals | |
| Kernel Certificate of Incorporation | Recitals | |
| Kernel Certificate of Merger | 1.1 | |
| Kernel Certificates | 1.9(a) | |
| Kernel Disclosure Schedules | Article IV | |
| Kernel Dissenting Shareholders | 1.12 | |
| Kernel Dissenting Shares | 1.12 |
| A-97 |
| Kernel Financials | 4.6(b) | |
| Kernel Material Contract | 4.13(a) | |
| Kernel Merger Consideration | 1.7(a) | |
| Kernel Merger Sub | Preamble | |
| Kernel Special Meeting | 6.12(a) | |
| Kernel Stockholder Approval Matters | 6.12(a) | |
| Kernel Surviving Corporation | Recitals | |
| Kernel Transmittal Documents | 1.9(b) | |
| Letter of Transmittal | 1.9(a) | |
| Lock-Up Agreement | Recitals | |
| Lost Certificate Affidavit | 1.9(d) | |
| Non-Competition Agreement | 6.23 | |
| OFAC | 4.19(c) | |
| Off-the-Shelf Software | 5.13(a) | |
| Outbound IP License | 5.13(c) | |
| Outside Date | 8.1(b) | |
| ParentCo | Preamble | |
| ParentCo Directors | 6.17(a) | |
| ParentCo Disclosure Schedules | Article IV | |
| ParentCo Financials | 4.6(b) | |
| ParentCo Material Contract | 4.13(a) | |
| ParentCo Representative | Preamble | |
| ParentCo Representative Documents | 10.14(a) | |
| ParentCo Stockholder Approval Matters | 6.12(a) | |
| ParentCo Special Meeting | 6.12(a) | |
| PIPE/Convertible Note Investment | 6.20(a) | |
| Platform Agreements | 5.13(h) | |
| Post-Closing ParentCo Board | 6.17(a) | |
| Proxy Statement | 6.12(a) |
| A-98 |
| Public Certifications | 4.6(a) | |
| Public Stockholders | 9.1 | |
| Redemption | 6.12(a) | |
| Registration Statement | 6.12(a) | |
| Related Person | 5.21 | |
| Released Claims | 9.1 | |
| Replacement Options | 6.25 | |
| Replacement Warrants | 6.24 | |
| Required Company Stockholder Approval | 7.1(b) | |
| Required Kernel Stockholder Approval | 7.1(a) | |
| Resolution Period | 10.4 | |
| RSUs | 5.3(a) | |
| Scarsdale | 5.3(a) | |
| Scarsdale Warrant | 5.3(a) | |
| SEC Reports | 4.6(a) | |
| Second Effective Time | 2.2 | |
| Second Merger | Recitals | |
| Section 409A Plan | 5.19(j) | |
| Seller Representative | Preamble | |
| Seller Representative Documents | 10.15(a) | |
| Signing Filing | 6.14(b) | |
| Signing Press Release | 6.14(b) | |
| Specified Courts | 10.5 | |
| Stephenson | 5.3(a) | |
| Stephenson Warrant | 5.3(a) | |
| Surviving Corporation | 1.1 | |
| Top Customers | 5.24 | |
| Top Suppliers | 5.24 | |
| Transmittal Documents | 1.9(b) |
{REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS}
| A-99 |
IN WITNESS WHEREOF, each Party has caused this Agreement and Plan of Merger to be signed and delivered as of the date first written above.
| Kernel: | ParentCo Representative/Sponsor: | |||
| KERNEL GROUP HOLDINGS, INC. | VKSS CAPITAL, LLC | |||
| By: | By: | |||
| Name: | Suren Ajjarapu | Name: | Suren Ajjarapu | |
| Title: | Chief Executive Officer | Title: | Managing Member | |
| Kernel Merger Sub: | Company: | |||
| KERNEL MERGER SUB, INC. | AIRO GROUP HOLDINGS, INC. | |||
| By: | By: | |||
| Name: | Suren Ajjarapu | Name: | Joseph Burns | |
| Title: | President | Title: | Chief Executive Officer | |
| AIRO Merger Sub: | Seller Representative: | |||
| AIRO MERGER SUB, INC. | Dr. Chirinjeev Kathuria, | |||
| solely in the capacity as the Seller Representative hereunder | ||||
| By: | By: | |||
| Name: | Suren Ajjarapu | Name: | Dr. Chirinjeev Kathuria | |
| Title: | President | |||
| ParentCo: | ||||
| AIRO GROUP, INC. | ||||
| By: | ||||
| Name: | Suren Ajjarapu | |||
| Title: | President | |||
[Signature Page to Business Combination Agreement]
| A-100 |
FIRST AMENDMENT TO
BUSINESS COMBINATION AGREEMENT
August 29, 2023
This First Amendment to Business Combination Agreement, dated as of August 29, 2023 (this “Amendment”) amends that certain Business Combination Agreement, dated March 3, 2023 (the “BCA”), by and among Kernel Group Holdings, Inc., a Cayman Island exempted company (“Kernel”), AIRO Group, Inc. (“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, a Delaware limited liability company (the “ParentCo Representative”) and also in the capacity as Kernel’s Sponsor (“Sponsor”), Dr. Chirinjeev Kathuria, in the capacity as the representative for the company stockholders (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO Group Holdings” or the “Company”). ParentCo, Kernel, Kernel Merger Sub, AIRO Merger Sub, ParentCo Representative, the Seller Representative and the Company are collectively referred to as the “Parties” and each a “Party.” Capitalized terms used but not defined elsewhere herein have the meanings assigned to them in the BCA.
WHEREAS, on March 3, 2023, the Parties entered into the BCA;
WHEREAS, the Parties wish to amend the BCA, as set forth herein.
NOW, THEREFORE, pursuant to Section 10.9 of the BCA, the Parties hereby agree as follows:
1. Section 2.14(a) of the BCA is hereby deleted in its entirety and replaced with the following:
“(a) After the Closing, subject to the terms and conditions set forth herein, (I) the Company Stockholders shall have the contingent right to receive up to 33,000,000 shares of ParentCo Common Stock and (II) the Sponsor shall have the contingent right to receive up to 3,300,000 shares of ParentCo Common Stock (in the case of each of (I) and (II), subject to adjustment for share splits, share dividends, combinations, recapitalizations and the like after the Closing, including to account for any equity securities into which such shares are exchanged or converted) (the “Earnout Shares”), as additional consideration from ParentCo based on ParentCo’s revenue and EBITDA performance, as follows:
(i) In the event ParentCo’s revenue 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”) is greater than or equal to $42,600,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 6,600,000 Earnout Shares and the Sponsor shall be issued 660,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for any Earnout Period is greater than or equal to $141,400,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 6,600,000 Earnout Shares and the Sponsor shall be issued 660,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for any Earnout Period is greater than or equal to $358,900,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 6,600,000 Earnout Shares and the Sponsor shall be issued 660,000 Earnout Shares.
| A-1-1 |
(iv) In the event ParentCo’s EBITDA for any Earnout Period is greater than or equal to $(19,300,000) for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 4,400,000 Earnout Shares and the Sponsor shall be issued 440,000 Earnout Shares.
(v) In the event ParentCo’s EBITDA for any Earnout Period is greater than or equal to $4,000,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 4,400,000 Earnout Shares and the Sponsor shall be issued 440,000 Earnout Shares.
(vi) In the event ParentCo’s EBITDA for any Earnout Period is greater than or equal to $98,600,000 for the first time during the Earnout Eligibility Period, then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 4,400,000 Earnout Shares and the Sponsor shall be issued 440,000 Earnout Shares.”
2. Effect of this Amendment. Except as otherwise set forth in this Amendment, the provisions, representations, warranties, covenants and conditions of the BCA shall remain unchanged by the terms of this Amendment, and shall remain in full force and effect in accordance with their respective terms, and are hereby ratified, approved and confirmed in all respects. In the event of any conflict or inconsistency between the terms of this Amendment and the terms of the BCA, the terms of this Amendment shall control. From and after the date of this Amendment, all references to the BCA or Agreement (whether in the BCA or this Amendment) shall refer to the BCA as amended by this Amendment.
3. Miscellaneous Provisions. The parties hereto hereby agree that the provisions and obligations set forth in Article X of the BCA shall apply, mutatis mutandis, to this Amendment.
[Signature Page to Follow]
| A-1-2 |
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on their behalf by their duly authorized officers, this 29th day of August, 2023.
| Kernel: | ||
| KERNEL GROUP HOLDINGS, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Chief Executive Officer | |
| Kernel Merger Sub: | ||
| KERNEL MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| AIRO Merger Sub: | ||
| AIRO MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| ParentCo: | ||
| AIRO GROUP, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| Company: | ||
| AIRO GROUP HOLDINGS, INC. | ||
| By | /s/ Joseph Burns | |
| Name: | Joseph Burns | |
| Title: | Chief Executive Officer | |
| ParentCo Representative/Sponsor: | ||
| VKSS CAPITAL, LLC: | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Managing Member | |
| Seller Representative: | ||
| DR. CHIRINJEEV KATHURIA | ||
| By | /s/ Dr. Chirinjeev Kathuria | |
| Name: | Dr. Chirinjeev Kathuria, solely in the capacity as the Seller Representative hereunder | |
| A-1-3 |
SECOND AMENDMENT TO
BUSINESS COMBINATION AGREEMENT
January 16, 2024
This Second Amendment to Business Combination Agreement, dated as of January 16, 2024 (this “Amendment”) further amends that certain Business Combination Agreement, dated March 3, 2023 (the “BCA”), by and among Kernel Group Holdings, Inc., a Delaware corporation (“Kernel”), AIRO Group, Inc., a Delaware corporation and a wholly-owned subsidiary of Kernel (“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, a Delaware limited liability company (the “ParentCo Representative”) and also in the capacity as Kernel’s Sponsor (“Sponsor”), Dr. Chirinjeev Kathuria, in the capacity as the representative for the company stockholders (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO Group Holdings” or the “Company”). ParentCo, Kernel, Kernel Merger Sub, AIRO Merger Sub, ParentCo Representative, the Sponsor, the Seller Representative and the Company are collectively referred to as the “Parties” and each a “Party.” Capitalized terms used but not defined elsewhere herein have the meanings assigned to them in the BCA.
WHEREAS, the Parties entered into the BCA on March 3, 2023, and subsequently amended the BCA pursuant to the First Amendment to Business Combination Agreement date August 29, 2023, and ;
WHEREAS, the Parties wish to further amend the BCA, as set forth herein.
NOW, THEREFORE, pursuant to Section 10.9 of the BCA, the Parties hereby agree as follows:
1. Section 2.14(a) of the BCA is hereby deleted in its entirety and replaced with the following:
“(a) After the Closing, subject to the terms and conditions set forth herein, (I) the Company Stockholders shall have the contingent right to receive up to 33,000,000 shares of ParentCo Common Stock and (II) the Sponsor shall have the contingent right to receive up to 3,300,000 shares of ParentCo Common Stock (in the case of each of (I) and (II), subject to adjustment for share splits, share dividends, combinations, recapitalizations and the like after the Closing, including to account for any equity securities into which such shares are exchanged or converted) (the “Earnout Shares”), as additional consideration from ParentCo based on ParentCo’s achievement of certain revenue thresholds (each, a “Revenue Target”), as follows:
(i) In the event ParentCo’s revenue for the fiscal year that includes the Closing Date (“Earnout Period 1”) is greater than or equal to $50,000,000 (“Revenue Target 1”), then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 11,000,000 Earnout Shares and the Sponsor shall be issued 1,100,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date (“Earnout Period 2”) is greater than or equal to $62,500,000 (“Revenue Target 2”), then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 11,000,000 Earnout Shares and the Sponsor shall be issued 1,100,000 Earnout Shares.
| A-2-1 |
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date (“Earnout Period 3”) is greater than or equal to $78,100,000 (“Revenue Target 3”), then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 11,000,000 Earnout Shares and the Sponsor shall be issued 1,100,000 Earnout Shares.
(vii) Earnout Period 1, 2, and 3 are collectively referred to herein as the “Earnout Periods.” In the event that a Revenue Target is not met during its designated Earnout Period, such Revenue Target shall carry over into the next Earnout Period. Notwithstanding the foregoing, in no event may more than one Earnout Share award for achieving a Revenue Target be earned in a single Earnout Period.
2. Section 2.14(b) of the BCA is hereby deleted in its entirety and replaced with the following:
“(b) Within five (5) Business Days of the issuance of ParentCo’s audited financial statements for each fiscal year, the CFO will prepare and deliver to each Representative Party a written statement (each, an “Earnout Statement”) that sets forth (i) ParentCo’s revenue for the most recently completed Earnout Period, and (ii) whether any Earnout Shares have been earned as a result of ParentCo’s performance during the most recently completed Earnout Period. Each Representative Party will have ten (10) Business Days after its receipt of an Earnout Statement to review it. Each Representative Party, and its Representatives on its behalf, may make inquiries to the CFO and related ParentCo and Company personnel and advisors regarding questions concerning or disagreements with the Earnout Statement arising in the course of their review thereof, and ParentCo and the Company shall provide reasonable cooperation in connection therewith. If either Representative Party has any objections to an Earnout Statement, such Representative Party shall deliver to ParentCo (to the attention of the CFO) and the other Representative Party a statement setting forth its objections thereto (in reasonable detail). If such written statement is not delivered by a Representative Party within ten (10) Business Days following the date of delivery of each Earnout Statement, then such Representative Party will have waived its right to contest such Earnout Statement and the calculation of the revenue calculations during the applicable portion of the Earnout Period (and whether the Earnout Shares have been earned) as set forth therein. If such written statement is delivered by a Representative Party within such ten (10) Business Day period, then the Seller Representative and ParentCo Representative shall negotiate in good faith to resolve any such objections for a period of ten (10) Business Days thereafter. If the Representative Parties do not reach a final resolution within such ten (10) Business Day period, then upon the written request of either Representative Party, the Representative Parties will refer the dispute to arbitration in accordance with the provision of Section 10.4.
3. The reference to “August 2, 2023” as the Outside Date in Section 8.1(b) is hereby amended to “August 5, 2024.”
4. The references to “Earnout Eligibility Period,” “Earnout End Date” and “Earnout Start Date” in Section 11.2 are hereby deleted.
5. Effect of this Amendment. Except as otherwise set forth in this Amendment, the provisions, representations, warranties, covenants and conditions of the BCA shall remain unchanged by the terms of this Amendment, and shall remain in full force and effect in accordance with their respective terms, and are hereby ratified, approved and confirmed in all respects. In the event of any conflict or inconsistency between the terms of this Amendment and the terms of the BCA, the terms of this Amendment shall control. From and after the date of this Amendment, all references to the BCA or Agreement (whether in the BCA or this Amendment) shall refer to the BCA as amended by this Amendment.
6. Miscellaneous Provisions. The parties hereto hereby agree that the provisions and obligations set forth in Article X of the BCA shall apply, mutatis mutandis, to this Amendment.
[Signature Page to Follow]
| A-2-2 |
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on their behalf by their duly authorized officers, this 16th day of January, 2024.
| Kernel: | ||
| KERNEL GROUP HOLDINGS, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Chief Executive Officer | |
| Kernel Merger Sub: | ||
| KERNEL MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| AIRO Merger Sub: | ||
| AIRO MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| ParentCo: | ||
| AIRO GROUP, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| Company: | ||
| AIRO GROUP HOLDINGS, INC. | ||
| By | /s/ Joseph Burns | |
| Name: | Joseph Burns | |
| Title: | Chief Executive Officer | |
| ParentCo Representative/Sponsor: | ||
| VKSS CAPITAL, LLC: | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Managing Member | |
| Seller Representative: | ||
| DR. CHIRINJEEV KATHURIA | ||
| By | /s/ Chirinjeev Kathuria | |
| Name: | Dr. Chirinjeev Kathuria, solely in the capacity as the Seller Representative hereunder | |
| A-2-3 |
THIRD AMENDMENT TO
BUSINESS COMBINATION AGREEMENT
February 5, 2024
This Third Amendment to Business Combination Agreement, dated as of February 5, 2024 (this “Amendment”) further amends that certain Business Combination Agreement, dated March 3, 2023 (the “BCA”), by and among Kernel Group Holdings, Inc., a Cayman Islands exempted company (“Kernel”), 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, a Delaware limited liability company (the “ParentCo Representative”) and also in the capacity as Kernel’s Sponsor (“Sponsor”), Dr. Chirinjeev Kathuria, in the capacity as the representative for the company stockholders (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO Group Holdings” or the “Company”). ParentCo, Kernel, Kernel Merger Sub, AIRO Merger Sub, ParentCo Representative, the Seller Representative and the Company are collectively referred to as the “Parties” and each a “Party.” Capitalized terms used but not defined elsewhere herein have the meanings assigned to them in the BCA.
WHEREAS, the Parties entered into the BCA on March 3, 2023, and subsequently amended the BCA pursuant to the First Amendment to Business Combination Agreement dated August 29, 2023, and the Second Amendment to Business Combination Agreement, dated January 16, 2024; and
WHEREAS, the Parties wish to further amend the BCA, as set forth herein.
NOW, THEREFORE, pursuant to Section 10.9 of the BCA, the Parties hereby agree as follows:
1. Section 7.1(g) of the BCA is hereby deleted in its entirety.
2. Effect of this Amendment. Except as otherwise set forth in this Amendment, the provisions, representations, warranties, covenants and conditions of the BCA shall remain unchanged by the terms of this Amendment, and shall remain in full force and effect in accordance with their respective terms, and are hereby ratified, approved and confirmed in all respects. In the event of any conflict or inconsistency between the terms of this Amendment and the terms of the BCA, the terms of this Amendment shall control. From and after the date of this Amendment, all references to the BCA or Agreement (whether in the BCA or this Amendment) shall refer to the BCA as amended by this Amendment.
3. Miscellaneous Provisions. The parties hereto hereby agree that the provisions and obligations set forth in Article X of the BCA shall apply, mutatis mutandis, to this Amendment.
[Signature Page to Follow]
| A-3-1 |
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on their behalf by their duly authorized officers, this 5th day of February, 2024.
| Kernel: | ||
| KERNEL GROUP HOLDINGS, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Chief Executive Officer | |
| Kernel Merger Sub: | ||
| KERNEL MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| AIRO Merger Sub: | ||
| AIRO MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| ParentCo: | ||
| AIRO GROUP, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| Company: | ||
| AIRO GROUP HOLDINGS, INC. | ||
| By | /s/ Joseph Burns | |
| Name: | Joseph Burns | |
| Title: | Chief Executive Officer | |
| ParentCo Representative/Sponsor: | ||
| VKSS CAPITAL, LLC: | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Managing Member | |
| Seller Representative: | ||
| DR. CHIRINJEEV KATHURIA | ||
| By | /s/ Dr. Chirinjeev Kathuria | |
| Name: | Dr. Chirinjeev Kathuria, solely in the capacity as the Seller Representative hereunder | |
| A-3-2 |
FOURTH AMENDMENT TO
BUSINESS COMBINATION AGREEMENT
June 24, 2024
This Fourth Amendment to Business Combination Agreement, dated as of June 24, 2024 (this “Amendment”) further amends that certain Business Combination Agreement, dated March 3, 2023 (the “BCA”), by and among Kernel Group Holdings, Inc., a Cayman Islands exempted company (“Kernel”), 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, a Delaware limited liability company (the “ParentCo Representative”) and also in the capacity as Kernel’s Sponsor (“Sponsor”), Dr. Chirinjeev Kathuria, in the capacity as the representative for the company stockholders (the “Seller Representative”), and AIRO Group Holdings, Inc., a Delaware corporation (“AIRO Group Holdings” or the “Company”). ParentCo, Kernel, Kernel Merger Sub, AIRO Merger Sub, ParentCo Representative, the Seller Representative and the Company are collectively referred to as the “Parties” and each a “Party.” Capitalized terms used but not defined elsewhere herein have the meanings assigned to them in the BCA.
WHEREAS, the Parties entered into the BCA on March 3, 2023, and subsequently amended the BCA pursuant to the First Amendment to Business Combination Agreement dated August 29, 2023, the Second Amendment to Business Combination Agreement, dated January 16, 2024, and the Third Amendment to Business Combination Agreement, dated February 5, 2024; and
WHEREAS, the Parties wish to further amend the BCA, as set forth herein.
NOW, THEREFORE, pursuant to Section 10.9 of the BCA, the Parties hereby agree as follows:
| 1. | Section 2.7(b) of the BCA is hereby amended and restated in its entirety as follows. |
(b) Additionally, after the Closing, subject to the terms and conditions set forth in this Agreement, the Company Stockholders shall have the contingent right to receive Earnout Shares as additional consideration if the requirements for receipt of such Earnout Share Payments as set forth in Section 2.14 are satisfied.
| 2. | Section 2.14(a) of the BCA is hereby amended and restated in its entirety as follows: |
(a) After the Closing, subject to the terms and conditions set forth herein, the Company Stockholders shall have the contingent right to receive up to 33,000,000 shares of ParentCo Common Stock (subject to adjustment for share splits, share dividends, combinations, recapitalizations and the like after the Closing, including to account for any equity securities into which such shares are exchanged or converted) (the “Earnout Shares”), as additional consideration from ParentCo based on ParentCo’s achievement of certain revenue thresholds (each, a “Revenue Target”), as follows:
(i) In the event ParentCo’s revenue for the fiscal year that includes the Closing Date (“Earnout Period 1”) is greater than or equal to $50,000,000 (“Revenue Target 1”), then, subject to the terms and conditions of this Agreement, ParentCo shall issue to the Company Stockholders such Company Stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(ii) In the event ParentCo’s revenue for the first full fiscal year following the Closing Date (“Earnout Period 2”) is greater than or equal to $62,500,000 (“Revenue Target 2”), then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iii) In the event ParentCo’s revenue for the second full fiscal year following the Closing Date (“Earnout Period 3”) is greater than or equal to $78,100,000 (“Revenue Target 3”), then, subject to the terms and conditions of this Agreement, ParentCo shall issue to each of the Company Stockholders such Company Stockholder’s Pro Rata Share of 11,000,000 Earnout Shares.
(iv) Earnout Period 1, 2, and 3 are collectively referred to herein as the “Earnout Periods.” In the event that a Revenue Target is not met during its designated Earnout Period, such Revenue Target shall carry over into the next Earnout Period. Notwithstanding the foregoing, in no event may more than one Earnout Share award for achieving a Revenue Target be earned in a single Earnout Period.”
| 3. | Effect of this Amendment. Except as otherwise set forth in this Amendment, the provisions, representations, warranties, covenants and conditions of the BCA shall remain unchanged by the terms of this Amendment, and shall remain in full force and effect in accordance with their respective terms, and are hereby ratified, approved and confirmed in all respects. In the event of any conflict or inconsistency between the terms of this Amendment and the terms of the BCA, the terms of this Amendment shall control. From and after the date of this Amendment, all references to the BCA or Agreement (whether in the BCA or this Amendment) shall refer to the BCA as amended by this Amendment. |
| 4. | Miscellaneous Provisions. The parties hereto hereby agree that the provisions and obligations set forth in Article X of the BCA shall apply, mutatis mutandis, to this Amendment. |
[Signature Page to Follow]
| A-4-1 |
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on their behalf by their duly authorized officers, this 24th day of June, 2024.
| Kernel: | ||
| KERNEL GROUP HOLDINGS, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Chief Executive Officer | |
| Kernel Merger Sub: | ||
| KERNEL MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| AIRO Merger Sub: | ||
| AIRO MERGER SUB, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| ParentCo: | ||
| AIRO GROUP, INC. | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | President | |
| Company: | ||
| AIRO GROUP HOLDINGS, INC. | ||
| By | /s/ Joseph Burns | |
| Name: | Joseph Burns | |
| Title: | Chief Executive Officer | |
| ParentCo Representative/Sponsor: | ||
| VKSS CAPITAL, LLC: | ||
| By | /s/ Surendra Ajjarapu | |
| Name: | Surendra Ajjarapu | |
| Title: | Managing Member | |
| Seller Representative: | ||
| DR. CHIRINJEEV KATHURIA | ||
| By | /s/ Dr. Chirinjeev Kathuria | |
| Name: | Dr. Chirinjeev Kathuria, solely in the capacity as the Seller Representative hereunder | |
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AIRO GROUP, INC.
[●], 2024
AIRO Group, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), DOES HEREBY CERTIFY AS FOLLOWS:
1. The name of the Corporation is “AIRO Group, Inc.” The original certificate of incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on February 27, 2023 (the “Certificate”).
2. This Amended and Restated Certificate of Incorporation (this “Amended and Restated Certificate”), which both restates and amends the provisions of the Certificate, was duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, as amended from time to time (the “DGCL”).
3. This Amended and Restated Certificate shall become effective on the date of filing with Secretary of State of Delaware.
4. Certain capitalized terms used in this Amended and Restated Certificate are defined where appropriate herein.
5. The text of the Certificate, as amended to the date hereof, is hereby restated and amended in its entirety to read as follows:
ARTICLE I
NAME
The name of the corporation is AIRO Group, Inc. (the “Corporation”).
ARTICLE II
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL.
ARTICLE III
REGISTERED AGENT
The address of the Corporation’s registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Zip Code 19801. The name of its registered agent at that address is The Corporation Trust Company.
ARTICLE IV
CAPITALIZATION
Section 4.1 Authorized Capital Stock. The total number of shares of all classes of capital stock, each with a par value of $0.0001 per share, which the Corporation is authorized to issue is 310,000,000 shares, consisting of (a) 300,000,000 shares of common stock (the “Common Stock”), and (b) 10,000,000 shares of preferred stock (the “Preferred Stock”).
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Section 4.2 Preferred Stock. The Board of Directors of the Corporation (the “Board”) is hereby expressly authorized to provide out of the unissued shares of the Preferred Stock for one or more series of Preferred Stock and to establish from time to time the number of shares to be included in each such series and to fix the voting rights, if any, designations, powers, preferences and relative, participating, optional, special and other rights, if any, of each such series and any qualifications, limitations and restrictions thereof, as shall be stated in the resolution or resolutions adopted by the Board providing for the issuance of such series and included in a certificate of designation (a “Preferred Stock Designation”) filed pursuant to the DGCL, and the Board is hereby expressly vested with the authority to the full extent provided by law, now or hereafter, to adopt any such resolution or resolutions.
Except as otherwise provided in Preferred Stock Designation, the number of authorized shares of the class of Common Stock or undesignated Preferred Stock may from time to time be increased or decreased (but not below the number of shares of such class outstanding) by the affirmative vote of the holders of a majority in voting power of the outstanding shares of capital stock of the Corporation irrespective of the provisions of Section 242(b)(2) of the DGCL.
Section 4.3 Common Stock.
(a) Voting.
(i) Except as otherwise required by law or this Amended and Restated Certificate (including any Preferred Stock Designation), the holders of the Common Stock shall exclusively possess all voting power with respect to the Corporation.
(ii) Except as otherwise required by law or this Amended and Restated Certificate (including any Preferred Stock Designation), the holders of shares of Common Stock shall be entitled to one vote for each such share on each matter properly submitted to the stockholders on which the holders of the Common Stock are entitled to vote.
(iii) Except as otherwise required by law or this Amended and Restated Certificate (including any Preferred Stock Designation), at any annual or special meeting of the stockholders of the Corporation, holders of the Common Stock shall have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Notwithstanding the foregoing, except as otherwise required by law or this Amended and Restated Certificate (including any Preferred Stock Designation), holders of shares of any series of Common Stock shall not be entitled to vote on any amendment to this Amended and Restated Certificate (including any amendment to any Preferred Stock Designation) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series of Preferred Stock are entitled exclusively, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Amended and Restated Certificate (including any Preferred Stock Designation) or the DGCL.
(b) Dividends. Subject to applicable law, the rights, if any, of the holders of any outstanding series of the Preferred Stock, the holders of shares of Common Stock shall be entitled to receive such dividends and other distributions (payable in cash, property or capital stock of the Corporation) when, as and if declared thereon by the Board from time to time out of any assets or funds of the Corporation legally available therefor and shall share equally on a per share basis in such dividends and distributions.
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(c) Liquidation, Dissolution or Winding Up of the Corporation. Subject to applicable law, the rights, if any, of the holders of any outstanding series of the Preferred Stock, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of shares of Common Stock shall be entitled to receive all the remaining assets of the Corporation available for distribution to its stockholders, ratably in proportion to the number of shares of Common Stock held by them.
Section 4.4 Rights and Options. The Corporation has the authority to create and issue rights, warrants and options entitling the holders thereof to acquire from the Corporation any shares of its capital stock of any class or classes, with such rights, warrants and options to be evidenced by or in instrument(s) approved by the Board. The Board is empowered to set the exercise price, duration, times for exercise and other terms and conditions of such rights, warrants or options; provided, however, that the consideration to be received for any shares of capital stock issuable upon exercise thereof may not be less than the par value thereof.
ARTICLE V
BOARD OF DIRECTORS
Section 5.1 Board Powers. The business and affairs of the Corporation shall be managed by, or under the direction of, the Board. In addition to the powers and authority expressly conferred upon the Board by statute, this Amended and Restated Certificate or the Bylaws of the Corporation (“Bylaws”), the Board is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the DGCL, this Amended and Restated Certificate and any Bylaws adopted by the stockholders of the Corporation; provided, however, that no Bylaws hereafter adopted by the stockholders of the Corporation shall invalidate any prior act of the Board that would have been valid if such Bylaws had not been adopted.
Section 5.2 Number, Election and Term.
(a) The number of directors of the Corporation, other than those who may be elected by the holders of one or more series of the Preferred Stock voting separately by class or series, shall be fixed from time to time exclusively by the Board pursuant to a resolution adopted by a majority of the Board.
(b) The directors, other than those who may be elected by the holders of any series of Preferred Stock, shall be classified, with respect to the term for which they severally hold office, into three classes. The Board of Directors shall assign directors into classes at the time the classification becomes effective. The initial Class I Directors shall serve for a term expiring at the first annual meeting of stockholders to be held after the filing of this Amended and Restated Certificate, the initial Class II Directors shall serve for a term expiring at the second annual meeting of stockholders to be held after the filing of this Amended and Restated Certificate, and the initial Class III Directors shall serve for a term expiring at the third annual meeting of stockholders to be held after the filing of this Amended and Restated Certificate. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Notwithstanding the foregoing, the directors elected to each class shall hold office until their successors are duly elected and qualified or until their earlier resignation, death or removal. Subject to Section 5.5 hereof, if the number of directors that constitutes the Board is changed, any increase or decrease shall be apportioned by the Board among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors constituting the Board shorten the term of any incumbent director.
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(c) Unless and except to the extent that the Bylaws shall so require, the election of directors need not be by written ballot. The holders of shares of Common Stock shall not have cumulative voting rights.
Section 5.3 Newly Created Directorships and Vacancies. Subject to Section 5.5 hereof, newly created directorships resulting from an increase in the number of directors and any vacancies on the Board resulting from death, resignation, retirement, disqualification, removal or other cause may be filled solely and exclusively by a majority vote of the remaining directors then in office, even if less than a quorum, or by a sole remaining director (and not by stockholders), and any director so chosen shall hold office until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal.
Section 5.4 Removal. Subject to Section 5.5 hereof and except as otherwise required by this Amended and Restated Certificate, any or all of the directors may be removed from office at any time (i) only with cause and (ii) only with the affirmative vote of holders of not less than two thirds (2/3) of the voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. At least forty-five (45) days prior to any annual or special meeting of stockholders at which it is proposed that any Director be removed from office, written notice of such proposed removal and the alleged grounds thereof shall be sent to the Director whose removal will be considered at the meeting.
Section 5.5 Preferred Stock - Directors. Notwithstanding any other provision of this Article V, and except as otherwise required by law, whenever the holders of one or more series of the Preferred Stock shall have the right, voting separately by class or series, to elect one or more directors, the term of office, the filling of vacancies, the removal from office and other features of such directorships shall be governed by the terms of such series of the Preferred Stock as set forth in this Amended and Restated Certificate (including any Preferred Stock Designation) and such directors shall not be included in any of the classes created pursuant to this Article V unless expressly provided by such terms.
Section 5.6 Quorum. A quorum for the transaction of business by the directors shall be set forth in the Bylaws.
ARTICLE VI
BYLAWS
In furtherance and not in limitation of the powers conferred upon it by law, the Board shall have the power and is expressly authorized to adopt, amend, alter or repeal the Bylaws. The affirmative vote of a majority of the Board shall be required to adopt, amend, alter or repeal the Bylaws. The Bylaws also may be adopted, amended, altered or repealed by the stockholders of the Corporation; provided, however, that in addition to any vote of the holders of any class or series of capital stock of the Corporation required by law or by this Amended and Restated Certificate (including any Preferred Stock Designation), the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders to adopt, amend, alter or repeal the Bylaws; and provided further, however, that no Bylaws hereafter adopted by the stockholders shall invalidate any prior act of the Board that would have been valid if such Bylaws had not been adopted.
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ARTICLE VII
MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT
Section 7.1 Meetings. Subject to the rights, if any, of the holders of any outstanding series of the Preferred Stock, and to the requirements of applicable law, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, Chief Executive Officer of the Corporation, or the Board pursuant to a resolution adopted by a majority of the Board, and the ability of the stockholders of the Corporation to call a special meeting is hereby specifically denied. Except as provided in the foregoing sentence, special meetings of stockholders of the Corporation may not be called by another person or persons. Only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders of the Corporation.
Section 7.2 Advance Notice. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws.
Section 7.3 Action by Written Consent. Except as may be otherwise provided for or fixed pursuant to this Amended and Restated Certificate, any action required or permitted to be taken by the stockholders of the Corporation may be effected by a duly called annual or special meeting of such stockholders or by written consent of the stockholders.
ARTICLE VIII
LIMITED LIABILITY; INDEMNIFICATION
Section 8.1 Limitation of Director Liability. A director or officer of the Corporation (each, for purposes of this Article VIII, a “Covered Person”) shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Covered Person, regardless of whether such Covered Person acted in their capacity as a director or as an officer, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended. If the DGCL is hereafter amended to authorize the further elimination or limitation of the liability of any Covered Person, then the liability of such Covered Person shall be eliminated or limited to the fullest extent authorized by the DGCL, as so amended, automatically and without further action, as of the date of such amendment. Any amendment, modification or repeal of the provisions of this Section 8.1 shall not adversely affect any right or protection of a director or officer of the Corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal.
Section 8.2 Indemnification and Advancement of Expenses.
(a) To the fullest extent permitted by applicable law, as the same exists or may hereafter be amended, the Corporation shall indemnify and hold harmless each person who is or was made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”) by reason of the fact that he or she is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, other enterprise or nonprofit entity, including service with respect to an employee benefit plan (an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as a director, officer, employee or agent, against all liability and loss suffered and expenses (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred by such indemnitee in connection with such proceeding. The Corporation shall to the fullest extent not prohibited by applicable law pay the expenses (including attorneys’ fees) incurred by an indemnitee in defending or otherwise participating in any proceeding in advance of its final disposition; provided, however, that, to the extent required by applicable law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking, by or on behalf of the indemnitee, to repay all amounts so advanced if it shall ultimately be determined that the indemnitee is not entitled to be indemnified under this Section 8.2 or otherwise. The rights to indemnification and advancement of expenses conferred by this Section 8.2 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators. Notwithstanding the foregoing provisions of this Section 8.2(a), except for proceedings to enforce rights to indemnification and advancement of expenses, the Corporation shall indemnify and advance expenses to an indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board.
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(b) The rights to indemnification and advancement of expenses conferred on any indemnitee by this Section 8.2 shall not be exclusive of any other rights that any indemnitee may have or hereafter acquire under law, this Amended and Restated Certificate, the Bylaws, an agreement, vote of stockholders or disinterested directors, or otherwise.
(c) Any repeal or amendment of this Section 8.2 by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Amended and Restated Certificate inconsistent with this Section 8.2, shall, unless otherwise required by law, be prospective only (except to the extent such amendment or change in law permits the Corporation to provide broader indemnification rights on a retroactive basis than permitted prior thereto), and shall not in any way diminish or adversely affect any right or protection existing at the time of such repeal or amendment or adoption of such inconsistent provision in respect of any proceeding (regardless of when such proceeding is first threatened, commenced or completed) arising out of, or related to, any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.
(d) This Section 8.2 shall not limit the right of the Corporation, to the extent and in the manner authorized or permitted by law, to indemnify and to advance expenses to persons other than indemnitees.
ARTICLE IX
BUSINESS COMBINATIONS
Section 9.1 Section 203 of the DGCL. The Corporation will be subject to Section 203 of the DGCL.
Section 9.2 Limitations on Business Combinations. Notwithstanding Section 9.1, the Corporation shall not engage in any business combination (as defined below), at any point in time at which the Corporation’s common stock is registered under Section 12(b) or 12(g) of the Exchange Act, with any interested stockholder (as defined below) for a period of three years following the time that such stockholder of the Corporation became an interested stockholder, unless:
(a) prior to such time, the Board approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or
(b) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock (as defined below) of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also officers of the Corporation or (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or
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(c) at or subsequent to such time, the business combination is approved by the Board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock of the Corporation which is not owned by the interested stockholder.
Section 9.3 Definitions. For the purposes of this Article IX:
(a) “affiliate” means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.
(b) “associate,” when used to indicate a relationship with any person, means: (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
(c) “business combination,” when used in reference to the Corporation and any interested stockholder, means:
(i) any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation (A) with the interested stockholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation Article X is not applicable to the surviving entity;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of the Corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Corporation;
(iii) any transaction which results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any stock of the Corporation or of such subsidiary to the interested stockholder, except: (A) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (B) pursuant to a merger under Section 251(g) of the DGCL; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of the Corporation subsequent to the time the interested stockholder became such; (D) pursuant to an exchange offer by the Corporation to purchase stock made on the same terms to all holders of said stock; or (E) any issuance or transfer of stock by the Corporation; provided, however, that in no case under items (C)-(E) of this subsection (iii) shall there be an increase in the interested stockholder’s proportionate share of the stock of any class or series of the Corporation or of the voting stock of the Corporation (except as a result of immaterial changes due to fractional share adjustments);
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(iv) any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the Corporation or of any such subsidiary which is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or
(v) any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees or pledges (other than those expressly permitted in subsections (i)-(iv) above) provided by or through the Corporation or any direct or indirect majority-owned subsidiary.
(d) “control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of the Corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this Article IX, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.
(e) “interested stockholder” means any person (other than the Corporation or any direct or indirect majority-owned subsidiary of the Corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the Corporation, or (ii) is an affiliate or associate of the Corporation and was the owner of 15% or more of the outstanding voting stock of the Corporation at any time within the three year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and associates of such person; provided, however, that the term “interested stockholder” shall not include (A) the Principal Stockholder or Principal Stockholder Transferees or any “group” (within the meaning of Rule 13d-5 of the Exchange Act) that includes any Principal Stockholder or Principal Stockholder Transferee or (B) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of any action taken solely by the Corporation; provided that such person specified in this clause (B) shall be an interested stockholder if thereafter such person acquires additional shares of voting stock of the Corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the Corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of the definition of “owner” below but shall not include any other unissued stock of the Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
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(f) “owner,” including the terms “own” and “owned,” when used with respect to any stock, means a person that individually or with or through any of its affiliates or associates:
(i) beneficially owns such stock, directly or indirectly; or
(ii) has (A) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person’s affiliates or associates until such tendered stock is accepted for purchase or exchange; or (B) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person’s right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten or more persons; or
(iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of subsection (ii) above), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.
(g) “person” means any individual, corporation, partnership, unincorporated association or other entity.
(h) “stock” means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.
(i) “Principal Stockholder” means, collectively, (i) Poseidon Bio, LLC, a Delaware limited liability company, (ii) a Principal Shareholder Transferee and (iii) any affiliate or successor of a person referenced in clauses (i) and (ii) of this definition.
(j) “Principal Stockholder Transferee” means any Person who acquires voting stock of the Corporation from the Principal Stockholder (other than in connection with a public offering) and who is designated in writing by the Principal Stockholder as a “Principal Stockholder Transferee.”
(k) “voting stock” means stock of any class or series entitled to vote generally in matters submitted for stockholders’ approval other than the election of directors.
ARTICLE X
CORPORATE OPPORTUNITY
To the extent allowed by law, the doctrine of corporate opportunity, or any other analogous doctrine, shall not apply with respect to the Corporation or any of its non-employee directors, or any of their respective affiliates, in circumstances where the application of any such doctrine would conflict with any fiduciary duties or contractual obligations they may have as of the date of this Amended and Restated Certificate or in the future, and the Corporation renounces any expectancy that any of the non-employee directors of the Corporation will offer any such corporate opportunity of which he or she may become aware to the Corporation, except, the doctrine of corporate opportunity shall apply with respect to any of the non-employee directors of the Corporation with respect to a corporate opportunity that was offered to such person solely in his or her capacity as a director or officer of the Corporation and (i) such opportunity is one the Corporation is legally and contractually permitted to undertake and would otherwise be reasonable for the Corporation to pursue and (ii) the director is permitted to refer that opportunity to the Corporation without violating any legal obligation.
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ARTICLE XI
AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate (including any Preferred Stock Designation), and other provisions authorized by the laws of the State of Delaware at the time in force that may be added or inserted, in the manner now or hereafter prescribed by this Amended and Restated Certificate and the DGCL; and, except as set forth in Article VIII, all rights, preferences and privileges of whatever nature herein conferred upon stockholders, directors or any other persons by and pursuant to this Amended and Restated Certificate in its present form or as hereafter amended are granted subject to the right reserved in this Article XI; provided, however, that the affirmative vote of not less than two thirds (2/3) of the outstanding shares of capital stock entitled to vote on such amendment, alteration, change or repeal, and the affirmative vote of not less than two thirds (2/3) of the outstanding shares of each class entitled to vote thereon as a class, shall be required to amend, alter, change or repeal any provision of Article V, Article VI, Article VII, Article VIII, Article IX, Article XI and Article XII of this Amended and Restated Certificate.
ARTICLE XII
EXCLUSIVE FORUM FOR CERTAIN LAWSUITS; CONSENT TO JURISDICTION
Section 12.1 Forum. Subject to the last sentence in this Section 12.1, and unless the Corporation consents in writing to the selection of an alternative forum, to the fullest extent permitted by the applicable law, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation, its directors, officers or employees arising pursuant to any provision of the DGCL or this Amended and Restated Certificate or the Bylaws, or (iv) any action asserting a claim against the Corporation, its directors, officers or employees governed by the internal affairs doctrine and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel except any action (A) as to which the Court of Chancery in the State of Delaware determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), (B) which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or (C) for which the Court of Chancery does not have subject matter jurisdiction. Notwithstanding the foregoing, (i) the provisions of this Section 12.1 will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction and (ii) unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder.
Section 12.2 Consent to Jurisdiction. If any action the subject matter of which is within the scope of Section 12.1 immediately above is filed in a court other than a court located within the State of Delaware (a “Foreign Action”) in the name of any stockholder, such stockholder shall be deemed to have consented to (i) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce Section 12.1 immediately above (an “FSC Enforcement Action”) and (ii) having service of process made upon such stockholder in any such FSC Enforcement Action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder.
Section 12.3 Severability. If any provision or provisions of this Article XII shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article XII (including, without limitation, each portion of any sentence of this Article XII containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XII.
| B-10 |
IN WITNESS WHEREOF, AIRO Group, Inc. has caused this Amended and Restated Certificate to be duly executed and acknowledged in its name and on its behalf by an authorized officer as of the date first set forth above.
| AIRO GROUP, INC. | ||
| By: | ||
| Joseph Burns, Chief Executive Officer | ||
| B-11 |
AIRO GROUP, INC.
(a Delaware corporation)
BYLAWS
As Adopted [●], 2024 and
As Effective [●], 2024
| C-1 |
TABLE OF CONTENTS
| ARTICLE I—STOCKHOLDERS | 1 | |
| 1.1 | Annual Meetings | 1 |
| 1.2 | Special Meetings | 1 |
| 1.3 | Notice of Meetings | 1 |
| 1.4 | Adjournments; Postponements | 2 |
| 1.5 | Quorum | 2 |
| 1.6 | Organization | 3 |
| 1.7 | Voting; Proxies | 3 |
| 1.8 | Fixing Date for Determination of Stockholders of Record | 4 |
| 1.9 | List of Stockholders Entitled to Vote | 4 |
| 1.10 | Inspectors of Elections | 5 |
| 1.11 | Notice of Stockholder Business; Nominations | 6 |
| ARTICLE II—BOARD OF DIRECTORS | 13 | |
| 2.1 | Number; Qualifications | 13 |
| 2.2 | Election; Resignation; Removal; Vacancies | 14 |
| 2.3 | Regular Meetings | 14 |
| 2.4 | Special Meetings | 14 |
| 2.5 | Remote Meetings Permitted | 14 |
| 2.6 | Quorum; Vote Required for Action | 15 |
| 2.7 | Organization | 15 |
| 2.8 | Unanimous Action by Directors in Lieu of a Meeting | 15 |
| 2.9 | Powers | 15 |
| 2.10 | Compensation of Directors | 15 |
| 2.11 | Confidentiality | 15 |
| ARTICLE III—COMMITTEES | 16 | |
| 3.1 | Committees | 16 |
| 3.2 | Committee Rules | 16 |
| ARTICLE IV—OFFICERS; EXECUTIVE CHAIRMAN; LEAD INDEPENDENT DIRECTOR | 17 | |
| 4.1 | Generally | 17 |
| 4.2 | Executive Chairman of the Board | 17 |
| 4.3 | Lead Independent Director | 17 |
| 4.4 | Chief Executive Officer | 17 |
| 4.5 | Vice President | 18 |
| 4.6 | Chief Financial Officer | 18 |
| 4.7 | Treasurer | 19 |
| 4.8 | Secretary | 19 |
| 4.9 | Delegation of Authority | 19 |
| 4.10 | Removal | 19 |
| i |
| ARTICLE V—STOCK | 19 | |
| 5.1 | Certificates; Uncertificated Shares | 19 |
| 5.2 | Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates or Uncertificated Shares | 20 |
| 5.3 | Other Regulations | 20 |
| ARTICLE VI—INDEMNIFICATION | 20 | |
| 6.1 | Indemnification of Officers and Directors; Termination of Proceeding | 20 |
| 6.2 | Indemnification of Officers and Directors; Liability | 21 |
| 6.3 | Non-Exclusivity of Rights | 21 |
| 6.4 | Indemnification Contracts | 21 |
| 6.5 | Insurance | 21 |
| ARTICLE VII—NOTICES | 22 | |
| 7.1 | Notice | 22 |
| 7.2 | Waiver of Notice | 22 |
| ARTICLE VIII—INTERESTED DIRECTORS | 23 | |
| 8.1 | Interested Directors | 23 |
| 8.2 | Quorum | 23 |
| ARTICLE IX—MISCELLANEOUS | 23 | |
| 9.1 | Fiscal Year | 23 |
| 9.2 | Seal | 23 |
| 9.3 | Form of Records | 24 |
| 9.4 | Reliance Upon Books and Records | 24 |
| 9.5 | Certificate of Incorporation Governs | 24 |
| 9.6 | Severability | 24 |
| 9.7 | Time Periods | 24 |
| ARTICLE X—AMENDMENT | 24 | |
| ii |
AIRO GROUP, INC.
(a Delaware corporation)
BYLAWS
As Adopted [●], 2024 and
As Effective [●], 2024
ARTICLE I
STOCKHOLDERS
1.1 Annual Meetings.
An annual meeting of stockholders shall be held for the election of directors at such date and time as the Board of Directors (the “Board”) of AIRO Group, Inc. (the “Corporation”) shall each year fix. The meeting may be held either at a place, within or without the State of Delaware as permitted by the Delaware General Corporation Law (the “DGCL”), or by means of remote communication as the Board in its sole discretion may determine. Any proper business may be transacted at the annual meeting. The Corporation may postpone, reschedule, adjourn, recess or cancel any annual meeting of stockholders previously scheduled.
1.2 Special Meetings.
Special meetings of stockholders for any purpose or purposes shall be called in the manner set forth in the Certificate of Incorporation of the Corporation (as the same may be amended and/or restated from time to time, the “Certificate of Incorporation”). The special meeting may be held either at a place, within or without the State of Delaware, or by means of remote communication as the Board in its sole discretion may determine. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of the meeting. The Corporation may postpone, reschedule, adjourn, recess or cancel any annual meeting of stockholders previously scheduled.
1.3 Notice of Meetings.
Notice of all meetings of stockholders shall be given in writing or by electronic transmission in the manner provided by applicable law (including, without limitation, as set forth in Section 7.1.1 of these Bylaws) stating the date, time and place, if any, of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and the record date for determining the stockholders entitled to vote at the meeting. In the case of a special meeting, such notice shall also set forth the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation, notice of any meeting of stockholders shall be given not less than ten (10), nor more than sixty (60), days before the date of the meeting to each stockholder of record entitled to vote at such meeting.
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1.4 Adjournments; Postponements.
The chairperson of the meeting shall have the power to adjourn or postpone the meeting to another time, date and place (if any). Whether or not a quorum is present, any meeting of stockholders, annual or special, may be adjourned from time to time for any reasonable purpose and to any other time or place (if any) at which a meeting of stockholders may be held under these Bylaws, by the chairperson of the meeting or the Board. When a meeting is adjourned to another time or place (if any), (including an adjournment taken to address a technical failure to convene or continue a meeting using remote communication) unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if (i) the time, date and place (if any) thereof and the means of remote communication (if any) by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting, are (a) announced at the meeting at which the adjournment is taken, (b) displayed during the time scheduled for the meeting on the same electronic network used to enable stockholders and proxy holders to participate in the meeting by means of remote communication or (c) set forth in the notice of meeting given in accordance with these Bylaws; and (ii) the date is not more than thirty (30) days after the date for which the meeting was originally noticed. If the adjournment is more than thirty (30) days after the date for which the meeting was originally noticed, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting in accordance with these Bylaws. At the adjourned meeting, the Corporation may transact any business that might have been transacted at the original meeting. If after the adjournment the Board fixes a new record date, notice of the time, date and place (if any) of the adjourned meeting shall be sent to each stockholder of record entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting. To the fullest extent permitted by law, the Board may postpone, reschedule or cancel any previously scheduled special or annual meeting of stockholders before it is to be held, regardless of whether any notice or public disclosure with respect to any such meeting has been sent or made pursuant to Section 1.3 hereof or otherwise, in which case notice shall be provided to the stockholders of the new date, time and place, if any, of the meeting as provided in Section 1.3 above.
1.5 Quorum.
Except as otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws, at each meeting of stockholders the holders of a majority of the voting power of the shares of stock issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business; provided, however, that where a separate vote by a class or classes or series of stock is required by applicable law or the Certificate of Incorporation, the holders of a majority of the voting power of the shares of such class or classes or series of the stock issued and outstanding and entitled to vote on such matter, present in person or represented by proxy at the meeting, shall constitute a quorum entitled to take action with respect to the vote on such matter. If a quorum shall fail to attend any meeting, the chairperson of the meeting or, if directed to be voted on by the chairperson of the meeting, the holders of a majority of the voting power of the shares entitled to vote who are present in person or represented by proxy at the meeting may adjourn the meeting. Shares of the Corporation’s stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation’s stock held by it in a fiduciary capacity and to count such shares for purposes of determining a quorum. A quorum, once established at a meeting, shall not be broken by the withdrawal of enough votes to leave less than a quorum.
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1.6 Organization.
Meetings of stockholders shall be presided over by (a) such person as the Board may designate, or (b) in such person’s absence, the Executive Chairman of the Board, or (c) in such person’s absence, the Lead Independent Director, or, (d) in such person’s absence, the Chief Executive Officer of the Corporation, or (e) in such person’s absence, by a Vice President. Such person shall be the chairperson of the meeting and, subject to Section 1.10 of these Bylaws, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to such person to be in order. The Secretary of the Corporation shall act as the secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as the secretary of the meeting.
1.7 Voting; Proxies.
Each stockholder of record entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. A proxy may be executed in writing (or by an electronic transmission permitted by applicable law, including Rule 14a-19 under the Securities Exchange Act of 1934, as amended (such act, and the rules and regulations promulgated thereunder, the “Exchange Act”)) by the stockholder, or by such stockholder’s duly authorized attorney in fact. A proxy may be in the form of an electronic transmission that sets forth or is submitted with information from which it can be determined the identity of the stockholder granting such authorization, and that the transmission was authorized by the stockholder. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a new proxy bearing a later date. Any stockholder directly or indirectly soliciting proxies from other stockholders must use a proxy card color other than white, which shall be reserved for the exclusive use by the Board.
Except as may be required in the Certificate of Incorporation, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided by applicable law, rule or regulation applicable to the Corporation or its securities, the rules or regulations of any stock exchange applicable to the Corporation, the Certificate of Incorporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the voting power of the shares of stock entitled to vote on such matter that are present in person or represented by proxy at the meeting and are voted for or against the matter (or if there are two (2) or more classes or series of stock entitled to vote as separate classes, then in the case of each class or series, the holders of a majority of the voting power of the shares of stock of that class or series present in person or represented by proxy at the meeting voting for or against such matter).
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1.8 Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board and which shall not be more than sixty (60) days prior to such action. If no such record date is fixed by the Board, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.
1.9 List of Stockholders Entitled to Vote.
The Secretary shall prepare, at least ten (10) days before every meeting of stockholders, a complete list of stockholders entitled to vote at the meeting (provided, however, if the record date for determining the stockholders entitled to vote is less than ten (10) days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth (10th) day before the meeting date), arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten (10) days prior to the meeting, (a) on a reasonably accessible electronic network as permitted by applicable law (provided that the information required to gain access to the list is provided with the notice of the meeting), or (b) during ordinary business hours, at the principal place of business of the Corporation. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. Except as otherwise provided by law, the list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.
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1.10 Inspectors of Elections.
1.10.1 Applicability. Unless otherwise required by the Certificate of Incorporation or by the DGCL, the following provisions of this Section 1.10 shall apply only if and when the Corporation has a class of voting stock that is: (a) listed on a national securities exchange; (b) authorized for quotation on an interdealer quotation system of a registered national securities association; or (c) held of record by more than two thousand (2,000) stockholders. In all other cases, observance of the provisions of this Section 1.10 shall be optional, and at the discretion of the Board.
1.10.2 Appointment. The Corporation shall, in advance of any meeting of stockholders, appoint one (1) or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one (1) or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one (1) or more inspectors to act at the meeting.
1.10.3 Inspector’s Oath. Each inspector of election, before entering upon the discharge of such inspector’s duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability.
1.10.4 Duties of Inspectors. At a meeting of stockholders, the inspectors of election shall (a) ascertain the number of shares outstanding and the voting power of each share, (b) determine the shares represented at a meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.
1.10.5 Opening and Closing of Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the chairperson of the meeting at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware, upon application by a stockholder, shall determine otherwise.
1.10.6 Determinations. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies pursuant to Section 211(a)(2)b.(i) of the DGCL, or in accordance with Sections 211(e) or 212(c)(2) of the DGCL, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.10 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.
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1.11 Notice of Stockholder Business; Nominations.
1.11.1 Annual Meeting of Stockholders.
(a) Nominations of persons for election to the Board and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders only: (i) pursuant to the Corporation’s notice of such meeting (or any supplement thereto), (ii) by or at the direction of the Board or any committee thereof or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.11 (the “Record Stockholder”), who is entitled to vote at such meeting and who complies with the notice and other procedures set forth in this Section 1.11 in all applicable respects. For the avoidance of doubt, the foregoing clause (iii) shall be the exclusive means for a stockholder to make nominations or propose business (other than business included in the Corporation’s proxy materials pursuant to Rule 14a-8 under the Exchange Act at an annual meeting of stockholders), and such stockholder must fully comply with the notice and other procedures set forth in this Section 1.11 to make such nominations or propose business before an annual meeting.
(b) For nominations or other business to be properly brought before an annual meeting by a Record Stockholder pursuant to Section 1.11.1(a) of these Bylaws:
(i) the Record Stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and provide any updates or supplements to such notice at the times and in the forms required by this Section 1.11;
(ii) such other business (other than the nomination of persons for election to the Board) must otherwise be a proper matter for stockholder action;
(iii) if the Proposing Person (as defined below) has provided the Corporation with a Solicitation Notice (as defined below), such Proposing Person must, in the case of a proposal other than the nomination of persons for election to the Board, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporation’s voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the Corporation’s voting shares reasonably believed by such Proposing Person to be sufficient to elect the nominee or nominees proposed to be nominated by such Record Stockholder, and must, in either case, have included in such materials the Solicitation Notice; and
(iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this Section 1.11, the Proposing Person proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 1.11.
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To be timely, a Record Stockholder’s notice must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day, nor earlier than the close of business on the one hundred and twentieth (120th) day, prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that no annual meeting was held during the preceding year or the date of the annual meeting is more than thirty (30) days before, or more than sixty (60) days after, such anniversary date, to be timely, the notice by the Record Stockholder must be delivered (A) no earlier than the close of business on the one hundred and twentieth (120th) day prior to such annual meeting and (B) no later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which Public Announcement (as defined below) of the date of such meeting is first made by the Corporation. In no event shall an adjournment or postponement of an annual meeting for which notice has been given commence a new time period (or extend any time period) for providing the Record Stockholder’s notice. Such Record Stockholder’s notice shall set forth:
(x) as to each person whom the Record Stockholder proposes to nominate for election or reelection as a director:
(i) the name, age, business address and residence address of such person;
(ii) the principal occupation or employment of such nominee;
(iii) the class, series and number of any shares of stock of the Corporation that are beneficially owned or owned of record by such person or any Associated Person (as defined in Section 1.11.3(c));
(iv) the date or dates such shares were acquired and the investment intent of such acquisition;
(v) all other information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or would be otherwise required, in each case pursuant to and in accordance with Section 14(a) (or any successor provision) under the Exchange Act and the rules and regulations thereunder (including such person’s written consent to being named in the proxy statement as a nominee, to the public disclosure of information regarding or related to such person provided to the Corporation by such person or otherwise pursuant to this Section 1.11 and to serving as a director if elected); and
(vi) whether such person meets the independence requirements of the stock exchange upon which the Corporation’s common stock is primarily traded.
(y) as to any other business that the Record Stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend these Bylaws, the text of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such Proposing Person, including any anticipated benefit to any Proposing Person therefrom; and
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(z) as to the Proposing Person giving the notice:
(i) the current name and address of such Proposing Person, including, if applicable, their name and address as they appear on the Corporation’s stock ledger, if different;
(ii) the class or series and number of shares of stock of the Corporation that are directly or indirectly owned of record or beneficially owned by such Proposing Person, including any shares of any class or series of the Corporation as to which such Proposing Person has a right to acquire beneficial ownership at any time in the future;
(iii) whether and the extent to which any derivative interest in the Corporation’s equity securities (including without limitation any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of shares of the Corporation or otherwise, and any cash-settled equity swap, total return swap, synthetic equity position or similar derivative arrangement, as well as any rights to dividends on the shares of any class or series of shares of the Corporation that are separated or separable from the underlying shares of the Corporation) or any short interest in any security of the Corporation (for purposes of this bylaw a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any increase or decrease in the value of the subject security, including through performance-related fees) is held directly or indirectly by or for the benefit of such Proposing Person, including without limitation whether and the extent to which any ongoing hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including without limitation any short position or any borrowing or lending of shares) has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, such Proposing Person with respect to any share of stock of the Corporation;
(iv) any other material relationship between such Proposing Person, on the one hand, and the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation, on the other hand;
(v) any direct or indirect material interest in any material contract or agreement with the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation (including, in any such case, any employment agreement, collective bargaining agreement or consulting agreement);
(vi) any other information relating to such Proposing Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies or consents by such Proposing Person in support of the business proposed to be brought before the meeting pursuant to Section 14(a) (or any successor provision) under the Exchange Act and the rules and regulations thereunder (the disclosures to be made pursuant to the foregoing clauses (iv) through (vi) are referred to as “Disclosable Interests”). For purposes hereof Disclosable Interests shall not include any information with respect to the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the stockholder directed to prepare and submit the notice required by these Bylaws on behalf of a beneficial owner;
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(vii) such Proposing Person’s written consent to the public disclosure of information provided to the Corporation pursuant to this Section 1.11;
(viii) a complete written description of any agreement, arrangement or understanding (whether oral or in writing) (including any knowledge that another person or entity is Acting in Concert (as defined in Section 1.11.3(c)) with such Proposing Person) between or among such Proposing Person, any of its respective affiliates or associates and any other person Acting in Concert with any of the foregoing persons;
(ix) as to each person whom such Proposing Person proposes to nominate for election or re-election as a director, any agreement, arrangement or understanding of such person with any other person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director known to such Proposing Person after reasonable inquiry;
(x) a representation that the Record Stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination;
(xi) a representation whether such Proposing Person intends (or is part of a group that intends) to deliver a proxy statement or form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporation’s voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporation’s voting shares to elect such nominee or nominees in accordance with Rule 14a-19 under the Exchange Act (an affirmative statement of such intent being a “Solicitation Notice”); and
(xii) any proxy, contract, arrangement, or relationship pursuant to which the Proposing Person has a right to vote, directly or indirectly, any shares of any security of the Corporation.
A stockholder providing written notice required by this Section 1.11 will update and supplement such notice in writing, if necessary, so that the information provided or required to be provided in such notice is true and correct in all material respects as of (i) the record date for the meeting and (ii) the close of business on the fifth (5th) business day prior to the meeting and, in the event of any adjournment or postponement thereof, the close of business on the fifth (5th) business day prior to such adjourned or postponed meeting. In the case of an update and supplement pursuant to clause (i) of the foregoing sentence, such update and supplement will be received by the Secretary of the Corporation at the principal executive office of the Corporation not later than five (5) business days after the record date for the meeting, and in the case of an update and supplement pursuant to clause (ii) of the foregoing sentence, such update and supplement will be received by the Secretary of the Corporation at the principal executive office of the Corporation not later than two (2) business days prior to the date for the meeting, and, in the event of any adjournment or postponement thereof, two (2) business days prior to such adjourned or postponed meeting.
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(c) Notwithstanding anything in the second sentence of Section 1.11.1(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no Public Announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board at least ninety (90) days prior to the first anniversary of the preceding year’s annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least ninety (90) days prior to such annual meeting), a stockholder’s notice required by this Section 1.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation no later than the close of business on the tenth (10th) day following the day on which such Public Announcement is first made by the Corporation.
(d) Notwithstanding anything in Section 1.11 or any other provision of these Bylaws to the contrary, any person who has been determined by a majority vote of the directors then in office to have violated Section 2.11 of these Bylaws or a Board Confidentiality Policy (as defined below) while serving as a director of the Corporation in the preceding five (5) years shall be ineligible to be nominated or serve as a member of the Board, absent a prior waiver for such nomination or service approved by the affirmative vote of two-thirds of the directors then in office.
(e) Notwithstanding anything in Section 1.11 or any other provision of these Bylaws to the contrary, unless otherwise required by law, (i) no stockholder making such a nomination shall solicit proxies in support of director nominees other than the Corporation’s nominees unless such stockholder has complied with Rule 14a-19 under the Exchange Act in connection with the solicitation of such proxies, including the provision to the Corporation of notices required thereunder in a timely manner unless the information required by Rule 14a-19(b) under the Exchange Act has been provided in a preliminary or definitive proxy statement previously filed by such person and (ii) if any stockholder making such a nomination (A) provides notice pursuant to Rule 14a-19(b) under the Exchange Act, and (B) subsequently fails to comply with the requirements of Rule 14a-19 under the Exchange Act or any other rules and regulations thereunder, including the provision to the Corporation of notices required thereunder in a timely manner, then the Corporation shall disregard any proxies or votes solicited for any proposed nominees on the Corporation’s proxy card other than the Corporation’s nominees and such nomination shall be disregarded, notwithstanding that proxies in favor thereof may have been received by the Corporation. In addition, any stockholder that provides notice pursuant to Rule 14a-19(b) under the Exchange Act shall notify the Secretary within two (2) business days of any change in such stockholder’s intent to solicit proxies from the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the Corporation’s nominees. Upon request by the Corporation, if any stockholder making such a nomination provides notice pursuant to Rule 14a-19(b) under the Exchange Act, such stockholder shall deliver to the Corporation, no later than five (5) business days prior to the applicable meeting, reasonable evidence that it has met the requirements of Rule 14a-19(a)(3) under the Exchange Act.
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1.11.2 Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of such meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of such meeting (a) by or at the direction of the Board or any committee thereof or (b) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice and other procedures set forth in this Section 1.11 in all applicable respects. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one (1) or more directors to the Board, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by Section 1.11.1(b) of these Bylaws shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation (i) no earlier than the one hundred twentieth (120th) day prior to such special meeting and (ii) no later than the close of business on the later of the ninetieth (90th) day prior to such special meeting or the tenth (10th) day following the day on which Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting.
1.11.3 General.
(a) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.11 shall be eligible to be elected at a meeting of stockholders and serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.11. Except as otherwise provided by law or these Bylaws, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.11 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 1.11, unless otherwise required by law, if the stockholder (or a Qualified Representative of the stockholder (as defined below)) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation.
(b) Notwithstanding the foregoing provisions of this Section 1.11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights of (a) stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.
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(c) For purposes of this Section 1.11 the following definitions shall apply:
(A) a person shall be deemed to be “Acting in Concert” with another person if such person knowingly acts (whether or not pursuant to an express agreement, arrangement or understanding) in concert with, or toward a common goal relating to the management, governance or control of the Corporation in substantial parallel with, such other person where (1) each person is conscious of the other person’s conduct or intent and this awareness is an element in their decision-making processes and (2) at least one additional factor suggests that such persons intend to act in concert or in substantial parallel, which such additional factors may include, without limitation, exchanging information (whether publicly or privately), attending meetings, conducting discussions or making or soliciting invitations to act in concert or in substantial parallel; provided, that a person shall not be deemed to be Acting in Concert with any other person solely as a result of the solicitation or receipt of revocable proxies or consents from such other person in response to a solicitation made pursuant to, and in accordance with, Section 14(a) (or any successor provision) of the Exchange Act by way of a proxy or consent solicitation statement filed on Schedule 14A. A person Acting in Concert with another person shall be deemed to be Acting in Concert with any third party who is also Acting in Concert with such other person;
(B) “Associated Person” shall mean with respect to any subject stockholder or other person (including any proposed nominee) (1) any person directly or indirectly controlling, controlled by or under common control with such stockholder or other person, (2) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder or other person, (3) any associate (as defined in Rule 405 under the Securities Act of 1933, as amended (the “Securities Act”)), of such stockholder or other person, and (4) any person directly or indirectly controlling, controlled by or under common control or Acting in Concert with any such Associated Person;
(C) “Proposing Person” shall mean (1) the stockholder providing the notice of business proposed to be brought before an annual meeting or nomination of persons for election to the Board at a stockholder meeting, (2) the beneficial owner or beneficial owners, if different, on whose behalf the notice of business proposed to be brought before the annual meeting or nomination of persons for election to the Board at a stockholder meeting is made, and (3) any Associated Person on whose behalf the notice of business proposed to be brought before the annual meeting or nomination of persons for election to the Board at a stockholder meeting is made;
(D) “Public Announcement” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act; and
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(E) to be considered a “Qualified Representative” of a stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as a proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction thereof, at the annual meeting; provided, however, that if the stockholder is (1) a general or limited partnership, any general partner or person who functions as a general partner of the general or limited partnership or who controls the general or limited partnership shall be deemed a Qualified Representative, (2) a corporation or a limited liability company, any officer or person who functions as the substantial equivalent of an officer of the corporation or limited liability company or any officer, director, general partner or person who functions as an officer, director or general partner of any entity ultimately in control of the corporation or limited liability company shall be deemed a Qualified Representative or (z) a trust, any trustee of such trust shall be deemed a Qualified Representative. The Secretary of the Corporation, or any other person who shall be appointed to serve as the secretary of the meeting, may require, on behalf of the Corporation, reasonable and appropriate documentation to verify the status of a person purporting to be a “Qualified Representative” for purposes hereof.
1.12 Written Consent of Stockholders without a Meeting.
Any action to be taken at any annual or special meeting of Stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action to be so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of Stockholders are recorded. Every written consent shall bear the date of signature of each Stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this Section 1.12, written consents signed by a sufficient number of holders to take action are delivered to the Corporation as aforesaid. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall, to the extent required by applicable law, be given to those Stockholders who have not consented in writing, and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation.
ARTICLE II
BOARD OF DIRECTORS
2.1 Number; Qualifications.
The total number of directors constituting the Board shall be fixed from time to time in the manner set forth in the Certificate of Incorporation. No decrease in the authorized number of directors constituting the Board shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation.
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2.2 Election; Resignation; Removal; Vacancies.
Election of directors need not be by written ballot. Unless otherwise provided by the Certificate of Incorporation and subject to the special rights of holders of any series of Preferred Stock to elect directors, the directors shall be divided into three (3) classes, as nearly equal in number as possible, designated as Class I, Class II and Class III. Each director shall hold office until the annual meeting at which such director’s term expires and until such director’s successor is elected and qualified or until such director’s earlier death, resignation, disqualification or removal. Any director may resign by delivering a resignation in writing or by electronic transmission to the Corporation at its principal office or to the Executive Chairman of the Board, the Chief Executive Officer, or the Secretary. Such resignation shall be effective upon delivery unless it is specified to be effective at a later time or upon the happening of an event. Subject to the special rights of holders of any series of Preferred Stock to elect directors, directors may be removed only as provided by the Certificate of Incorporation and applicable law. All vacancies occurring in the Board and any newly created directorships resulting from any increase in the authorized number of directors shall be filled in the manner set forth in the Certificate of Incorporation.
2.3 Regular Meetings.
Regular meetings of the Board may be held at such places, within or without the State of Delaware, and at such times as the Board may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board.
2.4 Special Meetings.
Special meetings of the Board may be called by the Executive Chairman of the Board, the Chief Executive Officer, the Lead Independent Director or by resolution adopted by a majority of the directors then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile, electronic mail or other means of electronic transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting.
2.5 Remote Meetings Permitted.
Members of the Board, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or other remote communications by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or other remote communications shall constitute presence in person at such meeting.
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2.6 Quorum; Vote Required for Action.
At all meetings of the Board, two-thirds (2/3) of the directors then in office shall constitute a quorum for the transaction of business. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date or time without further notice thereof. Except as otherwise provided herein or in the Certificate of Incorporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.
2.7 Organization.
Meetings of the Board shall be presided over by (a) the Executive Chairman of the Board, or (b) in such person’s absence, the Lead Independent Director, or (c) in such person’s absence, by the Chief Executive Officer, or (d) in such person’s absence, by a chairperson chosen by the Board at the meeting. The Secretary shall act as the secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as the secretary of the meeting.
2.8 Unanimous Action by Directors in Lieu of a Meeting.
Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, as applicable. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
2.9 Powers.
Except as otherwise provided by the Certificate of Incorporation or the DGCL, the business and affairs of the Corporation shall be managed by or under the direction of the Board.
2.10 Compensation of Directors.
Members of the Board, as such, may receive, pursuant to a resolution of the Board, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board.
2.11 Confidentiality.
Each director shall maintain the confidentiality of, and shall not share with any third party person or entity (including third parties that originally sponsored, nominated or designated such director (the “Sponsoring Party”)), any non-public information learned in their capacities as directors, including communications among Board members in their capacities as directors. The Board may adopt a board confidentiality policy further implementing and interpreting this bylaw (a “Board Confidentiality Policy”). All directors are required to comply with this bylaw and any such Board Confidentiality Policy unless such director or the Sponsoring Party for such director has entered into a specific written agreement with the Corporation, in such case as approved by the Board, providing otherwise with respect to such confidential information.
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ARTICLE III
COMMITTEES
3.1 Committees.
The Board may designate one (1) or more committees, each committee to consist of one (1) or more of the directors of the Corporation. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it, but no such committee shall have the power or authority in reference to the following matters: (a) approving, adopting or recommending to the stockholders any action or matter (other than the election or removal of members of the Board) expressly required by the DGCL to be submitted to stockholders for approval or (b) adopting, amending or repealing any bylaw of the Corporation.
3.2 Committee Rules.
Each committee shall keep records of its proceedings and make such reports as the Board may from time to time request. Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these Bylaws. Except as otherwise provided in the Certificate of Incorporation, these Bylaws or the resolution of the Board designating the committee, any committee may create one (1) or more subcommittees, each subcommittee to consist of one (1) or more members of the committee, and may delegate to any such subcommittee any or all of the powers and authority of the committee.
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ARTICLE IV
OFFICERS; EXECUTIVE CHAIRMAN; LEAD INDEPENDENT DIRECTOR
4.1 Generally.
The officers of the Corporation shall consist of an Executive Chairman of the Board, a Chief Executive Officer, a Secretary and a Treasurer and may consist of such other officers, including, without limitation, a Chief Financial Officer and one (1) or more Vice Presidents, as may from time to time be appointed by the Board. All officers shall be elected by the Board; provided, however, that the Board may empower the Chief Executive Officer of the Corporation to appoint any officer other than the Chief Executive Officer, the Chief Financial Officer or the Treasurer. Except as otherwise provided by law, by the Certificate of Incorporation or these Bylaws, each officer shall hold office until such officer’s successor is duly elected and qualified or until such officer’s earlier resignation, death, disqualification or removal. Any number of offices may be held by the same person. Any officer may resign by delivering a resignation in writing or by electronic transmission to the Corporation at its principal office or to the Executive Chairman of the Board, the Chief Executive Officer or the Secretary. Such resignation shall be effective upon delivery unless it is specified to be effective at some later time or upon the happening of some later event. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board and the Board may, in its discretion, leave unfilled, for such period as it may determine, any offices. Each such successor shall hold office for the unexpired term of such officer’s predecessor and until a successor is duly elected and qualified or until such officer’s earlier resignation, death, disqualification or removal.
4.2 Executive Chairman of the Board.
Subject to the provisions of Section 2.7 of these Bylaws, the Executive Chairman of the Board shall have the power to preside at all meetings of the Board and shall have such other powers and duties as provided in these Bylaws and as the Board may from time to time prescribe.
The Executive Chairman is an executive officer of the Corporation with the authority and power to sign all instruments and to take all actions which an executive officer is authorized to perform by the Board of Directors or these Bylaws, and such other powers and duties as may be prescribed by the Board. In addition to compensation for service as a member of the Board, the Executive Chairman shall receive such compensation as shall be fixed from time to time by the Board or a committee thereof and shall not be prohibited from receiving any compensation by reason of the fact that such Executive Chairman also is a director of the Corporation.
4.3 Lead Independent Director.
The Board may, in its discretion, elect one of its Independent Directors (as defined below) to the position of lead independent director (such director, the “Lead Independent Director”). The Lead Independent Director shall preside at all meetings at which the Executive Chairman of the Board is not present and shall exercise such other powers and duties as may from time to time be assigned to such person by the Board or as prescribed by these Bylaws. For purposes of these Bylaws, “Independent Director” has the meaning ascribed to such term under the rules of the exchange upon which the Corporation’s common stock is primarily traded.
4.4 Chief Executive Officer.
Subject to the control of the Board and such supervisory powers, if any, as may be given by the Board, the powers and duties of the Chief Executive Officer of the Corporation are:
(a) to act as the general manager and, subject to the control of the Board, to have general supervision, direction and control of the business and affairs of the Corporation;
(b) subject to Section 1.6 of these Bylaws, to preside at all meetings of the stockholders;
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(c) subject to Section 1.2 of these Bylaws, to call special meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as the Chief Executive Officer shall deem proper;
(d) to affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation;
(e) to sign certificates for shares of stock of the Corporation (if any); and
(f) subject to the direction of the Board, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation.
In the absence (or inability or refusal to act) of the Executive Chairman, the Chief Executive Officer (if he or she shall be a director) shall preside when present at all meetings of the stockholders and the Board.
4.5 President.
The President shall be the chief operating officer of the Corporation and shall, subject to the authority of the Chief Executive Officer and the Board, have general management and control of the day-to-day business operations of the Corporation and shall consult with and report to the Chief Executive Officer. The President shall put into operation the business policies of the Corporation as determined by the Chief Executive Officer and the Board and as communicated to the President by the Chief Executive Officer and the Board. The President shall make recommendations to the Chief Executive Officer on all operational matters that would normally be reserved for the final executive responsibility of the Chief Executive Officer. In the absence (or inability or refusal to act) of the Executive Chairman and Chief Executive Officer, the President (if he or she shall be a director) shall preside when present at all meetings of the stockholders and the Board.
4.6 Vice President.
Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President or that are delegated to such Vice President by the Board or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer’s absence or disability.
4.6 Chief Financial Officer.
The person holding the office of Chief Financial Officer shall be the Treasurer of the Corporation unless the Board shall have designated another officer as the Treasurer of the Corporation. Subject to the direction of the Board and the Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer, or as the Board may from time to time prescribe.
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4.7 Treasurer.
The person holding the office of Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board or the Chief Executive Officer may from time to time prescribe.
4.8 Secretary.
The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board or the Chief Executive Officer may from time to time prescribe.
4.9 Delegation of Authority.
The Board may from time to time delegate the powers or duties of any officer of the Corporation to any other officers or agents of the Corporation, notwithstanding any provision hereof.
4.10 Removal.
Any officer of the Corporation shall serve at the pleasure of the Board and may be removed at any time, with or without cause, by the Board; provided, that if the Board has empowered the Chief Executive Officer to appoint any officer of the Corporation, then such officer may also be removed by the Chief Executive Officer. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation.
ARTICLE V
STOCK
5.1 Certificates; Uncertificated Shares.
The shares of capital stock of the Corporation shall be uncertificated shares; provided, however, that the resolution of the Board that the shares of capital stock of the Corporation shall be uncertificated shares shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation (or the transfer agent or registrar, as the case may be). Notwithstanding the foregoing, the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be certificated shares. Every holder of stock represented by certificates shall be entitled to have a certificate representing the number of shares registered in certificate form and signed by, or in the name of the Corporation, by the Executive Chairman of the Board, the Chief Executive Officer or a Vice President, and by the Treasurer or the Secretary of the Corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.
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5.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates or Uncertificated Shares.
The Corporation may issue either of a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
5.3 Other Regulations.
Subject to applicable law, the Certificate of Incorporation and these Bylaws, the issue, transfer, conversion and registration of shares represented by certificates and of uncertificated shares shall be governed by such other regulations as the Board may establish.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification of Officers and Directors; Termination of Proceeding.
The Corporation shall, to the fullest extent permitted by the DGCL, as the same exists or may hereafter be amended, indemnify and hold harmless any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) (a “Proceeding”), by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including, without limitation, attorneys’ fees and disbursements and ERISA excise taxes), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any Proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any Proceeding, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be against or opposed to the best interests of the Corporation, and, with respect to any Proceeding, had reasonable cause to believe that such person’s conduct was unlawful.
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6.2 Indemnification of Officers and Directors; Liability.
The Corporation shall, to the fullest extent permitted by the DGCL, indemnify and hold harmless any person who was or is a party or is threatened to be made a party to or is otherwise involved in any Proceeding by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation and is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or employee benefit plan, against reasonable and documented out-of-pocket expenses (including, without limitation, attorneys’ fees and disbursements, judgments, fines, ERISA excise taxes, damages, claims and penalties and amounts paid in settlement) actually and reasonably incurred by such person in connection with such Proceeding, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any Proceeding as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such Proceeding was brought shall determine.
6.3 Non-Exclusivity of Rights.
The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI.
6.4 Indemnification Contracts.
The Board is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification or advancement rights to such person. Such rights may be greater than those provided in this Article VI.
6.5 Insurance.
The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.
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ARTICLE VII
NOTICES
7.1 Notice.
7.1.1 Form and Delivery. Except as otherwise specifically required in these Bylaws (including, without limitation, Section 7.1.2 of these Bylaws) or by applicable law, all notices required to be given pursuant to these Bylaws shall be in writing and may (a) in every instance in connection with any delivery to a member of the Board, be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by overnight express courier, facsimile, electronic mail or other form of electronic transmission and (b) be effectively delivered to a stockholder when given by hand delivery, by depositing such notice in the mail, postage prepaid or, if specifically consented to by the stockholder as described in Section 7.1.2 of these Bylaws, by sending such notice by facsimile, electronic mail or other form of electronic transmission. Any such notice shall be addressed to the person to whom notice is to be given at such person’s address as it appears on the records of the Corporation. The notice shall be deemed given: (a) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person; (b) in the case of delivery by mail, upon deposit in the mail; (c) in the case of delivery by overnight express courier, when dispatched; and (d) in the case of delivery via facsimile, electronic mail or other form of electronic transmission, at the time provided in Section 7.1.2 of these Bylaws.
7.1.2 Electronic Transmission. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given in accordance with Section 232 of the DGCL. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (a) the Corporation is unable to deliver by electronic transmission two (2) consecutive notices given by the Corporation in accordance with such consent and (b) such inability becomes known to the Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, that the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Section 7.1.2 shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of such posting and the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.
7.1.3 Affidavit of Giving Notice. An affidavit of the Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
7.2 Waiver of Notice.
Whenever notice is required to be given under any provision of the DGCL, the Certificate of Incorporation or these Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.
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ARTICLE VIII
INTERESTED DIRECTORS
8.1 Interested Directors.
No contract or transaction between the Corporation and one (1) or more of its members of the Board or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one (1) or more of its directors or officers are members of the board of directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof that authorizes the contract or transaction, or solely because such director’s or officer’s votes are counted for such purpose, if: (a) the material facts as to such director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (b) the material facts as to such director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board, a committee thereof, or the stockholders.
8.2 Quorum.
Interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.
ARTICLE IX
MISCELLANEOUS
9.1 Fiscal Year.
The fiscal year of the Corporation shall be determined by resolution of the Board.
9.2 Seal.
The Board may provide for a corporate seal, which may have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board.
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9.3 Form of Records.
Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of any other information storage device or method, electronic or otherwise, provided, that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the DGCL.
9.4 Reliance Upon Books and Records.
A member of the Board, or a member of any committee designated by the Board shall, in the performance of such person’s duties, be fully protected in relying in good faith upon the books and records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
9.5 Certificate of Incorporation Governs.
In the event of any conflict between the provisions of the Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern.
9.6 Severability.
If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect.
9.7 Time Periods.
In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
ARTICLE X
AMENDMENT
The Board shall have the power to adopt, amend or repeal these Bylaws. Any adoption, amendment or repeal of these Bylaws by the Board shall require the approval of a majority of the directors then in office; provided, however, the amendment or repeal of Section 2.6 of these Bylaws shall require the approval of at least two-thirds (2/3) of the directors then in office. The stockholders shall also have power to adopt, amend or repeal these Bylaws; provided, however, that, notwithstanding any other provision of the Certificate of Incorporation (including any certificate of designation) or any provision of law that might otherwise permit a lesser or no vote, but in addition to any vote of the holders of any class or series of stock of the Corporation required by applicable law or by the Certificate of Incorporation (including any preferred stock issued pursuant to any certificate of designation), the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of these Bylaws; provided, further, that if two-thirds (2/3) of the directors then in office have approved such adoption, amendment or repeal of any provisions of these Bylaws, then only the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of these Bylaws.
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CERTIFICATION OF BYLAWS
OF
AIRO GROUP, INC.
(a Delaware corporation)
I, __________, certify that I am __________ of AIRO Group, Inc., a Delaware corporation (the “Corporation”), that I am duly authorized to make and deliver this certification and that the attached Bylaws are a true and complete copy of the Bylaws of the Corporation in effect as of the date of this certificate.
| Dated: [●], 2024 | |
Name: Title: |
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AIRO GROUP, INC.
2024 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the AIRO Group, Inc. 2024 Stock Option and Incentive Plan (as amended from time to time, the “Plan”). The purpose of the Plan is to encourage and enable the officers, employees, Non-Employee Directors and Consultants of AIRO Group, Inc. (the “Company”) and its Affiliates upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company and its stockholders, thereby stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company or one of its Affiliates.
The following terms shall be defined as set forth below:
“Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations thereunder.
“Administrator” means either the Board or the compensation committee of the Board or a similar committee performing the functions of the compensation committee and which is comprised of not less than two Non-Employee Directors who are independent.
“Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405 of the Act. The Board will have the authority to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.
“Award” or “Awards,” except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Units, Restricted Stock Awards, Unrestricted Stock Awards, Cash-Based Awards, and Dividend Equivalent Rights.
“Award Agreement” means a written or electronic document setting forth the terms and provisions applicable to an Award granted under the Plan. Each Award Agreement is subject to the terms and conditions of the Plan.
“Board” means the Board of Directors of the Company.
“Cash-Based Award” means an Award entitling the recipient to receive a cash-denominated payment.
“Code” means the U.S. Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations.
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“Consultant” means a consultant or adviser who provides bona fide services to the Company or an Affiliate as an independent contractor and who qualifies as a consultant or advisor under Instruction A.1.(a)(1) of Form S-8 under the Act.
“Dividend Equivalent Right” means an Award entitling the grantee to receive credits based on ordinary cash dividends that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the grantee.
“Effective Date” means the date on which the Plan becomes effective as set forth in Section 19.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
“Fair Market Value” of the Stock on any given date means the fair market value of the Stock determined in good faith by the Administrator; provided, however, that if the Stock is listed on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”), The New York Stock Exchange or another national securities exchange or traded on any established market, the determination shall be made by reference to the closing price on such date. If there is no closing price for such date, the determination shall be made by reference to the last date preceding such date for which there is a closing price.
“Incentive Stock Option” means any Stock Option designated and qualified as an “incentive stock option” as defined in Section 422 of the Code.
“Non-Employee Director” means a member of the Board who is not also an employee of the Company or any Subsidiary.
“Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option.
“Option” or “Stock Option” means any option to purchase shares of Stock granted pursuant to Section 5.
“Restricted Shares” means the shares of Stock underlying a Restricted Stock Award that remain subject to a risk of forfeiture or the Company’s right of repurchase.
“Restricted Stock Award” means an Award of Restricted Shares subject to such restrictions and conditions as the Administrator may determine at the time of grant.
“Restricted Stock Units” means an Award of stock units subject to such restrictions and conditions as the Administrator may determine at the time of grant.
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“Sale Event” shall mean (i) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (ii) a merger, reorganization or consolidation pursuant to which the holders of the Company’s outstanding voting power and outstanding stock immediately prior to such transaction do not own a majority of the outstanding voting power and outstanding stock or other equity interests of the resulting or successor entity (or its ultimate parent, if applicable) immediately upon completion of such transaction, (iii) the sale of all of the Stock of the Company to an unrelated person, entity or group thereof acting in concert, or (iv) any other transaction in which the owners of the Company’s outstanding voting power immediately prior to such transaction do not own at least a majority of the outstanding voting power of the Company or any successor entity immediately upon completion of the transaction other than as a result of the acquisition of securities directly from the Company.
“Sale Price” means the value as determined by the Administrator of the consideration payable, or otherwise to be received by stockholders, per share of Stock pursuant to a Sale Event.
“Section 409A” means Section 409A of the Code and the regulations and other guidance promulgated thereunder.
“Service Relationship” means any relationship as an employee, Non-Employee Director or Consultant of the Company or any Affiliate. Unless as otherwise set forth in the Award Agreement, a Service Relationship shall be deemed to continue without interruption in the event a grantee’s status changes from full-time employee to part-time employee or a grantee’s status changes from employee to Consultant or Non-Employee Director or vice versa, provided that there is no interruption or other termination of Service Relationship in connection with the grantee’s change in capacity.
“Stock” or “Common Stock” means the Class A common stock, par value $0.0001 per share, of the Company, subject to adjustments pursuant to Section 3.
“Stock Appreciation Right” means an Award entitling the recipient to receive shares of Stock (or cash, to the extent explicitly provided for in the applicable Award Agreement) having a value equal to the excess of the Fair Market Value of the Stock on the date of exercise over the exercise price of the Stock Appreciation Right multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised.
“Subsidiary” means any corporation or other entity (other than the Company) in which the Company has at least a 50 percent interest, either directly or indirectly.
“Ten Percent Owner” means an employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation.
“Unrestricted Stock Award” means an Award of shares of Stock free of any restrictions.
SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES AND DETERMINE AWARDS
(a) Administration of Plan. The Plan shall be administered by the Administrator.
(b) Powers of Administrator. The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority:
(i) to select the individuals to whom Awards may from time to time be granted;
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(ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Unrestricted Stock Awards, Cash-Based Awards, and Dividend Equivalent Rights, or any combination of the foregoing, granted to any one or more grantees;
(iii) to determine the number of shares of Stock to be covered by any Award;
(iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and grantees, and to approve the forms of Award Agreements;
(v) to accelerate at any time the exercisability or vesting of all or any portion of any Award;
(vi) subject to the provisions of Section 5(c) or 6(d), to extend at any time the period in which Stock Options or Stock Appreciation Rights, respectively, may be exercised; and
(vii) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan.
All decisions and interpretations of the Administrator shall be binding on all persons, including the Company and Plan grantees.
(c) Delegation of Authority to Grant Awards. Subject to applicable law, the Administrator, in its discretion, may delegate to a committee consisting of one or more officers of the Company, including the Chief Executive Officer of the Company, all or part of the Administrator’s authority and duties with respect to the granting of Awards to individuals who are (i) not subject to the reporting and other provisions of Section 16 of the Exchange Act and (ii) not members of the delegated committee. Any such delegation by the Administrator shall include a limitation as to the amount of Stock underlying Awards that may be granted during the period of the delegation and shall contain guidelines as to the determination of the exercise price and the vesting criteria. The Administrator may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Administrator’s delegate or delegates that were consistent with the terms of the Plan.
(d) Award Agreement. Awards under the Plan shall be evidenced by Award Agreements that set forth the terms, conditions and limitations for each Award which may include, without limitation, the term of an Award and the provisions applicable in the event the Service Relationship terminates.
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(e) Indemnification. Neither the Board nor the Administrator, nor any member of either or any delegate thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and the Administrator (and any delegate thereof) shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under the Company’s articles or bylaws or any directors’ and officers’ liability insurance coverage which may be in effect from time to time and/or any indemnification agreement between such individual and the Company.
(f) Non-U.S. Award Recipients. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries in which the Company and its Affiliates operate or have employees or other individuals eligible for Awards, the Administrator, in its sole discretion, shall have the power and authority to: (i) determine which Affiliates shall be covered by the Plan; (ii) determine which individuals outside the United States are eligible to participate in the Plan; (iii) modify the terms and conditions of any Award granted to individuals outside the United States to comply with applicable laws; (iv) establish subplans and modify exercise procedures and other terms and procedures, to the extent the Administrator determines such actions to be necessary or advisable (and such subplans and/or modifications shall be incorporated into and made part of this Plan); provided, however, that no such subplans and/or modifications shall increase the share limitations contained in Section 3(a) hereof; and (v) take any action, before or after an Award is made, that the Administrator determines to be necessary or advisable to obtain approval or comply with any local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the Administrator may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable United States securities law, the Code, or any other applicable United States governing statute or law.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 8,000,000 shares (the “Initial Limit”), plus on January 1, 2025 and on each January 1 thereafter, the number of shares of Stock reserved and available for issuance under the Plan shall be cumulatively increased by three percent of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31, or such lesser number of shares as approved by the Administrator, in all cases subject to adjustment as provided in this Section 3 (the “Annual Increase”). Subject to such overall limitation, the maximum aggregate number of shares of Stock that may be issued in the form of Incentive Stock Options shall not exceed the Initial Limit cumulatively increased on January 1, 2025 and on each January 1 thereafter by the lesser of the Annual Increase for such year, subject in all cases to adjustment as provided in Section 3(c). In the event the Company repurchases shares of Stock on the open market, such shares shall not be added to the shares of Stock available for issuance under the Plan. Subject to such overall limitations, shares of Stock may be issued up to such maximum number pursuant to any type or types of Award. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company. Awards that may be settled solely in cash shall not be counted against the share reserve, nor shall they reduce the shares of Stock authorized for grant to a grantee in any calendar year.
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(b) Maximum Awards to Non-Employee Directors. Notwithstanding anything to the contrary in this Plan, the value of all Awards awarded under this Plan and all other cash compensation paid by the Company to any Non-Employee Director for services as a Non-Employee Director in any calendar year shall not exceed: (i) $1,000,000 in the first calendar year an individual becomes a Non-Employee Director and (ii) $750,000 in any other calendar year. For the purpose of this limitation, the value of any Award shall be its grant date fair value, as determined in accordance with ASC Topic 718 or successor provision but excluding the impact of estimated forfeitures related to service-based vesting provisions.
(c) Changes in Stock. Subject to Section 3(d) hereof, if, as a result of any reorganization, recapitalization, reclassification, stock dividend, extraordinary cash dividend, stock split, reverse stock split or other similar change in the Company’s capital stock, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, or, if, as a result of any merger or consolidation, sale of all or substantially all of the assets of the Company, the outstanding shares of Stock are converted into or exchanged for securities of the Company or any successor entity (or a parent or subsidiary thereof), the Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, including the maximum number of shares that may be issued in the form of Incentive Stock Options, (ii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, (iii) the repurchase price, if any, per share subject to each outstanding Restricted Stock Award, and (iv) the exercise price for each share subject to any then outstanding Stock Options and Stock Appreciation Rights under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of shares subject to Stock Options and Stock Appreciation Rights) as to which such Stock Options and Stock Appreciation Rights remain exercisable. The Administrator shall also make equitable or proportionate adjustments in the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration cash dividends paid other than in the ordinary course or any other extraordinary corporate event. The adjustment by the Administrator shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares.
(d) Mergers and Other Transactions. In the case of and subject to the consummation of a Sale Event, the parties thereto may cause the assumption or continuation of Awards theretofore granted by the successor entity, or the substitution of such Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as such parties shall agree. To the extent that the parties to such Sale Event do not provide for the assumption, continuation or substitution of Awards, upon the effective time of the Sale Event, the Plan and all outstanding Awards granted hereunder shall terminate. In such case, except as may be otherwise provided in the relevant Award Agreement, all Options and Stock Appreciation Rights with time-based vesting conditions or restrictions that are not vested and/or exercisable immediately prior to the effective time of the Sale Event shall become fully vested and exercisable as of the effective time of the Sale Event, all other Awards with time-based vesting, conditions or restrictions shall become fully vested and nonforfeitable as of the effective time of the Sale Event, and all Awards with conditions and restrictions relating to the attainment of performance goals may become vested and nonforfeitable in connection with a Sale Event in the Administrator’s discretion or to the extent specified in the relevant Award Agreement. In the event of such termination, (i) the Company shall have the option (in its sole discretion) to make or provide for a payment, in cash or in kind, to the grantees holding Options and Stock Appreciation Rights, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the Sale Price multiplied by the number of shares of Stock subject to outstanding Options and Stock Appreciation Rights (to the extent then exercisable at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options and Stock Appreciation Rights (provided that, in the case of an Option or Stock Appreciation Right with an exercise price equal to or greater than the Sale Price, such Option or Stock Appreciation Right shall be cancelled for no consideration); or (ii) each grantee shall be permitted, within a specified period of time prior to the consummation of the Sale Event as determined by the Administrator, to exercise all outstanding Options and Stock Appreciation Rights (to the extent then exercisable) held by such grantee. The Company shall also have the option (in its sole discretion) to make or provide for a payment, in cash or in kind, to the grantees holding other Awards in an amount equal to the Sale Price multiplied by the number of vested shares of Stock under such Awards.
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SECTION 4. ELIGIBILITY
Grantees under the Plan will be such employees, Non-Employee Directors or Consultants of the Company and its Affiliates as are selected from time to time by the Administrator in its sole discretion; provided that Awards may not be granted to employees, Non-Employee Directors or Consultants who are providing services only to any “parent” of the Company, as such term is defined in Rule 405 of the Act, unless (i) the stock underlying the Awards is treated as “service recipient stock” under Section 409A or (ii) the Company has determined that such Awards are exempt from or otherwise comply with Section 409A.
SECTION 5. STOCK OPTIONS
(a) Award of Stock Options. The Administrator may grant Stock Options under the Plan. Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the Company or any Subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Code. To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option.
Stock Options granted pursuant to this Section 5 shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Stock Options may be granted in lieu of cash compensation at the optionee’s election, subject to such terms and conditions as the Administrator may establish.
(b) Exercise Price. The exercise price per share for the Stock covered by a Stock Option granted pursuant to this Section 5 shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the exercise price of such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the date of grant. Notwithstanding the foregoing, Stock Options may be granted with an exercise price per share that is less than 100 percent of the Fair Market Value on the date of grant (i) pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code, (ii) to individuals who are not subject to U.S. income tax on the date of grant or (iii) if the Stock Option is otherwise exempt from or compliant with Section 409A.
(c) Option Term. The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the term of such Stock Option shall be no more than five years from the date of grant.
(d) Exercisability; Rights of a Stockholder. Stock Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the date of grant. The Administrator may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.
(e) Method of Exercise. Stock Options may be exercised in whole or in part, by giving written or electronic notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods except to the extent otherwise provided in the Award Agreement:
(i) In cash, by certified or bank check or other instrument acceptable to the Administrator;
(ii) Through the delivery (or attestation to the ownership following such procedures as the Company may prescribe) of shares of Stock that are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date;
(iii) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Company shall prescribe as a condition of such payment procedure; or
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(iv) With respect to Stock Options that are not Incentive Stock Options, by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price.
Payment instruments will be received subject to collection. The transfer to the optionee on the records of the Company or of the transfer agent of the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Award Agreement or applicable provisions of laws (including the satisfaction of any taxes that the Company or an Affiliate is obligated to withhold with respect to the optionee). In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the optionee upon the exercise of the Stock Option shall be net of the number of attested shares. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the exercise of Stock Options, such as a system using an internet website or interactive voice response, then the paperless exercise of Stock Options may be permitted through the use of such an automated system.
(f) Annual Limit on Incentive Stock Options. To the extent required for “incentive stock option” treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) Award of Stock Appreciation Rights. The Administrator may grant Stock Appreciation Rights under the Plan. A Stock Appreciation Right is an Award entitling the recipient to receive shares of Stock (or cash, to the extent explicitly provided for in the applicable Award Agreement) having a value equal to the excess of the Fair Market Value of a share of Stock on the date of exercise over the exercise price of the Stock Appreciation Right multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised.
(b) Exercise Price of Stock Appreciation Rights. The exercise price of a Stock Appreciation Right shall not be less than 100 percent of the Fair Market Value of the Stock on the date of grant. Notwithstanding the foregoing, Stock Appreciation Rights may be granted with an exercise price per share that is less than 100 percent of the Fair Market Value on the date of grant (i) pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code, (ii) to individuals who are not subject to U.S. income tax on the date of grant or (iii) if the Stock Appreciation Right is otherwise exempt from or compliant with Section 409A.
(c) Grant and Exercise of Stock Appreciation Rights. Stock Appreciation Rights may be granted by the Administrator independently of any Stock Option granted pursuant to Section 5 of the Plan.
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(d) Terms and Conditions of Stock Appreciation Rights. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined on the date of grant by the Administrator. The term of a Stock Appreciation Right may not exceed ten years. The terms and conditions of each such Award shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees.
SECTION 7. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. The Administrator may grant Restricted Stock Awards under the Plan. A Restricted Stock Award is any Award of Restricted Shares subject to such restrictions and conditions as the Administrator may determine at the time of grant. Conditions may be based on continuing employment (or other Service Relationship) and/or achievement of pre-established performance goals and objectives.
(b) Rights as a Stockholder. Upon the grant of the Restricted Stock Award and payment of any applicable purchase price, a grantee shall have the rights of a stockholder with respect to the voting of the Restricted Shares and receipt of dividends; provided that if the lapse of restrictions with respect to the Restricted Stock Award is tied to the attainment of vesting conditions, any dividends paid by the Company shall accrue and shall not be paid to the grantee until and to the extent the vesting conditions are met with respect to the Restricted Stock Award. Unless the Administrator shall otherwise determine, (i) uncertificated Restricted Shares shall be accompanied by a notation on the records of the Company or the transfer agent to the effect that they are subject to forfeiture until such Restricted Shares are vested as provided in Section 7(d) below, and (ii) certificated Restricted Shares shall remain in the possession of the Company until such Restricted Shares are vested as provided in Section 7(d) below, and the grantee shall be required, as a condition of the grant, to deliver to the Company such instruments of transfer as the Administrator may prescribe.
(c) Restrictions. Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Restricted Stock Award Agreement. Except as may otherwise be provided by the Administrator either in the Award Agreement or, subject to Section 16 below, in writing after the Award is issued, if a grantee’s employment (or other Service Relationship) with the Company and its Affiliates terminates for any reason, any Restricted Shares that have not vested at the time of termination shall automatically and without any requirement of notice to such grantee from or other action by or on behalf of, the Company be deemed to have been reacquired by the Company at its original purchase price (if any) from such grantee or such grantee’s legal representative simultaneously with such termination of employment (or other Service Relationship), and thereafter shall cease to represent any ownership of the Company by the grantee or rights of the grantee as a stockholder. Following such deemed reacquisition of Restricted Shares that are represented by physical certificates, a grantee shall surrender such certificates to the Company upon request without consideration.
(d) Vesting of Restricted Shares. The Administrator at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Shares and the Company’s right of repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of such pre-established performance goals, objectives and other conditions, the shares on which all restrictions have lapsed shall no longer be Restricted Shares and shall be deemed “vested.”
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SECTION 8. RESTRICTED STOCK UNITS
(a) Nature of Restricted Stock Units. The Administrator may grant Restricted Stock Units under the Plan. A Restricted Stock Unit is an Award of stock units that may be settled in shares of Stock (or cash, to the extent explicitly provided for in the Award Agreement) upon the satisfaction of such restrictions and conditions at the time of grant. Conditions may be based on continuing employment (or other Service Relationship) and/or achievement of pre-established performance goals and objectives. The terms and conditions of each such Award shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees. Restricted Stock Units with deferred settlement dates are subject to Section 409A and shall contain such additional terms and conditions as the Administrator shall determine in its sole discretion in order to comply with the requirements of Section 409A.
(b) Election to Receive Restricted Stock Units in Lieu of Compensation. The Administrator may, in its sole discretion, permit a grantee to elect to receive a portion of future cash compensation otherwise due to such grantee in the form of an award of Restricted Stock Units. Any such election shall be made in writing and shall be delivered to the Company no later than the date specified by the Administrator and in accordance with Section 409A and such other rules and procedures established by the Administrator. Any such future cash compensation that the grantee elects to defer shall be converted to a fixed number of Restricted Stock Units based on the Fair Market Value of Stock on the date the compensation would otherwise have been paid to the grantee if such payment had not been deferred as provided herein. The Administrator shall have the sole right to determine whether and under what circumstances to permit such elections and to impose such limitations and other terms and conditions thereon as the Administrator deems appropriate. Any Restricted Stock Units that are elected to be received in lieu of cash compensation shall be fully vested, unless otherwise provided in the Award Agreement.
(c) Rights as a Stockholder. A grantee shall have the rights as a stockholder only as to shares of Stock acquired by the grantee upon settlement of Restricted Stock Units; provided, however, that the grantee may be credited with Dividend Equivalent Rights with respect to the stock units underlying his or her Restricted Stock Units, subject to the provisions of Section 11 and such terms and conditions as the Administrator may determine.
(d) Termination. Except as may otherwise be provided by the Administrator either in the Award Agreement or, subject to Section 16 below, in writing after the Award is issued, a grantee’s right in all Restricted Stock Units that have not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of Service Relationship) with the Company and its Affiliates for any reason.
SECTION 9. UNRESTRICTED STOCK AWARDS
Grant or Sale of Unrestricted Stock. The Administrator may grant (or sell at par value or such higher purchase price determined by the Administrator) an Unrestricted Stock Award under the Plan. An Unrestricted Stock Award is an Award pursuant to which the grantee may receive shares of Stock free of any restrictions under the Plan. Unrestricted Stock Awards may be granted in respect of past services or other valid consideration, or in lieu of cash compensation due to such grantee.
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SECTION 10. CASH-BASED AWARDS
Grant of Cash-Based Awards. The Administrator may grant Cash-Based Awards under the Plan. A Cash-Based Award is an Award that entitles the grantee to a payment in cash upon the attainment of specified performance goals, including continued employment (or other Service Relationship). The Administrator shall determine the maximum duration of the Cash-Based Award, the amount of cash to which the Cash-Based Award pertains, the conditions upon which the Cash-Based Award shall become vested or payable, and such other provisions as the Administrator shall determine. Each Cash-Based Award shall specify a cash-denominated payment amount, formula or payment ranges as determined by the Administrator. Payment, if any, with respect to a Cash-Based Award shall be made in accordance with the terms of the Award and may be made in cash.
SECTION 11. DIVIDEND EQUIVALENT RIGHTS
(a) Dividend Equivalent Rights. The Administrator may grant Dividend Equivalent Rights under the Plan. A Dividend Equivalent Right is an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other Award to which it relates) if such shares had been issued to the grantee. A Dividend Equivalent Right may be granted hereunder to any grantee as a component of an award of Restricted Stock Units or as a freestanding award. The terms and conditions of Dividend Equivalent Rights shall be specified in the Award Agreement. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan sponsored by the Company, if any. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or installments. A Dividend Equivalent Right granted as a component of an Award of Restricted Stock Units shall provide that such Dividend Equivalent Right shall be settled only upon settlement or payment of, or lapse of restrictions on, such other Award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other Award.
(b) Termination. Except as may otherwise be provided by the Administrator either in the Award Agreement or, subject to Section 16 below, in writing after the Award is issued, a grantee’s rights in all Dividend Equivalent Rights shall automatically terminate upon the grantee’s termination of employment (or cessation of Service Relationship) with the Company and its Affiliates for any reason.
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SECTION 12. Transferability of Awards
(a) Transferability. Except as provided in Section 12(b) below or otherwise determined by the Administrator, during a grantee’s lifetime, his or her Awards shall be exercisable only by the grantee, or by the grantee’s legal representative or guardian in the event of the grantee’s incapacity. No Awards shall be sold, assigned, transferred or otherwise encumbered or disposed of by a grantee other than by will or by the laws of descent and distribution or pursuant to a domestic relations order. No Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind, and any purported transfer in violation hereof shall be null and void.
(b) Administrator Action. Notwithstanding Section 12(a), the Administrator, in its discretion, may provide either in the Award Agreement regarding a given Award or by subsequent written approval that the grantee (who is an employee or Non-Employee Director) may transfer his or her Non-Qualified Stock Options to his or her immediate family members, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award Agreement. In no event may an Award be transferred by a grantee for value.
(c) Family Member. For purposes of Section 12(b), “family member” shall mean a grantee’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the grantee’s household (other than a tenant of the grantee), a trust in which these persons (or the grantee) have more than 50 percent of the beneficial interest, a foundation in which these persons (or the grantee) control the management of assets, and any other entity in which these persons (or the grantee) own more than 50 percent of the voting interests.
(d) Designation of Beneficiary. To the extent permitted by the Company and valid under applicable law, each grantee to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the grantee’s death. Any such designation shall be on a form provided for that purpose by the Administrator and shall not be effective until received by the Administrator. If no beneficiary has been designated by a deceased grantee, or if the designated beneficiaries have predeceased the grantee, the beneficiary shall be the grantee’s estate or legal heirs.
SECTION 13. TAX WITHHOLDING
(a) Payment by Grantee. Each grantee shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the grantee for tax purposes, pay to the Company or any applicable Affiliate, or make arrangements satisfactory to the Administrator regarding payment of, any U.S. and non-U.S. federal, state, or local taxes of any kind required by law to be withheld by the Company or any applicable Affiliate with respect to such income. The Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee or to satisfy any applicable withholding obligations by any other method of withholding that the Company and its Affiliates deem appropriate. The Company’s obligation to deliver evidence of book entry (or stock certificates) to any grantee is subject to and conditioned on tax withholding obligations being satisfied by the grantee.
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(b) Payment in Stock. The Administrator may cause any tax withholding obligation of the Company or any applicable Affiliate to be satisfied, in whole or in part, by the Company withholding from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due; provided, however, that the amount withheld does not exceed the maximum statutory rate or such lesser amount as is necessary to avoid liability accounting treatment. For purposes of share withholding, the Fair Market Value of withheld shares shall be determined in the same manner as the value of Stock includible in income of the grantees. The Administrator may also require any tax withholding obligation of the Company or any applicable Affiliate to be satisfied, in whole or in part, by an arrangement whereby a certain number of shares of Stock issued pursuant to any Award are immediately sold and proceeds from such sale are remitted to the Company or any applicable Affiliate in an amount that would satisfy the withholding amount due.
SECTION 14. Section 409A awards
Awards are intended to be exempt from Section 409A to the greatest extent possible and to otherwise comply with Section 409A. The Plan and all Awards shall be interpreted in accordance with such intent. To the extent that any Award is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A (a “409A Award”), the Award shall be subject to such additional rules and requirements as specified by the Administrator from time to time in order to comply with Section 409A. In this regard, if any amount under a 409A Award is payable upon a “separation from service” (within the meaning of Section 409A) to a grantee who is then considered a “specified employee” (within the meaning of Section 409A), then no such payment shall be made prior to the date that is the earlier of (i) six months and one day after the grantee’s separation from service, or (ii) the grantee’s death, but only to the extent such delay is necessary to prevent such payment from being subject to interest, penalties and/or additional tax imposed pursuant to Section 409A. Further, the settlement of any 409A Award may not be accelerated except to the extent permitted by Section 409A. The Company makes no representation that any or all of the payments or benefits described in the Plan will be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to any such payment. The grantee shall be solely responsible for the payment of any taxes and penalties incurred under Section 409A.
SECTION 15. TERMINATION OF SERVICE RELATIONSHIP, TRANSFER, LEAVE OF ABSENCE, ETC.
(a) Termination of Service Relationship. If the grantee’s Service Relationship is with an Affiliate and such Affiliate ceases to be an Affiliate, the grantee shall be deemed to have terminated his or her Service Relationship for purposes of the Plan.
(b) For purposes of the Plan, the following events shall not be deemed a termination of a Service Relationship:
(i) a transfer to the Service Relationship of the Company from an Affiliate or from the Company to an Affiliate, or from one Affiliate to another; or
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(ii) an approved leave of absence, if the employee’s right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing.
SECTION 16. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall materially and adversely affect rights under any outstanding Award without the holder’s consent. The Administrator is specifically authorized to exercise its discretion to reduce the exercise price of outstanding Stock Options or Stock Appreciation Rights, or effect the repricing of such Awards through cancellation and re-grants or cancellation of Stock Options or Stock Appreciation Rights in exchange for cash or other Awards. To the extent required under the rules of any securities exchange or market system on which the Stock is listed, or to the extent determined by the Administrator to be required by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code, Plan amendments shall be subject to approval by Company stockholders. Nothing in this Section 16 shall limit the Administrator’s authority to take any action permitted pursuant to Section 3(c) or 3(d).
SECTION 17. STATUS OF PLAN
With respect to the portion of any Award that has not been exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence.
SECTION 18. GENERAL PROVISIONS
(a) No Distribution. The Administrator may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof.
(b) Issuance of Stock. To the extent certificated, stock certificates to grantees under this Plan shall be deemed delivered for all purposes when the Company or a stock transfer agent of the Company shall have mailed such certificates in the United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company. Uncertificated Stock shall be deemed delivered for all purposes when the Company or a Stock transfer agent of the Company shall have given to the grantee by electronic mail (with proof of receipt) or by United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company, notice of issuance and recorded the issuance in its records (which may include electronic “book entry” records). Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any evidence of book entry or certificates evidencing shares of Stock pursuant to the exercise or settlement of any Award, unless and until the Administrator has determined, with advice of counsel (to the extent the Administrator deems such advice necessary or advisable), that the issuance and delivery is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any exchange on which the shares of Stock are listed, quoted or traded. Any Stock issued pursuant to the Plan shall be subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with federal, state or foreign jurisdiction, securities or other laws, rules and quotation system on which the Stock is listed, quoted or traded. The Administrator may place legends on any Stock certificate or notations on any book entry to reference restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the Administrator may require that an individual make such reasonable covenants, agreements, and representations as the Administrator, in its discretion, deems necessary or advisable in order to comply with any such laws, regulations, or requirements. The Administrator shall have the right to require any individual to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Administrator.
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(c) Stockholder Rights. Until Stock is deemed delivered in accordance with Section 18(b), no right to vote or receive dividends or any other rights of a stockholder will exist with respect to shares of Stock to be issued in connection with an Award, notwithstanding the exercise of a Stock Option or any other action by the grantee with respect to an Award.
(d) Other Incentive Arrangements; No Rights to Continued Service Relationship. Nothing contained in this Plan shall prevent the Board from adopting other or additional incentive arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of Awards do not confer upon any grantee any right to continued employment or other Service Relationship with the Company or any Affiliate.
(e) Trading Policy Restrictions. Option exercises and other Awards under the Plan shall be subject to the Company’s insider trading policies and procedures, as in effect from time to time.
(f) Clawback Policy. Awards under the Plan shall be subject to the Company’s clawback policy, as in effect from time to time.
(g) Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Administrator shall determine whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or nay rights thereto shall be cancelled, terminated or otherwise eliminated.
SECTION 19. EFFECTIVE DATE OF PLAN
This Plan shall become effective [·], 2024, subject to prior stockholder approval in accordance with applicable state law, the Company’s bylaws and articles of incorporation, and applicable stock exchange rules. No grants of Awards may be made hereunder after the tenth anniversary of the Effective Date and no grants of Incentive Stock Options may be made hereunder after the tenth anniversary of the date the Plan is approved by the Board.
SECTION 20. GOVERNING LAW
This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the State of Delaware applied without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS:
DATE APPROVED BY STOCKHOLDERS:
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AIRO GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
The purpose of the AIRO Group, Inc. Employee Stock Purchase Plan (the “Plan”) is to provide eligible employees of AIRO Group, Inc. (the “Company”) and each Designated Company (as defined in Section 11) with opportunities to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). 4,000,000 shares of Common Stock in the aggregate have been approved and reserved for this purpose, plus on January 1, 2025 and each January 1 thereafter until the Plan terminates pursuant to Section 20, the number of shares of Common Stock reserved and available for issuance under the Plan shall be cumulatively increased by the least of (i) 4,000,000 shares of Common Stock, (ii) 1.5% of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31, and (iii) such lesser number of shares of Common Stock as determined by the Administrator (as defined in Section 1).
The Plan includes two components: a Code Section 423 Component (the “423 Component”) and a non-Code Section 423 Component (the “Non-423 Component”). It is intended for the 423 Component to constitute an “employee stock purchase plan” within the meaning of Section 423(b) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and the 423 Component shall be interpreted in accordance with that intent. Under the Non-423 Component, which does not qualify as an “employee stock purchase plan” within the meaning of Section 423(b) of the Code, options will be granted pursuant to rules, procedures or sub-plans adopted by the Administrator designed to comply with appliable laws to achieve tax, and other objectives for eligible employees. Except as otherwise provided herein or by the Administrator, the Non-423 Component will operate and be administered in the same manner as the 423 Component.
Unless otherwise defined herein, capitalized terms in this Plan shall have the meaning ascribed to them in Section 11.
1. Administration. The Plan will be administered by the person or persons (the “Administrator”) appointed by the Company’s Board of Directors (the “Board”) for such purpose. The Administrator has authority at any time to: (i) adopt, alter and repeal such rules, guidelines and practices for the administration of the Plan and for its own acts and proceedings as it shall deem advisable; (ii) interpret the terms and provisions of the Plan; (iii) make all determinations it deems advisable for the administration of the Plan, including to accommodate the specific requirements of applicable laws, regulations and procedures for jurisdictions outside the United States; (iv) decide all disputes arising in connection with the Plan; and (v) otherwise supervise the administration of the Plan. All interpretations and decisions of the Administrator shall be binding on all persons, including the Company and the Participants. No member of the Board or individual exercising administrative authority with respect to the Plan shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder.
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2. Offerings. The Company will make one or more offerings to eligible employees to purchase Common Stock under the Plan (“Offerings”). The Administrator may, in its discretion, determine when each Offering shall occur, including the duration of any Offering, provided that no Offering shall exceed 27 months in duration. Unless as otherwise determined by the Administrator, Participants will only be permitted to participate in one Offering at a time.
3. Eligibility. All individuals classified as employees on the payroll records of the Company and each Designated Company are eligible to participate in any one or more of the Offerings under the Plan, provided that, unless otherwise determined by the Administrator, as of the first day of the applicable Offering (the “Offering Date”) they are customarily employed by the Company or a Designated Company for more than 20 hours a week and have been employed for such period as determined by the Administrator in advance of an Offering, with such period not to exceed two years; provided further, that employees who are employed for 20 hours or less a week may be eligible to participate in the Plan if required by applicable law or regulations. Notwithstanding any other provision herein, individuals who are not contemporaneously classified as employees of the Company or a Designated Company for purposes of the Company’s or applicable Designated Company’s payroll system are not considered to be eligible employees of the Company or any Designated Company and shall not be eligible to participate in the Plan. In the event any such individuals are reclassified as employees of the Company or a Designated Company for any purpose, including, without limitation, common law or statutory employees, by any action of any third party, including, without limitation, any government agency, or as a result of any private lawsuit, action or administrative proceeding, such individuals shall, notwithstanding such reclassification, remain ineligible for participation. Notwithstanding the foregoing, the exclusive means for individuals who are not contemporaneously classified as employees of the Company or a Designated Company on the Company’s or Designated Company’s payroll system to become eligible to participate in this Plan is through an amendment or subplan to this Plan, duly executed by the Company, which specifically renders such individuals eligible to participate herein.
4. Participants. An eligible employee who is not a Participant in any prior Offering may participate in a subsequent Offering by submitting an enrollment form to the Company or an agent designated by the Company (in the manner described in Section 4(c)) at least 15 business days before the Offering Date (or by such other deadline as shall be established by the Administrator for the Offering).
(a) Enrollment. The enrollment form (which may be in an electronic format or such other method as determined by the Company in accordance with the Company’s practices) will (a) state a whole percentage to be deducted from an eligible employee’s Compensation (as defined in Section 11) per pay period, (b) authorize the purchase of Common Stock in each Offering in accordance with the terms of the Plan and (c) specify the exact name or names in which shares of Common Stock purchased for such individual are to be issued pursuant to Section 10. An employee who does not enroll in accordance with these procedures will be deemed to have waived the right to participate. Unless a Participant files a new enrollment form or withdraws from the Plan, such Participant’s deductions or contributions and purchases will continue at the same percentage of Compensation for future Offerings, provided he or she remains eligible.
(b) Notwithstanding the foregoing, participation in the Plan will neither be permitted nor be denied contrary to the requirements of the Code.
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5. Employee Contributions. Each eligible employee may authorize payroll deductions or contributions at a minimum of 1 percent up to a maximum of 15 percent of such employee’s Compensation for each pay period or such other maximum as may be specified by the Administrator in advance of an Offering. The Company will maintain book accounts showing the amount of payroll deductions or contributions made by each Participant for each Offering Period. No interest will accrue or be paid on payroll deductions or contributions, except as may be required by applicable law. If payroll deductions or contributions for purposes of the Plan are prohibited or otherwise problematic under applicable law (as determined by the Administrator in its discretion), the Administrator may require Participants to contribute to the Plan by such other means as determined by the Administrator. Any reference to “payroll deductions” or contributions in this Section 5 (or in any other section of the Plan ) will similarly cover contributions by other means made pursuant to this Section 5.
6. Deduction Changes. Except as may be determined by the Administrator in advance of an Offering, a Participant may not increase or decrease his or her payroll deduction or contribution during any Offering, but may increase or decrease his or her payroll deduction or contributions with respect to the next Offering (subject to the limitations of Section 5) by filing a new enrollment form at least 15 business days before the next Offering Date (or by such other deadline as shall be established by the Administrator for the Offering). The Administrator may, in advance of any Offering, establish rules permitting a Participant to increase, decrease or terminate his or her payroll deduction or contributions during an Offering.
7. Withdrawal. A Participant may withdraw from participation in the Plan by delivering a written notice of withdrawal to the Company or an agent designated by the Company (in accordance with such procedures as may be established by the Administrator). The Participant’s withdrawal will be effective as of the next business day. Following a Participant’s withdrawal, the Company will promptly refund such individual’s entire account balance under the Plan to him or her (after payment for any Common Stock purchased before the effective date of withdrawal). Partial withdrawals are not permitted. Such an employee may not begin participation again during the remainder of the Offering, but may enroll in a subsequent Offering in accordance with Section 4.
8. Grant of Options. On each Offering Date, the Company will grant to each eligible employee who is then a Participant in the Plan an option (“Option”) to purchase, on the last day of such Offering (the “Exercise Date”) and at the Option Price hereinafter provided for, the lowest of (a) a number of shares of Common Stock determined by dividing such Participant’s accumulated payroll deductions or contributions on such Exercise Date by the Option Price (as defined herein), (b) the number of shares of Common Stock determined by dividing $25,000 by the Fair Market Value of the Common Stock on the Offering Date for such Offering; or (c) such other lesser maximum number of shares as shall have been established by the Administrator in advance of the Offering; provided, however, that such Option shall be subject to the limitations set forth below. Each Participant’s Option shall be exercisable only to the extent of such Participant’s accumulated payroll deductions or contributions on the Exercise Date. The purchase price for each share purchased under each Option (the “Option Price”) will be eighty-five percent (85%) of the Fair Market Value (as defined in Section 11) of the Common Stock on the Offering Date or the Exercise Date, whichever is less.
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Notwithstanding the foregoing, no Participant may be granted an Option hereunder if such Participant, immediately after the Option was granted, would be treated as owning stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the Company or any Parent or Subsidiary (as defined in Section 11). For purposes of the preceding sentence, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of a Participant, and all stock which the Participant has a contractual right to purchase shall be treated as stock owned by the Participant. In addition, no Participant may be granted an Option which permits his or her rights to purchase stock under the Plan, and any other employee stock purchase plan of the Company and its Parents and Subsidiaries, to accrue at a rate which exceeds $25,000 of the Fair Market Value of such stock (determined on the option grant date or dates) for each calendar year in which the Option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code and shall be applied taking Options into account in the order in which they were granted.
9. Exercise of Option and Purchase of Shares. Each employee who continues to be a Participant in the Plan on the Exercise Date shall be deemed to have exercised his or her Option on such date and shall acquire from the Company such number of whole shares of Common Stock reserved for the purpose of the Plan as his or her accumulated payroll deductions or contributions on such date will purchase at the Option Price, subject to any other limitations contained in the Plan. Unless otherwise determined by the Administrator in advance of an Offering, any amount remaining in a Participant’s account after the purchase of shares on an Exercise Date of an Offering solely by reason of the inability to purchase a fractional share will be carried forward to the next Offering; any other balance remaining in a Participant’s account at the end of an Offering will be refunded to the Participant promptly.
10. Issuance of Certificates. Certificates or book-entries at the Company’s transfer agent representing shares of Common Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or in the name of a broker authorized by the employee to be his, her or their, nominee for such purpose.
11. Definitions.
The term “Affiliate” means any entity that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under the common control with, the Company.
The term “Compensation” means the amount of base pay, prior to salary reduction (such as pursuant to Sections 125, 132(f) or 401(k) of the Code), but excluding overtime, commissions, incentive or bonus awards, allowances and reimbursements for expenses such as relocation allowances or travel expenses, income or gains related to Company stock options or other share-based awards, and similar items. The Administrator shall have the discretion to determine the application of this definition to Participants outside the United States.
| E-4 |
The term “Designated Company” means any present or future Subsidiary or Affiliate that has been designated by the Administrator to participate in the Plan. The Administrator may so designate any Subsidiary or Affiliate, or revoke any such designation, at any time and from time to time, either before or after the Plan is approved by the stockholders, and may further designate such companies or Participants as participating in the 423 Component or the Non-423 Component. The Administrator may also determine which Affiliates or eligible employees may be excluded from participation in the Plan, to the extent consistent with Section 423 of the Code or as implemented under the Non-423 Component, and determine which Designated Company or Companies will participate in separate Offerings (to the extent that the Company makes separate Offerings). For purposes of the 423 Component, only the Company and its Subsidiaries may be Designated Companies; provided, however, that at any given time, a Subsidiary that is a Designated Company under the 423 Component will not be a Designated Company under the Non-423 Component. The current list of Designated Companies is attached hereto as Appendix A.
The term “Fair Market Value of the Common Stock” on any given date means the fair market value of the Common Stock determined in good faith by the Administrator; provided, however, that if the Common Stock is admitted to quotation on the Nasdaq or another national securities exchange, the determination shall be made by reference to the closing price on such date. If there is no closing price for such date, the determination shall be made by reference to the last date preceding such date for which there is a closing price.
The term “New Exercise Date” means a new Exercise Date if the Administrator shortens any Offering then in progress.
The term “Parent” means a “parent corporation” with respect to the Company, as defined in Section 424(e) of the Code.
The term “Participant” means an individual who is eligible as determined in Section 3 and who has complied with the provisions of Section 4.
The term “Sale Event” means (i) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (ii) a merger, reorganization, statutory share exchange, consolidation, or similar transaction pursuant to which the holders of the Company’s outstanding voting power and outstanding stock immediately prior to such transaction do not own a majority of the outstanding voting power and outstanding stock or other equity interests of the resulting or successor entity (or its ultimate parent, if applicable) immediately upon completion of such transaction, (iii) the sale of all of the Common Stock to an unrelated person, entity or group thereof acting in concert, (iv) any other transaction in which the owners of the Company’s outstanding voting power immediately prior to such transaction do not own at least a majority of the outstanding voting power of the Company or any successor entity immediately upon completion of the transaction other than as a result of the acquisition of securities directly from the Company, or (v) the approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
The term “Subsidiary” means a “subsidiary corporation” with respect to the Company, as defined in Section 424(f) of the Code.
| E-5 |
12. Rights on Termination or Transfer of Employment. If a Participant’s employment terminates for any reason before the Exercise Date for any Offering, no payroll deduction or contributions will be taken from any pay due and owing to the Participant and the balance in the Participant’s account will be paid to such Participant or, in the case of such Participant’s death, if permitted by the Administrator and valid under applicable law, to his or her designated beneficiary or to the legal representative of his or her estate as if such Participant had withdrawn from the Plan under Section 7. An employee will be deemed to have terminated employment, for this purpose, if the corporation that employs him or her, having been a Designated Company, ceases to be a Subsidiary or Affiliate, or if the employee is transferred to any corporation other than the Company or a Designated Company. Unless otherwise determined by the Administrator, a Participant whose employment transfers between, or whose employment terminates with an immediate rehire (with no break in service) by, Designated Companies or a Designated Company and the Company will not be treated as having terminated employment for purposes of participating in the Plan or an Offering; provided, however, that if a Participant transfers from an Offering under the 423 Component to an Offering under the Non-423 Component, the exercise of the Participant’s Option will be qualified under the 423 Component only to the extent that such exercise complies with Section 423 of the Code. If a Participant transfers from an Offering under the Non-423 Component to an Offering under the 423 Component, the exercise of the Participant’s Option will remain non-qualified under the Non-423 Component. Further, an employee will not be deemed to have terminated employment for purposes of this Section 12, if the employee is on an approved leave of absence where the employee’s right to reemployment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise provides in writing.
13. Special Rules and Sub-Plans. Notwithstanding anything herein to the contrary, the Administrator may adopt special rules or sub-plans applicable to the employees of a particular Designated Company, whenever the Administrator determines that such rules are necessary or appropriate for the implementation of the Plan in a jurisdiction where such Designated Company has employees, regarding, without limitation, eligibility to participate in the Plan, handling and making of payroll deductions or contributions by other means, establishment of bank or trust accounts to hold payroll deductions or contributions, payment of interest, conversion of local currency, obligation to pay payroll tax, withholding procedures and handling of share issuances, any of which may vary according to applicable requirements; provided that if such special rules or sub-plans are inconsistent with the requirements of Section 423(b) of the Code, the employees subject to such special rules or sub-plans will participate in the Non-423 Component.
14. Optionees Not Stockholders. Neither the granting of an Option to a Participant nor the deductions or contributions from his or her pay shall result in such Participant becoming a holder of the shares of Common Stock covered by an Option under the Plan until such shares have been purchased by and issued to him or her.
15. Rights Not Transferable. Rights under the Plan are not transferable by a Participant other than by will or the laws of descent and distribution, and are exercisable during the Participant’s lifetime only by the Participant.
| E-6 |
16. Application of Funds. All funds received or held by the Company under the Plan may be combined with other corporate funds and may be used for any corporate purpose, unless otherwise required under applicable law.
17. Adjustment in Case of Changes Affecting Common Stock. In the event of a subdivision of outstanding shares of Common Stock, the payment of a dividend in Common Stock or any other change affecting the Common Stock, the number of shares approved for the Plan and the share limitation set forth in Section 8 shall be equitably or proportionately adjusted to give proper effect to such event. In the case of and subject to the consummation of a Sale Event, the Administrator, in its discretion, and on such terms and conditions as it deems appropriate, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent the dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any right under the Plan or to facilitate such transactions or events:
(a) To provide for either (i) termination of any outstanding Option in exchange for an amount of cash, if any, equal to the amount that would have been obtained upon the exercise of such Option had such Option been currently exercisable or (ii) the replacement of such outstanding Option with other options or property selected by the Administrator in its sole discretion.
(b) To provide that the outstanding Options under the Plan shall be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for similar options covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices.
(c) To make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options under the Plan and/or in the terms and conditions of outstanding Options and Options that may be granted in the future.
(d) To provide that the Offering with respect to which an Option relates will be shortened by setting a New Exercise Date on which such Offering will end. The New Exercise Date will occur before the date of the Sale Event. The Administrator will notify each Participant in writing or electronically prior to the New Exercise Date, that the Exercise Date for the Participant’s Option has been changed to the New Exercise Date and that the Participant’s Option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering as provided in Section 7 hereof.
(e) To provide that all outstanding Options shall terminate without being exercised and all amounts in the accounts of Participants shall be promptly refunded.
18. Amendment of the Plan. The Board may at any time and from time to time amend the Plan in any respect, except that without the approval within 12 months of such Board action by the stockholders, no amendment shall be made increasing the number of shares approved for the Plan or making any other change that would require stockholder approval in order for the 423 Component of the Plan, as amended, to qualify as an “employee stock purchase plan” under Section 423(b) of the Code.
| E-7 |
19. Insufficient Shares. If the total number of shares of Common Stock that would otherwise be purchased on any Exercise Date plus the number of shares purchased under previous Offerings under the Plan exceeds the maximum number of shares issuable under the Plan, the shares then available shall be apportioned among Participants in proportion to the amount of payroll deductions or contributions accumulated on behalf of each Participant that would otherwise be used to purchase Common Stock on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time by the Board. Upon termination of the Plan, all amounts in the accounts of Participants shall be promptly refunded. Unless terminated earlier, the Plan shall automatically terminate on the ten year anniversary of the Effective Date.
21. Governmental Regulations. The Company’s obligation to sell and deliver Common Stock under the Plan is subject to applicable laws and the completion of any registration or qualification of the Common Stock under any U.S. or non-U.S. local, state or federal securities or exchange control law, or under rulings or regulations of the Securities Exchange Commission (“SEC”) or of any other governmental regulatory body, and to obtaining any approval or other clearance from any U.S. and non-U.S. local, state or federal governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Company is under no obligation to register or qualify the Common Stock with the SEC or any other U.S. or non-U.S. securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of such stock.
22. Governing Law. This Plan and all Options and actions taken thereunder shall be governed by, and construed in accordance with the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the State of Delaware applied without regard to conflict of law principles.
23. Issuance of Shares. Shares may be issued upon exercise of an Option from authorized but unissued Common Stock, from shares held in the treasury of the Company, or from any other proper source.
24. Tax Withholding. Participation in the Plan is subject to any applicable U.S. and non-U.S. federal, state or local tax withholding requirements on income the Participant realizes in connection with the Plan. Each Participant agrees, by entering the Plan, that the Company or any Subsidiary or Affiliate may, but will not be obligated to, withhold from a Participant’s wages, salary or other compensation at any time the amount necessary for the Company or any Subsidiary or Affiliate to meet applicable withholding obligations, including any withholding required to make available to the Company or any Subsidiary or Affiliate any tax deductions or benefits attributable to the sale or disposition of Common Stock by such Participant. In addition, the Company or any Subsidiary or Affiliate may, but will not be obligated to, withhold from the proceeds of the sale of Common Stock or use any other method of withholding that the Company or any Subsidiary or Affiliate deems appropriate to the extent permitted by U.S. Treasury Regulation Section 1.423-2(f) with respect to the 423 Component. The Company will not be required to issue any Common Stock under the Plan until such obligations are satisfied.
25. Notification Upon Sale of Shares Under the 423 Component. Each Participant agrees, by entering the 423 Component of the Plan, to give the Company prompt notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option pursuant to which such shares were purchased or within one year after the date such shares were purchased.
26. Effective Date and Approval of Stockholders. The Plan shall take effect on [·], 2024, subject to prior approval by the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present or by written consent of the stockholders.
| E-8 |
Appendix A
Designated Companies
| E-9 |
March 6, 2023
Board of Directors
Kernel Group Holdings, Inc.
2 Rousseau Street
San Francisco, CA 94112
c/o Mr. Suren Ajjarapu
CEO
Dear Mr. Ajjarapu:
We understand that Kernel Group Holdings, Inc. (together with its successors, “Kernel”), (ii) AIRO Group, Inc., (“ParentCo”), (iii) Kernel Merger Sub, Inc. (a wholly-owned subsidiary of ParentCo, “Kernel Merger Sub”), (iv) AIRO Merger Sub, Inc. (a wholly-owned subsidiary of ParentCo, “AIRO Merger Sub”), (v) VKSS Capital, LLC, (vi) Dr. Chirinjeev Kathuria (the “Seller Representative”), and (vii) AIRO Group Holdings, Inc. (the “Company”), collectively, the “Parties,” have entered into a Business Combination Agreement (the “Agreement”) as of March 3, 2023. ParentCo is a wholly-owned direct subsidiary of Kernel and each of Kernel Merger Sub and AIRO Merger Sub is a wholly-owned direct subsidiary of ParentCo.
We further understand that the Agreement shall be executed as the First Merger and the Second Merger; the Parties intend the First Merger and the Second Merger be treated as part of an integrated transaction that qualifies as a contribution pursuant to Section 351 of the Code (the “Merger,” and, together with the AIRO Merger Consideration, the “Transaction”). Prior to the First Merger, each issued and outstanding share of Old Kernel Preferred Stock, each issued and outstanding share of Old Kernel Class A Stock, each issued and outstanding share of Old Kernel Class B Stock, each issued and outstanding Old Kernel Private Warrant, each issued and outstanding Old Kernel Public Warrant and each issued and outstanding Old Kernel Unit shall convert automatically, on a one-for-one basis, into one share of Kernel Preferred Stock, one share of Kernel Class A Common Stock, one share of Kernel Class B Common Stock, one Kernel Private Warrant, one Kernel Public Warrant and one Kernel Public Unit, respectively (the “Domestication”). Immediately following the Domestication, (a) each share of Kernel Parent Class B Common Stock shall convert automatically, on a one-for-one basis, into one share of Kernel Class A Common Stock, (b) the Kernel Class A Common Stock will be reclassified as Kernel Common Stock and (c) each Kernel Public Unit will be separated into Kernel Common Stock and Kernel Public Warrants.
| The Mentor Group | F-1 |
| Offices in Principal U.S. Cities | |
| www.thementorgrp.com |
On the Closing Date, (a) share of Kernel Common Stock issued and outstanding immediately prior to the First Merger shall automatically be converted into and exchanged for one validly issued, fully paid and nonassessable share of ParentCo Common Stock, (b) each share of ParentCo Common Stock held by Kernel issued and outstanding immediately prior to the First Merger shall automatically be cancelled and shall cease to exist, and (c) each share of Kernel Merger Sub Common Stock issued and outstanding as of immediately prior to the First Effective Time shall automatically be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Kernel Surviving Company.
Kernel Merger Sub and Kernel shall consummate the First Merger, pursuant to which Kernel Merger Sub shall be merged with and into Kernel, following which the separate corporate existence of Kernel Merger Sub shall cease and Kernel shall continue as the surviving corporation (“Kernel Surviving Corporation”) as a wholly owned subsidiary of ParentCo. On the Closing Date, immediately following the First Merger, AIRO Merger Sub will merge with and into the Company (Second Merger), with the Company surviving the Second Merger as a wholly-owned subsidiary of ParentCo.
As consideration for the Second Merger, the Company Security Holders 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 (a) $770,000,000 minus (b) the amount, if any, by which the Target Net Working Capital Amount exceeds the Net Working Capital by more than $500,000, plus (c) the amount, if any, by which the Net Working Capital exceeds the Target Net Working Capital Amount by more than $500,000 (but not less than zero), minus (d) the amount, if any, by which the Closing Net Debt exceeds the Target Net Debt, by more than $500,000 (but not less than zero), plus (e) the amount, if any, by which the Target Net Debt exceeds Closing Net Debt, minus (f) the amount, if any, by which the Company Transaction Expenses exceed the Target Company Transaction Expenses (but not less than zero) (such resulting amount, the “AIRO Merger Consideration”).
The Board of Directors of Kernel Group Holdings, Inc. (the “Board”) has requested that The Mentor Group, Inc., (“TMG,” “we,” “our”) provide an opinion (the “Opinion”) to the Board as to whether, as of the date hereof, the AIRO Merger Consideration to be received by the holders of Kernal Common Stock in the Transaction pursuant to the Agreement is fair to such holders from a financial point of view.
In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Among other things, we have:
| 1) | reviewed a draft dated March 3, 2023 of the Business Combination Agreement; |
| 2) | reviewed the as filed proof of the Form S-1 Registration Statement regarding the Merger dated August 12, 2022; |
| 3) | reviewed certain financial information of AIRO Group Holdings provided by the Company; |
| 4) | reviewed AIRO’s Advanced Air Solutions Forecast Investor Presentation dated November 2, 2022; |
| 5) | reviewed AIRO’s Advanced Air Solutions Company Presentation Investor Presentation dated November 2, 2022; |
| 6) | reviewed AIRO’s Advanced Air Solutions Company Presentation Investor Presentation dated November 2, 2022; |
| 7) | reviewed the JAUNT Jaunt Journey eVTOL Overview dated October 14, 2022; |
| 8) | reviewed Raymond James’ The AIRO Group Illustrative Valuation Overview dated February 2022; |
| 0) | compared the financial and operating performance of the Company with that of other public companies that we deemed to be relevant; |
| 1) | considered publicly available financial terms of certain transactions that we deemed to be relevant; and, |
| 2) | conducted such other financial studies, analyses and inquiries and considered such other information and factors as we deemed appropriate. |
| The Mentor Group | F-2 |
| Offices in Principal U.S. Cities | |
| www.thementorgrp.com |
We have relied upon and assumed, without independent verification, the accuracy and completeness of all data, material other information furnished, or otherwise made available, to us, discussed with or reviewed by us, or publicly available, and do not assume any responsibility with respect to such data, material, and other information. In addition, Kernal management has advised us, and we have assumed that the Company forecasts reviewed by us have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of Company management as to the future financial results and condition of the Company and the other matters covered thereby, and we express no opinion with respect to such projections or the assumptions on which they are based. We have relied upon and assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to us that would be material to our analyses or this Opinion, and that there is no information or any facts that would make any of the information reviewed by us incomplete or misleading.
We have relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the Agreement identified and all other related documents and instruments that are referred to therein are true and correct, (b) each party to the Agreement and other related documents and instruments will fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the Merger will be satisfied without waiver thereof, and (d) the Merger will be consummated in a timely manner in accordance with the terms described in the Agreement and other related documents and instruments. We have relied upon and assumed, without independent verification, that (i) the Merger will be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the Merger will be obtained and that no delay, limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have an effect on the Merger or the Company that would be material to our analyses or this Opinion.
Furthermore, in connection with this Opinion, we have not been requested to make, and have not made, any physical inspection or independent appraisal or evaluation of any of the assets, properties, or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of the Company or any other party, nor were we provided with any such appraisal or evaluation. We have undertaken no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company is or may be a party or is or may be subject.
| The Mentor Group | F-3 |
| Offices in Principal U.S. Cities | |
| www.thementorgrp.com |
TMG has in the past provided financial consulting services to the Board for which TMG received compensation. TMG has not acted as financial advisor to the Company or any of the other Parties in connection with, and has not participated in any of the negotiations leading to, the Transaction. We will receive a fee for rendering this Opinion, which is not contingent upon the successful completion of the Transaction. We have not been requested to, and did not, solicit indications of interest from, third parties with respect to the Merger, the securities, assets, business or operations of the Company or any other party. We have not been requested to, and did not, advise the Board or any other party with respect to alternatives to the Merger. This Opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. We have not undertaken, and are under no obligation, to update, revise, reaffirm or withdraw this Opinion, or otherwise comment on or consider events occurring or coming to our attention after the date hereof.
This Opinion is directed only to the Board of Directors of Kernal and addresses only the fairness of the Merger from a financial point of view. This Opinion is furnished for the use of the Board (in its capacity as such) in connection with its evaluation of the Merger and may not be used for any other purpose without our prior written consent. This Opinion is not intended to be, and does not constitute, a recommendation to the Board, any security holder or any other party as to how to act or vote with respect to any matter relating to, or whether to tender shares in connection with, the Merger or otherwise. The Opinion is based on TMG’s analyses, which contain estimates and valuation ranges that are not necessarily indicative of actual values or predictive of future results or values.
This Opinion shall be used only by the Board in evaluating the Merger. It is not to be used, circulated, quoted or otherwise referred to (either in its entirety or through excepts or summaries) for any other purposes, unless (1) it is to be filed with or referred to in any registration statement, proxy statement or any other document filed with the Securities and Exchange Commission, and it is included in full and you have received TMG’s prior written consent with respect to all of the references to it and/or the opinion included in any such registration statement, proxy statement or any other document filed with the Securities and Exchange Commission or (2) it is to be introduced into evidence or referred to in any litigation pertaining to matters relating to the Transaction and covered in the Opinion; provided, however, that notwithstanding the foregoing, (a) the Board shall provide, upon request, a copy of the Opinion or a summary of it (and TMG shall have the right to review and approve any such summary, such approval not be unreasonably withheld, conditioned or delayed) to (i) Board and (ii) any shareholders as determined from time to time by the Board.
Kernal will give TMG written notice at least three business days in advance of such use in any litigation or it (or the summary) being provided to any shareholder. The opinion will be provided to the Board for its evaluation and analysis of the Merger at or prior to the time the Company will execute definitive transaction documents, and TMG is not required to update our opinion as of a later date. Anything to the contrary contained herein notwithstanding.
The material in this Opinion may not be reprinted in whole or in part without the prior express written consent of TMG. The Board of Directors of Kernal alone contracted for and are the intended beneficiary of this Opinion. This Opinion may not be relied upon by any other person or entity without TMG’s prior express written consent. Any use which any third party makes of the Opinion, or any reliance on it, or decision to be made based upon it, are the responsibilities of that party. This Opinion is subject to the attached Statement of Assumptions and Limited Conditions.
| The Mentor Group | F-4 |
| Offices in Principal U.S. Cities | |
| www.thementorgrp.com |
We have not been requested to opine as to, and this Opinion does not express an opinion as to or otherwise address, among other things: (i) the underlying business decision of the Board, the Company, its security holders or any other party to proceed with or effect the Transaction, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form, structure or any other portion or aspect of, the Transaction or otherwise (other than the Consideration to the extent expressly specified herein), (iii) the fairness of any portion or aspect of the Transaction to the holders of any class of securities, creditors or other constituencies of the Company, or to any other party, except if and only to the extent expressly set forth in the last sentence of this Opinion, (iv) the fairness of any portion or aspect of the Transaction to any one class or group of the Company’s or any other party’s security holders or other constituents vis-à-vis any other class or group of the Company’s or such other party’s security holders or other constituents (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders or other constituents), (v) whether or not the Company, its security holders or any other party is receiving or paying reasonably equivalent value in the Transaction, (vi) the solvency, creditworthiness or fair value of the Company, the Acquiror or any other participant in the Transaction, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (vii) the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the Transaction, any class of such persons or any other party, relative to the Consideration or otherwise. Furthermore, no opinion, counsel or interpretation is intended in matters that require legal, regulatory, accounting, tax or other similar professional advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, we have relied, with the consent of the Board, on the assessments by the Board, and its advisors, as to all legal, regulatory, accounting, tax and other similar matters with respect to the Company and the Transaction or otherwise.
Conclusion
Based upon and subject to the foregoing, and in reliance thereon, it is our opinion that, as of the date hereof, the AIRO Merger Consideration to be received by the holders of Kernal Common Stock in the Transaction pursuant to the Business Combination Agreement is fair to such holders from a financial point of view.
Respectfully submitted,
THE MENTOR GROUP, INC.
| The Mentor Group | F-5 |
| Offices in Principal U.S. Cities | |
| www.thementorgrp.com |
Statement of Limiting Factors and Assumptions
The analyses and opinions concluded by The Mentor Group, Inc. (hereinafter referred to as “TMG”) and set forth in this Opinion are subject to the following assumptions and limiting conditions:
We have no present or contemplated material interest in the business or assets that are the subject of this Opinion. We have no personal interest or bias with respect to the subject matter of this Opinion or the parties involved. In accordance with recognized professional ethics, the professional fee for this service is not contingent upon TMG’s conclusion of value, and neither TMG nor any of its employees has a present or intended financial interest in the Company.
To the best of our knowledge and belief, the statements of fact contained in this Opinion, upon which the analyses, opinions, and conclusions expressed herein are based, are true and correct.
The fee for this engagement is not contingent upon the values reported. The opinion of value expressed herein is valid only for the stated purpose and only as of the date of the Opinion.
No investigation of legal fee or title to the business or its assets has been made and the ownership claim to the business and its assets is assumed valid. No consideration has been given to liens or encumbrances which may be in place against the business or assets, except as specifically stated in this Opinion.
The Mentor Group, Inc. is not specifically identified as a tax advisor under IRS Circular 230. Under these standards, written advice may not be relied upon for the purpose of avoiding accuracy-related penalties or reportable transaction understatement penalties, unless the advice satisfies a variety of requirements. Nothing contained in any written product issued by TMG has been prepared, nor may be relied upon, for the purpose of avoiding tax penalties that may be imposed.
This letter and the conclusions arrived at herein are for the exclusive use of the Company. Furthermore, the letter and conclusions are not intended by the author, and should not be construed by the reader, to be investment advice in any manner whatsoever. The conclusions reached herein represent the considered opinion of TMG based upon information furnished to it by the Company and other sources. The extent to which the conclusions and valuations arrived at herein should be relied upon, they should be governed and weighted accordingly.
All value conclusions are presented as the considered opinion of TMG based on the facts noted within this Opinion. We assume no responsibility for changes in values or market condition nor for the inability of the owner to locate a purchaser at the estimated value. The value conclusions derived were for the specific purpose set forth herein and may be invalid if used for any other purpose. This is not a solvency opinion and may not be used out of the context as presented herein nor used to solicit potential buyers.
Kernel Group Holdings, Inc. (“Client”) agrees to preserve the confidential format and content of our Opinions. Our Opinions and the TMG name are not to be used in whole or in part outside your organization, without our prior written approval, except for review by your auditors, legal counsel, advisors, financial institution (if the purpose of our appraisal is financing), and by representatives of taxing authorities. We will likewise preserve the confidential nature of information received from you, or developed during this engagement, in accordance with our established professional standards. Client agrees that TMG does not, either by entering into this contract or by performing the services rendered, assume, abrogate or undertake to discharge any duty of Client to any other person. Unless otherwise stated in writing, TMG may reference the work performed for Client in general public announcements.
All financial statements and other pertinent data relating to the income and expense attributed to the entity have been provided either by management or its representatives and accepted without further verification, except as may be noted in the Opinion. Therefore, to the extent that such information may be found at a later date to have been inaccurate or misrepresented, we cannot accept liability for the consequences such inaccuracy or misrepresentation may have on our value conclusion or the use of our conclusion in actions taken by our client.
While we accept as correct the information furnished to us by others, no guarantee is expressed or implied herein for the validity of such information, whether in written or oral form. We accept as correct the information furnished us by others. Providers of the information warrant the following:
| 1. | The above referenced information does not contain any untrue statements of material fact, or omit a material fact which makes the information misleading; | |
| 2. | The financial statements and other financial information provided to TMG fairly present in all material respects the financial condition, results of operations and cash flow of Client; and | |
| 3. | TMG was made aware of all known factors which could significantly affect an independent third-party financial analysis of Client. |
In addition, we assume that the information supplied by management and others represented a good faith effort to describe the business or assets. We further assume that, unless indicated otherwise, there is no intention of selling control of or liquidating any material asset other than in the normal and ordinary course of business.
Neither all nor any part of the contents of this Opinion shall be conveyed to the public through advertising, public relations, news, sales, or other media, without the written consent and approval of TMG.
We assume that the terms of any leases currently in effect will not be altered by any lessor contending that the new financial structure triggers a material change in the financial condition of the Company, unless and to the extent that these assertions are specifically disclosed. We assume there are no hidden or unexpected conditions of either the real or personal property utilized by the business enterprise which would materially and adversely affect value.
We express no opinion as to: a) the tax consequences of any transaction which may result; b) the effect of the tax consequences of any net value received or to be received as a result of a transaction; and, c) the possible impact on the market price resulting from any need to effect a transaction to pay taxes; and, d) the viability or legality of any transaction for which our valuation may be utilized.
No opinion is expressed for matters that require legal or specialized expertise, investigation, or knowledge beyond that customarily employed by appraisers. Therefore, this Opinion does not address issues of law, engineering, code conformance, toxic contamination or discharge, the potential presence of hazardous substances, etc., unless specifically identified in the body of the Opinion.
Unless express written notice of noncompliance is delivered and brought to the attention of TMG, we assume that the Company is in compliance with all laws and regulations of any government or agency significant and relevant to its operations.
TMG has no responsibility to update the opinions stated herein for events and circumstances occurring after the date of this letter. Any additional consultation, attendance during any hearings or depositions, testimony, or additional research required in reference to the present engagement beyond the opinions expressed herein, as of the date of this letter, are subject to specific written arrangements between the parties.
The analyses and market value estimate may, in part, be based on estimates and assumptions which are inherently subject to uncertainty and variation, depending on evolving events. However, some assumptions inevitably will not materialize, and unanticipated events and circumstances may occur; therefore, actual results achieved during the period covered by our analyses may vary from our estimates, and the variations may be material.
This Opinion may contain prospective financial estimates or opinions that represent TMG’s expectations at a particular point in time, but such information, estimates or opinions are not offered as predictions or as assurances that a particular level of income or profit will be achieved, that events will occur, or that a particular price will be offered or accepted.
Any value estimates provided in the Opinion apply to the overall business enterprise, and any proration of the total into fractional interests will invalidate the value estimate, unless such proration or division of interests has been set forth in the Opinion.
No consideration has been given in this appraisal to the underlying market value of the real and personal property, such as furniture, fixtures, machinery and equipment located on the premises, unless otherwise identified in this Opinion.
TMG assumes no responsibility for economic or physical factors which may affect the opinions herein stated which may occur at some date after the date of this Opinion. Forecasts of future events which influence the valuation process are predicated on the continuation of historical and current trends in the market, as identified in the Opinion.
TMG reserves the right to make such adjustments to the analyses, opinions and conclusions set forth in this Opinion as may be required by consideration of additional data or more reliable data that may become available.
We assume no responsibility for any financial reporting judgements which are appropriately those of management. Management accepts the responsibility for any related financial reporting with respect to the assets or properties encompassed by this appraisal.
All appraisal services, pursuant to this Opinion, shall be deemed to be contracted for and rendered in the county of TMG office contracted to perform the services, and any arbitration or judicial proceedings shall take place in that county.
With regard to any intangible assets (patents, trademarks, service marks, trade names, copyrights, trade secrets, etc.), either valued separately and distinctly from the business or which may contribute to the value of the business enterprise but not be separately valued as a part of this valuation engagement, TMG expresses no opinion regarding nor shall it have any responsibility in connection with, any of the following matters:
| a. | verifying the ownership of the property; | |
| b. | determining whether the owner of such property has granted to other parties any licenses, options or security interests therein, or made any commitment to license or assign rights in such property; or whether such property has liens or other encumbrances against it; | |
| c. | the validity or enforceability of any patent, copyright registration or trademark (or service mark) registration; | |
| d. | whether property identified as a trade secret is, in fact, a legally enforceable trade secret, and the scope of protection afforded; | |
| e. | the scope of patent claims; that is, the range and types of products or processes covered by any patent; | |
| f. | whether the inventor(s) identified in any patent is(are) the true inventor(s), and whether all inventors have been named; | |
| g. | the scope of rights in trademarks, service marks or trade names; | |
| h. | the correct authorship of any copyrighted works; | |
| I. | whether there has been litigation relating to such intangible assets and the results of any adjudication or settlement of such litigation, particularly with respect to issues of validity, enforceability and scope of protection afforded. |
TMG has not been involved in the financial planning, the structuring of the ownership entity(s), and/or the tax and accounting issues related to any Federal Gift and/or Estate Tax Planning Strategy. Furthermore, we have provided no legal advice and we take no responsibility for the legal interpretation of California Partnership Law, or the Laws of any other state impacting the entity(s) valued herein. In addition, if any adjustments have been made for the lack of control or the lack of marketability in the appraisal, then that segment of our analysis is not in compliance with the Uniform Standards of Professional Appraisal Practice (“USPAP”), in that USPAP does not specifically reference any methodology for valuing minority interests in Partnerships, Corporations, LLCs, etc. or undivided fractional interests held directly in real estate.
The liability of TMG and its employees and associates is limited to the client only and to the amount of the fee actually received by TMG. There is no accountability, obligation, or liability to any third party. If the Opinion or any part thereof is disseminated to anyone other than the client, the client shall make such party or parties aware of all limiting conditions and assumptions affecting the appraisal assignment. TMG is not in any way responsible for any costs incurred to discover or correct any physical, financial, and/or legal deficiencies of any type present in the subject property.
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