AIRO Group Holdings, Inc.

Thank you for standing by. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the Arrow Third Quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Press star 1 again. Thank you. I would now like to turn the call over to Dan Johnson, Executive President of Investor Relations. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to Arrow Group Holdings Incorporated third quarter 2025 earnings call. We appreciate you joining us today and look forward to sharing an update on our progress and performance. With me on the call are Dr. Kiranjeev Kathuria, our Executive Chairman, Captain Joe Burns, our Chief Executive Officer, and Dr. Maria Pilipiv, our Chief Financial Officer. Replay information for today's call can be found in our earnings press release issued earlier this morning. Today's call will include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to estimates and forecasts of financial and performance metrics, including fourth quarter and full year 2025 expected results, statements regarding Arrow's joint venture with Nord Drone Group, and proposed joint venture with Bullitt, including the goals of and opportunities for each joint venture and the ability to consummate the joint ventures on the terms described herein or at all, and the timing thereof, the timing and the development of CEW capabilities, ERO's plans for a manufacturing and engineering development facility, expectations concerning expanded Canadian operations, future products and developments, the intended use of proceeds from ERO's follow-on offering, the market acceptance and opportunity of ERO's products and services, and other statements that are not historical fact. In addition to our prepared remarks, our earnings press release, SEC filings, and a replay of today's call can be found on our investor relations website at investor.thearrowgroup.com. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect the company's financial results is included in its filing with the SEC from time to time, including the section titled risk factors in the company's final prospectus filed with the SEC on June 16, 2025, and the company's upcoming quarterly report on Form 10-Q for the quarter ended September 30, 2025. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP financial measures and the discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalent is available in our earnings release. With that, I'll turn the call over to our Executive Chairman, Dr. Chiranjeev Kathuria.

Thank you, Dan, and thank you all for joining us. I'm pleased to join you all today as we review our progress during the third quarter. We have lots to share as we executed several initiatives during the quarter, including two new joint ventures with Nord Drone and Bullet, completing a follow-on offering, and orders across our four key verticals. Before turning to our results, let me briefly reintroduce Arrow Group. We built an integrated aerospace and defense platform positioned at the intersection of mobility, security, and training. Our mission is to deliver dual-use technologies that advance the future of flight across four synergistic segments. Drones, fully autonomous GPS-denied unmanned aerial systems for defense and commercial ISR missions, including our battle-tested RQ-35 Hedron platform now deployed across NATO forces. Avionics, through Aspen Avionics, a 20-year heritage business with over 14,000 systems delivered, providing flight displays, sensors, and integration solution used in both manned and unmanned aircraft. Training. Elite military and commercial flight training through our Coastal Defense brand. A trusted DOD contractor under the $5.7 billion CAF-CAS IDIQ program. Electric air mobility. led by Jaunt Air Mobility, developing next-generation eVTOL and hybrid cargo drone platforms, leveraging our patented slow rotor compound technology. Arrow operates across nine facilities in the U.S., Canada, and Europe with ISO 9001 and AS 9100 certifications and the ability to serve NATO customers directly. Our business share R&D, avionics integration, and manufacturing infrastructure create a meaningful cost and speed advantages as we scale. During the quarter, Arrow announced two important strategic partnerships aimed at expanding our unmanned systems portfolio and manufacturing scale. First, we signed a joint venture agreement with Nord Drone to focus on accelerating deployment of combat proven UAS across the U.S., Ukraine, and NATO markets. Under the terms of the JV agreement, Arrow will contribute manufacturing oversight, R&D, and government procurement expertise, while Nord Drone brings proprietary technology, production facilities, and established defense relationships. Nord Drone currently produces 4,000 drones per month with the capacity to scale to 25,000 units, and its systems are already active in the frontline operation. This collaboration will integrate Nord Drone's high-volume, battlefield-tested platforms with Aero's RQ-35, Hedron, and broader unmanned portfolios. significantly broadening our reach and accelerating our ability to meet allied operational needs. The consummation of the joint venture is subject to a number of closing conditions. We also signed a letter with Bullet, a Ukrainian developer of high-speed unmanned interceptor systems. The proposed 50-50 joint venture will produce and deploy Bullitt's six-wing turbojet UAV technology across the U.S. and NATO defense markets and Ukraine. The interceptor platform achieves speeds up to 300 miles an hour. offers a 200-kilometer range and supports payloads from 2.5 to 9 kilograms, making it one of the fastest and most adaptable unmanned aerial defense systems available today. The venture will expand production capacity in both the US and Ukraine accelerate R&D on next-generation interceptor and strike variants, and pursue qualified contracts with the U.S. Department of Defense, NATO, and allied ministries. The LOI is non-binding and subject to the execution of a definitive joint venture agreement. Together, these initiatives reinforce Arrow's platform as a leading integrator of combat-proven, high-performance unmanned technologies, extending our collaboration across both tactical ISR and aerial defense applications, and advancing our mission to deliver next-generation solutions for the U.S. and allied forces worldwide. With strong momentum across each segment, a $200 million-plus booking pipeline, and expanded demand in both defense and advanced air mobility markets, Arrow is well-positioned for substantial growth and long-term value creation. With that, I'll hand the call over to our CEO, Joe Burtz.

Thank you, Chiranjeev. It's a pleasure to be with you all today. Let me walk you through the progress in each of our core businesses. Our drone business continues to demonstrate strong momentum, supported by rising defense budgets and growing demand for autonomous ISR platforms. During the quarter, we launched the AI-capable, full-stack version of our RQ-35 Hedron, extending our leadership in GPS-denied and AI-enabled operations across Ukraine and NATO markets. Additionally, Skywatch, together with the University of Aalborg and a third partner, has been awarded $4.5 million to develop counter electronic warfare technology for integration into Skywatch UAS platforms, with development starting in Q1, 2026, and the first demonstrator expected in Q2 or Q3 of 2026. We also advanced several initiatives to scale production and expand global reach. In Denmark, Skywatch is completing the modernization of its stovering facility in Q4, which will meaningfully increase capacity and operational efficiency. Our Phoenix facility continues U.S. progress towards U.S. drone manufacturing, and particularly the RQ-35 Hedron. We expect the facility to be online as planned with the first RQ-35 Hedron drones assembled there by the end of this year. To support continued international growth, we opened a sales hub in Singapore to serve the Asia Pacific region, initiated new trial programs across both the Asia Pacific region and the EU, and expanded our local presence in Ukraine to remain close to end users and evolving battlefield needs. Additionally, Skywatch achieved CMMC cybersecurity certification, an important milestone for future U.S. defense programs, and launched a multi-year R&D initiative to double its engineering team by 2026, ensuring continued innovation in high-end UAV systems. And finally, we are progressing and on track to receiving blue UAS certification for our RQ-35 Hedron drones in the first half of 2026. Our training division delivered another solid quarter, executing over 1.7 million in task orders for the Naval Special Warfare and the United States Air Force, supporting joint ground and air training missions. We are nearly complete modifying our S-211 aircraft, almost flight ready for upcoming contracts. It had begun modification of our L-39 aircraft to support live ordnance training missions targeted to begin by year end. Importantly, we have submitted a source of sought response for the next Naval Special Warfare Contract, projected at approximately 20 million for over five years. These efforts reinforce Coastal Defense's position as a trusted provider of specialized military flight training for the U.S. and allied nations. At Jaunt, we've made significant progress in advancing our next-generation cargo drone and the eVTOL programs. We publicly unveiled our medium lift cargo drone at EAA AirVenture at Oshkosh, designed for 200 to 500-pound payloads and a range exceeding 200 miles, and an option that drew strong interest from commercial and defense stakeholders. We also expanded into Quebec's YMX Innovation Zone, enabling real-world testing certification, and collaboration with local regulators. John was selected as a partner on the MACATA program with TALIS Canada and Vertico Mobility to advance and detect and avoid technologies for UAV and eVTOL operations. We continue working closely with Transport Canada and NAV Canada to enable VVLOS operations and have completed key supplier sections for propulsion, battery, and flight control systems. Engineering activities ramping up in the fourth quarter as we prepare for the initial BVLOS flight testing in the YMX ecosystem. Additionally, Jaunt is pursuing Canadian support, including grants, reimbursements, and tax incentives, of which roughly 30% is already committed, and the balance remains subject to additional program approvals. Aspen Avianis continues to invest in new products, and the uptick in general aviation flying supports continued retrofit activity. During the quarter, we began development of the next generation, next nav max two program now funded and targeted availability in late of 2026. Aspen secured a multi-year OEM purchase order from established OEM and an additional orders from foreign air force. We are also working with an international aircraft integrator that has placed a large order for displays and batteries with all deliveries expected by year end. These wins highlight Aspen's strong OEM relationships and growing international presence in both civil and defense markets. With that, I'll turn the call over to Maria to walk through the financials.

Thank you, Joe, and good morning, everyone. As of November 14th, we have already booked $24.5 million of fourth quarter revenue in drone segments, reflecting shipments that shifted out of the third quarter. For the third quarter of 2025, revenue was compared to 23.7 million in the prior year period. Our customer requested a capability upgrade on a short notice on the RQ35 Hadron to meet evolving operational needs. We paused planned Q3 shipments to implement the change and retrofitted completed units. Approximately 20 million of Q3 shipments shifted as a result. The retrofit work increases revenue per unit and does not change the underlying contract scope beyond the configuration update. Gross profit for the quarter was $2.8 million and gross margin was 44% as compared to $16.3 million and 68.7% in the prior year period. Margin reflects product mix and shipment timing. Training delivered higher margins due to increased ground target vehicle programs. Avionic margins were stable on the lower volume. Drone margin was affected by a pause and retrofit work ahead of fourth quarter deliveries. Year-to-date growth margin was 58.1% driven by lower proportion of drone revenue in the mix. EBITDA loss was 5.7 million and improvement from 23.1 million loss in the prior year quarter. Adjusted EBITDA loss was $8 million compared to a positive $10.9 million in the prior year quarter. The movement reflects the revenue timing described above and higher public company costs as we scale. We recorded a net loss of $8 million compared to a net loss of $30.3 million in Q3 of 2024. On a segment basis, our defense drone solution continued to advance with cutting-edge technologies. ensuring that end users maintain a decisive technological advantage in operational environments. Aligning our products with those rapid updates is a core strength and a key differentiator for AeroGroup. Occasionally, component replacements and integration of new technologies can shift certain deliveries from one quarter to the next. This timing adjustment does not reflect any change in underlying demand or our confidence in future performance. Customer requirements remain strong and we are fully committed to meeting them. We are actively collaborating across our internal teams, supply chain partners, and end users to maintain agility and responsiveness. Our focus remains on delivering best-in-class technology while strengthening our ability to adapt quickly to evolving mission needs. Of end of Q3, we have over $119 million in bookings in progress to be delivered in 2025 and 2026. For training, we recorded growth from ground target vehicle programs and increased activity from IAQ contract. For IONIX, we experienced lower revenue as we deliberately sequenced R&D and commercialization activities to prioritize drone production in prior periods. Turning to cash flow and liquidity. As of September 30th, 2025, we had 83.7 million in cash and cash equivalents. During the quarter, we successfully completed a follow-on offering, raising 89.4 million in growth proceeds. This significantly straightened our balance sheet and provides substantial resources for growth investments across all four operating segments and to pursue opportunistic acquisitions of complementary businesses, products, services, or technologies. As we noted earlier, third quarter revenue was impacted by timing, primarily related to customer requests to incorporate additional technological capabilities into a drone platform. This required sourcing new components on a short notice, which created sourcing issues within the quarter. The company is actively working to source additional supply as well as implemented multiple sources for key components. Importantly, those timing-related effects not lost demand, and we expect the associated revenue to convert as component availability improves. Given those factors, we expect full-year 2025 revenue to exceed 2024 revenue of $86.9 million. This outlook reflects AERA's organic operations and does not include potential contributions from our recently announced joint ventures with Noraduron or Bullitt, which remain subject to financial agreements and regulatory approvals. In summary, while near-term timing and supply chain dynamics influence the quarter, the fundamentals of our business remain strong. Our diversified platform, growing order pipeline, and expanding production capacity give us confidence that we are well positioned for continued growth into 2026 and beyond. With that, operator, we're ready for questions.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We do ask you limit your questions to one and one follow-up. And your first question comes from the line of Colin Canfield with Cantor. Please go ahead.

Thank you for the question. Maybe if we could just talk through kind of the $100 million orders in progress and when we expect to see that materialize and backlog. And then if you could talk about how you expect the building blocks of revenue to shake out for next year, specifically for drones. Thank you.

Thanks, Colin. Joe, maybe if you want to start, followed by Maria.

Sorry. Sure. Thanks, Colin. Appreciate the question. You know, our current visibility for orders for the remainder of this year and for 2026 is still solid. So, that's the number that we've talked about, and that's the $200 million. Maria?

Yes. So, thank you, Joe. Thank you, Colin. So, Colin, right now, as of Q3, we have about more than 190, close to 200, as Joe mentioned. when we look across the divisions. And those orders are to be delivered in the next 18 months. We recently expanded our BD and sales efforts, specifically focusing on Asia Pacific as well as North America. And that's where you will see a lot of ramp up and focus. In terms of the building blocks and our cash, we are very strategically positioned right now on expansion and growth. As we discussed previously, we are focusing on spending on our R&D for drones, continuously modifying and improving our technologies. In our avionics, we are focusing on delivery of new products. In our training, we are expanding in the investments into new equipment that will allow us to qualify for more programs. And with our air mobility, we are funding R&D, but we recently got confirmation that 30% of the funding that we're expecting from the government support is confirmed, and we will be hearing more on it in the next quarter.

And this is Joe. If I could add one more building block call, and it's that we did open our Phoenix facility in North Phoenix last And that will be for production of AS9100 types of materials such as drones and avionics. So that has been officially opened.

Got it. And then maybe in terms of the air mobility R&D, just quantify the level of R&D spend you're targeting this year in air mobility and how you think about that progressing into next year. And then maybe talk about what sort of progress the team has made around government officials exploring that capability as a military or municipal capability and when we might expect initial study contracts for the air mobility platform. Thank you.

Maria, do you want to start?

Go ahead, Maria, please.

So in terms of our work in Canada, just to level set, we anticipate that approximately 17% of funding will be coming from aero internal funds, then about 30 to 40% it will be customer supported, customer advances and remainder will be government funding. As I mentioned previously, we have confirmation that 30% of the government funding is already confirmed and we are moving forward with next stages and it's per mile delivery and we expect to receive next approvals in the next quarters. In terms of quantifying it, In our work, we have received very positive discussions with the government officials and a lot of support for our efforts and dual usage of the cargo drones. Joe? Joe, back to you.

Sure. We talked a little bit about the government municipal or military capability, and I can say that Jaunt is very actively engaged And funded by the Quebec government currently in developing a corridor from Montreal to the First Nation communities. That's a very key project along our cargo eVTOL project. The cargo ground is being developed for dual use though. And as you've seen, the Canadian government has just announced a massive investment in military funding, which we will certainly apply for. So we're excited to continue our strong partnership with Canada in the YMX zone specifically.

And the only thing, Colin, you know, I would add in terms of the Phoenix facility, we continue to U.S. progress towards the U.S. road manufacturing, particularly R2-35. And we expect that facility to be online as planned with the first R2-35 drones assembled there by, you know, the end of the year.

Yeah. And part of that, the key is the actual blue U.S. certification. program, which will allow us then to further bid into more U.S. military programs. That program has shifted quite a bit over the last few months, but we're fairly confident in its current state. We understand the hurdles required to get there. We plan on being first half of 2026 to be Blue U.S. certified for our initial drone run.

Your next question comes from the line of Brett Lindsay with Mizuho. Please go ahead.

Hey, good morning all. Thanks for all the details. Wanted to follow up on the blue certification. So you noted the first half 26, but perhaps just a finer point on that manufacturing expansion to scale. What do you see as the unit production per month as you ramp those facilities? And then have you taken any inbound orders from the DOD at this point, or is it still contingent upon this blue cert?

Joe?

Yeah, so clearly the production rate will continue to grow. I mean, we're going to run our first prototypes this year up to six to understand the process and everything we need to do to get them up and running. But we feel that ultimately we could support at least a third of the volume of what we are currently manufacturing in Denmark throughout 2026. And I'm sorry, Brad, I forgot your second half of your question.

Yeah, just have you taken any inbound orders from the DOD at this point, or is it really contingent upon that blue certification first?

It is contingent upon blue certification at this time. However, there are some prototype orders systems that we are in delivery or discussion with the DOD that we really can't talk about at this point in time.

Okay, understood. And then maybe just shifting over to the Nord Drone Group JV, can you talk a little bit about the economics of the JV? What's the incremental capital required to fund the entity? And then how did the profit economics structure between you and your partner there?

So I can start. So basically, just to give you an overall, it's accelerating the deployment of the combat proven UAS across U.S., Ukraine, and the NATO markets. Under the terms of the JV agreement, Aero will contribute manufacturing, oversight, R&D, and government procurement experience. Nord Drone will bring its proprietary technology that's producing 4,000 drones a month. that can scale up to 25,000 drones And these systems are already active in the front line. So in terms of the economics, it's a 50-50 joint venture. And as we scale up in Ukraine, Aero will receive 50% of the economics of the revenue and profit. And also, as NATO and the US DOD want to stockpile these FPV proven drones, We'll also share in 50% of the revenues and profits. So for us, it's a substantial joint venture that allows us to scale both in Ukraine, in the U.S. DOD, and NATO.

Right. Your next question comes from the line of Andre Madrid with BTIG. Please go ahead.

Yep. Good morning. I want to circle back to Blue UAS. Seems like you kind of noted to it, but, you know, pushed out a little bit after we had thought that it was going to maybe get pulled to the left a little bit. Can you maybe talk about what exactly those hurdles are? I would have thought that with a lot of the favorable, you know, rulings and commentary coming out of the Pentagon that there would have been everything that maybe could have hold this more forward as opposed to pushing it back. So I'm just curious what happened there.

Well, a multiple factor, and this is Joe, by the way, Andre, good morning. So multiple factors, you know, one, we had a fairly significant government shutdown that everybody on the phone is aware of that absolutely stopped any progress in this particular area. The second is a lot of announcements were made about Blue EOS changing. However, the process of BlueAS changing was not defined yet. So we are now into the point where those processes are being defined. We are working with a large industry trade group to be in the middle of the hopper, but we are just now getting the requirements that we need to actually do it. So we've kind of been in the sit and wait mode, continuing to develop our internal processes and build out our infrastructure to be ready for this. And we're now just starting to see some of the, situations and requirements that we need to actually certify by. And I'd put an analog on, if you're going to certify an aircraft with the FAA, if you don't have the certification standards in hand, it's pretty hard to say, I'm going to go ahead and move this thing to the left. We were expecting those, but obviously for all the reasons I just said, we don't have the actual parameters in hand yet, but they're starting to come out. And the trade groups that we're working with are very strong with this. So we're very confident now in our path forward.

That's really helpful, Joe. Thank you. I guess on that point, you did note the expansion of the Danish facility. Could you maybe explain where monthly production of R2-35 is at now with that expansion, or maybe just what percent increase that provides?

Maria, do you have that number in front of you?

Brad, just to answer your question, currently expansion of the facility will allow us to deliver our current bookings in progress. So as I mentioned earlier, we have about more than 190 million in bookings in progress to be delivered from Q3 to next and through 2026. So that allows us to be able to deliver them on time and without any issues.

This now concludes our question and answer session. I would like to turn the call over to Joe Burns, Chief Executive Officer, for closing remarks.

Thank you, everybody. I appreciate your time and listening today. It's been a fun and challenging quarter for us just coming out of the IPO. We are extensively in the process now of creating internal processes and really building a very solid foundation for the future We have an excellent order book. We had a few challenges around timing on some orders due to customer requirements in the wartime environment, but we have met all those and are really excited about the future, meeting our expectations for the total year, and then a fairly significant expansion into 2026. Thank you again for your time, everybody, and we appreciate all the questions and answers.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.