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YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.37pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.78pp
Lean -
Net-tone change vs last year's 10-K.
MD&A
+0.04pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
conflict+20
conflicts+16
loss+9
critical+9
disruptions+8
Positive rising
exclusive+7
opportunities+5
achieve+5
win+4
favorable+3
Risk Factors (Item 1A)
14,439 words
Item 1A. Risk Factors.
Risks Related to Our Business
The audited consolidated financial statements included in this Annual Report have been prepared assuming the Company will continue as a going concern.
The Company recorded negative working capital of approximately $30 million (which includes $24.5 million of stock purchase warrant liabilities which will not require any cash to extinguish) and stockholders’ deficit of $15.6 million as of December 31, 2025; a net operating loss of $32.6 million and net cash used in operations of $6.2 million for the year ended December 31, 2025. Absent any other action, the Company will require additional liquidity to continue its operations for the next 12 months.
After evaluating these conditions, management concluded that its plans, when considered in aggregate, alleviate substantial doubt about the Company’s ability to continue as a going concern. Those plans include: (i) cancellation of a previously contemplated $16 million intercompany note obligation arising from the acquisition of Star 26, which has been mutually agreed to be of no force or effect; (ii) the Company's existing unrestricted cash balance of approximately $7.0 million, sufficient to fund projected operating expenses of its portfolio companies through the look-forward period; (iii) an active Equity Line of Credit ("ELOC") with Esousa Holdings, LLC — legally binding, SEC-registered, and shareholder-approved — providing estimated monthly drawdown capacity of approximately $6.6 million, which exceeds the Company's projected annual operating cash needs; (iv) the Company's majority-owned subsidiaries, including Rimon Ltd. and Nimbus Robotics, which are cash- and require no capital support from the Company; (v) management's ongoing efforts to assist subsidiaries in securing or expanding bank credit facilities; (vi) the option to certain obligations through issuance of equity in lieu of cash; and (vii) the Company's demonstrated track record of capital markets execution, including the completion of PIPE transactions raising approximately $20 million in the prior twelve months.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
closing+6
cancellation+4
liquidated+4
default+4
damages+3
Positive rising
effective+7
beneficial+2
success+2
opportunities+1
exclusivity+1
MD&A (Item 7)
7,237 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis summarizes the significant factors affecting our financial condition, operating results, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “T3 Defense”, “we”, “us”, “our”, and the “Company” are intended to refer to (i) following the Business Combination (as defined below), the business and operations of T3 Defense Inc and its consolidated subsidiaries, and (ii) prior to the Business Combination, Old Nukk (the predecessor entity in existence prior to the consummation of the Business Combination) and its consolidated subsidiaries.
Company Overview
Following the appointment in September 2024 of Menachem Shalom, our current chief executive officer and a director, we have transformed from a financial technology services provider into a strategic acquirer and operator of aerospace and defense (A&D) businesses. We are building a portfolio of mission- suppliers and advanced technology companies and strategic infrastructure across the defense, aerospace, and advanced manufacturing sectors across the United States, Israel and Europe.
Management has determined that its plans are probable of being effectively implemented and probable of mitigating the conditions described above, enabling continuation of the Company’s operations for the foreseeable future.
Our unprecedented transformation from financial technology to aerospace and defense lacks any operational track record and may completely fail.
We have recently completed our business model transformation. This transformation required or requires us to: divest our existing operations; acquire and integrate multiple defense companies; establish new regulatory compliance systems for ITAR, DFARS, and other regulations; obtain facility security clearances that typically take 12-18 months; recruit cleared personnel in a competitive market; and develop prime contractor relationships from scratch, all within a short timeframe.
We have never managed a defense program, never held a government contract, never obtained security clearances, and have no established relationships with prime defense contractors. The defense industry operates under fundamentally different business models, regulations, and customer requirements than financial services. There is no assurance that we will successfully execute this transformation or generate any returns from the substantial capital being deployed. Our complete lack of defense industry track record means investors are funding an entirely unproven strategy that may result in total loss of invested capital.
We are attempting to integrate multiple defense companies simultaneously without any aerospace and defense experience.
We have recently acquired Star 26, Tiltan and Nimbus, ITS, and are constantly pursuing other targets, all within a compressed timeframe and without any defense industry acquisition or integration experience. Each acquisition involves different countries (U.S., Israel, Europe), currencies, regulatory regimes, and business models. Managing simultaneous integrations of this magnitude typically requires extensive expertise, dedicated integration teams, and proven playbooks—none of which we possess.
Historical data shows that 70-90% of acquisitions fail to achieve projected synergies, and our complete lack of industry experience significantly increases this failure risk. We may discover post-closing that acquired technologies are obsolete, customer relationships are not transferable, key employees depart, or compliance violations trigger penalties. The complexity of simultaneous multi-jurisdictional defense acquisitions without relevant experience creates extreme execution risk.
Our Chief Executive Officer’s commitments to other companies may limit his ability to devote full-time attention to our business and could result in competition or conflicts of interest, which could adversely affect our operations and financial performance.
Menachem Shalom, our Chief Executive Officer, also serves as the Chief Executive Officer of Star 26, Motomova Inc., and Hold Me Ltd. These roles require Mr. Shalom to devote significant time and resources to the management and strategic direction of these other companies, which may reduce the time and attention he can dedicate to T3. This divided focus could impair our ability to execute our business strategy, particularly as we transition to a defense-focused company following the acquisition of Star 26. The competing demands on Mr. Shalom’s time may delaycritical decision-making, hinder our ability to respond to market opportunities, or weaken our operational oversight, all of which could materially adversely affect our business, financial condition, and results of operations.
Furthermore, the businesses of Star 26, Motomova Inc., and Hold Me Ltd. may operate in sectors or pursue opportunities that compete with our current or future operations. While Star 26 is now our wholly-owned subsidiary, Motomova Inc. and Hold Me Ltd. are separate entities with potentially divergent interests. Mr. Shalom’s involvement in these companies could lead to conflicts of interest, including the allocation of business opportunities, resources, or strategic priorities that may favor these other entities over T3. Any such competition or conflicts could harm our competitive position, limit our growth prospects, and negatively impact the value of our securities.
If we do not effectively manage our growth and the associated demands on our operational, risk management, sales and marketing, technology, compliance and finance and accounting resources, our business may be adversely impacted.
In our recent acquisitions, including our acquisitions of Star 26, Tiltan and Nimbus, our business has become increasingly complex. To effectively manage and capitalize on our growth, we must continue to expand our information technology and financial, operating, and administrative systems and controls, and continue to manage headcount, capital, and processes efficiently. Our continued growth could strain our existing resources, and we could experience ongoing operating difficulties in managing our business as it expands, including difficulties in hiring, training, and managing an employee base. Failure to scale could harm our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. If we do not adapt to meet these evolving challenges, or if our management team does not effectively scale with our growth, we may experience erosion to our reputation and the integration of our products and services. Moreover, the failure of our systems and processes could undermine our ability to provide accurate, timely, and reliable reports on our financial and operating results, including the financial statements provided herein, and could impact the effectiveness of our internal controls over financial reporting. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud, though we have experienced no such material errors, omissions or fraud in the past. Any of the foregoing operational failures could lead to noncompliance with laws, loss of revenues, licenses or other government authorizations, or loss of relationships that could substantially impair or even suspend company operations.
We intend to continue to develop our technology, in particular our blockchain-enabled payment processing offering. Successful implementation of this strategy may require significant expenditures before any substantial associated revenue is generated and we cannot guarantee that these increased investments will result in corresponding and offsetting revenue growth. Our growth may not be sustainable and depends on our ability to retain existing customers, attract new customers, expand product offerings, and increase processed volumes and revenue from both new and existing customers.
The future growth of our business depends on its ability to retain existing customers, attract new customers as well as getting existing customers and new customers to increase the volumes processed through our payments platform and therefore grow revenue. Our customers are not subject to any minimum volume commitments and they have no obligation to continue to use our services, and we cannot be sure that customers will continue to use our services or that we will be able to continue to attract new volumes at the same rate as we have in the past.
A customer’s use of our services may decrease for a variety of reasons, including the customer’s level of satisfaction with our products and services, the expansion of business to offer new products and services, the effectiveness of our support services, the pricing of our products and services, the pricing, range and quality of competing products or services, the effects of global economic conditions, regulatory or financial institution limitations, trust, perception and interest in foreign exchange and payment processing services and in our products and services, or reductions in the customer’s payment and transfer activity. Furthermore, the complexity and costs associated with switching to a competitor may not be significant enough to prevent a customer from switching service providers, especially for larger customers who commonly engage more than one payment service provider at any one time.
Any failure by us to retain existing customers, attract new customers, and increase revenue from both new and existing customers could materially and adversely affect our business, financial condition, results of operations and prospects. These efforts may require substantial financial expenditures, commitments of resources, developments of our processes, and other investments and innovations.
We have divested our financial technology business and are now building a defense business, creating operational complexity and execution risk.
We are now focused on acquiring and integrating defense companies. This dual-track strategy has required and may continue to require management attention and resources across divergent activities, including: negotiating divestiture terms while managing acquisition integrations; maintaining legacy compliance obligations while implementing new defense regulations; supporting existing financial services customers during transition while pursuing defense customers; and managing employee uncertainty across both divesting and acquiring operations. The complexity of completing divestitures and acquisitions within a short timeframe significantly increases execution risk and the potential for value destruction in both transactions.
We are subject to heightened operational and cybersecurity risks.
We are subject to heightened operational and cybersecurity risks. Many of our employees work from their homes or other non-company dwellings. Technologies in our employees’ and service providers’ homes and shared office spaces may not be as robust and could cause the networks, information systems, applications, and other tools available to employees and service providers to be more limited or less reliable. Further, the security systems in place at our employees’ and service providers’ homes and shared office spaces may be less secure than those used in corporate offices, and while we have implemented technical and administrative safeguards to help protect our systems when our employees and service providers work from home, we may be subject to increased cybersecurity risk which could expose us to risks of data or financial loss, and could disrupt our business operations. There is no guarantee that the data security and privacy safeguards we have put in place will be completely effective or that we will not encounter risks associated with employees and service providers accessing company data and systems remotely.
Our pivot from fintech to the defense sector exposes us to new operational, regulatory, and market risks for which we have limited prior experience.
We have successfully transitioned our business focus from financial technology services to the distribution of advanced defense technologies, primarily through exclusive distribution agreements with Israeli-based companies. This pivot represents a significant shift in our operations, requiring us to develop new expertise in the defense and homeland security markets, including sales, marketing, compliance, and supply chain management tailored to highly regulated industries. Our management team and employees have limited experience in the defense sector, which may result in challenges adapting to industry-specific practices, customer requirements, and competitive dynamics. Failure to effectively manage this transition could lead to operational inefficiencies, delays in fulfilling distribution obligations, or inability to capitalize on market opportunities, adversely affecting our business, financial condition, and results of operations.
We have an exclusive distribution agreement with an Israeli supplier, and any termination, non-renewal, or disruption in this relationship could severely impact our operations.
In August 2025 we executed an exclusive U.S. distribution agreement with BladeRanger Ltd. for drone payload systems. This agreement grants us rights limited to the U.S. defense and homeland security markets and imposes minimum purchase or revenue commitments (e.g., 5, 10, and 15 payloads in Years 1-3). Failure to meet these commitments could result in termination of the agreement, loss of exclusivity, or penalties, forcing us to seek alternative suppliers on less favorable terms or cease operations in these product lines. Any disputes with our suppliers, changes in their business strategies, or external factors affecting their ability to supply products (such as production delays or quality issues) could disrupt our inventory, delay deliveries to customers, and lead to lost revenue or reputational damage.
Our minimum purchase and revenue commitments under the BladeRanger distribution agreement creates financial risks, including potential cash flow strains and inventory overhang.
The BladeRanger agreement requires us to meet escalating minimum commitments, starting at 5 payloads in Year 1 and increasing thereafter. If market demand falls short—due to economic downturns, technological shifts, or competitive pressures—we may be forced to purchase excess inventory or incur shortfallpenalties, straining our liquidity and working capital. Excess inventory could lead to obsolescence write-offs if products become outdated before sale. Our ability to finance these commitments depends on generating sufficient cash flows or accessing capital markets, and failure to do so could lead to defaults, termination of agreements, or dilution of shareholder equity through additional financing.
We have entered into an exclusive distribution agreement with minimum purchase and revenue commitments that we may be unable to meet, which could result in the loss of exclusivity or termination of these agreements, materially harming our business and financial condition.
Our exclusive distribution agreement with BladeRanger Ltd. requires us to achieve substantial minimum purchase targets. Specifically, we must purchase minimum quantities of drone payloads from BladeRanger (5 units in Year 1, 10 units in Year 2, and 15 units in Year 3). If we fail to meet these commitments, we may lose our exclusive distribution rights or face agreement termination, which would adversely impact our defense sector strategy.
Any significant disruption in our technology could adversely impact our brand and reputation and our business, operating results, and financial condition.
During our transformation period, we are building new technology infrastructure to support defense operations and have divested our legacy financial technology systems. Our reputation and ability to grow our defense business depends on our ability to develop and maintain systems that meet defense industry standards for reliability, scalability, and performance, including compliance with DFARS cybersecurity requirements and maintaining systems capable of handling classified information processing once we obtain necessary clearances. The proper functioning of our future defense products and services will depend on secure networks, encrypted communications, and systems that meet government security standards.
Our systems, the systems of our third-party service providers and partners, and defense networks we will interact with, have experienced from time to time and may experience in the future service interruptions or degradation because of hardware and software defects or malfunctions, distributed denial-of-service and other cyberattacks, insider threats, break-ins, sabotage, human error, vandalism, earthquakes, hurricanes, floods, fires, and other natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. In addition, extraordinary site usage could cause our computer systems to operate at an unacceptablyslow speed or even fail. Some of our systems, particularly those we have acquired from Star 26 and Tiltan, or the systems of our third-party service providers and partners are not fully redundant, and our or their disaster recovery planning may not be sufficient for all possible outcomes or events.
If any of our systems, or those of our third-party service providers, are disrupted for any reason, our defense products and services may fail, resulting in unanticipateddisruptions, slower response times and delays in our services. For defense contracts, system failures could result in program delays, cost overruns, performance penalties, or contract terminations. This could lead to missed contract milestones, incomplete or inaccurate program reporting, loss of sensitive government information, increased demand on limited program management resources, government claims, and complaints with regulatory organizations, lawsuits, or enforcement actions. A prolongedinterruption in the availability or reduction in the availability, speed, or functionality of our products and services could harm our business. Frequent or persistentinterruptions in our services could cause current or potential defense customers or partners to believe that our systems are unreliable, leading them to select other contractors or to avoid or reduce the use of our products and services, and could permanently harm our reputation and brands in the defense community. Moreover, to the extent that any system failure or similar event results in damages to our customers or their programs, these customers or the government could seek significant compensation or contractual penalties from us for their losses, and those claims, even if unsuccessful, are likely to be time-consuming and costly for us to address. Problems with the reliability or security of our systems would harm our reputation, and damage to our reputation and the cost of remedying these problems could negatively affect our business, operating results, and financial condition. In addition, we are continually developing our information systems and technologies to meet defense industry requirements. Implementation of new systems and technologies is complex, expensive, time-consuming, and may not be successful. If we fail to timely and successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies, or if such systems and technologies do not operate as intended, it could have an adverse impact on our business, internal controls (including internal controls over financial reporting), operating results, and financial condition. Because we will be subject to defense regulation in multiple jurisdictions, frequent or persistentinterruptions could also lead to regulatory scrutiny, significant fines and penalties, potential debarment, and mandatory and costly changes to our business practices, and ultimately could cause us to lose facility security clearances or government contracts that we need to operate, or prevent or delay us from obtaining additional clearances and contracts that may be required for our business.
We rely on third parties in critical aspects of our business, which creates additional risk. Our ability to offer our services depends on relationships with other financial services institutions and entities, and our inability to maintain existing relationships or to enter into new such relationships could impact our ability to offer services to customers.
As we build our defense business, we will depend on relationships with prime defense contractors, specialized subcontractors, and government-approved suppliers. We will depend on various third-party partners including prime contractors who control access to major defense programs, cleared facilities for classified work, and specialized defense supply chains.
To participate in defense programs, we must establish relationships with prime contractors and other defense companies for teaming agreements, joint ventures, and subcontracting opportunities. Major primes like Lockheed Martin, Boeing, and Raytheon control the majority of defense spending and often prefer working with established partners. Our ability to win defense contracts depends on our ability to establish these critical relationships despite our lack of track record.
Also, critical aspects of our defense technology will rely on third-party technologies, including specialized defense components, ITAR-controlled technologies, and government-furnished equipment. Our lack of established relationships in the defense industry and foreign ownership structure may be an impediment to our ability to establish partnerships with major defense contractors. Should potential partners refuse to work with us, we would be at risk of being unable to participate in major defense programs.
Third parties upon which we rely for defense programs may refuse to partner with us, may breach their agreements with us, refuse to enter into agreements on commercially reasonable terms, take actions that degrade the functionality of our services, impose additional costs or requirements on us, or give preferential treatment to established defense contractors, any of which could prevent us from competing effectively and materially and adversely affect our business, financial condition, results of operations and prospects.
Some third parties that provide services to the defense industry may have significant market power and be able to impose unfavorable terms on new entrants like us. In addition, there can be no assurance that third parties will be willing to work with us on acceptable terms, or at all. If we cannot establish necessary partnerships, we may be unable to compete for defense contracts, which may materially and adversely affect our business, financial condition, results of operations and prospects.
Risks Related to the Defense Industry
We lack the facility security clearances and cleared personnel required for 90% of U.S. defense contracts.
Approximately 90% of U.S. defense contracts require facility security clearances that we completely lack. Obtaining clearances involves: 12-18 month investigation periods; extensive ownership documentation complicated by our foreign ties; sophisticated security system implementation; designation of cleared U.S. citizen executives; and ongoing compliance costs exceeding $500,000 annually. Our foreign ownership through Israeli subsidiaries may preclude certain clearance levels entirely or require restrictive FOCI mitigation agreements. Without clearances, we are excluded from classified programs, sole-source contracts, prime contractor opportunities, and the majority of defense spending.
Fixed-price defense contracts expose us to unlimited losses without cost estimation experience.
The majority of defense contracts are fixed-price, meaning we bear all risk of cost overruns. We have zero experience estimating defense program costs, which require sophisticated models accounting for technical complexity, regulatory compliance, supply chain volatility, labor escalation, and schedule delays. Industry data shows 65% of major defense programs experience cost overruns exceeding 25%. Our lack of historical data, experienced estimators, and program management expertise virtually guarantees significant losses. A single major fixed-price contract loss could exceed our entire equity base.
Export control violations could result in criminalprosecution and permanent debarment.
Operating in defense requires strict ITAR and EAR compliance, where violations carry criminalpenalties, fines up to $1 million per violation, and permanent debarment. We lack export compliance programs, technology control plans, licensing expertise, deemed export procedures, and supply chain compliance systems. Our Israeli operations create immediate deemed export risks. Recent enforcement actions include: Raytheon paying $100 million, multiple executive criminalconvictions, and permanent debarments. Our lack of compliance infrastructure creates extreme risk of violations that could destroy our business.
We face overwhelming competition from established prime contractors.
The aerospace and defense industry is dominated by companies like Lockheed Martin, Boeing, and Raytheon with 100+ year histories, billions in R&D budgets, thousands of cleared personnel, established customer relationships, and political influence. These contractors win 80% of defense dollars through evaluation criteria favoring past performance we don’t have. As a new entrant with zero track record, we face insurmountable disadvantages in competing for contracts. Small defense companies have failure rates exceeding 60% within five years.
We must comply with complex defense regulations without any infrastructure.
Defense operations require compliance with ITAR, DFARS, CMMC, FAR, CAS, and other regulations for which we have zero infrastructure or expertise. Implementation costs typically exceed $3-5 million in year one. Common violations include inadvertent technical discussions, missing flow-down clauses, and inadequate cybersecurity. Recent enforcement: Raytheon paid $950 million, Boeing suspended from contracts. Our lack of compliance infrastructure virtually guarantees violations resulting in suspension or debarment.
Our defense distribution business is subject to complex export control laws and regulations, including ITAR and EAR, and failure to comply could result in significant fines, loss of export privileges, and reputational damage.
The distribution of drone payloads and advanced defense software is subject to strict U.S. export control regulations, including the International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR). We must obtain and maintain appropriate licenses and ensure compliance with all export restrictions. Any violations, even inadvertent ones, could result in criminal and civil penalties, loss of export privileges, debarment from government contracts, and severe reputational harm.
Dependence on government and homeland security customers exposes us to risks associated with budget constraints, procurement processes, and policy changes.
A significant portion of our target market consists of U.S. government agencies, military branches, and homeland security entities, whose purchases are subject to federal budgeting cycles, sequestration, or shifts in defense priorities. Reductions in defense spending, delays in appropriations, or changes in administration policies could decrease demand for our distributed products, impacting our revenue projections. Government procurement processes are often lengthy, competitive, and unpredictable, requiring us to navigate complex bidding requirements without guaranteed success. Moreover, as a distributor rather than a manufacturer, we may face challenges in qualifying for certain contracts that favor direct suppliers or U.S.-based entities. Failure to secure key contracts or adapt to policy shifts could result in underutilization of our distribution rights, inability to meet minimum commitments under our agreements, and substantial financial harm.
The defense procurement process is lengthy, complex, and highly competitive, which may prevent us from achieving the revenue targets required under our distribution agreements.
Sales to defense and homeland security customers typically involve long procurement cycles, extensive testing and certification requirements, competitive bidding processes, and budget constraints. These factors could make it difficult to achieve the aggressive revenue targets we have committed to, particularly the escalating purchase requirements under the BladeRanger agreement.
We face potential liability and indemnification obligations related to the defense products we distribute, which could expose us to significant financial losses.
As the exclusive U.S. distributor of drone payloads and defense software, we may face product liability claims, indemnification obligations, or lawsuits related to product performance, defects, or misuse. While our agreements include certain protections, we could still face substantial legal costs, damages, and reputational harm from claims related to these defense technologies, particularly given their use in critical security applications.
Risks Related to Geopolitical and Macroeconomic Conditions
Risks Related to the Ongoing Conflict in Israel and Regional Instability
The ongoing “Swords of Iron” war and the broader military conflict in the Middle East have had, and may continue to have, a material adverse effect on our Israeli operations, supply chains, personnel, and ability to execute our business strategy.
Since October 7, 2023, Israel has been engaged in an ongoing multi-front military conflict, initially triggered by the Hamas attack on southern Israel and subsequently expanding to military operations against Hezbollah in Lebanon, Houthi forces in Yemen, Iranian-backed militias in Syria and Iraq, and direct hostilities with Iran, including a 12-day conflict in June 2025 that resulted in over a billion dollars in claimed property damage in Israel. The majority of our operations, employees, and subsidiaries are located in Israel. Our Israeli subsidiaries — including B. Rimon Agencies Ltd., Tiltan Software Engineering Ltd., Nimbus Drones Technologies Ltd. and I.T.S. Industrial Tecno-logic Solutions Ltd., Positech Ltd. — are directly exposed to the consequences of this conflict, including missile and drone attacks on Israeli territory, temporary evacuation of employees from facilities subject to attack, disruptions to supply chains and shipping routes (exacerbated by attacks by the Houthi movement on shipping in the Red Sea, which have materially increased transportation costs and delivery times), material and component shortages resulting from limitations imposed by certain countries on exports to Israel, and general economic instability. The security situation has created additional challenges, including reluctance by certain foreign counterparties to perform contractual obligations with Israeli entities during hostilities, various bans and limitations on trade and cooperation with Israel-related entities, and fluctuations in the value of the New Israeli Shekel. While ceasefire agreements have been reached on certain fronts, the security situation remains volatile, and the scope, duration, and ultimate consequences of the conflict remain highly uncertain.
Mandatory military reserve duty obligations have resulted in, and may continue to result in, significant personnel shortages that disrupt our operations, production schedules, and ability to fulfill contractual obligations.
Under Israeli law, Israeli citizens and permanent residents are subject to mandatory military reserve service obligations. Since the commencement of the “Swords of Iron” war, our need for employees, particularly in the fields of production and development, has increased in light of higher demand for defense products, while at the same time a significant number of our employees have been called up for military reserve duty, creating recurring personnel shortages. As a smaller reporting company with few employees, the impact of reserve duty call-ups on our operations may be disproportionatelysevere. Many of our key technical personnel, engineers, and production workers are of military reserve age and are subject to call-up with little or no advance notice, for unpredictable durations. During the initial phase of the conflict, Israeli companies in our sector experienced workforce reductions of up to 40% and operational suspensions lasting 60 days or more. If a material number of our employees are called for reserve duty simultaneously, or if key personnel are called during critical project delivery or acquisition integration periods, we may be unable to meet contractual deadlines, maintain production schedules, fulfill customer orders, or operate our businesses at required levels, any of which could result in breach of contract, loss of customer relationships, financial penalties, and material harm to our business, financial condition, and results of operations.
Escalating global conflicts, particularly the ongoing wars in the Middle East and Ukraine, create both heightened demand and severe operational risks for our business.
The global security environment has deteriorated significantly, with active military conflicts in the Middle East (including the ongoing conflict in Israel and the broader regional tensions involving Iran, Hezbollah, and other actors) and the continuing war in Ukraine now entering its fourth year. While these conflicts may drive increased defense spending globally, they create severe and direct operational risks for our company. Our Israeli subsidiaries, including B. Rimon Agencies Ltd., Tiltan Software Engineering Ltd., Nimbus Drones Technologies Ltd., and I.T.S. Industrial Tecno-logic Solutions Ltd., operate in an active conflict zone where missile attacks, drone incursions, and ground operations pose immediate threats to our facilities, personnel, and supply chains. Mandatory military reserve duty requirements have at times removed significant portions of the Israeli workforce from civilian employment, directly affecting our subsidiaries’ ability to maintain production schedules and fulfill contractual obligations. Flight suspensions and port disruptions in Israel can impede logistics and delay delivery of critical defense products. The continuation or escalation of these conflicts could result in physical damage to our facilities, loss of key personnel, disruption of production, inability to fulfill contractual obligations, and substantial uninsuredlosses.
We do not carry war risk insurance for our Israeli operations, and losses arising from military conflict would be entirely unrecovered.
Standard commercial insurance policies maintained by our Israeli subsidiaries exclude losses arising from war, military action, terrorism, and related events. Specialized war risk insurance coverage for our Israeli operations is either unavailable or available only at costs that are prohibitively expensive relative to our current financial resources. Accordingly, we carry no insurance coverage for physical damage to our facilities, destruction of inventory or equipment, business interruption, or loss of key personnel resulting from missile strikes, drone attacks, or other military action. To date, none of our facilities have sustained physical damage from the conflict, but we cannot predict whether this will remain the case, particularly in the event of an escalation of hostilities with Iran or an expansion of the conflict to additional fronts. Any war-related losses would be borne entirely by us with no prospect of insurance recovery, which could materially impair our financial condition and ability to continue operations.
The conflict has resulted in limitations on exports to Israel, attacks on defense companies by anti-Israeli organizations, and reputational risks that may impair our ability to conduct international business.
The ongoing conflict has resulted in limitations imposed by certain countries on exports to Israel, restrictions on defense cooperation with Israeli entities, and expanding boycott, divestment, and sanctions (BDS) campaigns targeting Israeli companies and companies doing business with Israel. As a smaller company without the resources or global infrastructure of an established prime contractor, we are vulnerable to such disruptions. International customers, partners, and distributors may decline to do business with us or our Israeli subsidiaries due to political pressure, reputational concerns, or changes in their governments’ policies toward Israel. Our employees at Israeli subsidiaries may face increased pressure due to geopolitical considerations, potentially affecting our ability to attract and retain talent. Any of these developments could limit our addressable market, disrupt our supply chains, impair our revenue growth, and adversely affect our business, financial condition, and results of operations.
Our business partners, customers, and suppliers may invoke force majeure or otherwise fail to perform their contractual obligations as a result of the conflict, which could disrupt our operations and revenue.
The SEC has noted that companies with operations or business relationships in conflict-affected areas should evaluate the potential impacts of counterparties failing to perform obligations, including by invoking force majeure provisions. Several of our contracts with Israeli and international counterparties contain force majeure clauses that may be triggered by the ongoing military conflict or by future escalations. If our customers delay or cancel orders, if our suppliers are unable to deliver materials or components due to export restrictions, shipping disruptions, or damage to their own facilities, or if our business partners invoke force majeure to suspend or terminate contractual obligations, our revenue, supply chain continuity, and business operations could be materially adversely affected. Additionally, we may be unable to invoke force majeure in our own favor if we are unable to perform under our contracts due to the conflict, exposing us to potential claims for breach of contract and damages.
Rising global defense spending may not translate into revenue for our company, and shifts in government budget priorities could adversely affect demand for our products and services.
Global defense spending has reached levels not seen since the Cold War, with NATO members moving toward a 3.5% of GDP defense spending target and the United States proposing its first-ever trillion-dollar defense budget for fiscal year 2026. While these macro trends may appear favorable, there is no assurance that increased defense budgets will result in contracts or revenue for our company. Government defense budgets are subject to annual appropriations, continuing resolutions, sequestration, and political priorities that can shift rapidly. Changes in administration, shifting threat assessments, and fiscal constraints may redirect defense spending away from the categories of products and services we offer. Moreover, as a relatively small and newly formed defense platform, we lack the established relationships and past performance record that government procurement officers and prime contractors rely upon when awarding contracts. Even in a period of rising defense budgets, we may be unable to capture meaningful contract awards, which would adversely affect our ability to achieveprofitability and fund ongoing operations.
U.S. trade policy, including tariffs and export restrictions, may increase our costs, disrupt our supply chains, and limit our market access.
The current U.S. trade policy environment is characterized by elevated tariffs, evolving export control regimes, and increasingly restrictive foreign investment regulations. Tariffs on imported materials, components, and finished defense products from allied countries, including Israel, may increase our procurement costs and reduce our margins. Our Israeli-manufactured products, including generators, drone payloads, motion control systems, and AI software, may become subject to new or increased tariffs that we cannot pass on to customers. Additionally, U.S. export control regulations, including the International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR), are becoming more stringent, and any violations, even inadvertent, could result in criminal and civil penalties, loss of export privileges, or debarment from government contracts. Changes in the U.S.-Israel trade relationship, including renegotiation of free trade agreements or changes in defense cooperation frameworks, could materially and adversely affect our business.
Intensifying great-power competition and the fragmentation of international trade and security frameworks create systemic risks to our business model.
The international security and trade architecture is undergoing fundamental restructuring. U.S.-China strategic competition has resulted in export restrictions on critical technologies, restrictions on Chinese rare earth exports (which are essential for defense manufacturing), and the formation of competing technology and security blocs. Russia’s invasion of Ukraine has triggered comprehensive sanctions regimes, disrupted energy markets, and accelerated European rearmament. The potential expiration of the New START nuclear arms control treaty in 2026, combined with expanding nuclear arsenals and proliferation risks, increases the likelihood of a new arms race with attendant risks to global stability. China’s demonstrated willingness to weaponize its dominance in rare earth minerals, critical semiconductor components, and drone components as instruments of geopolitical coercionthreatens supply chains throughout the defense industry, including our own. These systemic risks may result in higher input costs, disrupted supply chains, restricted market access, and an operating environment of sustained uncertainty that depresses investment and growth.
Our Israeli operations face active military conflict without war risk insurance.
Our Israeli subsidiaries operate in an active conflict zone with ongoing military operations. Risks include: missile attacks that could destroy facilities; mandatory reserve duty removing 30% of workforce; flight suspensionspreventing logistics; supply chain disruptions; cyber attacks on defense companies; and economic impacts from mobilization. Standard insurance excludes war risks, and specialized coverage is unavailable or prohibitively expensive. During the October 2023 conflict, Israeli companies experienced 40% workforce reductions and 60-day operational suspensions. War-related losses would be entirely unrecovered.
Operating across multiple jurisdictions creates irreconcilable legal conflicts.
Our U.S., Israeli, and European operations create conflicts between national security laws, technology transfer restrictions, and foreign investment regulations. Criticalconflicts include: U.S. ITAR restrictions versus Israeli technology requirements; CFIUS powers versus Israeli defense controls; EU privacy laws versus U.S. surveillance requirements; and conflicting sanctions regimes. Compliance with one jurisdiction’s laws may violate another’s, creating permanent risk regardless of our compliance efforts.
Our foreign ownership structure may permanently preclude classified U.S. defense programs.
Our foreign ties may exclude us from classified programs representing 40% of defense spending. The National Industrial Security Program requires FOCI mitigation that severely restricts operations. Even with mitigation, we would be excluded from Special Access Programs and the highest-value contracts. Major primes increasingly refuse to work with FOCI-mitigated companies. Our structure may create an insurmountable barrier to 40% of the U.S. defense market.
Geopolitical tensions, international conflicts, or changes in U.S.-Israel relations could disrupt our supply chain and restrict our ability to distribute defense technologies.
As our subsidiaries are currently based in Israel, our operations are vulnerable to geopolitical risks in the Middle East, including ongoing conflicts, political instability, or escalations involving Israel. Such events could lead to supply disruptions, increased costs for shipping or insurance, or export restrictions imposed by Israeli authorities. Furthermore, shifts in U.S. foreign policy, trade relations with Israel, or sanctions could limit our access to these technologies. For instance, heightened tensions might result in delays at ports, damage to supplier facilities, or workforce disruptions in Israel, directly impacting our ability to fulfill customer orders. If we cannot secure alternative sources quickly, these risks could cause significant interruptions in our business, leading to breaches of customer contracts, financial losses, and potential legal liabilities.
We are subject to stringent U.S. and international regulations governing defense technologies, and non-compliance could result in fines, loss of licenses, or restrictions on our operations.
The distribution of defense-related products, including drone payloads and software for GPS-denied navigation, AI simulations, 3D mapping, and multi-sensor management, is heavily regulated under U.S. laws such as the International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and the Arms Export Control Act. These regulations require us to obtain export licenses, register as a defense exporter, and comply with end-user restrictions, particularly since our products originate from Israel and are intended for U.S. defense and homeland security applications. Violations, even unintentional, could lead to civil or criminalpenalties, revocation of licenses, or debarment from government contracts. Additionally, changes in regulatory interpretations or heightened scrutiny of foreign-sourced defense tech could impose new compliance burdens, increasing our costs and delaying product distribution. Our limited experience in this regulatory environment heightens the risk of oversight failures, which could materially adversely affect our business and reputation.
Risks Related to Our Financial Condition
We lack the financial infrastructure required for defense contracting.
We will require additional capital to support our operations, particularly since we intend to focus on obtaining meaningful defense contracts. Defense contractors require, among other requirements, performance bonds equaling 100% of contract value; payment bonds; letters of credit; working capital lines for 60-90 day payment cycles; and DCAA-compliant accounting systems. Surety companies require 3 years of profitable operations we don’t have. Banks won’t provide credit without contract history and positive cash flow. Without bonding, we cannot bid on contracts exceeding $150,000. These gaps exclude us from meaningful defense contracts.
Risks Related to Our Existing Capital Structure
The outstanding warrants, convertible preferred stock, and our equity line of credit facility may result in substantial dilution to existing stockholders and depress our stock price.
Our capital structure includes a significant number of securities that are currently convertible into or exercisable for shares of our Common Stock. As of the date of this report, these include: (i) shares of Series A Convertible Preferred Stock convertible to an aggregate of 2,044,800 shares of Common Stock; (ii) shares of Series B Convertible Preferred Stock issued in the February 2026 Private Placement, initially convertible into 4,6944835 shares of Common Stock at a conversion price of $2.13 per share, with the conversion price subject to further downward adjustment upon stockholder approval or the effectiveness of a registration statement; (iii) 2,357,303 warrants issued in the February 2026 Private Placement, exercisable at $2.13 per share with a cashless exercise option based on Black-Scholes value ; (iv) an aggregate of 9,460,345 warrants to purchase Common Stock; and (v) the Company’s equity line of credit agreement under which the Company may sell shares of Common Stock from time to time. The conversion or exercise of all or a significant portion of these securities would result in the issuance of a substantial number of additional shares of Common Stock, which would significantly dilute the ownership interest of existing stockholders and could materially depress the market price of our Common Stock.
The price-based anti-dilution provisions in our convertible preferred stock may create a self-reinforcing cycle of dilution if our stock price declines.
The Series B Convertible Preferred Stock and the associated warrants issued to the purchaser contain price-based anti-dilution adjustment provisions that automatically reduce the conversion or exercise price — and correspondingly increase the number of shares of Common Stock issuable upon conversion or exercise — if we issue additional shares or convertible securities at prices below the then-applicable conversion or exercise price (subject to certain exempt issuances). The conversion price of the Series B Preferred Stock is also subject to further downward adjustment upon receipt of stockholder approval to the lower of the then-applicable conversion price and the market price of the Common Stock at the time of the triggering event. These provisions mean that if our stock price declines, the holders will be entitled to convert into or exercise for a greater number of shares than initially contemplated, resulting in additional dilution beyond what was anticipated at the time of the original issuance. This downward price adjustment mechanism may create a self-reinforcing cycle: declining stock prices trigger increased conversion shares, the prospect of which further depresses the stock price, leading to further adjustments and additional dilution. Such “death spiral” dynamics have been observed in other public companies with similar convertible security structures and can result in severeerosion of value for existing common stockholders.
The substantial overhang of shares issuable upon conversion of preferred stock and exercise of outstanding warrants may depress our stock price regardless of our operating performance.
Even if the holders of our convertible preferred stock and warrants do not immediately convert or exercise their securities, the existence of a large number of shares of Common Stock that may be issued in the future creates a significant “overhang” that may depress the trading price of our Common Stock. Market participants may sell existing shares in anticipation of future dilutive issuances, or may be unwilling to purchase shares knowing that a substantial number of additional shares may enter the market at any time. The Star Warrant alone, if fully exercised, would result in the issuance of over 12 million additional shares at $1.50 per share. The Series A and Series B Preferred Stock, if fully converted at their respective current conversion prices, would result in the issuance of additional shares representing a significant percentage of our currently outstanding Common Stock. The aggregate potential dilution from all outstanding convertible securities and warrants is substantial relative to our current public float, and this overhang may discourage new investment, impair our ability to raise capital on favorable terms, and limit the potential appreciation of our stock price, regardless of our operating performance.
We expect to issue additional shares of Common Stock or other securities in the future to fund acquisitions and operations, which would further dilute existing stockholders.
Our business strategy depends on acquiring and integrating defense companies, which we have historically financed in significant part through the issuance of equity securities. We expect to continue to use our Common Stock as acquisition currency, to fund operations, and to attract and retain employees and consultants. We are also obligated to issue additional shares under existing contractual commitments, including shares issuable to the Tiltan seller based on earn-out provisions, additional shares that may be issuable in connection with the ITS acquisition upon exercise of our option to acquire the remaining 49%, and shares that may be issued under future equity incentive plans that will require stockholder approval under Nasdaq listing rules. Each additional issuance of Common Stock or convertible securities will further dilute the ownership interest and economic value of existing stockholders’ shares, may reduce earnings per share, and may adversely affect the market price of our Common Stock. There can be no assurance that we will be able to issue additional equity securities on terms favorable to us, and any future issuances may be on terms significantly dilutive to existing stockholders.
Our stock price has been and may continue to be highly volatile, and investors may not be able to resell their shares at or above the price at which they purchased them.
The market price of our Common Stock has been subject to significant volatility since our transition from a financial technology company to a defense holding company. The trading price may continue to fluctuate widely in response to factors including: our ability to successfully execute our defense acquisition strategy and integrate acquired companies; quarterly variations in our results of operations or those of our competitors; changes in defense spending priorities or government budget sequestration; negative publicity regarding the conflict in Israel, changes in U.S.-Israel relations, or BDS campaigns targeting Israeli companies; changes in financial estimates or recommendations by securities analysts; sales of Common Stock by insiders, large stockholders, or holders of convertible securities; the exercise of warrants or conversion of preferred stock; draws under the ELOC; announcements of new acquisitions, contracts, or products by us or our competitors; and general market conditions and macroeconomic factors. Our Common Stock has a relatively limited public float and trading volume, which amplifies price movements in response to trading activity. There can be no assurance that the market price of our Common Stock will not decline significantly from current levels.
We are currently at risk of failing to maintain the minimum bid price required by Nasdaq Listing Rules.
Pursuant to Nasdaq Listing Rule 5550(a)(2), if we fail to maintain a minimum bid price of $1.00 for thirty consecutive trading days (the “Minimum Bid Price”) and do not rectify the situation, our Common Stock could be delisted from Nasdaq, in which case trading of our Common Stock would most likely take place on an over-the-counter market established for unlisted securities. Our Common Stock has traded under $1.00 since March 20, 2026. An investor would likely find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our Common Stock on an over-the-counter market, and many investors would likely not buy or sell our Common Stock due to difficulty in accessing over-the-counter markets, policies preventing them from trading in securities not listed on a national exchange or other reasons. In addition, as a delisted security, our Common Stock would be subject to SEC rules as a “penny stock,” which impose additional disclosure requirements on broker-dealers. The regulations relating to penny stocks, coupled with the typically higher cost per trade to the investor of penny stocks due to factors such as broker commissions generally representing a higher percentage of the price of a penny stock than of a higher-priced stock, would further limit the ability of investors to trade in our Common Stock.
Under Nasdaq Rule 5810(c)(3)(A)(iv), if the price of our Common Stock fails to satisfy the Minimum Bid Price Requirement (A) within one year after effectiveness of a reverse stock split or (B) if the Company has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to one, then the Company shall not be eligible for any compliance period specified in Rule 5810(c)(3)(A) and the Listing Qualifications Department will issue a Staff Delisting Determination under Rule 5810 with respect to that security, and the Common Stock would be subject to delisting by Nasdaq without any opportunity for a cure period. On October 11, 2024, the Company effected a one-for-eight reverse stock split of the Common Stock. Accordingly, if the Company implements a reverse stock split after the price of our Common Stock fails to satisfy the Minimum Bid Price Requirement with a cumulative ratio combined with the prior reverse split of 250 shares or more to one, the Company will not be eligible for any compliance period specified in Rule 5810(c)(3)(A) and the Listing Qualifications Department will issue a Staff Delisting Determination under Rule 5810 with respect to our Common Stock, which would then be subject to delisting by Nasdaq.
For these reasons and others, delisting would adversely affect the liquidity, trading volume, investor interest and price of our Common Stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified employees and to raise capital.
On August 28, 2025, we received a deficiency letter from Nasdaq indicating that we no longer complied with the minimum Market Value of Listed Securities requirement of $50 million for continued listing. On September 26, 2025, we received written confirmation from Nasdaq that we had regained compliance with the minimum Market Value of Listed Securities requirement and the matter was now closed. There can be no guarantee that we will continue to meet the requirements for listing on Nasdaq. Our failure to maintain compliance, and our failure to regain compliance thereafter, could result in delisting, which would trigger debt acceleration, acquisition agreement breaches, loss of blue sky law exemptions, elimination of trading liquidity, inability to use stock as currency, and severe capital raising constraints. Based on historical precedent, companies receiving deficiency notices face significant challenges in maintaining regaining compliance.
We might not be able to consummate the second tranche of our recent financing.
Pursuant to the terms of the Securities Purchase Agreement executed in February 2026, the Purchaser agreed to purchase an additional 200 units for an additional investment of $10 million following (i) the effectiveness of a registration statement and (ii) stockholder approval of the issuance of the transactions contemplated by the Securities Purchase Agreement as required pursuant to Nasdaq rules. In addition, the stock price must be at least $1.00 and the value of the trading in the Company’s stock on Nasdaq for the 10 consecutive days preceding the second closing is at or above $900,000 (the “Second Closing Market Trading Value”), provided that if the Second Closing Market Trading Value is less than $900,000, then there will be a proportionate reduction in the number of units to be sold at the second closing. As a result of all the foregoing conditions, there is a possibility that the Purchaser will not have to consummate the additional investment of $10 million in which case the Company will utilize its current ELOC facility.
Star has the right to require the Company to exchange the Investment Note for all the shares of Star then held by the Company if the Common Stock is delisted.
Pursuant to the terms of the Purchase Agreement, the aggregate consideration paid by the Company for all the shares of Star consisted of: (i) $16,000,000, which was paid to Star 26 by the issuance by the Company of the Investment Note; (ii) $500,000 in cash, representing $5,000,000 less $4,500,000 previously borrowed by Star 26 from the Company; (iii) 4,770,340 Common Shares; (iv) the Warrant to purchase 12,017,648 Warrant Shares at an exercise price of $1.50 per share, exercisable for a period of five years from the Closing Date; (v) the Six-Month Note in the principal amount of $3,000,000, which accrues interest at the rate of 8% per annum and matures on July 12, 2026; and (vi) the Three-Month Note in the principal amount of $3,000,000 (the “Three-Month Note”), which matures on April 12, 2026. The Common Shares, the Warrant, the Six-Month Note and the Three-Month Note were subsequently assigned by Star 26 to the Star shareholders, pro ratably based on their equity ownership in Star 26. The Purchase Agreement provides that if, for a period of 12 months after the closing, the Common Stock is delisted from Nasdaq, Star 26 shall have the right, at its own discretion, to require the Company to exchange the Investment Note for all the shares of Star 26 then held by the Company. In such instance, Star 26 shall retain any cash payments made by the Company to Star 26 and the Company shall retain an equity interest in Star 26 equivalent to all cash payments. Given the current stock price of our Common Stock and the previous reverse stock splits effectuated by the Company, there is a possibility that our Common Stock could be delisted and Star would exercise its right to exchange the Investment Note for the shares of Star owned by the Company.
There is no assurance that we will achieve and maintain profitability or that our revenue and business models will be successful.
Our ability to achieve and maintain profitability is based on numerous factors, many of which are beyond our control. We may not be able to generate sufficient revenue to maintain profitability in the short or long-term. Our revenue growth may slow, or our revenue may decline for a number of other reasons, including reduced demand for our offerings, increased competition, a decrease in the usage of blockchain technologies generally, or any failure to capitalize on growth opportunities.
We are continually refining our revenue and business model and have shifted our focus to the development and commercialization of our Platforms. There is no assurance that these efforts will be successful or that we will generate revenues commensurate with our efforts and expectations or become or stay profitable. We may be forced to make significant changes to our revenue and business model to compete with our competitors’ offerings, and even if such changes are undertaken, there is no guarantee that they will be successful or profitable. Additionally, we will need to hire, train, and integrate qualified personnel to meet and further such changes to our business objectives at potentially significant additional expense. Failure to successfully implement revenue and business models or manage related expenses could cause us to be unprofitable and have an adverse effect on our business, operating results and financial condition.
Changes in U.S. and foreign tax laws, as well as the application of such laws, could adversely impact our financial position and operating results.
We are subject to complex income and non-income tax laws and regulations in the United States and a variety of foreign jurisdictions. Our Israeli subsidiaries and cross-border defense operations create particular complexity. Both the United States and foreign jurisdictions may revise corporate income tax and other non-income tax laws which could impact the amount of tax due in such jurisdiction.
Our determination of our corporate income tax liability is subject to review and may be challenged by applicable U.S. and foreign tax authorities. Any adverse outcome of such challenge could harm our operating results and financial condition. The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is complex and uncertain. Defense contracts often involve complex cost accounting standards and allowable cost determinations that affect tax treatment. Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws. Furthermore, as we operate in multiple taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views with respect to, among other things, the characterization and source of income or other tax items, the manner in which the arm’s-length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. The transfer of defense technology between our U.S. and Israeli operations raises particular transfer pricing complexities. The taxing authorities of the jurisdictions in which we operate may challenge our tax treatment of certain items or the methodologies we use for valuing developed technology or intercompany arrangements, which could impact our worldwide effective tax rate and harm our financial position and operating results.
We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes in the United States and various foreign jurisdictions. A change in the tax law could impact tax positions which could result in an increased exposure related to such tax liabilities. Such changes could have an adverse effect on our operating results and financial condition.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” (as defined under Sections 382 and 383 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs and certain other tax attributes to offset post-change taxable income or taxes.
We have not performed a study to determine whether our NOLs are currently subject to Section 382 limitations. We may also experience a future ownership change under Section 382 of the Code that could affect our ability to utilize our NOLs to offset our income.
If our estimates or judgment relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of T3 — Critical Accounting Policies”. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates and judgments involve the identification of performance obligations in revenue recognition, particularly for defense contracts with multiple deliverables and milestone payments, evaluation of tax positions, inter-company transactions, and the valuation of stock-based awards, among others. Defense contracts require particular judgment in percentage-of-completion accounting and estimating costs to complete. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of analysts and investors, resulting in a decline in the trading price of our Common Stock.
The nature of our business requires the application of complex financial accounting rules, and there is limited guidance from accounting standard setting bodies. If financial accounting standards undergo significant changes, our operating results could be adversely affected.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. As we transition to defense contracting, we must adopt government cost accounting standards and comply with DCAA requirements, which are significantly different from our previous financial services accounting. A change in these principles or interpretations could have a significant effect on our reported financial results and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. Recent actions and public comments from the FASB and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public.
Defense contracting involves unique accounting requirements including Cost Accounting Standards (CAS), progress payment billing, and complex revenue recognition for long-term contracts. We lack experience with these specialized accounting requirements, and establishing DCAA-compliant accounting systems typically costs $500,000 to $1 million.
There remains uncertainty on how companies transitioning between industries should account for discontinued operations, acquisition-related costs, and transformation expenses. Uncertainties in or changes to regulatory or financial accounting standards could result in the need to change our accounting methods, restate our financial statements or impair our ability to provide timely and accurate financial information, which could adversely affect our financial statements, result in a loss of investor confidence, and more generally impact our business, operating results, and financial condition.
Business metrics and other estimates are subject to inherent challenges in measurement, and our business, operating results, and financial condition could be adversely affected by real or perceived inaccuracies in those metrics.
As we transition from financial technology to defense, our traditional business metrics are no longer applicable, and we have not yet established meaningful defense industry metrics. We will need to develop new metrics relevant to defense contracting, such as contract backlog, book-to-bill ratios, win rates, and program performance indices. These metrics will be calculated using internal company data and initially will not be validated against industry standards. While these numbers will be based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in such measurements. During our transformation period, we have minimal operational metrics to report, making it difficult for investors to evaluate our progress or compare us to established defense contractors.
Our future defense business metrics may also be impacted by program delays, contract modifications, stop-work orders, or classification restrictions that limit disclosure. Government contracting involves unique reporting requirements and restrictions that differ significantly from commercial business metrics. If our metrics provide us with incorrect or incomplete information about program performance and contract profitability, we may make inaccurate conclusions about our business.
We are subject to changes in financial reporting standards or policies, including as a result of choices made by us, which could materially adversely affect our reported results of operations and financial condition and may have a corresponding material adverse impact on capital ratios.
Our consolidated financial statements are prepared in accordance with GAAP, which are periodically revised or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized bodies. It is possible that future accounting standards and financial reporting standards or policies, including as a result of choices made by us, which we are required to adopt, could change the current accounting treatment that applies to our consolidated financial statements and that such changes could have a material adverse effect on our reported results of operations and financial condition, and may have a corresponding material adverse effect on capital ratios.
As a public company, we are required to develop and maintain proper and effective internal controls over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our stock.
We are required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to certify that our internal control over financial reporting is effective. We cannot assure that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our stock could decline, and we could be subject to sanctions or investigations by the exchange on which shares of our stock are listed, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
We might require additional capital to support business growth, and this capital might not be available or may require stockholder approval to obtain.
We have funded our operations since inception primarily through equity financings, convertible notes, and revenue generated by our products and services. We intend to continue to make investments in our business to respond to business challenges, including developing new products and services, enhancing our operating infrastructure, expanding our international operations, and acquiring complementary businesses and technologies, all of which may require us to secure additional funds.
Additional financing may not be available on terms favorable to us, if at all. If we incur additional debt, the debt holders would have rights senior to holders of our Common Stock to make claims on our assets, and the terms of any debt could restrict our operations.
Risks Related to Our Employees and Other Service Providers
In the event of employee or service provider misconduct or error, our business may be adversely impacted.
Employee or service provider misconduct or error could subject us to legal liability, financial losses, and regulatory sanctions, and could seriouslyharm our reputation and negatively affect our business. Such misconduct could include engaging in improper or unauthorized transactions or activities, misappropriation of customer funds, and misappropriation of information, failing to supervise other employees or service providers, or improperly using confidential information.
Employee or service provider errors, including mistakes in executing, recording, or processing transactions for customers, could expose us to the risk of material losses even if the errors are detected. Although we have implemented processes and procedures and provide trainings to our employees and service providers to reduce the likelihood of misconduct and error, these efforts may not be successful. Moreover, the risk of employee or service provider error or misconduct may be even greater for novel products and services, and is compounded by the fact that many of our employees and service providers are accustomed to working at tech companies which generally do not maintain the same compliance customs and rules as financial services firms.
This can lead to high risk of confusion among employees and service providers, particularly in a fast growth company like ours, with respect to compliance obligations particularly including confidentiality, data access, trading, and conflicts. It is not always possible to determisconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. If we were found not to have met our regulatory oversight and compliance and other obligations, we could be subject to regulatory sanctions, financial penalties and restrictions on our activities for failure to properly identify, monitor and respond to potentially problematic activity, which could seriouslydamage our reputation. Our employees, contractors, and agents could also commit errors that subject us to financial claims for negligence, as well as regulatory actions, or result in financial liability. Further, allegations by regulatory or criminal authorities of improper transactions could affect our brand and reputation.
The loss of our chief executive officer, or our failure to attract and retain other highly qualified personnel in the future, could adversely impact our business, operating results, and financial condition.
We operate in an industry that requires highly skilled and technical personnel. We believe that our future success is highly dependent on the talents and contributions of our senior management team, including Menachem Shalom, our Chief Executive Officer and a director and other key service providers across finance, compliance, legal, talent and marketing.
Our future success depends on our ability to attract, develop, motivate, and retain highly qualified and skilled employees and service providers. The pool of qualified talent is extremely limited, particularly with respect to executive talent, engineering, risk management, and financial regulatory expertise. We face intense competition for qualified individuals from numerous software and other technology companies. To attract and retain key personnel, we incur significant costs, including salaries and benefits and equity incentives. Even so, these measures may not be enough to attract and retain the personnel we require to operate our business effectively. The loss of even a few qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the planned expansion of our business, could adversely impact our operating results and impair our ability to grow.
Our culture emphasizes innovation, and if we cannot maintain this culture as we grow, our business and operating results could be adversely impacted.
We believe that our entrepreneurial and innovative corporate culture has been a key contributor to our success. We encourage and empower our employees and service providers to develop and launch new and innovative products and services, which we believe is essential to attracting high quality talent, partners, and developers, as well as serving the best, long-term interests of our company. If we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork that has been integral to our business, in which case our products and services may suffer and our business, operating results, and financial condition could be adversely impacted.
Additional Risk Factors
Cybersecurity requirements exceed our current capabilities.
Defense contractors face sophisticated nation-state cyber threats and strict requirements we cannot meet. The Cybersecurity Maturity Model Certification requires 110 security controls, third-party assessment, and ongoing monitoring. Our inadequate cybersecurity virtually guarantees a breach that could result in contract loss and massive liability.
Environmental liabilities could exceed our resources.
Aerospace operations create environmental liabilities including hazardous materials, groundwater contamination, and air emissions with unlimited remediation costs. Recent examples: Raytheon allocated $1.2 billion for cleanup. Environmental insurance excludes pre-existing conditions. Discovery of contamination could trigger costs exceeding our market capitalization.
Menachem Shalom, our Chief Executive Officer and a director, beneficially owns a substantial percentage of our outstanding Common Stock and, if he exercises his warrants, would control a majority of the voting power of our Common Stock. This will allow him to exert significant control over corporate decisions and may discourage transactions that other stockholders may favor.
As of March 30, 2026, Menachem Shalom, our Chief Executive Officer and a director, beneficially owned 8,260,369 shares of our Common Stock, representing approximately 19.4% of our issued and outstanding shares of Common Stock. This beneficial ownership includes a five-year warrant to purchase an aggregate of 12,017,648 shares of our Common Stock at an exercise price of $1.50 per share. As a result of his current ownership position and his potential to acquire voting control of a majority of our outstanding Common Stock through the exercise of his warrant, Mr. Shalom has, and upon exercise of the warrant would have, the ability to exert significant influence over, or control, substantially all matters requiring stockholder approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, approval of mergers, acquisitions, and other business combinations, and the outcome of any other matter submitted to a vote of stockholders. This concentration of voting power could have the effect of delaying, deterring, or preventing a change of control of the Company, even if such a transaction would be beneficial to other stockholders, and could deprive other stockholders of the opportunity to receive a premium for their shares. Mr. Shalom’s interests may not always be aligned with the interests of other stockholders, and he may exercise his voting power in a manner that advances his own interests to the detriment of other stockholders.
In addition, Mr. Shalom involvement in other companies could give rise to conflicts of interest, including with respect to the allocation of business opportunities, corporate resources, and management attention.
The holder of our Series B Convertible Preferred Stock has additional voting power as compared to the holders of our Common Stock.
The holder of our Series B Convertible Preferred Stock is entitled to 10,000 votes per share on matters submitted to a vote of stockholders. If we consummate the second tranche of the investment and receive an additional $10,000,000, the holder of our Series B Convertible Preferred stock will hold 400 shares. This will entitle the holder to no less than 4,000,000 votes, which further concentrates voting power among a limited number of security holders and may limit the ability of holders of Common Stock to influence corporate governance and strategic decisions. The concentration of ownership and voting power may also discourage potential acquirers from attempting to obtain control of the Company and may make it more difficult for other stockholders to effect changes in the composition of our Board of Directors or management, which could adversely affect the market price of our Common Stock.
We may never achieveprofitability.
We have a history of losses, minimal current revenue, massive transformation costs, and highly uncertain future revenue. Even if our transformation succeeds, the defense industry’s long sales cycles, competitive pressures, and contract risks may prevent profitability. We may exhaust our resources before generating sustainable revenue, resulting in total loss of investment.
Cyberattacks and security breaches of our systems, or those impacting our customers or third parties, could adversely impact our brand and reputation and our business, operating results and financial condition.
As we transition to the defense industry, we will handle highly sensitive defense-related data, technical specifications, and potentially classified information once we obtain necessary clearances. Our business will involve the collection, storage, processing and transmission of confidential information, defense contractor data, employee, service provider and other personal data, as well as information required to support defense programs. For our defense operations, we must build our reputation on the premise that our systems meet stringent defense industry security requirements including CMMC, DFARS, and NIST standards. As a result, any actual or perceived security breach of us or our third-party partners may:
harm our reputation and brand and potentially result in loss of facility security clearances;
result in our systems or services being unavailable and interrupt our operations;
result in improper disclosure of data and violations of applicable privacy laws, ITAR, EAR, and defense regulations;
result in significant regulatory scrutiny, investigations, fines, penalties, potential debarment from defense contracts, and other legal, regulatory and financial exposure;
cause us to incur significant remediation costs;
compromise classified or controlled technical information critical to defense programs;
reduce defense contractors’ confidence in, or decrease use of, our products and services;
divert the attention of management from the operation of our business;
result in significant compensation or contractual penalties from us to our customers including the U.S. government or third parties as a result of losses to them or claims by them; and
adversely affect our business and operating results.
Further, any actual or perceived breach or cybersecurity attack directed at other defense contractors or government systems, whether or not we are directly impacted, could lead to a general loss of customer confidence in our ability to protect sensitive defense information, which could negatively impact us including the market perception of the effectiveness of our security measures and technology infrastructure.
An increasing number of organizations, including defense contractors, government agencies, and critical infrastructure providers, have disclosedbreaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on their websites, classified networks, and infrastructure. Attacks upon systems across the defense industry are increasing in their frequency, persistence, and sophistication, and, in many cases, are being conducted by sophisticated, well-funded, and organized groups and individuals, including nation-state actors specifically targeting defense contractors. The techniques used to obtain unauthorized, improper, or illegal access to systems and information (including customers’ personal data and digital assets), disable or degrade services, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. These attacks may occur on our systems or those of our third-party service providers or partners. Certain types of cyberattacks could harm us even if our systems are left undisturbed. For example, attacks may be designed to deceive employees and service providers into releasing control of our systems to a hacker, while others may aim to introduce computer viruses or malware into our systems with a view to stealing confidential or proprietary data. Additionally, certain threats are designed to remain dormant or undetectable until launched against a target and we may not be able to implement adequate preventative measures.
Although we do not have a past history of material security breaches or cyberattacks, as we enter the defense industry we will become a more attractive target for state-sponsored attacks. We are developing systems and processes designed to protect the data we manage, prevent data loss and other security breaches, and meet defense industry cybersecurity requirements. We expect to continue to expend significant resources to bolster these protections, but there can be no assurance that these security measures will provide absolute security or prevent breaches or attacks. Threats can come from a variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insiders. In the defense industry, certain threat actors are supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. As a result, our costs and the resources we devote to protecting against these advanced threats and their consequences will increase over time.
Although we maintain insurance coverage that we believe is adequate for our business, it may be insufficient to protect us against all losses and costs stemming from security breaches, cyberattacks, and other types of unlawful activity, or any resulting disruptions from such events. Defense-specific cyber insurance is particularly expensive and may exclude nation-state attacks. Outages and disruptions of our systems, including any caused by cyberattacks, may harm our reputation and our business, operating results, and financial condition.
Adverse economic conditions may adversely affect our business.
Our future performance in the defense industry is subject to general economic conditions, defense budget appropriations, continuing resolutions, sequestration risks, and geopolitical tensions that drive defense spending. The United States and other key defense markets experience cyclical changes in defense budgets from time to time based on political priorities, threat assessments, and fiscal constraints. Defense spending is subject to annual appropriations and can be affected by government shutdowns, budget caps, and changing national security priorities. The impact of defense budget cycles on our business is highly uncertain and dependent on a variety of factors, including congressional appropriations, international conflicts, emerging threats, and other events beyond our control. Geopolitical developments, such as regional conflicts, arms races, and alliance dynamics can directly impact defense spending priorities. To the extent that defense budgets are reduced or reallocated away from our focus areas, our ability to win contracts and generate revenue may suffer.
We may be adversely affected by natural disasters, pandemics, and other catastrophic events, and by man-made problems such as war or terrorism, that could disrupt our business operations, and our business continuity and disaster recovery plans may not adequately protect us from a seriousdisaster.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and could have an adverse effect on our business, operating results, and financial condition. Our business operations are subject to interruption by natural disasters, fire, power shortages, and other events beyond our control. Our Israeli subsidiaries face particular risks from regional conflicts, including potential facility damage, workforce mobilization for military service, and operational disruptions.
In addition, our global operations expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and cause our operating results to suffer. Defense programs may be delayed or suspended during national emergencies, affecting our revenue and operations.
Further, war, acts of terrorism, labor activism and other geopolitical unrest could cause disruptions in our business or the businesses of our partners or the economy as a whole. While increased global tensions may drive defense spending, they also create operational risks for our international operations, particularly in Israel. In the event of a natural disaster, including a major earthquake, blizzard, or hurricane, or a catastrophic event such as a fire, power loss, or telecommunications failure, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in program execution, lengthy interruptions in service, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results.
Acquisitions, joint ventures or other strategic transactions create certain risks and may adversely affect our business, financial condition or results of operations.
Acquisitions, partnerships and joint ventures are central to our transformation strategy. We recently completed our acquisitions of Star 26, Tiltan, Nimbus and ITS, each of which is an Israeli defense company, and divested our Digital RFQ business. We may not be successful in finding additional defense acquisition targets. In addition, we may not be able to successfully finance or integrate any defense businesses given our complete lack of defense industry experience.
We may not be able to identify suitable defense acquisition candidates or complete acquisitions in the future, which could adversely affect our future growth; or businesses that we acquire may not perform as well as expected or may be more difficult or expensive to integrate and manage than expected, particularly given the specialized nature of defense operations and our lack of industry knowledge, which could adversely affect our business and results of operations. In addition, the process of integrating these acquisitions may disrupt our business and divert our resources.
In addition, acquisitions of defense companies, particularly those outside our current operating jurisdictions often involve additional or increased risks including, for example:
managing geographically separated organizations, systems and facilities with different security requirements;
integrating personnel with security clearances and diverse business backgrounds and organizational cultures;
complying with defense export controls and foreign regulatory requirements;
fluctuations in exchange rates;
enforcement and protection of intellectual property and controlled technical data in some foreign countries;
difficulty entering new foreign markets due to, among other things, national security restrictions, customer acceptance and business knowledge of these new markets; and
general economic and political conditions affecting defense relationships between countries.
These risks may arise for a number of reasons: we may not be able to find suitable defense businesses to acquire at affordable valuations or on other acceptable terms; we may face competition for acquisitions from other established defense companies; we may need to borrow money or sell equity or debt securities to the public to finance acquisitions and the terms of these financings may be adverse to us; changes in accounting, tax, securities or other regulations could increase the difficulty or cost for us to complete acquisitions; we may incur unforeseen obligations or liabilities in connection with acquisitions including environmental remediation costs common in aerospace facilities; we may need to devote unanticipated financial and management resources to an acquired business; we may not realize expected operating efficiencies or product integration benefits from an acquisition; we are entering the defense market where we have no prior experience; and we may experience decreases in earnings as a result of non-cash impairment charges.
We cannot ensure that any acquisition, partnership or joint venture we make will not have a material adverse effect on our business, financial condition and results of operations.
Delaware law and our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain certain provisions, including anti-takeover provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
T3 Defense’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by the Board and therefore depress the trading price of our Common Stock. Additionally, our foreign ownership structure and defense operations may trigger CFIUS review of certain transactions, potentially limiting strategic alternatives. In addition, as a Delaware corporation, the Company will generally be subject to provisions of Delaware law, including the DGCL. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of the Board or taking other corporate actions, including effecting changes in management.
Such provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the Board or management.
Any provision of our Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for stockholders to receive a premium for their shares of the Company’s capital stock and could also affect the price that some investors are willing to pay for our Common Stock.
critical
opportunities
The Company is positioned as a strategic platform company focused on acquiring, integrating, and scaling high-impact businesses in the aerospace and defense industries. Our strategy targets Tier 2 and Tier 3 suppliers that form the industrial backbone of national security infrastructure, with particular emphasis on companies offering dual-use technologies, advanced AI applications, and critical manufacturing capabilities.
Recent Developments
Proposed Business Combination
On March 31, 2026, SC II Acquisition Corp., a Cayman Islands exempted company (the “SPAC”), entered into a non-binding letter of intent (the “LOI”) with a payments technology company (the “Target”), which outlines the general terms and conditions of a potential business combination (the “Proposed Transaction”) pursuant to which the Company would acquire 100% of the outstanding equity and equity equivalents of the Target. The SPAC’s sponsor, SC Capital II Sponsor LLC, is controlled and majority owned by Nukkleus Defense Technologies Inc., a wholly-owned subsidiary of T3.
The LOI is a preliminary, non-binding expression of mutual interest and does not constitute a binding commitment, obligation or agreement of the SPAC or the Target to consummate the Proposed Transaction or any other transaction. Except for certain limited binding provisions, including, among other things, exclusivity, confidentiality, the waiver of claimsagainst the SPAC’s trust account, and governing law, neither the SPAC nor the Target has any legal obligation to the other party with respect to the Proposed Transaction by virtue of the LOI.
Cancellation of $16,000,000 Indebtedness
On March 31, 2026, T3 memorialized the termination of its obligation to pay $16,000,000 to its wholly-owned subsidiary Star 26 Capital, Inc., a Nevada corporation (“Star 26”). Pursuant to the Cancellation Agreement, (the “Cancellation Agreement”), while all terms and provisions of the Amended and Restated Securities Purchase Agreement, dated September 15, 2025 (the “Acquisition Agreement”) remain in full force and effect, and the Company's ownership of Star 26, including all assets, operations, and subsidiaries, is unaffected, the Company eliminated $16,000,000 of indebtedness, effective immediately, at no cost, no dilution, and with no offsetting obligation to the Company or its shareholders.
Pursuant to the terms of the Cancellation Agreement, the entire $16,000,000 obligation to Star 26, including principal, accrued interest and any other amounts owing with respect thereto, were cancelled, terminated and rendered of no further force or effect, effective immediately, at no cost, no dilution, and with no offsetting obligation to the Company or its shareholders and while maintaining full ownership of Star 26 and all of its assets.
February Private Placement
On February 26, 2026, T3 closed a private placement pursuant to the terms of a Securities Purchase Agreement with an accredited investor (the “Securities Purchase Agreement”) for a private placement (the “Private Placement”) pursuant to which the investor (the “Purchaser”) agreed to purchase from the Company 400 units for an aggregate purchase price of $20,000,000, or a per unit price of $50,000. Each unit consists of (i) one share (each a “Share” and collectively, the “Shares”) of Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), and (ii) one and a half common stock purchase warrants to initially purchase up to one and a half shares of common stock, par value $0.0001 per share (the “Common Stock”), of the Company, subject to adjustment as described herein (the “Common Warrants” and the shares of Common Stock issuable upon exercise or exchange of the Common Warrants, the “Warrant Shares”). The Private Placement is structured as a two stage investment. At the initial closing, which occurred on February 26, 2026, the Company will sold 200 units for gross proceeds of $10 million. The Purchaser agreed to purchase an additional 200 units for an additional investment of $10 million following (i) the effectiveness of the registration statement described below, (ii) stockholder approval of the issuance of the transactions contemplated by the Securities Purchase Agreement as required pursuant to Nasdaq rules, (iii) the stock price is at least $1.00 and (iv) subject to the condition that the value of the trading in the Company’s stock on Nasdaq for the 10 consecutive days preceding the second closing is at or above $900,000 (the “Second Closing Market Trading Value”), provided that if the Second Closing Market Trading Value is less than $900,000, then there will be a proportionate reduction in the number of units to be sold at the second closing.
Pursuant to the Securities Purchase Agreement, the Company is required to seek stockholder approval (the “Stockholder Approval”) related to the issuance of the units to be issued in the Private Placement. The Company is required to file a preliminary proxy statement for a special meeting of the Company’s stockholders within 75 days of the initial closing of the Private Placement. The Company’s directors and officers have agreed to execute voting agreements to vote in favor of the applicable proposals. If the Company does not obtain Stockholder Approval at the first such meeting, the Company is required to call a meeting every 4 months thereafter to seek Stockholder Approval until the earlier of the date on which Stockholder Approval is obtained or the securities are no longer outstanding.
The Company also granted the Purchaser a right of participation in subsequent financings of the Company for a period of time following closing, subject to certain exempt issuances, and has agreed not to issue securities for a period of time following the closing of the Private Placement, subject to certain exempt issuances, including issuances pursuant to strategic transactions.
Under the terms of the Securities Purchase Agreement, the Company agreed not deliver any purchase notices under Company’s equity line of credit with the Purchaser until after the later of the date on which (i) the registration statement is declared effective and (ii) the Company obtains Stockholder Approval and even after such date, certain market conditions must be satisfied.
Series B Preferred Stock
Pursuant to the Certificate of Designations of Rights, Preferences and Limitations which was filed with the Secretary of State of the State of Delaware prior to closing of the Private Placement, each share of Series B Preferred Stock has a stated value of $50,000 (the “Stated Value”) and will initially be convertible into 23,474 shares of Common Stock (the “Conversion Shares”) (or pre-funded warrants in lieu thereof (the “Pre-Funded Warrants”)), calculated by dividing the Stated Value by the initial conversion price equal to $2.13 per Share (the “Initial Conversion Price”). The Initial Conversion Price is subject to adjustment upon stock splits, distributions, reorganizations, reclassifications, change of control and the like, and is also subject to price-based anti-dilution adjustments for subsequent offerings made by the Company while the Series B Preferred Stock remains outstanding (subject to certain exempt issuances). The Initial Conversion Price will also be adjusted upon receipt of Stockholder Approval (as hereinafter defined), if obtained, to the lower of (i) the then applicable conversion price and (ii) the price per share of the Common Stock on its trading market upon the earlier of (A) effectiveness of the registration statement required to be filed pursuant to the Registration Rights Agreement (as defined herein) or (B) upon applicability of Rule 144 as it relates to the sale of the Conversion Shares.
The Series B Preferred Stock is convertible at the option of the holder at any time and will be automatically converted into Common Stock or Pre-Funded Warrants in lieu thereof on the effective date of the registration statement, whether or not the Stockholder Approval has been obtained. If at any time after the one-year anniversary of the closing of the Private Placement, the Series B Preferred Stock is then outstanding and the Company has not received Stockholder Approval, the Series B Preferred Stock is redeemable at the option of the holder at a price per Share equal to 105% of the Stated Value. The conversion of the Series B Preferred Stock is subject to a 9.9% beneficial ownership limitation blocker. The Series B Preferred Stock are not entitled to receive dividends, other than on an as-converted basis if dividends are paid to holders of Common Stock.
The holders of Series B Preferred Stock are entitled to 10,000 votes per each share of Series B Preferred Stock. The holders of Series BPreferred Stock have voting rights with respect to certain corporate actions that affect the rights of the Series B Preferred Stockholders and also have certain consent rights in connection with certain proposed Fundamental Transactions (as defined in the Certificate of Designations). The Series B Preferred Stock is (i) senior to the Common Stock of the Company and any other equity securities that the Company may issue in the future, the terms of which specifically provide that such equity securities rank junior to the Series B Preferred Stock, (ii) equal with any class or series of capital stock established after the closing date of the Private Placement, the terms of which specifically provide that such equity securities rank on par with such Series B Preferred Stock, in each case with respect to payment of amounts upon liquidation, dissolution or winding up and (iii) junior to all of the Company’s existing and future indebtedness. The Company has agreed not to issue any parity stock or senior securities without the written consent of a majority in interest of the Series B Preferred Stock. Upon a change of control, liquidation or winding up of the Company the holders of the Series B Preferred Stock are entitled to a liquidation preference of $50,000 per Share.
Common Warrants
The Common Warrants are exercisable on a cash or cashless basis at the earlier of (i) 180 days following their issuance and (ii) the date the stockholder approval is obtained, and expire 5 years from the date of issuance. Each Common Warrant will be initially exercisable for one share of Common Stock at an initial exercise price of $2.13 per share, subject to adjustment for stock splits, distributions and the like (the “Initial Exercise Price”). The Initial Exercise Price is also subject to price-based anti-dilution adjustments for subsequent offerings made by the Company while the Common Warrants remain outstanding (subject to certain exempt issuances). At any time after the closing of the Private Placement, the holder of the Common Warrants may exchange the Common Warrants on a cashless basis for a number of shares of Common Stock determined by multiplying the total number of Warrant Shares with respect to which the Common Warrant is then being exercised by the Black Scholes Value (as defined in the Common Warrant) divided by the lower of the two closing bid prices of the Common Stock in the two days prior the time of such exercise, but in any event not less than $0.01 (as may be adjusted for stock dividends, subdivisions, or combinations and the like). The exercise of the Common Warrants is subject to a 9.9% beneficial ownership limitation blocker.
In the event of a Fundamental Transaction (as defined in the Common Warrants), the holders of the Common Warrants will be entitled to receive upon exercise of the Common Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Common Warrants immediately prior to such Fundamental Transaction. Additionally, as more fully described in the Common Warrants, the holders of the Common Warrants will be entitled to receive consideration in an amount equal to the Black Scholes value of the Common Warrant in connection with a Fundamental Transaction.
If the Company fails to timely deliver the Warrant Shares issuable upon exercise of the Common Warrants, the Company will be subject to liquidateddamages, payable in the Company’s discretion in cash or shares on the Registration Date (as defined therein) or buy-in. If the Company elects to pay in shares, the number of shares due will be based on the LD Share Formula (as defined below).
Registration Rights Agreement
In connection with the Private Placement, on February 24, 2026, the Company and the Purchaser entered into a Registration Rights Agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company is required to register the resale of the Conversion Shares (and any shares underlying the Pre-Funded Warrants, if any) and the Warrant Shares. The Company is required to prepare and file an initial registration statement (the “Initial Registration Statement”) with the Securities and Exchange Commission within 45 days of the date of the Securities Purchase Agreement (the “Filing Deadline”) and to use commercially reasonable efforts to have the Initial Registration Statement declared effective within 75 days of the date of the Securities Purchase Agreement (the “Effectiveness Deadline”). In certain circumstances including, but not limited to, if the Company misses the Filing Deadline or the Effectiveness Deadline, then the Company will be required to pay to the Purchasers an amount in shares or cash, at the Company’s discretion, as partial liquidateddamages and not as a penalty, equal to the product of 1.5% multiplied by the aggregate purchase price paid by such Purchaser. Liquidateddamages, if any, will accrue and be paid on the earlier of the effective date of a resale registration statement registering the sale of the shares that may be issued in lieu of cash or the date on which such shares can be sold pursuant to Rule 144 (the “Registration Date”). If the Company elects to pay liquidateddamages in shares of Common Stock, the number of shares of Common Stock issuable to the Purchaser will be determined by dividing the aggregate amount of accrued liquidateddamages by the closing price of the Company’s Common Stock on the trading market of the Common Stock on the day immediately prior to the Registration Date (the “LD Share Formula”).
In connection with the Private Placement, the Company entered into a Placement Agency Agreement, dated February 24, 2026, with Dawson James Securities Inc. (the “Placement Agent”), pursuant to which the Placement Agent acted as the sole placement agent for the Private Placement. In consideration for the foregoing, the Company has agreed to pay customary placement fees to the Placement Agent, including a cash fee equal to 3.5% of the gross proceeds raised in the Private Placement and issue warrants equal to 7.5% of the securities placed in the Offering. Pursuant to the Placement Agency Agreement, the Company has also agreed to reimburse certain expenses of the Placement Agent incurred in connection with the Private Placement.
Director Resignation
On February 23, 2026, the Company received a letter of resignation from Ms. Aviya Volodarsky pursuant to which Ms. Volodarsky resigned from her position as a member of the board of directors of the Company and from all the committees on which she served for personal reasons. The resignation was effective immediately.
Employment Agreement
On February 17, 2026, the Board of Directors, based on the recommendations and approval of the Compensation Committee, approved the terms of the terms and provisions of a Consulting Agreement between the Company and Billio Ltd., a company in Israel, to provide the services of Menachem Shalom as the principal executive officer of the Company. The consulting agreement terminates and supersedes the (i) Consulting Agreement dated December 16, 2024 between the Company and Billio Ltd., pursuant to which the Company obtained consulting services from the Consultant through Menachem Shalom; (ii) Management Services Agreement dated June 28, 2024, as amended by Amendment No. 1 dated August 8, 2024, between Star 26 Capital, Inc. (“Star Capital”) and Zero One Capital LLC, a Nevada limited liability company (“Zero One”) in which Mr. Shalom is the chief executive officer and controlling member and shareholder of Zero One; and (iii) Offsetting Management Services Agreement dated August 12, 2024 between Zero One and B. Rimon Agencies Ltd., an Israeli company which is currently wholly-owned by Star Capital.
Given the performance of the Company within the last 15 months, the Compensation Committee and the Board of Directors determined that it was in the best interest of the Company to provide Mr. Shalom with the amended consulting agreement and increased compensation. The Committee and the Board also authorized a cash bonus to Mr. Shalom in the amount of $250,000 for his past services to the Company. The Company, under the supervision and guidance of Mr. Shalom, has completed several acquisitions within the last 15 months, including without limitation, Star 26, Tiltan Software Engineering, Nimbus Drones and ITS.
Pursuant to the terms of the Consulting Agreement, which is effective as of January 1, 2026, Mr. Shalom will continue to act as the chief executive officer of the Company while maintaining other executive roles in non-completing companies. For his services, Mr. Shalom will receive a base salary of $60,000 per month and target cash bonuses equal to 50% of base salary, subject to achievement of performance goals to be set by the Compensation Committee He could also be entitled to additional milestone-based bonuses as determined by the Board. Mr. Shalom will receive 250,000 shares of common stock quarterly, subject to availability under approved incentive plans; if there is no plan or no availability, the quarterly amount of shares shall accrue until there is availability under an approved incentive plan. Such plan will also require shareholder approval pursuant to applicable Nasdaq rules. He will also be entitled to a relocation grant of $175,000 if Mr. Shalom relocates to the United States with his family. Mr. Shalom will also be entitled to all executive benefit plans including health and 401(k) plans and 30 business days per year vacation.
In the event Mr. Shalom is terminated for cause or is no longer employed by the Company for reason of death or disability, he shall only be entitled to his compensation at such time. If he is terminated by the Company without cause, he shall be entitled to 6 months of his base compensation, and if Mr. Shalom resigns, he shall be entitled to compensation for 12 months. If he is terminated for cause, Mr. Shalom shall not be entitled to any compensation. The Consulting Agreement contains customary non-competition, non-solicitation and confidentiality provisions.
Name Change
Effective February 9, 2026, the Company changed its name by the filing of a certificate of correction to the Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change the name of the Company to “T3 Defense Inc.”. The change in the name of the Company was effectuated pursuant to Section 242(d)(1) of the Delaware General Corporation Law. As a result of the name change, the new ticker of the Company became “DFNS”.
Nimbus Acquisition
On January 15, 2026, the Company consummated its acquisition (the “Nimbus Acquisition”) of 100% of Nimbus Drones Technologies and Marketing Ltd., an Israeli private company (“Nimbus”) specializing in unmanned aerial systems and services, pursuant to the terms of that certain Stock Purchase Agreement, dated January 15, 2026 (the “Nimbus Purchase Agreement”), by and among the Company, Nimbus and Elad Defense LLC (“Elad”). In connection with the closing of the Nimbus Acquisition, the Company issued to Elad as consideration (i) 1,850,000 shares of Common Stock and (ii) a $3,250,000 convertible 24-month note (the “Nimbus Note”) bearing 6% interest, which is convertible at the option of the holder at a fixed price of $2.00 per share. The Nimbus Note also prohibits the Company from issuing the holder shares that would result in the holder beneficially owning more than 4.99% of the outstanding shares of Common Stock. As of February 17, 2026, Elad converted the Nimbus Note to an aggregate of 1,625,000 shares of Common Stock.
Change in Independent Registered Public Accounting Firm
Effective as of January 14, 2026, the Company dismissed GreenGrowth CPAs (“GreenGrowth”) as the independent registered public accounting firm engaged to audit the Company’s financial statements and engaged Somekh Chaikin, a member firm of KPMG International (“Somekh Chaikin”), as the Company’s independent external auditors for the year ending December 31, 2025. See “Changes in and Disagreements with Accountants.”
Tiltan Acquisition
On December 30, 2025, the Company consummated its acquisition (the “Tiltan Acquisition”) of all of the issued and outstanding shares of Tiltan Software Engineering Ltd. (“Tiltan”) pursuant to a Stock Purchase Agreement, as amended (the “Tiltan Purchase Agreement”), among the Company, its wholly owned subsidiary Nukk Picolo Ltd. (“Nukk Picolo”), Tiltan and Arie Shafir (the “Tiltan Seller”), in consideration of NIS 47,600,000 (approximately $14,000,000). Pursuant to the Tiltan Purchase Agreement, the purchase price is payable in a combination of (i) cash equal to 75% of the purchase price (the “Cash Portion”), or NIS 35,700,000 (approximately $10,500,000), a portion of which (NIS 5,283,333, less NIS 666,667 retained by the Company as working capital for Tiltan) will be paid by the Company to the Tiltan Seller and the remainder of which is evidenced by a secured promissory note (the “Tiltan Note”) in the principal amount of NIS 29,750,000 (approximately $8,750,000), and (ii) shares of Common Stock equal to 25% of the purchase price (the “Stock Portion”), or NIS 11,900,000 (approximately $3,500,000). The remaining Cash Portion of NIS 29,750,000 (approximately $8,750,000) is payable by the Company in five installments at 36-day intervals until the final payment on June 29, 2026, with the first two installments each being reduced by NIS 666,667 for working capital to be retained by Tiltan. The cash payments are evidenced by the Note and secured by the pledge described below. As a result of the acquisition, Tiltan became an indirect wholly owned subsidiary of the Company.
In connection with the closing of the Tiltan Acquisition, the Company deposited 2,000,000 shares of Common Stock (the “Escrowed Shares”) into escrow with an escrow agent. On June 29, 2026, the escrow agent shall release to the Tiltan Seller shares of Common Stock having an aggregate value equal to 25% of the purchase price (NIS 11,900,000), calculated based on the market price of the Common Stock on said date. Any Escrowed Shares in excess of this amount shall be cancelled and returned to the Company. If the value of the Escrowed Shares on said date is less than 25% of the purchase price, the Company is required to either (i) issue additional shares of Common Stock to the Tiltan Seller or (ii) pay the Tiltan Seller the difference in cash, so that the Seller receives shares and/or cash having an aggregate value equal to 25% of the purchase price. as consideration that may be released to the Tiltan Seller in accordance with the Tiltan Purchase Agreement.
Also in connection with the closing of the Tiltan Acquisition, the Company issued the Tiltan Note to the Tiltan Seller. The Tiltan Note matures in five equal installments (other than the first two installments which have been reduced by NIS 666,667 for working capital to be retained by Tiltan) at 36-day intervals beginning on the 36th day following the closing date until the final payment which is due on June 29, 2026. The Tiltan Note does not bear interest unless an Event of Default (as defined in the Tiltan Note) occurs, in which case the outstanding principal amount shall bear interest at the rate of 10% per annum from the date of default until payment. Events of Default include failure to timely make a monthly installment payment within ten (10) business days after written notice is received from the Tiltan Seller, bankruptcy of the Company or Nukk Picolo, material breach of the Tiltan Purchase Agreement, and cessation of business operations for a continuous period of twenty (20) days. Upon an Event of Default, the Tiltan Seller may declare all amounts due and payable and exercise remedies under the Tiltan Note and the Pledge Agreement (as defined below).
As security for the Company’s payment obligations under the Tiltan Note and the Tiltan Purchase Agreement, Nukk Picolo entered into a pledge agreement (the “Pledge Agreement”) with the Tiltan Seller, pursuant to which Nukk Picolo granted the Tiltan Seller a first-priority security interest in all 100 shares of Tiltan acquired in the Tiltan Acquisition. The security interest shall be registered with the Israeli Registrar of Companies. Upon full payment of all amounts due under the Tiltan Note and the Tiltan Purchase Agreement, the pledge shall be released.
Special Meeting of Stockholders
On December 16, 2025, the Company held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, the Company’s stockholders approved (i) the terms of the Purchase Agreement, (ii) the issuance of shares of Common Stock upon exercise of certain outstanding warrants, (iii) the issuance of the shares of Common Stock in connection with the ELOC Purchase Agreement (as defined below) and (iv) the issuance of shares of Common Stock upon conversion of the Company’s outstanding Series A Preferred Stock.
Appointment of Chief Financial Officer
On December 8, 2025, the Board appointed Morel Levi as the Chief Financial Officer of the Company, effective as of December 8, 2025. Mr. Levi also serves as the Chief Financial Officer of Nukk Picolo and has entered into an employment agreement with Nukk Picolo. Mr. Levi receives a salary of $7,500 per month for serving as the Company’s Chief Financial Officer.
Initial Public Offering of Indirect Subsidiary
On November 28, 2025, SC II Acquisition Corp. (“SC II”), a newly formed special purpose acquisition company and indirect subsidiary of the Company, consummated its initial public offering of 17,250,000 units (the “SC II Units”) at a price of $10.00 per SC II Unit, generating gross proceeds to SC II of $172,500,000. SC Capital II Sponsor LLC, a Delaware limited liability company and indirect subsidiary of the Company (“SC II Sponsor”), in which the Company holds a majority interest, is the sponsor of SC II and acquired 255,000 additional SC II Units (the “Sponsor Units”) at a price of $10.00 per Sponsor Unit in connection with the consummation of SC II’s initial public offering.
The proceeds of the offering by SC II were placed in a trust account to be used for the purpose of completing a business combination in accordance with SC II’s amended and restated memorandum and articles of association. We are the primary beneficiary of SC II as we (i) have the power, through our majority ownership and control of SC II Sponsor, to direct the activities that most significantly impact the SPAC’s economic performance, including identifying and negotiating a potential business combination, and (ii) have the obligation to absorb losses and the right to receive benefits that could potentially be significant to the SPAC.
Accordingly, SC II has been consolidated in T3’s consolidated financial statements as of December 31, 2025.
Annual Meeting of Stockholders
On November 6, 2025, the Company held its 2025 annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, the Company’s stockholders approved (i) the election of Menachem Shalom, David Rokach, Tomer Nagar, Aviva Volodarsky and Reuven Yeganeh as directors, (ii) the ratification of the appointment of Somekh Chaikin, a member firm of KPMG International, as the Company’s independent external auditors for the year ending December 31, 2025, and (iii) the adoption of the Company’s 2025 Equity Incentive Plan and the authorization of 3,950,000 shares of Common Stock for issuance under the Company’s 2025 Equity Incentive Plan.
Litigation
On March 3, 2026, we obtained a copy of a summons and complaint filed in the Supreme Court of the State of New York dated February 24, 2026 by Kingswood Capital Partners, LLC against Star 26 Capital, Inc., Nukkleus, Inc. and the Company. The complaintalleges that a success fee is due for an earned investment banking success fee arising from a transaction. The Company denies all the allegations and intends to vigorously defend such action, which it believes is without merit.
Results of Operations
The following discussion and analysis is based upon, and should be read in conjunction with, our audited consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report. All references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are referring to the twelve-month period ended December 31, 2025 and to the twelve-month period ended December 31, 2024. This section of this Annual Report on Form 10-K generally discusses year-to-year comparisons between such periods. On February 14, 2025, the Board of Directors of the Company approved a change in the Company's fiscal year end from September 30 to December 31, effective for the fiscal year beginning January 1, 2024. This change resulted in a transition period from October 1, 2024 to December 31, 2024, for which the Company filed a transition report on Form 10-K with the Securities and Exchange Commission covering these three months. As a result, (a) the Form 10-K for the year ended September 30, 2024 filed with the SEC on February 10, 2025 (as amended on Form 10-K/A filed March 31, 2025) contains the audited financial statements for the year ended September 30, 2024 and (b) the Form 10-KT/ filed May 8, 2025(as amended on Form 10-KT/A filed July 9, 2025) contains the audited financial statements as of December 31, 2024 and the year ended September 30, 2024.
Accordingly, the discussion below regarding the financial information of the twelve-month period ended December 31, 2024 is based on unaudited financial statements and is being provided for comparative purposes only.
All numbers below are in the thousands except share and per share data.
Year Ended December 31, 2025 compared to the Year Ended December 31, 2024
Revenue
We had no revenues from operations during the twelve months ended December 31, 2025 and 2024, due to the transformation of the Company to a strategic acquirer and operator of aerospace and defense businesses. During the third quarter of 2025, we discontinued operations of our former subsidiary DRFQ.
Operating Expenses
Total operating expenses for the year ended December 31, 2025 was $32,600 as compared to $8,827 for the year ended December 31, 2024, an increase of approximately 269%. Operating expenses are comprised of professional fees, compensation and related benefits, other general and administrative expenses and impairmentloss. Professional fees increased from $6,373 for the year ended December 31, 2024 to $7,803 for the year ended December 31, 2025. Compensation and related benefits increased from $1,279 for the year ended December 31, 2024 to $19,145 for the year ended December 31, 2025, primarily as a result of $18,825 of share-based compensation for the year ended December 31, 2025. Other general and administrative expenses increased from $785 for the year ended December 31, 2024 to $1,308 for the year ended December 31, 2025. The increase in the other general and administrative expenses was primarily a result of increases in rent and office maintenance as well as travel expenses of our CEO and other critical members of our team in efforts to grow our business. The impairmentloss for the year ended December 31, 2024 was $391 as compared to $4,344 for the year ended December 31, 2025, which was solely attributable to the impairment recognized on the digital assets we acquired during the year ended December 31, 2025.
Net Income
Total net income was $78,631 for the year ended December 31, 2025 as compared to the total net loss of $160,378 for the year ended December 31, 2024. The net income from continuing operations for the year ended December 31, 2025 was $76,601 as compared to a net loss of $165,200 for the year ended December 31, 2024. The net gain from discontinued operations was $2,030 for the year ended December 31, 2025 as compared to a net gain of $4,821 for the year ended December 31, 2024.
Net cash
Net cash used in operating activities for the year ended December 31, 2025 was $6,147 as compared to $3,421 for the year ended December 31, 2024. Net cash used in operating activities for discontinued activities was $51 for the year ended December 31, 2025 as compared to 4,822 for the year ended December 31, 2024.
Net cash used in investing activities was $933 for the year ended December 31, 2024 as compared to $178,867 for the year ended December 31, 2025.
Net cash provided by financing activities was $11,307 for the year ended December 31, 2024 as compared to $181,985 for the year ended December 31, 2025.
Liquidity and Capital Resources
As of December 31, 2025, we had $13,555 of current assets, including $3,897 of cash and cash equivalents. Based on management’s current expectations, we anticipate that we will need approximately $6,000,000 for the next 12 months of operations. We believe that we will have sufficient capital to fund our ongoing operations given our ability to deliver purchase notices under our current ELOC facility after the registration statement is declared effective and we obtain stockholder approval of the issuances thereunder.
The Company recorded negative working capital of approximately $30 million (which includes $24.5 million of stock purchase warrant liabilities which will not require cash to extinquish) and stockholders’ deficit of $15.6 million as of December 31, 2025; a net operating loss of $32.6 million and net cash used in operations of $6.2 million for the year ended December 31, 2025. Absent any other action, the Company will require additional liquidity to continue its operations for the next 12 months.
After evaluating these conditions, management concluded that its plans, taken in aggregate, alleviate substantial doubt. Those plans include: (i) cancellation of a previously contemplated $16 million intercompany note obligation arising from the acquisition of Star 26, which has been mutually agreed to be of no force or effect; (ii) the Company's existing unrestricted cash balance of approximately $6.0 million, sufficient to fund projected operating expenses of its portfolio companies through the look-forward period; (iii) an active Equity Line of Credit ("ELOC") with Esousa Holdings, LLC — legally binding, SEC-registered, and shareholder-approved — providing drawdown capacity, which exceeds the Company's projected annual operating cash needs; (iv) the Company's majority-owned subsidiaries, including Rimon Ltd. and Nimbus Robotics, which are cash-positive and require no capital support from the Company; (v) management's ongoing efforts to assist subsidiaries in securing or expanding bank credit facilities; and (vi) the option to satisfy certain obligations through issuance of equity in lieu of cash.
Management has determined that its plans are probable of being effectively implemented and probable of mitigating the conditions described above, enabling continuation of the Company’s operations for the foreseeable future. In the event management is incorrect in its determination and current and anticipated future sources of liquidity are insufficient to fund our future business activities, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders.
Off-Balance Sheet Arrangements
We had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Critical Accounting Estimates
Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, operating results, and cash flows will be affected.
See Note 2. Summary of Significant Accounting Policies of the Notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and significant estimates and assumptions and their effects on our financial statements. Below are the significant estimates and assumptions that we consider critical because they involve a significant amount of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.
Derivative financial instruments
The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging (“ASC 815”). Changes in the fair value of derivative instruments are recognized in the consolidated statement of operations. The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risk.
The Company evaluates all of its financial instruments, including notes payable, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company applies significant judgment to identify and evaluate complex terms and conditions in its contracts and agreements to determine whether embedded derivatives exist. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract on the Company’s balance sheet. The Company identified embedded derivatives primarily related to conversion features included in certain financial instruments. These features were evaluated in accordance with ASC 815 and, where required, were bifurcated from the host contract and accounted for as derivative liabilities at fair value.
An evaluation of specifically identified conditions is made to determine whether the fair value of the derivative issued is required to be classified as equity or as a derivative liability. Changes in the estimated fair value of the liability-classified derivative financial instruments are recognized as a non-cash gain or loss on the accompanying consolidated statements of operations and comprehensive loss.
Stock purchase warrants
The Company accounts for stock purchase warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing liabilities from equity (“ASC 480”), and ASC 815. The assessment considers whether the stock purchase warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the stock purchase warrants meet all of the requirements for equity classification under ASC 815, including whether the stock purchase warrants are indexed to the Company’s own common shares and whether the holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of issuance, modification, and as of each subsequent quarterly period end date while the stock purchase warrants are outstanding.
For issued or modified stock purchase warrants that meet all of the criteria for equity classification, the stock purchase warrants are required to be recorded as a component of additional paid-in capital at the time of issuance.
For issued or modified stock purchase warrants that do not meet all the criteria for equity classification, the stock purchase warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the liability classified stock purchase warrants are recognized as a non-cash gain or loss on the accompanying consolidated statements of operations and comprehensive loss.
The Company assesses the classification of its common stock purchase warrants at each reporting date to determine whether a change in classification between equity and liability is required. For modified stock purchase warrants that result in a change of classification from equity to liability, a liability is recognized equal to the fair value on the date of modification, additional paid-in capital is adjusted by the fair value of the warrant on the date of issuance.
Extinguishment and Modification of Debt and Related Instruments
The Company accounts for the extinguishment of debt in accordance with ASC 470, Debt. An extinguishment of debt occurs when the Company is legally released from being the primary obligor under the liability, including through repayment, settlement, or a modification of terms that is considered substantial.
Upon extinguishment, the Company derecognizes the carrying amount of the debt and recognizes a gain or loss in the consolidated statement of operations for the difference between the reacquisition price and the net carrying amount of the extinguished debt.
The Company evaluates modifications of debt instruments to determine whether such modifications should be accounted for as a modification or an extinguishment. If the terms of the modified debt are substantially different from the original terms, including based on a quantitative assessment, the transaction is accounted for as an extinguishment of the original debt and the issuance of new debt.
In transactions where debt is settled through the issuance of equity instruments, warrants, or other derivative instruments, the Company evaluates whether such transactions represent an extinguishment of debt. The fair value of the instruments issued is used to determine the reacquisition price, and any resulting gain or loss is recognized in the consolidated statement of operations.
Stock-based compensation
The Company measures and recognizes the compensation expense for all equity-based payments to employees and nonemployees based on their estimated fair values in accordance with ASC 718, “Compensation- Stock Compensation”. Share-based payments including grants of stock options are recognized in the statement of comprehensive loss as a compensation expense based on the fair value of the award at the date of grant. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model. The Company has expensed compensation costs, net of forfeitures as they occur, applying the accelerated vesting method, over the requisite service period or over the implicit service period when a performance condition affects the vesting, and it is considered probable that the performance condition will be achieved.
Recently Issued Accounting Pronouncements
For information about recently issued accounting standards, refer to Note 2 to our Consolidated Financial Statements appearing elsewhere in this report.
