NOTE 4 – ACQUISITION

On June 26, 2026, Quantum Drones entered into (i) the APA with Arcade Technology to acquire certain operating assets used in Arcade Technology’s precision metal stamping, tool design, and manufacturing business, and (ii) the related PSA with Arcade Realty to acquire the real property located at 38 Union Avenue, Bridgeport, Connecticut, an approximately 53,000-square-foot industrial facility. The closings under both the APA and the PSA occurred simultaneously on July 15, 2026. The Arcade Acquisition provides the operational foundation for the Company’s domestic autonomous defense manufacturing capability.

The Arcade Acquisition was accounted for as a business combination under ASC 805, Business Combinations, using the acquisition method, with Quantum Drones as the acquirer and July 15, 2026 as the acquisition date. Consideration transferred was $4,180,000, paid in cash, consisting of $2,300,000 for the real property and $1,880,000 for the operating assets and inventory. Of the consideration, $250,000 was placed in escrow at closing for environmental matters at the acquired property. In addition to the consideration, the Company paid acquisition-related costs and customary property tax and utility prorations at closing, for total cash paid of $4,238,156. No liabilities were assumed.

The identifiable assets acquired were recognized at their estimated Acquisition Date fair values in accordance with ASC 805-20-30-1. The following table summarizes the preliminary allocation of the consideration transferred:

Buildings and machinery and equipment are depreciated on a straight-line basis over estimated useful lives of 39 years and seven years, respectively. Land is not depreciated.

The allocation of the consideration transferred is preliminary. As of the date of these financial statements, the Company has not finalized its valuation of the acquired inventory, land, buildings, and machinery and equipment, including the related estimated useful lives, or its evaluation of whether any identifiable intangible assets, such as customer relationships, should be recognized separately from goodwill. Accordingly, the amounts allocated to these assets and to goodwill are provisional and may change as the Company obtains additional information about facts and circumstances that existed as of the Acquisition Date. In accordance with ASC 805-10-25-13 through 25-15, the Company expects to finalize the allocation as soon as practicable, and no later than one year from the Acquisition Date. Any measurement-period adjustments will be recognized in the reporting period in which they are determined. Their effect on earnings, such as changes in depreciation or amortization, will be calculated as if the accounting had been completed at the Acquisition Date (ASC 805-10-25-17) and disclosed in accordance with ASC 805-10-50-6.

Goodwill of $534,000 represents the excess of the consideration transferred over the fair value of the identifiable assets acquired. It is attributable primarily to the assembled workforce and to the expected benefits of establishing the Company’s domestic autonomous defense manufacturing capability, neither of which qualifies for separate recognition as an intangible asset. Goodwill has been assigned to the Quantum Drones segment. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is not amortized and will be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that it may be impaired. Because the Arcade Acquisition was structured as an asset purchase, goodwill is expected to be deductible for income tax purposes over 15 years.

In accordance with ASC 805-10-25-23, acquisition-related costs of $58,156, consisting of legal fees, taxes, title insurance and recording fees, were expensed as incurred. They are included in general and administrative expenses in the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2026.

On July 24, 2026, the parties amended the APA and the PSA. Under the amendment, $125,000 of the escrow was returned to the Company, $95,000 was released to the sellers, $30,000 remains in escrow, and the Company assumed all environmental risk related to the property. The amendment resulted from negotiations after the closing, not from facts and circumstances that existed as of the Acquisition Date. Accordingly, the $125,000 returned to the Company was not accounted for as an adjustment to the consideration transferred or to the amounts allocated to the assets acquired (ASC 805-10-25-13 and ASC 805-10-30-2) and was recognized in other income for the three months ended September 30, 2026.

Since the Acquisition Date, the acquired business contributed revenue of $966,833 and a net loss of $34,855 to the Company’s results for the three and nine months ended September 30, 2026.

The following unaudited supplemental pro forma information presents the combined results of the Company and Arcade as if the Arcade Acquisition had occurred on January 1, 2025. The pro forma information reflects depreciation of the acquired property, plant and equipment based on their Acquisition Date fair values, the exclusion of interest on seller debt that was not assumed, and acquisition-related costs of $58,156, recognized as if incurred on January 1, 2025 and therefore excluded from the 2026 periods. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results that would have been achieved had the Arcade Acquisition occurred on January 1, 2025, or of future results.