Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and the notes to those financial statements included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2025 (the "Form 10-K"). This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide material information relevant to an assessment of the Company's financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. This MD&A is designed to focus specifically on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management's assessment to have a material impact on future operations.

Overview

Ondas, Inc. (together with its subsidiaries, the "Company," "Ondas," "we," "us," or "our") is a defense, security, and critical infrastructure technology company organized around three business units: Ondas Autonomous Systems Inc. ("OAS"), Ondas Networks Inc. ("Ondas Networks"), and Ondas Capital Inc. ("Ondas Capital"). Through these business units, we develop and commercialize autonomous systems, private wireless networking technologies, and strategic investment and partnership initiatives that support the scaling and adoption of mission-critical solutions for governments and industrial customers.

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OAS focuses on autonomous and unmanned aerial and ground systems and integrated mission solutions for defense, homeland security, public safety, and other critical infrastructure and industrial end markets. Through its product company subsidiaries, OAS develops, commercializes, and delivers integrated capabilities across Counter-Unmanned Aerial System ("CUAS"), aerial Intelligence, Surveillance, and Reconnaissance ("ISR"), and Unmanned Ground Vehicle ("UGV") applications.

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Ondas Networks provides mission-critical private wireless connectivity solutions for Industrial Internet of Things (IOT) applications, enabling secure, reliable, wide-area communications and edge data transport in demanding critical infrastructure environments.

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Ondas Capital supports our growth strategy through strategic investments, partnerships, and capital formation initiatives intended to accelerate technology development, expand market access, and enhance long-term value creation across the Ondas platform.

We manage these business units as distinct operating platforms aligned to complementary end markets and customer requirements. Our approach is designed to combine advanced autonomy, secure communications, and integrated operating capabilities to help customers improve situational awareness, operational resilience, and safety and security outcomes in complex, regulated, and often contested environments.

We operate in two reportable segments, Ondas Networks and OAS. We organize our operating segments based primarily on the nature of the products, solutions and services offered. Operational results for Ondas Capital are not material for the year ended December 31, 2025 and have been included in the corporate results with Ondas Inc. For additional information regarding our reportable segments, refer to Note 15 in the accompanying Consolidated Financial Statements.

Results of Operations

Comparison of Results for the Year Ended December 31, 2025 and 2024

Revenue, net by reportable segment for the years ended December 31, 2025 and 2024 are as follows:

		Year Ended December 31,
(dollars in thousands)		2025				2024				$ Change				% Change
OAS
Product revenue		$	34,390			$	2,770			$	31,620				1,142	%
Service revenue			10,218				2,458				7,760				316	%
Development revenue			5,143				33				5,110				15,485	%
Total OAS revenues, net			49,751				5,261				44,490				846	%
Ondas Networks
Product revenue			193				26				167				642	%
Service revenue			23				34				(11	)			-32	%
Development revenue			764				1,872				(1,108	)			-59	%
Total Ondas Networks revenues, net			980				1,932				(952	)			-49	%
Total revenues, net		$	50,731			$	7,193			$	43,538				605	%
Total product revenue			34,583				2,796				31,787				1,137	%
Total service revenue			10,241				2,492				7,749				311	%
Total development revenue			5,907				1,905				4,002				210	%
Total revenue, net		$	50,731			$	7,193			$	43,538				605	%

Revenue, net increased $43.5 million to $50.7 million for the year ended December 31, 2025 from $7.2 million for the year ended December 31, 2024. Revenues in our OAS segment increased by $44.5 million, primarily due to $26.9 million in revenue generated by companies acquired during the year. OAS revenue also increased by $17.6 million attributable to Airobotics, of which approximately $16.4 million relates to product sales and approximately $1.2 million relates to service revenue from sales of our Optimus System™ and Iron Drone Raider™. These increases were offset by a decrease of $952 thousand in Ondas Networks revenue, primarily related to decreased development revenue.

Cost of goods sold increased to $30.6 million for the year ended December 31, 2025, from $6.9 million for the year ended December 31, 2024. The $23.7 million increase was primarily due to activity from acquisitions and an increase in revenues discussed above, in addition to increased labor and material costs.

Gross margin percentage increased to 40% for the year ended December 31, 2025, compared to 5% for the year ended December 31, 2024. The 35% increase in gross margin percentage is primarily due to the more favorable mix of revenue, with significant increases in revenue generated by product sales offsetting fixed service delivery costs at OAS.

General and administrative expenses ("G&A") increased $27.3 million, or 159%, to $44.5 million for the year ended December 31, 2025, from $17.2 million for the year ended December 31, 2024. This increase is primarily due to (i) an increase of $11.7 million in stock-based compensation for awards granted during the year; (ii) an increase of $6.5 million in human resource costs, including benefits from increased headcount as we build out our management team; (iii) an increase of $4.9 million in professional fees and consulting costs primarily related to legal, accounting and due diligence fees associated with the acquisitions completed during the year; and (iv) an increase of $4.7 million related to general and administrative expense attributable to companies acquired during the year. These increases were partially offset by a decrease of approximately $435 thousand primarily in rent and facilities charges.

Sales and marketing expenses ("S&M") increased $7.9 million, or 147%, to $13.2 million for the year ended December 31, 2025, from $5.3 million for the year ended December 31, 2024. This increase is primarily due to (i) an increase of $4.1 million in human resource costs, including benefits from increased headcount and an increase in taxable fringe benefit expense; (ii) an increase of $1.3 million in other S&M costs primarily related to increased marketing and advertising costs, use of third-party contractors and consultants, and increased attendance at trade shows and other marketing events; and (iii) an in increase of $2 million related to S&M attributable to companies acquired during the year. The remaining increase of $567 thousand is related to increased stock-based compensation for awards granted during the year and increased travel and entertainment costs.

Research and development expenses ("R&D") increased $8.4 million, or 67%, to $20.9 million for the year ended December 31, 2025, from $12.5 million for the year ended December 31, 2024, of which $3 million related to companies acquired during the year ended December 31, 2025. Other increases in R&D include, (i) an increase of $2.8 million in human resource costs, including benefits from increased headcount, and (ii) an increase of $1.8 million in other R&D costs primarily related to increased cloud-based software expenses, use of third-party consultants and allocation of general expenses to research and development, and a one-time settlement of all amounts due to a vendor under previous development and manufacturing agreements, which reduced other R&D costs for the year ended December 31, 2024. The remaining increase of $862 thousand is related to increased stock-based compensation for awards granted during the year and increased travel and entertainment costs.

Total other expense, net increased $71.1 million, or 2,093%, to $74.5 million for the year ended December 31, 2025, from $3.4 million for the year ended December 31, 2024. Total other expense, net increased primarily as a result of the net loss of $82.2 million related to the change in fair value of our warrant liability, an increase of approximately $2.9 million in interest expense, amortization of debt discount and debt issuance costs, and an increase in other expense of approximately $299 thousand from the change in fair value of government grant liability. This was offset by the increase of approximately $14.3 million in interest and dividend income and unrealized gain on our equity security investments from the cash raised from our equity offerings consummated in 2025.

The Company recorded income tax expense of $488 thousand for the year ended December 31, 2025, and an income tax provision of $0 for the year ended December 31, 2024. The 2025 income tax expense is attributable to earnings in foreign jurisdictions.

Net loss increased $95.4 million, or 251%, to $133.4 million for the year ended December 31, 2025, from $38 million for the year ended December 31, 2024. For the year ended December 31, 2025, $1.4 million of net loss was attributable to noncontrolling interests ("NCI"), related to the subsidiaries in which we acquired less than 100% ownership during 2025. These subsidiaries incurred operating losses due to early-stage operating performance. Net loss per share of common stock basic and diluted was $(0.62) and $(0.61) for the years ended December 31, 2025 and 2024, respectively.

Non-GAAP Measures

As required by the rules of the Securities and Exchange Commission ("SEC"), we provide a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures. These reconciliations are set forth in the tables below.

We believe that adjusted earnings before interest, taxes, depreciation, and amortization ("Adjusted EBITDA") is a useful supplemental measure for evaluating our operating performance and period to period trends because it eliminates the impact of items that primarily reflect our capital structure, tax position, non-cash accounting charges, acquisition-related transaction costs, and other items that management does not consider indicative of ongoing operating performance. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income (loss) and other measures prepared in accordance with GAAP. Adjusted EBITDA removes the effects of interest and financing-related items, depreciation and amortization, income taxes, stock-based compensation, acquisition-related expenses, and other non-operating gains and losses. Management believes that excluding these items enhances comparability across periods and facilitates analysis of underlying operating trends. Other companies may calculate similarly titled non-GAAP measures differently, and therefore our Adjusted EBITDA may not be comparable to measures used by other companies.

Cash Operating Expense is a non-GAAP financial measure that represents total operating expenses excluding depreciation, amortization of intangible assets, and stock-based compensation. The most directly comparable GAAP measure to Cash Operating Expense is total operating expenses. Management believes Cash Operating Expense provides useful supplemental information by isolating recurring, cash-based operating costs and facilitating meaningful period-to-period comparisons. Management uses this measure for internal cost management, budgeting, and liquidity planning, and to evaluate operating trends exclusive of non-cash accounting charges. Cash Operating Expense should be considered in addition to, and not as a substitute for, total operating expenses prepared in accordance with GAAP.

Management uses Adjusted EBITDA and Cash Operating Expense, together with GAAP results, in making operating and planning decisions and in evaluating the Company's ongoing performance.

		Three Months Ended December 31,								Twelve Months Ended December 31,
(dollars in thousands)		2025				2024				2025				2024
Reconciliation of Adjusted EBITDA
Net Loss		$	(101,013	)		$	(10,335	)		$	(133,380	)		$	(38,007	)
Depreciation			380				176				946				602
Amortization of intangible assets			2,604				1,059				5,808				4,220
Acquisition-related expenses (1)			3,603				-				4,310				-
Stock-based compensation			6,805				277				16,016				1,265
Provision for income taxes			181				-				488				-
Other (income) expense, net (2)			77,511				1,818				74,508				3,398
Adjusted EBITDA (non-GAAP)		$	(9,929	)		$	(7,005	)		$	(31,304	)		$	(28,522	)

(1)	Acquisition-related expenses include legal, accounting, and other due diligence costs incurred in connection with completed or pending acquisitions.

(2)

Other (income) expense, net includes interest and dividend income, unrealized gain and losses on investments, interest expense, foreign exchange gain and loss, the change in the fair value of government grant liabilities and warrant liability, and other income (expense), net included on the Company's Consolidated Statements of Operations.

		Three Months Ended December 31,								Twelve Months Ended December 31,
(dollars in thousands)		2025				2024				2025				2024
Reconciliation of Cash Operating Expenses
Total operating expenses		$	36,052			$	9,401			$	78,540			$	34,954
Depreciation (1)			(211	)			(157	)			(743	)			(524	)
Amortization of intangible assets			(2,604	)			(1,059	)			(5,808	)			(4,220	)
Acquisition-related expenses (2)			(3,603	)			-				(4,310	)			-
Stock-based compensation (1)			(6,007	)			(258	)			(14,658	)			(1,191	)
Cash Operating Expense (non-GAAP)		$	23,627			$	7,927			$	53,021			$	29,019

(1)	Excludes depreciation and stock-based compensation amounts included in Costs of goods sold on the Company's Consolidated Statements of Operations.

(2)	Acquisition-related expenses include legal, accounting, and other due diligence costs incurred in connection with completed or pending acquisitions.

Summary of (Uses) and Sources of Cash

		Year Ended December 31,
(dollars in thousands)		2025				2024
Net cash used in operating activities		$	(38,746	)		$	(33,469	)
Net cash used in investing activities			(260,132	)			(1,733	)
Net cash provided by financing activities			862,653				50,179
Increase in cash, cash equivalents, and restricted cash			563,775				14,977
Effect of exchange rate on cash			585				-
Cash, cash equivalents, and restricted cash, beginning of period			29,999				15,022
Cash, cash equivalents, and restricted cash, end of period		$	594,359			$	29,999

The principal use of cash in operating activities for the year ended December 31, 2025, was to fund the Company's current expenses primarily related to operating activities necessary to allow us to service and support customers for the year ended December 31, 2025.

The increase in cash flows used in operating activities of $5.3 million primarily relates to an increase in net loss of $95.4 million, of which approximately $96.6 million related to non-cash charges and credits, which primarily includes investment gains, change in fair value of warrant liability, amortization of debt discount and issuance costs, and stock-based compensation, offset by changes in operating assets and liabilities resulting in a cash outflow of approximately $6.5 million for the year ended December 31, 2025.

The increase in cash flows used in investing activities of $258.4 million primarily relates to cash paid, net of cash acquired, for acquisitions of $206.8 million, purchases of long-term equity investments of $35.6 million, and purchases of short-term investments of $15.4 million.

The increase in cash provided by financing activities of $812.5 million primarily relates to the net proceeds of approximately $829.5 million received from equity offerings consummated in 2025, during the year ended December 31, 2025, compared to the net proceeds received from the sale of Common Stock in the Company of approximately $7.3 million during the year ended December 31, 2024, combined with proceeds of approximately $1.2 million from the exercise of warrants in OAS, the increase in proceeds from the exercise of stock options and warrants of approximately $30.8 million during the year ended December 31, 2025. These increases were partially offset by the decrease in net proceeds of $37.3 million from the issuance of notes payable and convertible notes payable and a decrease in net proceeds of $4.4 million from the sale of preferred stock in Ondas Networks during the year ended December 31, 2024.

Liquidity and Capital Resources

We have incurred losses since inception and have funded our operations primarily through debt and the sale of capital stock. As of December 31, 2025, we had an accumulated deficit of $368.4 million. On December 31, 2025, we had net long-term borrowings outstanding of approximately $3.8 million and short-term borrowings outstanding of approximately $9.4 million, including accrued interest of $721 thousand. On December 31, 2025, we had cash, cash equivalents, and restricted cash of approximately $594.4 million and working capital of $544 million. We had $38.7 million of net cash flows used in operations for the year ended December 31, 2025.

In 2025, we raised $829.5 million of net proceeds from the sale of common stock and warrants, $30.8 million from the exercise of stock options and warrants, $1.2 million from the exercise of warrants in OAS, and $923 thousand from issuance of convertible notes in Ondas Networks (collectively referred to as the "2025 Offerings").

In January 2026, we raised approximately $1 billion in gross proceeds from the sale of common stock and warrants in the Company.

We expect to fund our operations for the next twelve months from the filing date of this Annual Report on Form 10-K from the cash on hand as of December 31, 2025, proceeds from the 2026 financing activity discussed above, gross profits generated from revenue growth, potential prepayments from customers for purchase orders, potential proceeds from warrants issued and outstanding, and additional funds that we may seek through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources.

Our future capital requirements will depend upon many factors, including progress with developing, manufacturing and marketing our technologies, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, our ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes and overall economic conditions in our target markets. Our ability to generate revenue and achieve profitability requires us to successfully market and secure purchase orders for our products and services from customers currently identified in our sales pipeline as well as new customers. We also will be required to efficiently manufacture and deliver equipment on those purchase orders. These activities, including our planned research and development efforts, will require significant uses of working capital. There can be no assurance that we will generate revenue and cash as expected in our current business plan. We may seek additional funds through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. We do not know whether additional financing will be available on commercially acceptable terms or at all when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial conditions, or results of operations.

Off-Balance Sheet Arrangements

As of December 31, 2025, we had no off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if (1) the estimate requires assumptions to be made that were uncertain at the time the estimate was made, and (2) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition. We base our estimates and judgments on our experience, our current knowledge, our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The accounting estimates discussed below represent those estimates that management believes are critical to an understanding of our financial condition and results of operations.

Acquired intangible assets. During 2025, we completed multiple acquisitions that were accounted for as business combinations under ASC 805. Business combination accounting requires significant judgment in estimating the fair value of assets acquired, liabilities assumed, noncontrolling interests, redeemable noncontrolling interests, and goodwill as of the acquisition date. Acquired intangible assets, such as developed technology, customer relationships, trade names, and non-compete agreements, which are valued using income-based valuation techniques, including discounted cash flow, relief-from-royalty, and multi-period excess earnings methods, or cost-based techniques. These techniques require assumptions regarding future revenues, customer attrition, royalty rates, useful lives, and discount rates. Because the fair value measurements recorded in connection with these acquisitions resulted in significant balances of goodwill and identifiable intangible assets, and affect our future amortization expense and potential impairment assessments, relatively small changes in key assumptions could materially impact our consolidated financial position and results of operations.

Deferred tax assets and liabilities may arise from differences between the assigned fair values of acquired assets and their tax bases. Estimation related to these assets and liabilities requires judgment regarding applicable tax laws, tax rates, and the realizability of deferred tax assets. Noncontrolling interests are measured at fair value at the acquisition date using valuation techniques consistent with those applied to the acquired business. Redeemable noncontrolling interests are classified outside of permanent equity and subsequently adjusted to redemption value, requiring ongoing judgment related to accretion amounts and income or loss attribution. Changes in underlying assumptions could result in material changes to the recorded purchase price allocation, goodwill, or future amortization expense.

Impairment of long-lived assets, including goodwill. Goodwill is not amortized but is tested for impairment at least annually and whenever events or changes in circumstances indicate that impairment may exist. As of December 31, 2025, goodwill represented a significant portion of our total assets. Our goodwill impairment analysis requires judgment in identifying reporting units and assessing qualitative and quantitative impairment indicators.

The carrying values of property and equipment and other finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset group's carrying value for recoverability. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held and used. Assessments also consider changes in asset utilization, including the temporary idling of capacity and the expected timing for placing this capacity back into production. If the carrying value of the assets is not recoverable, then a loss is recorded for the difference between the assets' fair value and respective carrying value. The fair value of the assets is determined using an "income approach" based upon a forecast of all the expected discounted future net cash flows associated with the subject assets. Some of the more significant estimates and assumptions include: market size and growth, market share, projected selling prices, manufacturing cost and discount rate. Our estimates are based upon historical experience, commercial relationships, market conditions and available external information about future trends.

Valuation of Government Grant Liability. We receive research and development grants from the Israel Innovation Authority ("IIA"). These grants are royalty-bearing and are recognized as a liability rather than income. The government grant liability is initially and subsequently measured at fair value using a discounted cash flow model. Significant assumptions include the financial statement classification, projected future revenues from products developed with grant funding, royalty rates, timing of payments, and discount rates. The liability is remeasured each reporting period, with changes in fair value recognized in earnings. Because the valuation depends on commercialization success and future sales volumes, changes in assumptions may materially affect our results of operations.

Valuation of Warrant Liabilities. Certain warrants issued in connection with equity and debt financings are classified as liabilities and measured at fair value at each reporting date. Fair value is determined using either option-pricing models, including Monte Carlo simulations and Black-Scholes-Merton. These models require assumptions regarding common stock volatility, risk-free interest rates, expected term, and stock price. Due to the sensitivity of these assumptions, changes in market conditions or estimates can result in significant volatility in earnings.

Fair Value of Investments. We hold investments, including investments without readily determinable fair values. Investments with observable market prices are measured using quoted prices, while other investments are valued using models that incorporate unobservable inputs. These valuation techniques require judgment regarding expected cash flows, volatility, discount rates, and the likelihood of liquidity events. Changes in assumptions or market conditions could result in material changes to the carrying value of our investments and related unrealized gains or losses.

Revenue Recognition. We enter into complex customer arrangements that may include development services, system integration, deployment, and ongoing support. Revenue recognition requires judgment in identifying distinct performance obligations, determining whether revenue is recognized over time or at a point in time, and measuring progress toward completion. For development and long-term service arrangements, revenue is generally recognized over time using cost-to-cost or milestone-based methods. These methods require estimates of total expected costs, project timelines, and the achievement of contractual milestones. Revisions to these estimates may result in changes to the amount or timing of revenue recognized.

Stock-Based Compensation Expense. We calculate stock-based compensation expense for option awards ("Stock-based Award(s)") based on the estimated grant/issue date fair value using the Black-Scholes-Merton option pricing model ("Black-Scholes Model") and recognize the expense on a straight-line basis over the vesting period. We account for forfeitures as they occur. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period in determining the fair value of Stock-based Awards. The expected term is based on the "simplified method." Under this method, the term is estimated using the weighted average of the service vesting period and contractual term of the option award. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar complexities and industry and calculates historical volatility based on the volatilities of these companies. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.

We recognize restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated with shares of Common Stock issued or to be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange for the services to be provided.

Income Taxes. As part of the process of preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense.

On July 4, 2025, an act to provide for reconciliation to title II of H. Con. Res. 14 (known commonly as the One Big Beautiful Bill Act ("OBBBA")) was enacted into law. The OBBBA includes eliminating the requirement to capitalize U.S. R&D, permanent extension of certain provisions of the Tax Cuts & Jobs Act of 2017 and other corporate tax impacts. The Company has considered the impact on the Consolidated Financial Statements and concluded it is immaterial. Refer to Note 16 in the accompanying Consolidated Financial Statements for discussion related to Tax Reform.

The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.

Complex Derivative Financial Instruments. From time to time, we issue convertible debt, convertible preferred stock, common stock purchase warrants, and other freestanding financial instruments which may be accounted for as liabilities and recorded at fair value each reporting period. Due to the complexity of certain agreements, we may use an outside expert to assist in measuring the fair value of these liabilities. The valuation techniques may require judgment regarding estimates about future financings, volatility, and holder behavior. These assumptions may involve complex judgments about future events, which are open to interpretation with inherent uncertainty. In addition, significant changes to our assumptions could significantly impact these fair value estimates and the resulting changes in fair value recognized within earnings in a given period.

Recent Accounting Pronouncements and SEC Rules

Refer to Note 2 to our Consolidated Financial Statements included elsewhere in this Form 10-K for recently adopted accounting pronouncements and SEC rules and recently issued accounting pronouncements not yet adopted as of the date of this report.