T3 Defense (DFNS) Risk Analysis

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 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 severe erosion of value for existing common stockholders.

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.

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.

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.

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.

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 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.