What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-28 compared with 2024-04-01 · 126 added, 76 removed, 148 unchanged (58% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

On December 21, 2023, the Company entered into the Merger Agreement which is summarized in Note 13 — Reverse Recapitalization, of the audited consolidated financial statements included elsewhere in this report.

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below.

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Recent Developments

On June 27, 2023, BYTS entered into the Merger Agreement, by and among BYTS, Merger Sub, and Airship AI.

The Merger Agreement was amended on September 22, 2023.

On December 21, 2023, the Merger with BYTS closed.

Airship AI Holdings, Inc.

became the accounting acquiror and the combined entity became the successor SEC registrant under the ticker symbol “AISP”.

On June 3, 2024, we permanently reduced the exercise price of our outstanding public warrants and private warrants, previously exercisable at $11.50 per share, to an exercise price of $7.80 per share.

On November 20, 2024, we further reduced the exercise price of our outstanding public warrants and private warrants to an exercise price of $4.50 per share.

The purpose of this reduced exercise price was to potentially raise proceeds received from the exercise of such warrants, if any, for working capital and general corporate purposes.

On June 22, 2024, we entered into an extension agreement with Platinum Capital Partner, Inc.

to extend the maturity date of a $2,000,000 senior secured convertible promissory note to June 22, 2025.

In consideration for entering into the extension agreement, we issued to Platinum 232,360 shares of common stock in payment of all interest and extension fees through June 22, 2025.

As of December 31, 2024, the $2,000,000 principal balance of the senior secured convertible note was converted to equity.

During the year ended December 31, 2024, we issued 879,051 shares of common stock related to the conversion.

On September 3, 2024, we closed an offering of $8 million consisting of 2,882,883 shares of common stock and 2,882,883 common warrants to purchase up to 2,882,883 shares of common stock at a combined offering price of $2.775 per share and common stock warrant.

The Company received net proceeds of approximately $7.3 million, after deducting the estimated offering expenses payable by us, including the placement agent fees.

We intend to use the net proceeds from the offering for working capital and general corporate purposes, including cost of goods sold purchases, personnel and product development.

On September 27, 2024, the Company entered into a master loan agreement with Mr.

Huang, whereby he may provide additional funding of up to $1,500,000 under certain terms and conditions.

The agreement provides for interest of 6%.

We agreed to pay interest for the 2024 advances of $11,913 and issued warrants to purchase up to 220,000 shares of common stock.

The warrants have an exercise price of $2.36 per share, are exercisable immediately upon issuance and will expire in five years following the date of issuance.

There are no outstanding advances under this master loan agreement as of December 31, 2024.

On December 24, 2024, we entered into a warrant exercise inducement agreement with a holder of existing common stock warrants exercisable for an aggregate of 2,882,883 shares of common stock at the existing exercise price of $2.65 per share (collectively, the “Existing Warrants”), in exchange for the issuance of new common stock warrants to purchase 2,162,162 shares of common stock at an exercise price per share of $4.50 (collectively, the “Inducement Warrants”).

The investor agreed to exercise the existing 2,882,883 warrants for cash resulting in aggregate gross proceeds of approximately $7.6 million with approximately $7.4 million in net proceeds after deducting advisory fees.

The Inducement Warrants are immediately exercisable and will be exercisable for five years from the date of issuance.

As of September 30, 2024, we determined the First Operating Performance Milestone of the earnout shares was achieved and 1,250,000 shares of our common stock were issued to applicable personnel on January 7, 2025.

Key Performance Indicators

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Near-term impacts due to merger and acquisition activity .

If Airship AI merges with or acquires another company following the Business Combination, it is reasonably expected that there will be increased operating expenses and costs associated with the merger that could negatively impact operating profits in the future periods immediately following the M&A event.

If Airship AI merges with or acquires another company, it is reasonably expected that there will be increased operating expenses and costs associated with the merger that could negatively impact operating profits in the future periods immediately following the M&A event.

The extent and longevity of those impacts is not possible to quantify.

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The Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders.

Management monitors the revenue and expense components of the various products and services the Company offers, but operations are managed and financial performance is evaluated on a corporation-wide basis in comparison to a business plan which is developed each year.

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance.

The Chief Executive Officer, Chief Financial Officer and President are the Company’s CODM.

The CODM monitors the revenue and expense components of the various products and services we offer, but operations are managed and financial performance is evaluated on a corporation-wide basis in comparison to a business plan which is developed each year.

Accordingly, all operations are considered by management to be one operating segment and one reportable segment as contained in the Consolidated Statements of Operations and Comprehensive Loss to the consolidated financial statements.

The CODM uses consolidated net income (loss) as its required measure of segment profit/loss, as such measure is determined in accordance with the measurement principles most consistent with the consolidated financial statements.

Results of Operations

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(dollars in thousands)

Year Ended December 31,

Years Ended December 31,

Cost of net revenues

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Other income (expense):

Gain from change in fair value of warrants

Gain from change in fair value of earnout liability

(Loss) gain from change in fair value of earnout liability

(Loss) gain from change in fair value of warrant liability

Loss from change in fair value of convertible debt

Interest income

Interest expense

Other expense

Other income- PPP loan forgiveness

Other income- Employee retention tax credit

Total other income, net

Income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net Revenues — Revenues for the year ended December 31, 2023 decreased $2,249,000 to $12,300,000 as compared to $14,549,000 for the year ended December 31, 2022, as a result of lower product sales.

We have also recently received purchase orders from various government agency customers totaling over $13 million from which we expect to start receiving cash in the first quarter of 2024.

As a result of supply chain issues that existed at December 31, 2021, we were unable to fulfill many orders and had a backlog of new orders of $6.8 million that shipped during the year ended December 31, 2022.

Loss on note conversion

Interest expense, net

Other income (expense)

Total other (expense) income, net

(Loss) income before income taxes

Provision for income taxes

Net (loss) income

Net Revenues — Net revenues for the year ended December 31, 2024 increased $10,750,000 to $23,050,000 as compared to $12,300,000 for the year ended December 31, 2023, as a result of increased product sales.

We received purchase orders from various federal government agency customers totaling over $16 million which we shipped in the year ended December 31, 2024.

Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support.

For the year ended December 31, 2024, cost of sales increased $5,987,000 to $12,523,000 as compared to $6,536,000 for the year ended December 31, 2023.

The increase was due to higher product costs and increased post contract support costs.

Research and Development Expenses — Research and development expenses for the year ended December 31, 2023 decreased $886,000 to $2,729,000 as compared to $3,615,000 for the year ended December 31, 2022.

The decrease was due to reduced personnel (17 personnel as compared to 18 personnel) and reduced funding of $694,000 of the AI expenses in Taiwan.

The increase was due to higher product sales and product mix with increased equipment purchases during the year ended December 31, 2024.

Research and Development Expenses — Research and development expenses for the year ended December 31, 2024 increased $76,000 to $2,805,000 as compared to $2,729,000 for the year ended December 31, 2023.

The increase was due to increased expenses for product development.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the year ended December 31, 2024 increased $1,552,000 to $11,227,000 as compared to $9,675,000 for the year ended December 31, 2023.

The increase was due to (i) increased stock based compensation of $2,305,000;

and offset by (iii) reduced other expenses of $260,000.

The stock based compensation increase includes $2,100,000 for warrants to purchase 1,344,951 shares of common stock issued to each of Victor Huang and Derek Xu.

Other Income — Other income for the year ended December 31, 2023 was $23,011,000 as compared to other income of $2,347,000 for the year ended December 31, 2022.

The increase was due to (i) increased insurance costs of $626,000;

(ii) increased professional fees of $944,000, primarily related to the merger and the Nasdaq listing;

(iii) increased other operating expenses of $1,471,000 including higher wages and other costs associated with the Nasdaq listing;

and offset by (iv) decreased stock based compensation of $1,489,000.

The stock based compensation during the year ended December 31, 2023 included warrants to purchase common stock issued on May 8, 2023 for 765,000 shares to each of the two founders valued at $2,136,000.

Other Expense — Other expense for the year ended December 31, 2024 was $53,960,000 as compared to other income of $23,011,000 for the year ended December 31, 2023.

Other expense for the year ended December 31, 2024 consisted of (i) loss from change in fair value of earnout liability of $18,171,000;

(ii) loss from change in fair value of warrant liability of $33,513,000;

(iii) loss from change in fair value of convertible debt of $142,000;

(iv) loss on note conversion of $1,145,000;

(v) interest expense of $1,003,000:

and offset by (vi) other income of $14,000.

The loss from change in fair value of various financial instruments was primarily the result of an increase in the stock price.

Other income for the year ended December 31, 2023 consisted of (i) gain from change in fair value of warrant liability of $1,341,000;

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and offset by (iii) unrealized loss for increase in fair value of convertible promissory note of $241,000 and (iv) noncash interest and other, net of $66,000.

Other income for the year ended December 31, 2022 related primarily to (i) gain on forgiveness of Paycheck Protection Program loan of $1,146,000 and (ii) $1,233,000 income from employee retention tax credit.

Net Income (Loss) — Net income for the year ended December 31, 2023 was $16,371,000 as compared to net loss of $487,000 for the year ended December 31, 2022.

The change was the result of $2.7 million lower gross profit in 2023 from decreased revenue and higher cost of revenue, higher operating expenses in 2023 of $1.2 million due mostly to increased stock based compensation offset by $20.6 million increase in other income as discussed in other income above.

The gain from change in fair value of various financial instruments was primarily the result of a decrease in the stock price from the merger date to December 31, 2023.

Net Loss — Net loss for the year ended December 31, 2024 was $57,465,000 as compared to a net income of $16,371,000 for the year ended December 31, 2023.

The net loss primarily related to noncash items of $55,766 ,000.

Noncash items included (i) depreciation of $2,000;

(ii) stock based compensation of $1,363,000;

(iii) net amortization of operating lease right of use asset of $223,000;

(iv) issuance of common stock for services of $199,000;

(v) noncash interest expense of $1,008,000;

(vi) loss from change in warrant liability of $33,513,000;

(vii) loss from change in earnout liability of $18,171,000;

(viii) loss from change in fair value of convertible note of $142,000;

and (ix) loss on note conversions of $1,145,000.

The net income for the year ended December 31, 2023 included noncash income of $19,627,000.

Net loss for the year ended December 31, 2022 included net noncash expenses of $50,000.

Liquidity and Capital Resources as of December 31, 2024 and 2023

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis.

Liquidity is our ability to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis.

Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

We formally evaluated our liquidity and cash position most recently in March 2024 when preparing our December 31, 2023 audited financial statements.

During this process we concluded, based upon existing assets and liabilities, our order backlog and projections, plus the ability to borrow up to $2.5 million in short term loans from our founder, that we would be able to operate at least for the next twelve months.

We have also recently received purchase orders from various government agency customers totaling over $13 million from which we expect to start receiving cash in the first quarter of 2024.

As of December 31, 2023, we had cash of approximately $3,124,000 and net capital deficit of approximately $6,174,000.

The net working capital deficit includes a couple of items that are expected to require limited future cash outlays including current portion of deferred revenue totaling $4,009,000 and convertible debt totaling $2,825,000 which we expect to be converted to equity.

As of December 31, 2023, we had an accumulated deficit of $16,582,000.

On December 21, 2023, the merger with BYTS closed from which we received $2.8 million in net proceeds.

Airship AI Holdings, Inc.

became the accounting acquiror.

We have incurred losses from operations in the past few years and had an accumulated deficit of $74.9 million as of December 31, 2024.

As disclosed in Note 1, in September 2024, we closed an $8 million public offering with approximately $7.3 million in net proceeds.

In December 2024, we received net proceeds of approximately $7.4 million from the exercise of warrants related to an inducement offer agreement.

We formally evaluated our liquidity and cash position in February 2025 when preparing the December 31, 2024 audited consolidated financial statements.

During this process, we analyzed our cash requirements and operations at least through February 2026 and determined that, based upon our current available cash and operations, we have no substantial doubt about our ability to continue as a going concern.

Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties.

Our actual results could vary as a result of our near and long-term future capital requirements that will depend on many factors.

Operating Activities

Net cash used in operating activities for the year ended December 31, 2024 was $6,504,000.

This amount was primarily related to (i) net loss of $57,465,000;

and (ii) net working capital reductions of $4,804,000 (including a $2,780,000 reduction in deferred revenues);

offset by (iii) noncash items of $55,766,000.

Noncash items included (iv) depreciation of $2,000;

(v) stock based compensation of $1,363,000;

(vi) net amortization of operating lease right of use asset of $223,000;

(vii) issuance of common stock for services of $199,000;

(viii) noncash interest expense of $1,008,000;

(ix) loss from change in warrant liability of $33,513,000;

(x) loss from change in earnout liability of $18,171,000;

(xi) loss from change in fair value of convertible note of $142,000;

and (xii) loss on note conversions of $1,145,000.

Net cash used in operating activities for the year ended December 31, 2023 was $3,291,000.

This amount was primarily related to (i) net income of $16,371,000;

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and (ix) working capital changes of $36,000.

Net cash used in operating activities for the year ended December 31, 2022 was $2,903,000.

This amount was primarily related to (i) a net loss of $487,000;

(ii) working capital changes of $2,365,000;

(iii) gain on forgiveness of note payable — PPP of $1,146,000;

offset by (iv) depreciation of $15,000;

(v) stock based compensation of $546,000;

(vi) amortization of operating lease right of use asset of $517,000;

and (vii) other of $17,000.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024 was $14,785,000 and consisted of (i) net proceeds from offering of $7,290,000;

(ii) net proceeds from exercise of warrants of $7,705,000;

and (iii) proceeds from stock option exercises of $240,000;

offset by repayment of advances by founders of $450,000.

Net cash provided by financing activities for the year ended December 31, 2023 was $6,120,000 and consisted of (i) issuance of a senior secured convertible promissory note of $2,585,000;

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and offset by (iv) the payoff of small business loan and line of credit of $425,000.

Net cash provided by financing activities for the year ended December 31, 2022 was $1,866,000 and consisted of (i) $565,000 from a small business loan and a line of credit;

(ii) proceeds from notes receivable — related parties of $842,000;

(iii) the founders advances of $1,900,000 and repayment of advances to the founders of $1,300,000;

and (iv) repayment of small business loan and line of credit of $140,000.

Our contractual cash obligations as of December 31, 2023 (excluding debt financing arrangements below) are summarized in the table below:

Contractual Cash Obligations

Operating lease cash payments

Debt Financing Arrangements

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and received $2,000,000.

As a condition of funding, we paid off three small notes and accounts payable totaling $374,000.

At the option of the holder, the note is convertible into cash, common stock or a combination of cash and stock.

We expect the convertible debt to be converted to equity.

On November 2 2023, we issued senior secured convertible promissory notes for $600,000 to two private investors.

At the option of the holders, the notes are convertible into cash, common stock or a combination of cash and stock.

On March 5, 2024, the two private investors converted the debt to equity.

Huang has committed to providing $2.5 million in additional temporary funding if it is necessary.

We believe that our cash on hand, funding from the completion of the business combination, results of operations and financing transactions will be sufficient to fund our operations for the next twelve months.

Equity financing, if obtained, could result in dilution to our then-existing stockholders and/or require such stockholders to waive certain rights and preferences.

If such financing is not available on satisfactory terms, or is not available at all, we may be required to delay, scale back, or eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected.

On February 2, 2024, we issued an amended and restated senior secured convertible promissory note to Platinum in the principal amount of $2,000,000 primarily to adjust the conversion price per share to the lower of (i) $3.69717, subject to appropriate adjustment as provided in the note, and (ii) 65% of the VWAP of the common stock for the five trading days immediately prior to any conversion, but in no event below $2.27518, subject to appropriate adjustment as provided in the note.

The note contained “weighted average” anti-dilution protection for issuances of shares of common stock or common stock equivalents at a price less than the conversion price then in effect.

On June 22, 2024, we entered into an extension agreement with Platinum Capital Partner, Inc.

to extend the maturity date of the $2,000,000 senior secured convertible promissory note to June 22, 2025.

In consideration for entering into the extension agreement, we issued to Platinum 232,360 shares of common stock in payment of all interest and extension fees through June 22, 2025.

As of December 31, 2024, the Platinum convertible note was fully converted to equity.

We issued 879,051 shares of common stock related to the conversion.

On October 3, 2023, we issued senior secured convertible promissory notes for $600,000 to two private investors.

At the option of the holders, the notes were convertible into cash, common stock or a combination of cash and stock.

On March 5, 2024, the two private investors converted the notes with a face value of $600,000 and interest into 169,204 shares of the Company’s common stock valued at $835,610.

On September 13, 2024, we issued an additional 86,198 shares of our common stock related to the conversion of notes at $2.65 per share.

We recognized a loss on debt conversion of $393,253 during the year ended December 31, 2024.

Contractual Obligations and Commitments

On July 13, 2023, we entered into a lease in Redmond, WA for 15,567 square feet of office and warehouse space which started October 1, 2023.

Contractual Cash Obligations

Operating lease cash payments

On July 13, 2023, we entered into a lease in Redmond, WA for 15,567 square feet of office and warehouse space which started on October 1, 2023.

The monthly payment is $25,000 per month.

The lease expires October 31, 2027 and the monthly payment increases 3% on July 31, 2024 and each year thereafter.

There is a one three year option to extend based on the fair market rate on October 31, 2027.

On February 29, 2024, we extended a lease in Moorestown, North Carolina.

The Company leases 3,621 square feet and the net monthly payment is $6,488.

The lease expires on July 29, 2024.

There is a one three year option to extend the lease based on the fair market rate on October 31, 2027.

We do not believe that is reasonably certain that the lease will be extended.

On February 29, 2024, we extended an office lease in Mooresville, North Carolina.

We lease 3,621 square feet and the net monthly payment is $6,488.

On August 27, 2024, we extended the lease to February 28, 2025.

We will exit this location on February 28, 2025.

On February 1, 2025, we entered into an office lease in Mooresville, North Carolina.

We lease 5,240 square feet and the net monthly payment is $9,105.

The lease expires January 31, 2028 and the monthly payment increases 3% on February 1, 2026 and each year thereafter.

There is no option to extend the lease.

Off-Balance Sheet Arrangements

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We believe that the significant accounting policies described in “ Note 2, Summary of Significant Accounting Policies ” to our audited consolidated financial statements are accurate and complete.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the current economic environment.

To the extent that there are material differences between these estimates and our actual results, our future consolidated financial statements will be affected.

We believe that the significant accounting policies described in “ Note 2, Summary of Significant Accounting Policies ” to our audited consolidated financial statements are accurate and complete.

The critical accounting estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.

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The fair value of such equity instruments is determined at the date of grant and such value is recognized as an expense over the service period of the recipient.

The Black Scholes and Monte Carlo pricing model uses various inputs and assumptions, including the estimated fair value of the common stock, stock volatility, risk free interest rate over the expected term of the instrument, estimated life of the award, and forfeiture rates of such awards.

The Black-Scholes-Merton and Monte Carlo pricing model uses various inputs and assumptions, including the estimated fair value of the common stock, stock volatility, risk free interest rate over the expected term of the instrument, estimated life of the award, and forfeiture rates of such awards.

All of these estimates impact stock based compensation which is a non-cash expense.

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Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

We recorded our senior secured convertible promissory note, earnout liability (unvested earnout shares), public and private placement warrants and the warrants that were issued with the senior secured convertible note at fair value, remeasured on a recurring basis The senior secured convertible note was fully converted to equity as of December 31, 2024.

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2024 and 2023 are based upon the short-term nature of the assets and liabilities.

The Company recorded its Senior Secured Convertible Promissory Note, earnout liability, Private Warrants and the warrants that were issued with this Note at fair value, remeasured on a recurring basis.

The Company classifies as liabilities any contracts that (i) require net-cash settlement (including a requirement to net- cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis