Airship AI Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures We conducted an evaluation, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2024, our disclosure controls and procedures are effective at the reasonable assurance level. 56 Table of Contents (b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of our company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of our company are being made only in accordance with authorization of management and directors of our company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2024. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control-Integrated Framework. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2024. Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. (c) Changes in Internal Control over Financial Reporting During the fourth fiscal quarter ended December 31, 2024, there were no other changes in our internal controls over financial reporting, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a material effect on our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. We have no information to disclose that was required to be disclosed in a report on Form 8-K during fourth quarter of fiscal year 2024 but was not reported. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. 57 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Directors and Executive Officers The following table sets forth certain information about our current directors and executive officers: Name Age Position Victor Huang 55 Chief Excutive Officer, Chairman of the Board and Director Derek Xu 68 Chief Operating Officer and Director Paul Allen 55 President Yanda Ma 46 Chief Technology Officer Mark E. Scott 71 Chief Financial Officer, Secretary and Treasurer Peeyush Ranjan 50 Director Louis Lebedin 67 Director Amit Mital 55 Director Background and Business Experience: Victor Huang joined Airship AI as its first employee in October 2004. Mr. Huang has served as our Chief Executive Officer and Chairman of the Board since December 2023. He has served as Airship AI’s Chief Executive Officer since April 2007 and a member of the Board of Directors of Airship AI since March 2005 and as Chairman of the Board beginning in January 2012. From June 1996 to September 2004, Mr. Huang was an independent trader and investor. From January 1992 to June 1996, Mr. Huang worked at Smith Barney as a financial consultant. Mr. Huang attended University of Washington where he studied business administration. Derek Xu is a co-founder of Airship AI. Mr. Xu has served as our Chief Operating Officer, Secretary and Treasurer and a member of the Board since December 2023. He has served as Airship AI’s Chief Operating Officer, Secretary and Treasurer since March 2022 and as a member of the Board of Directors since the incorporation of Airship AI in 2003. Mr. Xu also previously served as Airship AI’s Chief Technology Officer from April 2007. Prior to 2003, Mr. Xu co-founded and sold his Web service company that provided eCommerce solutions for small businesses. Before that, Mr. Xu worked in leadership positions at various tech companies where he helped develop and launch several Web based products for financial institutions. Mr. Xu holds a Ph.D. degree in Geophysics from University of Washington. Paul Allen has served as our President since December 2023. He has served as Airship AI’s President since 2019. Mr. Allen joined Airship AI as the Director of Business Development in 2015 and was promoted to Vice President of Sales in 2017 before being promoted to President in 2019. Prior to joining Airship AI, Mr. Allen was partner at a boutique firm in Northern Virginia, providing technical goods and services to the U.S. Government and Department of Defense, which he left following a successful private acquisition. Mr. Allen previously spent 14 years with IBM, leaving as a Business Unit Executive in their partner channel organization to pursue a career in direct support of the U.S. Government and Department of Defense. Mr. Allen retired from the U.S. Army 1 st Special Forces Command in 2021 with over 28 years of service, the majority of which he spent in the U.S. Army Special Forces as a Green Beret, retiring as the 3 rd Battalion 20 th Special Forces Group (National Guard) Senior Warrant Officer at the rank of Chief Warrant Officer 3 (CW3). Mr. Allen holds a bachelor’s degree in Strategic Studies & Defense Analysis from Norwich University. Yanda Ma has served as our Chief Technology Officer since December 2023. He has served as Airship AI’s Chief Technology Officer since March 2022. Previously, Mr. Ma was Airship AI’s Vice President Engineering, a position he held from 2005. His primary role is aligning the direction of engineering and product development to the strategic goals of Airship AI. To that end, over the years Mr. Ma has developed multiple evolutions of Airship AI’s product offerings from introducing Airship Enterprise Management, re-focusing with a government specific surveillance solution, delivering innovative edge solutions such as Nexus Outpost and creating value-add through end-to-end solution sets. Mr. Ma holds a bachelor’s degree in EECS from U.C. Berkeley. He has over twenty years of technology leadership experience in the streaming video and security industries and has been awarded multiple patents for key technologies he has helped develop over the course of his career. 58 Table of Contents Mark E. Scott has served as our Chief Financial Officer since March 1, 2024. He served as Interim Chief Financial Officer of Airship AI since November 2021 and served as a consultant from February 2021 to November 2021. Mr. Scott has served as a consultant and Chief Financial Officer for Valterra Partners LLC, a private equity firm, from 2017 to 2024. Mr. Scott also served as a consultant and Chief Financial Officer of Valuto, Inc., a bitcoin kiosk company, from January 2021 to November 2021. Mr. Scott has operated a wholly owned consulting firm where he advises companies on financial matters. Mr. Scott has significant financial, SEC and merger and acquisition experience in public and private microcap companies. Mr. Scott is a certified public accountant and received a Bachelor of Arts in Accounting from the University of Washington. Peeyush Ranjan has served as a member of the Board since December 2023. From 2017 to present and from 2006-2015, Mr. Ranjan has served as VP, Director or Manager of Engineering at Google, a technology services firm. From 2015 to 2016, he was CTO of Flipkart, an e-commerce services company based in India, and a VP of Engineering at Airbnb. Previously, he was part of engineering teams at Consera Technologies, Hewlett Packard, Infospace, Inc. and Microsoft. He holds a B.Tech. degree in Computer Science from IIT Kharagpur, an M.S. in Computer Science from Purdue University and an M.B.A. in Technology Management from University of Washington. Louis Lebedin has served as a member of the Board since March 2021. Mr. Lebedin has over 25 years of banking experience with a proven track record of building and leading a world class business. From 2017 to 2019, Mr. Lebedin served as an advisor to Unio Capital LLC, an asset management firm, responsible for product development. From 2006 to 2012, Mr. Lebedin was global head of JP Morgan’s prime brokerage business, a leading provider of clearing and financing services for equity and fixed income hedge funds. He was responsible for defining and executing the strategy for the business, to expand its market share while continuing to meet the evolving needs of its hedge fund clients. From 2008 to 2012, Mr. Lebedin served on JP Morgan Clearing Corp.’s Operations Committee and the Equities Division’s Executive Committee. From 2001 to 2005, Mr. Lebedin was the chief operating officer and chief financial officer of Bear Stearns’s Global Clearing Services division. Mr. Lebedin joined the Clearance Division in 1988 assuming the role of controller before being promoted to chief financial officer in 1996. From 1980 to 1987, he worked at Coopers & Lybrand, rising to the level of audit manager specializing in financial services. Mr. Lebedin holds a B.S. in accounting from Syracuse University, and he earned his CPA license in 1982. Amit Mital has served as a member of the Board since December 2023. Mr. Mital has over two decades of experience in the tech field and currently serves as CEO and founder of Kernel Labs, which focuses on machine learning, virtual reality and cybersecurity, a position he also held from 2018 to 2021. From 2021 to 2022, Mr. Mital was on the National Security Council (NSC) as the senior director for cybersecurity strategy and policy and also served in the White House as a special assistant to the President. Before Kernel Labs, Mr. Mital was chief technology officer at Symantec Corporation, where he oversaw technology strategy for the cybersecurity company from 2013-2015. While at Kernel Labs, Mr. Mital was also co-founder and chairman of the blockchain-based distributed identification platform Trusted Key, which was later acquired by Workday. Mr. Mital’s longest-tenured job came at Microsoft, where he worked as a corporate vice president for 20 years, and as a general manager concurrently for seven years. Mr. Mital holds a Master of Science degree in Engineering from Dartmouth College. Term of Office Our directors currently have terms which will end at our next annual meeting of stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the Board. Family Relationships There are no family relationships among any of our officers or directors. 59 Table of Contents Involvement in Certain Legal Proceedings To the best of our knowledge, except as described below, none of our directors or executive officers has, during the past ten years: · been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); · had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; · been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; · been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; · been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or · been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. The Board’s Role in Risk Oversight The Company’s business and affairs are managed under the direction of the Board. The Board consists of five directors, including three independent directors, namely Amit Mital, Peeyush Ranjan and Louis Lebedin. A director is not required to hold any shares in the Company to qualify as a director. The Board has extensive involvement in the oversight of risk management related to the Company and its business and will accomplish this oversight through the regular reporting to the Board by the audit committee. The audit committee represents the Board by periodically reviewing the Company’s accounting, reporting and financial practices, including the integrity of its financial statements, the surveillance of administrative and financial controls and its compliance with legal and regulatory requirements. Through its regular meetings with management, including the finance, legal, internal audit and information technology functions, the audit committee reviews and discusses all significant areas of the Company’s business and summarize for the Board all areas of risk and the appropriate mitigating factors. In addition, the Board receives periodic detailed operating performance reviews from management. 60 Table of Contents Board Meetings and Committees During our last fiscal year, each of our directors attended at least 75% of the aggregate of (i) the total number of Board meetings and (ii) the total number of meetings of the committees on which the director served. Independent Directors Nasdaq rules generally require that independent directors must comprise a majority of a listed company’s board of directors. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, the Company has determined that Peeyush Ranjan, Louis Lebedin, and Amit Mital, representing three of the Company’s five directors, are “independent” as defined in the Nasdaq listing standards and applicable SEC rules. Committees of the Board of Directors The Board has established an audit committee, a compensation committee and a nominating and corporate governance committee, which have the responsibilities and authority necessary to comply with applicable Nasdaq and SEC rules. The Board may from time to time establish other committees. The Company’s chief executive officer and other executive officers will regularly report to the non-executive directors and the audit, the compensation and the nominating and corporate governance committees to ensure effective and efficient oversight of the Company’s activities and to assist in proper risk management and the ongoing evaluation of management controls. We believe that the leadership structure of the Board will provide appropriate risk oversight of the Company’s activities. Audit Committee Amit Mital, Peeyush Ranjan and Louis Lebedin serve as members of the audit committee of the Company (the “Audit Committee”), with Mr. Mital serving as the chairperson. Each of the members of the Audit Committee satisfies all independence requirements under the applicable rules and regulations of the SEC and Nasdaq. Our Board has determined that Louis Lebedin possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations of the SEC and Nasdaq. The Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. The Audit Committee is generally responsible for, among other things: • appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; • reviewing with the independent auditors any audit problems or difficulties and management’s response; • discussing the annual audited financial statements with management and the independent auditors; • reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; • reviewing and approving all proposed related party transactions as defined by applicable law or Nasdaq listing requirements; • meeting separately and periodically with management and the independent auditors; and • monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. 61 Table of Contents Compensation Committee Peeyush Ranjan and Amit Mital serve as members of the compensation committee of the Company (the “Compensation Committee”), with Mr. Ranjan serving as the chairperson. Each of the members of the Compensation Committee satisfies the independence requirements under the applicable rules and regulations of the SEC and Nasdaq. The Compensation Committee is generally responsible for overseeing and making recommendations to the Board regarding the salaries and other compensation of our Executive Officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices. The Compensation Committee is generally responsible for, among other things: • reviewing and approving the corporate goals and objectives applicable to the compensation of the chief executive officer, evaluating the chief executive officer’s performance, and determining and approving the chief executive officer’s compensation level based on this evaluation; • reviewing and approving the compensation of all other Executive Officers; • reviewing, approving and recommending incentive compensation plans and equity-based plans to the Board and stockholders of the Company for approval, and administering the Company’s incentive compensation plans, equity-based plans and the clawback policy; • reviewing, approving and recommending employment agreements and severance arrangements or plans to the Board for approval; • reviewing all Director compensation and benefits for service on the Board and Board committees, and recommending any changes to the Board as necessary; and • overseeing, in conjunction with the Nominating and Corporate Governance Committee, engagement with stockholders and proxy advisory firms on executive compensation matters. Nominating and Corporate Governance Committee Peeyush Ranjan and Amit Mital serve as members of the nominating and governance committee of the Company (the “Nominating and Governance Committee”), with Mr. Ranjan serving as the chairperson. The Nominating and Governance Committee is generally responsible for identifying and proposing new potential director nominees to the Board for consideration and for reviewing our corporate governance policies. The Nominating and Governance Committee is generally responsible for, among other things: • determining the qualifications, qualities, skills, and other expertise required to be a director, and developing and recommending to the Board the criteria to be considered in selecting director nominees for the Board’s approval; • identifying and screening individuals qualified to become members of the Board, and considering any director candidates recommended by the Company’s stockholders; • selecting and approving the director nominees to be submitted to a stockholder vote at the stockholders’ annual meeting, subject to approval by the Board; • developing and recommending to the Board a set of corporate governance guidelines applicable to the Company, reviewing these principles and recommending any changes to the Board; • overseeing the Company’s corporate governance practices and procedures, including identifying best practices, and reviewing and recommending to the Board for approval any changes to the documents, policies and procedures in the Company’s corporate governance framework; 62 Table of Contents • reviewing the Board’s committee structure and composition and to make recommendations to the Board annually regarding the appointment of directors to serve as members of each committee and committee chairmen; • if a vacancy on the Board and/or any Board committee occurs, identifying and making recommendations to the Board regarding the selection and approval of candidates to fill such vacancy either by election by stockholders or appointment by the Board; • developing and overseeing a Company orientation program for new Directors and a continuing education program for current Directors, periodically reviewing these programs and updating them as necessary; • reviewing and discussing with management disclosure of the Company’s corporate governance practices; • developing and recommending to the Board for approval an officer succession plan, to review such succession plan periodically with the chief executive officer, developing and evaluating potential candidates for executive positions, and recommending to the Board any changes to and any candidates for succession under the succession plan. Code of Ethics We have adopted code of business conduct that applies to all of its directors, officers and employees, including its principal executive officer, principal financial officer and principal accounting officer. Our code of business conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Please note that our Internet website address is provided as an inactive textual reference only. The Company will make any legally required disclosures regarding amendments to, or waivers of, provisions of its code of ethics on its Internet website. Insider Trading Policy We have adopted an insider trading policy and procedures governing the purchase, sale, and/or other dispositions of its securities by directors, officers and employees, or the Company itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the Company. Communication with our Board of Directors Our stockholders and other interested parties may communicate with our Board of Directors by sending written communication in an envelope addressed to “Board of Directors” in care of the Secretary, 8210 154th Avenue NE, Suite 120, Redmond WA 98052. Section 16(a) Beneficial Ownership Reporting Compliance Our executive officers, directors and 10% stockholders are required under Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Copies of these reports must also be furnished to us. Based solely on our review of the copies of such reports received by us, and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended December 31, 2024, all such reports were filed timely. 63 Table of Contents ITEM 11. EXECUTIVE COMPENSATION. Unless the context requires otherwise, references to “Airship AI,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Airship AI prior to the merger and the business and operations of the Company as directly or indirectly affected by Airship AI by virtue of the Company’s ownership of the business of Airship AI following the merger. This section discusses the material components of the executive compensation program for (i) the individual who served as our principal executive officer during fiscal years 2024 and 2023; and (ii) our next two most highly compensated executive officers who earned more than $100,000 during fiscal years 2024 and 2023 and were serving as executive officers as of December 31, 2024 or 2023. We refer to these individuals as our “named executive officers.” This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the merger may differ materially from the currently planned programs summarized in this discussion. As an “emerging growth company” as defined in the JOBS Act, we are not required to include a Compensation Discussion and Analysis section and have elected to comply with the scaled disclosure requirements applicable to emerging growth companies. Summary Compensation Table - Years Ended December 31, 2024 and 2023 The following table sets forth information concerning the compensation of our named executive officers for the years ended December 31, 2024 and 2023: Non-Equity Incentive Stock Plan Option Other Salary Bonus Awards Compensation Awards Compensation Total Name and Principal Position Year ($) ($) ($) (1) ($) ($) ($) ($) Victor Huang, Chief Executive Officer, Chairman of the Board and Director 12/31/24 $ 408,717 $ - $ - $ 284,478 $ 49,464 $ 11,584 $ 754,243 12/31/23 $ 399,145 $ - $ - $ 1,068,058 $ - $ - $ 1,467,203 Derek Xu, Chief Operating Officer, Director, Secretary and Treasurer 12/31/24 $ 388,000 $ - $ - $ - $ 49,464 $ 328 $ 437,792 12/31/23 $ 388,000 $ - $ - $ 1,068,058 $ - $ - $ 1,456,058 Paul Allen, President (2) 12/31/24 $ 320,875 $ - $ - $ - $ 49,464 $ - $ 370,339 12/31/23 $ 300,000 $ 32,942 $ - $ - $ 317,519 $ - $ 650,461 Outstanding Equity Awards as of the Years Ended December 31, 2024 and 2023 The following table summarizes the number of shares of common stock underlying outstanding equity incentive plan awards for each named executive officer as of December 31, 2024 and 2023. The number of shares subject to Airship AI options outstanding at the effective time of the merger, and the exercise price of such Airship AI options, have been adjusted to reflect the merger. Option Awards Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Option Options Options Exercise Option Exercisable Unexerciseable Price Expiration Name (#) (#) ($) Date Victor Huang 1,749,335 - $ 0.12 1/15//2032 12,500 87,500 $ 2.86 8/16/34 Victor Huang- SARS 1,758,105 - $ 0.12 2/16/2032 Derek Xu 12,500 87,500 $ 2.86 8/16/2034 Paul Allen 835,058 - $ 0.57 1/15/2032 150,000 - $ 2.86 8/16/2034 64 Table of Contents Stock Option Exercises as of the Years Ended December 31, 2024 and 2023 The following table summarizes the stock option exercises for each named executive officer as of December 31, 2024. Number of Shares Acquired on Exercise Value Realized on Exercise Name (#) ($) Victor Huang - $ - Derek Xu - $ - Paul Allen 30,000 $ 101,865 There were no stock option exercises for each named executive officer as of December 31, 2023. Executive Compensation Arrangements Other than the annual compensation, bonus and equity incentive awards described above and below, the Company has no other executive compensation, change in control or similar agreements or arrangements. On March 1, 2024, the Company entered into an employment agreement with Mark E. Scott, the Company’s Chief Financial Officer, which provides for a base salary of $250,000 annually. Mr. Scott is also eligible to participate in annual performance-based bonus programs established by the Board or Compensation Committee, subject to the achievement of applicable performance criteria established by the Board or Compensation Committee, which shall be determined in good faith by the Board or Compensation Committee. Mr. Scott was also granted options to purchase up to Twenty Five Thousand (25,000) shares of common stock with an exercise price equal to $1.49, which options vested in full on the date of issuance. 2022 Combined Incentive and Non-Qualified Stock Option Plan Related to the Share Exchange Agreement with Super Simple AI, Inc., on February 17, 2022, the Company’s Board of Directors approved the 2022 Combined Incentive and Non-Qualified Stock Option Plan (the “2022 Plan”) to issue options to acquire a maximum of 3,000,000 common stock shares. Effective upon the closing of the merger, the 2022 Plan will no longer be available for use for the grant of future awards. The 2022 Plan will continue to govern the terms of awards that have been granted under the 2022 Plan before, and that are still outstanding following, the merger. The 2022 Plan provides for the grant of stock options, including options that are intended to qualify as “incentive stock options” under Section 422 of the Code, as well as non-qualified stock options. Each award is set forth in a separate agreement with the person who received the award which indicates the type, terms and conditions of the award. Certain Transactions If as a result of any reorganization, recapitalization, stock dividend, stock split, reverse stock split or other similar change in our capital stock, the outstanding shares of common stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company without the receipt of consideration by the Company, or, if, as a result of any merger or consolidation, or sale of all or substantially all of the assets of the Company, the outstanding shares are converted into or exchanged for other securities of the Company. or any successor entity, the administrator shall make an appropriate and proportionate adjustment in (i) the maximum number of shares reserved for issuance under the 2022 Plan, (ii) the number and kind of shares or other securities subject to any then outstanding awards under the 2022 Plan, (iii) the repurchase price, if any, per share subject to each outstanding award, and (iv) the exercise price for each share subject to any then outstanding options under the 2022 Plan. 65 Table of Contents Amendment and Termination Our board of directors may terminate or amend the 2022 Plan at any time, but no such action shall adversely affect rights under any outstanding award without the holder’s consent. However, we must generally obtain stockholder approval for any such amendments to the extent required by applicable law. The administrator may exercise its discretion to reduce the exercise price of outstanding stock options to the then current fair market value if the fair market value of the common stock covered by such option has declined since the date the option was granted, without the approval of the Company’s stockholders. Upon consummation of the merger, each outstanding option under the 2022 Plan that was outstanding as of immediately prior to the effective time of the merger converted into (i) an option (each, a “Converted Stock Option”), on substantially the same terms and conditions as are in effect with respect to such award immediately prior to the effective time, to purchase the number of shares of common stock, determined by multiplying the number of shares of common stock subject to such award as of immediately prior to the effective time by the conversion ratio, at an exercise price per share of common stock equal to (A) the exercise price per share of common stock of such award divided by (B) the conversion ratio, and (ii) the right to receive a number of earnout shares in accordance with, and subject to, the contingencies set forth in the Merger Agreement. Stock Appreciation Rights Plan Related to the Share Exchange Agreement with Super Simple AI, Inc., on February 17, 2022, the Company’s Board of Directors approved the 2022 Stock Appreciation Rights Plan (the “SAR Plan”) to issue a maximum of 1,500,000, which was later adjusted to 2,637,150 stock appreciation rights (“SAR”) after the merger. As of December 31, 2024, after adjusting for the merger, there were 1,758,105 SARs outstanding with a base value of $0.12 and January 2028 expiration. Payment of Appreciation Amount The appreciation distribution in respect to a SAR may be paid in cash, in common stock of the Company, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the stock appreciation rights agreement evidencing such SAR. Amendment and Termination Our board of directors may terminate or amend the SAR Plan at any time, but no such action shall adversely affect rights under any outstanding award without the holder’s consent. Upon consummation of the merger, each SAR granted under the SAR Plan that was outstanding immediately prior to the effective time of the merger converted into a stock appreciation right denominated in shares of common stock (each, a “Converted SAR”). Each Converted SAR will continue to have and be subject to substantially the same terms and conditions as were applicable to such SAR immediately prior to the effective time, except that (i) each Converted SAR will cover that number of shares of common stock equal to (A) the product of (1) the number of shares of common stock subject to such SAR immediately prior to the effective time and (2) the conversion ratio and (B) a number of earnout shares in accordance with, and subject to, the contingencies set forth in the Merger Agreement, and (ii) the per share base value for each share of common stock covered by the Converted SAR will be equal to the quotient obtained by dividing (A) the base value per share of common stock of such SAR immediately prior to the effective time by (B) the conversion ratio. 66 Table of Contents 2023 Equity Incentive Plan The Company has adopted the Airship AI Holdings, Inc. 2023 Equity Incentive Plan (the “Equity Incentive Plan”), which plan was approved by stockholders at the extraordinary general meeting. This section summarizes certain principal features of the Equity Incentive Plan. The Equity Incentive Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to its officers, employees, directors, consultants and advisers. The purpose of the Equity Incentive Plan is to help the Company attract, motivate and retain such persons with awards under the Equity Incentive Plan and thereby enhance shareholder value. Administration. The Equity Incentive Plan is administered by the compensation committee of the Board, which consists of three members of the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and “independent” for purposes of any applicable listing requirements. If a member of the compensation committee is eligible to receive an award under the Equity Incentive Plan, such compensation committee member shall have no authority under the plan with respect to his or her own award. Among other things, the compensation committee has complete discretion, subject to the express limits of the Equity Incentive Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award to be granted the terms and conditions of the award, the form of payment to be made and/or the number of shares of common stock subject to each award, the exercise price of each option and base price of each stock appreciation right (“SAR”), the term of each award, the vesting schedule for an award, whether to accelerate vesting, the value of the common stock underlying the award, and the required withholding, if any. The compensation committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would impair the participant’s rights or entitlements with respect to that award. The compensation committee is also authorized to construe the award agreements, and may prescribe rules relating to the Equity Incentive Plan. Notwithstanding the foregoing, the compensation committee does not have any authority to grant or modify an award under the Equity Incentive Plan with terms or conditions that would cause the grant, vesting or exercise thereof to be considered nonqualified “deferred compensation” subject to Code Section 409A, unless such award is structured to be exempt from or comply with all requirements of Code Section 409A. Grant of Awards; Shares Available for Awards. The Equity Incentive Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. The aggregate number of shares of common stock initially reserved and available for grant and issuance under the Equity Incentive Plan is 4,000,000. Such aggregate number of shares of stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2024 and ending on (and including) January 1, 2033, in an amount equal to 2.0% of the total number of shares of common stock outstanding on December 31 of the preceding year; provided, however, that the Board may act prior to January 1 of a given year to provide that the increase for such year will be a lesser number of shares of common stock. No more than 4,000,000 shares of common stock in the aggregate may be issued under the Equity Incentive Plan in connection with incentive stock options. Shares shall be deemed to have been issued under the Equity Incentive Plan solely to the extent actually issued and delivered pursuant to an award. If any award granted under the Equity Incentive Plan expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the Equity Incentive Plan, other than any shares tendered or withheld in order to exercise or satisfy withholding obligation in respect of any award. The Equity Incentive Plan shall continue in effect, unless sooner terminated, until the tenth (10 th ) anniversary of the date on which it is adopted by the Board. It is expected that all of our employees, consultants, advisors and service providers and all of our non-executive officer directors will be eligible to participate in the Equity Incentive Plan. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the Equity Incentive Plan as well. The number of stock options and/or shares of restricted stock to be granted to executives and directors cannot be determined at this time as the grant of stock options and/or shares of restricted stock is dependent upon various factors such as hiring requirements and job performance. 67 Table of Contents Non-Employee Director Compensation Limit. The Equity Incentive Plan provides for a limit on non-employee director compensation. The maximum number of shares of stock that may be subject to an award granted under the Equity Incentive Plan during any single fiscal year to any non-employee director, when taken together with any cash fees paid to such non-employee director during such year in respect of his or her service as a non-employee director (including service as a member or chair of any committee of the board), shall not exceed $250,000 in total value (calculating the value of any such award based on the fair market value on the date of grant of such award for financial reporting purposes). Stock Options. The Equity Incentive Plan provides for the grant of either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under Section 422 of the Code, or “nonqualified stock options” (“NQSOs”). Stock options may be granted on such terms and conditions as the compensation committee may determine, which shall be specified in the option agreement; provided, however, that the per share exercise price under a stock option may not be less than the fair market value of a share of common stock on the date of grant and the term of the stock option may not exceed 10 years (110% of such value and five years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of capital stock of our company or a parent or subsidiary of our company). ISOs may only be granted to employees. In addition, the aggregate fair market value of common stock covered by one or more ISOs (determined at the time of grant), which are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Any excess is treated as a NQSO. Stock Appreciation Rights. A SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in the fair market value of the underlying common stock between the date of grant and the date of exercise. The compensation committee shall set forth in the applicable SAR award agreement the terms and conditions of the SAR, including the base value for the SAR (which shall not be less than the fair market value of a share on the date of grant), the number of shares subject to the SAR and the period during which the SAR may be exercised and any other special rules and/or requirements which the compensation committee imposes on the SAR. No SAR shall be exercisable after the expiration of ten (10) years from the date of grant. SARs may be granted in tandem with, or independently of, stock options granted under the Equity Incentive Plan. A SAR granted in tandem with a stock option (i) is exercisable only at such times, and to the extent, that the related stock option is exercisable in accordance with the procedure for exercise of the related stock option; (ii) terminates upon termination or exercise of the related stock option (likewise, the common stock option granted in tandem with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related stock option; and (iv) if the related stock option is an ISO, may be exercised only when the value of the stock subject to the stock option exceeds the exercise price of the stock option. A SAR that is not granted in tandem with a stock option is exercisable at such times as the compensation committee may specify. Performance Shares and Performance Unit Awards. Performance share and performance unit awards entitle the participant to receive cash or shares of common stock upon the attainment of specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values. The compensation committee shall set forth in the applicable award agreement the performance goals and objectives and the period of time to which such goals and objectives shall apply. If such goals and objectives are achieved, such distribution of shares, or payment in cash, as the case may be, shall be made no later than by the fifteenth (15 th ) day of the third (3 rd ) calendar month next following the end of the company’s fiscal year to which such performance goals and objectives relate, unless otherwise structured to comply with Code Section 409A. Distribution Equivalent Right Awards. A distribution equivalent right award entitles the participant to receive bookkeeping credits, cash payments and/or common stock distributions equal in amount to the distributions that would have been made to the participant had the participant held a specified number of shares of common stock during the period the participant held the distribution equivalent right. A distribution equivalent right may be awarded as a component of another award (but not an option or SAR award) under the Equity Incentive Plan, where, if so awarded, such distribution equivalent right will expire or be forfeited by the participant under the same conditions as under such other award. The compensation committee shall set forth in the applicable distribution equivalent rights award agreement the terms and conditions, if any, including whether the holder is to receive credits currently in cash, is to have such credits reinvested (at fair market value determined as of the date of reinvestment) in additional shares of common stock, or is to be entitled to choose among such alternatives. 68 Table of Contents Restricted Stock Awards. A restricted stock award is a grant or sale of common stock to the holder, subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the compensation committee or the board of directors may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such instalments or otherwise, as the compensation committee or the board of directors may determine at the date of grant or purchase or thereafter. If provided for under the restricted stock award agreement, a participant who is granted or has purchased restricted stock shall have all of the rights of a shareholder, including the right to vote the restricted stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the compensation committee or the board of directors or in the award agreement). During the restricted period applicable to the restricted stock, subject to certain exceptions, the restricted stock may not be sold, transferred, pledged, exchanged, hypothecated, or otherwise disposed of by the participant. Restricted Stock Unit Awards . A restricted stock unit award provides for a grant of shares or a cash payment to be made to the holder upon the satisfaction of predetermined individual service-related vesting requirements, based on the number of units awarded to the holder. The compensation committee shall set forth in the applicable restricted stock unit award agreement the individual service-based vesting requirements which the holder would be required to satisfy before the holder would become entitled to payment and the number of units awarded to the holder. The holder of a restricted stock unit shall be entitled to receive a cash payment equal to the fair market value of a share of common stock, or one share of common stock, as determined in the sole discretion of the compensation committee and as set forth in the restricted stock unit award agreement, for each restricted stock unit subject to such restricted stock unit award, if and to the extent the holder satisfies the applicable vesting requirements. Such payment or distribution shall be made no later than by the fifteenth (15th ) day of the third (3rd) calendar month next following the end of the calendar year in which the restricted stock unit first becomes vested, unless otherwise structured to comply with Code Section 409A. A restricted stock unit shall not constitute an equity interest in the company and shall not entitle the holder to voting rights, dividends or any other rights associated with ownership of shares prior to the time the holder shall receive a distribution of shares. Unrestricted Stock Awards. An unrestricted stock award is a grant or sale of shares of common stock to the employees, non-employee directors or non-employee consultants that are not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered to the company or an affiliate or for other valid consideration. Adjustment to Shares. Subject to any required action by shareholders of the company, the number of shares of common stock covered by each outstanding award shall be proportionately adjusted for any increase or decrease in the number of issued shares resulting from a subdivision or consolidation of shares, including, but not limited to, a stock split, reverse stock split, recapitalization, continuation or reclassification, or the payment of a stock dividend (but only on the stock) or any other increase or decrease in the number of such shares effected without receipt of consideration by the company. Change-in-Control Provisions. The compensation committee may, in its sole discretion, at the time an award is granted or at any time prior to, coincident with or after the time of a change in control, cause any award either (i) to be cancelled in consideration of a payment in cash or other consideration in amount per share equal to the excess, if any, of the price or implied price per share of common stock in the change in control over the per share exercise, base or purchase price of such award, which may be paid immediately or over the vesting schedule of the award; (ii) to be assumed, or new rights substituted therefore, by the surviving corporation or a parent or subsidiary of such surviving corporation following such change in control; (iii) accelerate any time periods, or waive any other conditions, relating to the vesting, exercise, payment or distribution of an award so that any award to a holder whose employment has been terminated as a result of a change in control may be vested, exercised, paid or distributed in full on or before a date fixed by the compensation committee; (iv) to be purchased from a holder whose employment has been terminated as a result of a change of control, upon the holder’s request, for an amount of cash equal to the amount that could have been obtained upon the exercise, payment or distribution of such rights had such award been currently exercisable or payable; or (v) terminate any then outstanding award or make any other adjustment to the awards then outstanding as the compensation committee deems necessary or appropriate to reflect such transaction or change. The number of shares subject to any award shall be rounded to the nearest whole number. Transferability. No award may be assigned, transferred, sold, exchanged, encumbered, pledged or otherwise hypothecated or disposed of by a holder except by will or by the laws of descent and distribution, or by gift to any immediate family member of the holder, subject to compliance with applicable laws. 69 Table of Contents Amendment and Termination. The compensation committee may adopt, amend and rescind rules relating to the administration of the Equity Incentive Plan, and amend, suspend or terminate the Equity Incentive Plan, but no such amendment or termination will be made that materially and adversely impairs the rights of any participant with respect to any award received thereby under the Equity Incentive Plan without the participant’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws. In addition, no amendment that results (directly or indirectly ) in the reduction of the exercise price of an option or SAR or that otherwise requires shareholder approval under applicable law will be made without shareholder approval. Director Compensation We primarily use monthly fees and stock option grants to attract and retain qualified candidates to serve on the Board. This compensation reflected the financial condition of the Company. In setting director compensation, we consider the significant amount of time that directors expend in fulfilling their duties to the Company as well as the skill-level required by our members of the Board. During the year ended December 31, 2024, Victor Huang and Derek Xu did not receive any compensation for their services as directors. The compensation disclosed in the “Summary Compensation Table” above represents the total compensation for Mr. Huang and Mr. Xu. Our independent non-employee directors are compensated in cash and stock option grants. There is no formal stock compensation plan for independent non-employee directors. Our non-employee directors received the following compensation during the year ended December 31, 2024: Non-Equity Non-Qualified Fees Earned Incentive Deferred or Paid in Plan Compensation Other Cash Stock Option Compensation Earnings Compensation Name $ Awards (1) Awards ($) $ ($) Total Peeyush Ranjan $ 65,000 - $ 50,683 - - - $ 115,683 Louis Lebedin $ - - $ 32,052 - - - $ 32,052 Amit Mital $ - - $ 58,539 - - - $ 58,539 70 Table of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information as of December 31, 2024 regarding the beneficial ownership of shares of our common stock by: ● each person known by us to be the beneficial owner of more than 5% of the outstanding shares of any class of our voting securities; ● each of our current executive officers and directors; and ● all executive officers and directors of the Company as a group. Percentage of beneficial ownership of common stock is based on 30,588,413 shares of common stock outstanding as of December 31, 2024. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to, or the power to receive the economic benefit of ownership of, the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares that the person has the right to acquire within 60 days are included, including through the exercise of any option or other right or the conversion of any other security. However, these shares are not included in the computation of the percentage ownership of any other person. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all of shares beneficially owned by them. Common Stock Beneficially Owned Name of Beneficial Owner (1) Shares % Directors and Named Executive Officers- Victor Huang (2) 8,538,014 23.9 % Derek Xu (3) 9,796,356 30.7 % Paul Allen (4) 923,809 2.9 % Yanda Ma (5) 687,173 2.2 % Mark E. Scott (6) 103,404 * Peeyush Ranjan (7) 109,880 * Louis Lebedin (8) 87,500 * Amit Mital (9) 76,148 * Total Directors and Officers (8 in total) 20,322,284 52.2 % Airship Kirkland LP (Victor Huang) (10) 6,913,063 23.9 % Airship Redmond LP (Derek Xu ) (11) 8,451,405 30.7 % Armistice Capital Master Fund LLC 5,045,045 15.4 % _________ * Less than 1% (1) Unless otherwise noted, the business address of each of the directors and executive officers of is c/o Airship AI Holdings, Inc., 8210 154th Ave NE, Redmond, WA 98052. (2) Includes (i) shares owned by Airship Kirkland Family LP, over which Mr. Huang has voting and dispositive power, (ii) 1,564,951 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock, (iii) 1,761,835 shares of common stock subject to options exercisable within 60 days, and (iv) 1,758,105 shares of common stock subject to stock appreciation rights. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. 71 Table of Contents (3) Includes (i) shares owned by Airship Redmond Family LP, over which Mr. Xu has voting and dispositive power, (ii) 1,344,951 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock, and (iii) 12,500 shares of common stock subject to options exercisable within 60 days. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. (4) Includes (i) shares owned by Mr. Allen, and (ii) 853,809 shares of common stock subject to options exercisable within 60 days. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. (5) Includes (i) shares owned by Mr. Ma, and (ii) 687,173 shares of common stock subject to options exercisable within 60 days. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. (6) Includes 103,404 shares of common stock subject to options exercisable within 60 days. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. (7) Includes 109,880 shares of common stock subject to options exercisable within 60 days. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. (8) Includes 37,500 shares of common stock subject to options exercisable within 60 days. (9) Includes 76,148 shares of common stock subject to options exercisable within 60 days. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. (10) Includes (i) 1,761,835 shares of common stock subject to options exercisable within 60 days, and (ii) 1,758,105 shares of common stock subject to stock appreciation rights. Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. Victor Huang has voting and dispositive power over the shares owned by Airship Kirkland Family LP. (11) Excludes the right to receive a number of earnout shares, in accordance with and subject to the contingencies set forth in the Merger Agreement. Derek Xu has voting and dispositive power over the shares owned by Airship Redmond Family LP. (12) The securities are directly held by Armistice Capital Master Fund Ltd., a Cayman Islands exempted company (the “Master Fund”), and may be deemed to be beneficially owned by: (i) Armistice Capital, LLC (“Armistice Capital”), as the investment manager of the Master Fund; and (ii) Steven Boyd, as the Managing Member of Armistice Capital. The warrants are subject to a beneficial ownership limitation of 4.99%, which such limitation restricts the holder from exercising that portion of the warrants that would result in the holder and its affiliates owning, after exercise, a number of shares of common stock in excess of the beneficial ownership limitation. The address of Armistice Capital Master Fund Ltd. is c/o Armistice Capital, LLC, 510 Madison Avenue, 7th Floor, New York, NY 10022. Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth certain information about the securities authorized for issuance under our incentive plans as of December 31, 2024: (a) (b) (c) Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column Equity compensation plan approved by shareholders - $ - - Equity compensation plans not approved by shareholders 5,527,559 1.04 3,178,053 Total 5,527,559 $ 1.04 3,178,053 72 Table of Contents The following table sets forth certain information about the securities authorized for issuance under our incentive plans for SARS as of December 31, 2024: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column Equity compensation plan approved by shareholders - $ - - Equity compensation plans not approved by shareholders 1,758,105 0.120 879,045 Total 1,758,105 $ 0.120 879,045 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. BYTE Acquisition Corp. Founder Shares On January 22, 2021, Byte Holdings LP, a Cayman Islands exempted limited partnership and the sponsor of BYTS (the “Sponsor”) paid an aggregate of $25,000 to cover certain offering costs of BYTS in consideration for 8,625,000 of BYTS Class B ordinary shares (the “Founder Shares”). The Founder Shares included an aggregate of up to 1,125,000 shares subject to forfeiture by the Sponsor to the extent that the underwriters’ over-allotment was not exercised in full or in part, so that the number of Founder Shares would collectively represent 20% of BYTS’ issued and outstanding shares upon the completion of the BYTS’ initial public offering (excluding the private placement shares). On April 7, 2021, the underwriter exercised its over-allotment option in part, and 532,687 Founder Shares were subsequently forfeited by the Sponsor. Effective as of March 27, 2023, pursuant to the terms of BYTS’ Cayman constitutional documents, the Sponsor elected to convert each outstanding Class B ordinary share held by it on a one-for-one basis into Class A ordinary shares of BYTS, with immediate effect. On June 26, 2023, BYTS issued one Class B ordinary share in connection with the domestication of BYTS as a Delaware corporation. At the time of BYTS’ IPO, the Sponsor agreed, subject to limited exceptions, not to transfer, assign or sell any of its Founder Shares until the earlier to occur of: (A) one year after the completion of the merger; and (B) subsequent to the merger, (x) if the closing price of the Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 120 days after the merger, or (y) the date on which BYTS completes a liquidation, merger, amalgamation, share exchange, reorganization or other similar transaction that results in all of BYTS’ shareholders having the right to exchange their Class A ordinary shares for cash, securities or other property. In connection with the merger, the Sponsor entered into a support agreement, pursuant to which the Sponsor forfeited 1,000,000 Founder Shares held by it and made the share contribution to secure non-redemption agreements and/or PIPE financing. 73 Table of Contents Related Party Loans On July 26, 2023, the Sponsor advanced $70,560 to BYTS, on September 8, 2023, the Sponsor advanced an additional $70,000 to BYTS, on November 1, 2023, BYTS received an additional advance from a related party of $224,500 and on November 2, 2023, the Sponsor advanced $25,159 to BYTS, for an aggregate $390,219 advanced to BYTS. These advances were repaid to the Sponsor at the time of closing of the merger. Administrative Services Agreement BYTS entered into an agreement that provided that, commencing on effective date of the BYTS’ initial public offering, BYTS agreed to pay the Sponsor $10,000 per month for office space, utilities, secretarial and administrative support services. During the three months ended December 31, 2023 and the year ended December 31, 2022, BYTS incurred $30,000 and $90,000, respectively, of such fees. On November 30, 2022, BYTS assigned the administrative services agreement, previously entered into by and between BYTS and the Sponsor to Sagara Group, LLC, which is a company controlled by Mr. Gloor. In connection with the merger, the Company agreed to extend the term of the administrative services agreement for an additional three months following the closing of the merger. Non-Redemption Agreements On August 1, 2023, BYTS entered into a non-redemption agreement with the Sponsor pursuant to which the Sponsor agreed to acquire from shareholders of BYTS $6 million in aggregate value of public shares, either in the open market or through privately negotiated transactions, at a price no higher than the redemption price per share payable to public shareholders who exercise redemption rights with respect to their public shares, prior to the closing date of the merger, to waive its redemption rights and hold the public shares through the closing date of the merger, and to abstain from voting and not vote the public shares in favor of or against the merger. As consideration for the non-redemption agreement, BYTS agreed to pay the Sponsor $0.033 per public share per month, which will begin accruing on the date that is three days after the date of the non-redemption agreement and terminate on the closing date of the merger. Additionally, on August 1, 2023, BYTS entered into a non-redemption agreement with a shareholder holding public shares, pursuant to which such shareholder agreed not to redeem $1 million in aggregate value of public shares held by it on the date of the non-redemption agreement in connection with the merger. Such shareholder is an investor in our Sponsor and, other than indirectly through its interest in our Sponsor, such shareholder did not receive any separate consideration for such waiver. Airship AI Holdings, Inc. Advances to Founders and Transfer of Zeppelin Worldwide LLC and Zeppelin Taiwan, Ltd. Interests In 2020, Victor Huang and Derek Xu, the founders, officers and directors of Airship AI (“Airship AI Founders”), borrowed $3,000,000 (“shareholder advances”) from Airship AI. As of January 1, 2023, Airship AI was owed $1,100,000 by the Airship AI Founders. Due to the uncertainty of the timing of payment, the advances were treated as a long-term asset. The shareholder advances bore interest at 5% and no interest was ever paid. Mr. Huang and Mr. Xu owned all the membership units of Zeppelin Worldwide, LLC and its subsidiary, Zeppelin Taiwan, Ltd. (together, “Zeppelin”). During the years ended December 31, 2022 and 2021, Zeppelin received from Airship AI an additional $1,095,000 and $590,000, respectively, in cash advances to fund operations which commenced in 2021. These advances between the companies are eliminated in the consolidated balance sheet. When Zeppelin started, their intent was to explore the technology in-development and determine value for external customers by providing cloud based back-end products. After a period of time for Zeppelin’s development it became apparent these efforts would be of value and accretive to Airship AI. In 2022, Airship AI began utilizing Zeppelin’s research and development personnel to develop Airship AI’s products. 74 Table of Contents On February 28, 2023, the Airship AI Founders transferred their interests in Zeppelin to Airship AI for the $1,100,000 owed by the Airship AI Founders. Advances due to Founders Prior to 2023, the founders had advanced to us a net $600,000. In the year ended December 31, 2023, Mr. Huang and Mr. Xu advanced Airship AI a total of $1,350,000 and were repaid a total of $200,000, with $1,750,000 recorded as advances from founders as of December 31, 2023. During 2024, Mr. Huang and Mr. Xu advanced Airship AI $2,100,000 and were repaid $2,550,000, with $1,300,000 recorded as advances from founders as of December 31, 2024. The outstanding advances as of December 31, 2024 and 2023 are non-interest bearing and the Company expects to pay the balance off within a one year period. Warrants to Purchase Common Stock On May 8, 2023, Airship AI issued warrants to purchase 1,344,951 shares of common stock to each of Victor Huang and Derek Xu. The warrants were valued at $2,136,115 based on the exercise price of $1.77, the fair market stock price of $1.89, a five year term, a volatility of 39.4% and interest of 3.41%. The warrants were recorded as stock-based compensation expense and as additional paid in capital. All warrants are fully vested as they were issued for services performed. Master Loan Agreement On September 27, 2024, we 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%. The Company paid interest for the 2024 advances (described under “Founder Advances” above) 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. The $284,478 fair value of the warrant is recorded in permanent equity in the consolidated balance sheets and was fully expensed on the date of grant. There are no outstanding advances under this Master Loan Agreement as of December 31, 2024. Issuance of Bankruptcy Plan Shares On December 13, 2023, BYTS formed a wholly-owned subsidiary in Nevada, BYTS NV Merger Sub, Inc. (“NV Merger Sub”), for the purpose of acquiring SILLC (E) Acquisition Corp., a Nevada corporation (“SILLC”), an entity subject to a bankruptcy proceeding that has no assets, no equity owners and no liabilities, except for claims of approximately 400 holders of allowed unsecured claims and a holder of allowed administrative expenses (collectively, the “Claim Holders”). On December 15, 2023, BYTS entered into an Agreement and Plan of Merger (the “SILLC Merger Agreement”) by and among BYTS, NV Merger Sub, SILLC, and the other parties thereto. On December 21, 2023, immediately following the consummation of the domestication and prior to the consummation of the merger, and as contemplated by the SILLC Merger Agreement, NV Merger Sub merged (the “SILLC Merger”) with and into SILLC, with SILLC surviving the SILLC Merger as a wholly-owned subsidiary of BYTS. SILLC became the successor and “Post Confirmation Debtor” pursuant to the bankruptcy plan. As a result of the SILLC Merger, and in accordance with the bankruptcy plan, the Company issued an aggregate of 150,000 shares of common stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfaction of their respective claims, pursuant to Section 1145 of the U.S. Bankruptcy Code. The Sponsor forfeited an equal number of shares of common stock. The issuance of the Plan Shares by the Company was exempt from the registration requirements of the Securities Act. The Plan Shares will not be subject to any lock-up or other transfer restriction. 75 Table of Contents Amended and Restated Registration Rights Agreement On December 21, 2023, the Company entered into an amended and restated registration rights agreement (the “Registration Rights Agreement”) with the Sponsor, Victor Huang and Derek Xu (collectively, the “Holders”), pursuant to which the Company agreed to register for resale, pursuant to Rule 415 under the Securities Act, certain shares of common stock and warrants that are held by the Holders from time to time. The Registration Rights Agreement amended and restated the registration rights agreement that was entered into by BYTS, the Sponsor and the other parties thereto in connection with BYTS’ initial public offering. The Registration Rights Agreement will terminate on the earlier of (a) the five year anniversary of the date of the Registration Rights Agreement or (b) with respect to any Holder, on the date that such Holder no longer holds any Registrable Securities (as defined therein). Indemnification The Company’s charter and bylaws provide that the Company will indemnify its directors and officers to the fullest extent permitted by Delaware law. In addition, the Company has entered into indemnification agreements with its directors and executive officers. Policies and Procedures for Related Persons Transactions Pursuant to its Audit Committee charter, the Audit Committee will have the responsibility to review related party transactions. A “related person transaction” is a transaction, arrangement or relationship in which the post-combination company or any of its subsidiaries was, is or will be a participant, the amount of which involved exceeds $120,000 (or, for so long as we remain a “smaller reporting company” the lesser of (i) $120,000 and (ii) 1% of our average total assets of the two completed fiscal years), and in which any related person had, has or will have a direct or indirect material interest. A “related person” means: · any person who is, or at any time during the applicable period was, one of the Company’s executive officers or directors; · any person who is known by the post-combination company to be the beneficial owner of more than 5% of the Company voting stock; · any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of a director, executive officer or a beneficial owner of more than 5% of the Company’s voting stock, and any person (other than a tenant or employee) sharing the household of such director, executive officer or beneficial owner of more than 5% of the Company’s voting stock; and · any firm, corporation or other entity in which any of the foregoing persons is a partner or principal, or in a similar position, or in which such person has a 10% or greater beneficial ownership interest. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Audit Committee Pre-Approval Policy The Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit our financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee’s responsibilities under the Exchange Act. During the year ended December 31, 2024, the Audit Committee pre-approved all audit and permissible non-audit services provided by our independent auditors. 76 Table of Contents Service Fees Paid to the Independent Registered Public Accounting Firm The Audit Committee engaged BPM LLP to perform an annual audit of our financial statements for the fiscal years ended December 31, 2024 and 2023. The following is the breakdown of aggregate fees paid for the last two fiscal years. Another tax firm prepares our tax returns. Year Ended Year Ended December 31, 2024 December 31, 2023 Audit fees $ 281,375 $ 280,325 Tax fees - - All other fees 159,265 95,500 $ 440,640 $ 375,825 -”Audit Fees” are fees paid for professional services for the audit and quarterly reviews of our financial statements. - “Tax Fees” are fees primarily for tax compliance in connection with filing US income tax returns. “All other fees” related to the reviews of Registration Statements on Form S-1 and S-4. 77 Table of Contents PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES. (a) List of Documents Filed as a Part of This Report: The Company’s financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 207 ) F-1 Consolidated Balance Sheets F-2 Consolidated Statement of Operations and Comprehensive Loss F-3 Consolidated Statement of Changes in Stockholders' Deficit F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 (2) Index to Financial Statement Schedules: All schedules have been omitted because the required information is included in the financial statements or the notes thereto, or because it is not required. (3) Index to Exhibits: See exhibits listed under Part (b) below. (b) Exhibits: Exhibit No. Description 2.1† Merger Agreement, dated June 27, 2023, by and among BYTE Acquisition Corp., BYTE Merger Sub, Inc. and Airship AI Holdings, Inc. (incorporated by reference to Exhibit 2.1 to BYTE Acquisition Corp.’s Current Report on Form 8-K filed with the SEC on June 27, 2023). 2.2 First Amendment to Merger Agreement, dated September 22, 2023, by and among BYTE Acquisition Corp., BYTE Merger Sub, Inc. and Airship AI Holdings, Inc. (incorporated by reference to Exhibit 2.1 to BYTE Acquisition Corp.’s Current Report on Form 8-K filed with the SEC on September 26, 2023). 3.1 Certificate of Incorporation of BYTE Acquisition Corp. (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 27, 2023). 3.2 Certificate of Amendment to Certificate of Incorporation of BYTE Acquisition Corp. (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed with the SEC on December 27, 2023). 3.3 Bylaws of Airship AI Holdings, Inc. (incorporated by reference to Exhibit 3.3 to the registrant’s Current Report on Form 8-K filed with the SEC on December 27, 2023). 4.1 Specimen Common Stock Certificate of Airship AI Holdings, Inc. (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-l (File No. 333-276932), filed with the SEC on February 7, 2024). 4.2 Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to BYTE Acquisition Corp.’s Registration Statement on Form S-l (File No. 333-253618), filed with the SEC on February 26, 2021). 4.3 Warrant Agreement, dated March 18, 2021, by and between BYTE Acquisition Corp. and Equiniti Trust Company, LLC, as warrant agent (incorporated by reference to Exhibit 4.1 to BYTE Acquisition Corp.’s Current Report on Form 8-K filed with the SEC on March 23, 2021). 78 Table of Contents 4.4 Amended and Restated Common Stock Purchase Warrant issued February 2, 2024 by Airship AI Holdings, Inc. to Platinum Capital Partners Inc. (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 4.5 Description of registrant’s securities. 4.6 Warrant Agency Agreement, dated September 3, 2024, between the Company and Equiniti Trust Company, LLC, as warrant agent (incorporated by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2024). 4.7 Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 of the registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2024). 4.8 Placement Agent Warrant, dated September 3, 2024 (incorporated by reference to Exhibit 4.3 of the registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2024). 10.1 Letter Agreement, dated March 18, 2021, by and among BYTE Acquisition Corp., its officers, its directors and Byte Holdings LP (incorporated by reference to Exhibit 10.1 of BYTE Acquisition Corp.’s Current Report on Form 8-K filed with the SEC on March 23, 2021). 10.2 Parent Support Agreement, dated as of June 27, 2023, by and among BYTE Holdings LP, BYTE Acquisition Corp., and Airship AI Holdings, Inc. ((incorporated by reference to Exhibit 10.1 to BYTE Acquisition Corp.’s Current Report on Form 8-K filed with the SEC on June 27, 2023). 10.3 Letter Amendment to Form of Bylaws, dated December 20, 2023, by and between BYTE Acquisition Corp. and Airship AI Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 27, 2023). 10.4 Amended and Restated Registration Rights Agreement, dated December 21, 2023 by and among Airship AI Holdings, Inc. and certain of its stockholders (incorporated by reference to Exhibit 10.8 to the registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2023). 10.5 Earnout Escrow Agreement, dated December 21, 2023 by and between Airship AI Holdings, Inc. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2023). 10.6 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2023). 10.7+ 2023 Airship AI Holdings, Inc. Equity Incentive Plan (incorporated by reference to Annex C to BYTE Acquisition Corp.’s prospectus filed with the SEC on dated December 5, 2023.). 10.8 Lease, dated as of December 22, 2020, by and between JDL Digital Systems Inc. DBA Airship Industries, Inc. and Langtree Development Company, LLC (incorporated by reference to Exhibit 10.15 of BYTE Acquisition Corp.’s Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-274464), filed with the SEC on October 18, 2023). 10.9 Sublease Agreement, effective July 13, 2023, by and between Helion Energy, Inc. and JDL Systems, Inc. (incorporated by reference to Exhibit 10.16 of BYTE Acquisition Corp.’s Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-274464), filed with the SEC on October 18, 2023). 10.10 Senior Secured Convertible Promissory Note issued June 22, 2023 by Airship AI Holdings, Inc. to Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.17 of BYTE Acquisition Corp.’s Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-274464), filed with the SEC on October 18, 2023). 10.11 Amended and Restated Senior Secured Convertible Promissory Note issued February 2, 2024 by Airship AI Holdings, Inc. to Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.12 Amended and Restated Security Agreement dated February 2, 2024 between Airship AI Holdings, Inc. and Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.13 Amended and Restated Guaranty dated February 2, 2024 between Airship AI Holdings, Inc., Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.14 Amended and Restated Subordination Agreement dated February 2, 2024 between Airship AI Holdings, Inc. and Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 79 Table of Contents 10.15 Amended and Restated Senior Secured Convertible Promissory Note issued February 2, 2024 by Airship AI Holdings, Inc. to Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.16 Amended and Restated Security Agreement dated February 2, 2024 between Airship AI Holdings, Inc. and Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.17 Amended and Restated Guaranty dated February 2, 2024 between Airship AI Holdings, Inc., Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.18 Amended and Restated Subordination Agreement dated February 2, 2024 between Airship AI Holdings, Inc. and Platinum Capital Partners Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2024). 10.19 Extension Agreement between Airship AI Holdings, Inc. and Platinum Capital Partners Inc. dated June 22, 2024. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on June 24, 2024). 10.20 Placement Agency Agreement dated August 29, 2024, between the Company and Roth Capital Partners, LLC and The Benchmark Company, LLC (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2024). 10.21 Securities Purchase Agreement, dated August 29, 2024, between the Company and the purchaser party thereto (incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2024). 10.22 Form of Lock-up Agreement (incorporated by reference to Exhibit 10.16 of the registrant’s Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-281333), filed with the SEC on August 22, 2024). 10.23 Master Loan Agreement dated September 27, 2024 by and between the Company and Victor Huang (incorporated by reference to Exhibit 10.4 of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2024). 14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2023). 19.1 Insider Trading Policy 16.1 Letter from Marcum LLP, dated December 28, 2023 (incorporated by reference to Exhibit 16.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2023). 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 28, 2023). 31.1* Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 97.1 Clawback Policy (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on January 4, 2024). 99.1 Audit Committee Charter (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed with the SEC on January 3, 2024). 99.2 Compensation Committee Charter (incorporated by reference to Exhibit 99.2 to the registrant’s Current Report on Form 8-K filed with the SEC on January 3, 2024). 99.3 Nominations and Corporate Governance Committee Charter (incorporated by reference to Exhibit 99.3 to the registrant’s Current Report on Form 8-K filed with the SEC on January 3, 2024). 101.INS* Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because iXBRL tags are embedded within the Inline XBRL document). 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Labels Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104* Cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 formatted in Inline XBRL (included in Exhibit 101). * Filed herewith + Indicates a management or compensatory plan. † Certain schedules and similar attachments to this Exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request. 80 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Airship AI Holdings, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Airship AI Holdings, Inc. (a Delaware corporation) (the “Company”) as of December 31, 2024 and 2023 and the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the auditing standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BPM LLP We have served as the Company’s auditor since 2021. Santa Rosa, California February 28, 2025 F-1 Table of Contents AIRSHIP AI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2024 and 2023 December 31, 2024 December 31, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,414,830 $ 3,124,413 Accounts receivable, net of allowance for credit losses of $ 0 1,226,757 1,648,904 Prepaid expenses and other 17,883 18,368 Income tax receivable - 7,230 Total current assets 12,659,470 4,798,915 PROPERTY AND EQUIPMENT, NET - 1,861 OTHER ASSETS Other assets 165,960 182,333 Operating lease right of use asset 882,024 1,104,804 TOTAL ASSETS $ 13,707,454 $ 6,087,913 LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable - trade $ 759,480 $ 2,908,472 Advances from founders 1,300,000 1,750,000 Accrued expenses 51,649 200,531 Senior Secured Convertible Promissory Notes - 2,825,366 Current portion of operating lease liability 305,178 174,876 Deferred revenue- current portion 3,238,483 4,008,654 Total current liabilities 5,654,790 11,867,899 NON-CURRENT LIABILITIES: Operating lease liability, net of current portion 638,525 943,702 Warrant liability 34,180,618 667,985 Earnout liability 23,304,808 5,133,428 Deferred revenue- non-current 2,951,850 4,962,126 Total liabilities 66,730,591 23,575,140 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' DEFICIT: Preferred stock - no par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2024 and December 31, 2023 - - Common stock - $ 0.0001 par value, 200,000,000 shares authorized, 30,588,413 and 22,812,048 shares issued and outstanding as of December 31, 2024 and 2023 3,056 2,281 Additional paid in capital 21,918,867 - Accumulated deficit ( 74,941,590 ) ( 17,476,700 ) Accumulated other comprehensive loss ( 3,470 ) ( 12,808 ) Total stockholders' deficit ( 53,023,137 ) ( 17,487,227 ) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 13,707,454 $ 6,087,913 The accompanying notes are an integral part of these consolidated financial statements. F-2 Table of Contents AIRSHIP AI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME For the years ended December 31, 2024 and 2023 Year Ended Yar Ended December 31, 2024 December 31, 2023 NET REVENUES: Product $ 18,716,196 $ 7,439,045 Post contract support 4,334,017 4,692,487 Other services - 168,052 Revenues 23,050,213 12,299,584 COST OF NET REVENUES: Cost of Sales 10,843,766 4,767,159 Post contract support 1,679,692 1,681,267 Other services - 86,841 Cost of revenue 12,523,458 6,535,267 GROSS PROFIT 10,526,755 5,764,317 RESEARCH AND DEVELOPMENT EXPENSES 2,804,894 2,729,492 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,226,974 9,675,190 TOTAL OPERATING EXPENSES 14,031,868 12,404,682 OPERATING LOSS ( 3,505,113 ) ( 6,640,365 ) OTHER (EXPENSE) INCOME: (Loss) gain from change in fair value of earnout liability ( 18,171,380 ) 21,976,349 (Loss) gain from change in fair value of warrant liability ( 33,512,633 ) 1,341,120 Loss from change in fair value of convertible debt ( 141,636 ) ( 240,784 ) Loss on note conversion ( 1,144,676 ) - Interest expense, net ( 1,003,096 ) ( 55,685 ) Other income (expense) 13,644 ( 9,501 ) Total other (expense) income, net ( 53,959,777 ) 23,011,499 (LOSS) INCOME BEFORE PROVISON FOR INCOME TAXES ( 57,464,890 ) 16,371,134 Provision for income taxes - - NET (LOSS) INCOME ( 57,464,890 ) 16,371,134 OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation income (loss), net 9,338 ( 2,702 ) TOTAL COMPREHENSIVE (LOSS) INCOME $ ( 57,455,552 ) $ 16,368,432 NET (LOSS) INCOME PER SHARE: Basic $ ( 2.34 ) $ 1.20 Diluted $ ( 2.34 ) $ 0.80 Weighted average shares of common stock outstanding Basic 24,585,955 13,671,376 Diluted 24,585,955 20,390,663 The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents AIRSHIP AI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT For the years ended December 31, 2024 and 2023 Common Stock Additional Paid in Accumulated Other Comprehensive (Loss) Total Stockholders' Shares Amount Capital Deficit Gain Deficit $ Balance as of January 1, 2023 13,387,344 $ 1,339 $ 1,964,669 $ ( 10,314,313 ) $ ( 10,106 ) $ ( 8,358,411 ) Stock-based compensation- stock option grants - - 715,727 - - 715,727 Stock-based compensation- warrants - - 2,136,115 - - 2,136,115 Reverse recapitalization on December 21, 2023 9,424,704 942 ( 4,816,511 ) ( 23,533,521 ) - ( 28,349,090 ) Foreign currency translation loss - - - - ( 2,702 ) ( 2,702 ) Net income - - - 16,371,134 - 16,371,134 Balance as of December 31, 2023 22,812,048 2,281 - ( 17,476,700 ) ( 12,808 ) ( 17,487,227 ) Balance as of January 1, 2024 22,812,048 2,281 - ( 17,476,700 ) ( 12,808 ) ( 17,487,227 ) Stock-based compensation - - 1,078,344 - - 1,078,344 Stock based compensation- warrants - - 284,478 - - 284,478 Issuance of common stock for services 65,000 5 198,495 - - 198,500 Issuance of common stock for conversion of debt 1,134,452 112 4,114,719 - - 4,114,831 Issuance of common stock for exercise of warrants, net 3,046,452 305 7,704,235 - - 7,704,540 Issuance of common stock for stock options exercise 415,218 42 240,465 - - 240,507 Issuance of common stock for debt interest payment 232,360 23 1,008,419 - - 1,008,442 Issuance of common stock and warrants for offering, net 2,882,883 288 7,289,712 - - 7,290,000 Foreign currency translation gain - - - - 9,338 9,338 Net loss - - - ( 57,464,890 ) - ( 57,464,890 ) Balance as of December 31, 2024 30,588,413 $ 3,056 $ 21,918,867 $ ( 74,941,590 ) $ ( 3,470 ) $ ( 53,023,137 ) (1) The shares of the Company's common stock, prior to the Merger, have been retroactively restated as shares reflecting the exchange ratio of approximately 1.7581 established in the Merger described in Note 1. The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents AIRSHIP AI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2024 and 2023 Year Ended Year Ended December 31, 2024 December 31, 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 57,464,890 ) $ 16,371,134 Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 1,861 14,879 Stock-based compensation 1,078,344 715,727 Stock-based compensation- warrants 284,478 2,136,115 Amortization of operating lease right of use asset 222,780 596,556 Accelerated amortization of ROU asset - lease termination - 265,130 Gain from lease termination - ( 344,093 ) Issuance of common stock for services 198,500 - Noncash interest expense 1,008,419 - Loss (gain) from change in fair value of warrant liability 33,512,633 ( 1,341,120 ) Loss (gain) from change in fair value of earnout liability 18,171,380 ( 21,976,349 ) Loss from change in fair value of convertible note 141,636 240,784 Loss on note conversion 1,144,676 - Non cash interest, net - 65,487 Changes in operating assets and liabilities: Accounts receivable 422,147 ( 943,152 ) Prepaid expenses and other 485 ( 2,329 ) Other assets 16,373 ( 182,333 ) Operating lease liability ( 174,875 ) ( 531,621 ) Payroll and income tax receivable 7,230 960,383 Accounts payable - trade and accrued expenses ( 2,294,698 ) 666,136 Deferred revenue ( 2,780,447 ) ( 2,667 ) NET CASH USED IN OPERATING ACTIVITIES ( 6,503,968 ) ( 3,291,333 ) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock and warrants for offering, net 7,290,000 - Proceeds from convertible promissory note - 2,584,582 Proceeds from warrant exercise, net 7,704,540 - Advances from founders, net ( 450,000 ) 1,150,000 Proceeds from reverse recapitalization - 2,809,792 Proceeds from stock option exercises 240,507 - Repayment of small business loan and line of credit - ( 424,540 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 14,785,047 6,119,834 NET INCREASE IN CASH AND CASH EQUIVALENTS 8,281,079 2,828,501 Effect from exchange rate on cash 9,338 ( 2,702 ) CASH AND CASH EQUIVALENTS, beginning of period 3,124,413 298,614 CASH AND CASH EQUIVALENTS, end of period $ 11,414,830 $ 3,124,413 Supplemental disclosures of cash flow information: Interest paid $ 11,913 $ 21,438 Taxes paid $ 2,410 $ 17,247 Noncash investing and financing Elimination of advances to founders in connection with contribution of Zeppelin by shareholders $ - $ 1,100,000 Elimination of payables to founders in connection with contribution of Zeppelin by shareholders $ - $ 1,100,000 Issuance of common stock for debt interest payment $ 1,008,442 $ - Issuance of common stock for debt conversion $ 4,114,831 $ - Recognition of warrant liability $ - $ 15,418 Recognition of right-of-use asset $ - $ 1,162,152 Recognition of operating lease liability $ - $ 1,162,152 Noncash activity related to Merger- Recognition of warrant liability $ - $ 2,009,105 Recognition of earnout liability $ - $ 27,109,777 Recognition of accounts payable $ - $ 1,500,000 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents AIRSHIP AI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Airship AI Holdings, Inc. (the “Company” or “Airship”) is a holding company incorporated in Delaware that executes business through its wholly owned subsidiary, Airship AI, Inc. (“Airship AI”). Prior to the formation of Super Simple AI, Inc. in 2022, the Company operated as Airship AI, Inc. (formerly known as JDL Digital Systems, Inc.). On March 7, 2023, Super Simple AI, Inc. changed its name to Airship AI Holdings, Inc. Super Simple AI, Inc. was formed in January 2022 through a share exchange with JDL Digital Systems, Inc. JDL Digital Systems, Inc. was incorporated under the laws of the State of Washington on June 30, 2003. On December 21, 2023, the Company completed the merger (“the Merger”) contemplated by the merger agreement (the “Merger Agreement”) dated as of June 27, 2023 and amended on September 22, 2023, by and among BYTE Acquisition Corp. (“BYTS”), BYTE Merger Sub, Inc., a Washington corporation and a direct, wholly-owned subsidiary of BYTS (“Merger Sub”), and Airship AI. Effective December 21, 2023, Merger Sub merged with and into Airship AI with Airship AI as the surviving corporation. Thus, Airship AI became a wholly-owned subsidiary of the Company. In connection with the Merger, Airship AI changed its name from “Airship AI Holdings, Inc.” to “Airship AI, Inc.” See Note 11 —Reverse Recapitalization for additional information. Fair Value Transactions in Connection with Merger As a result of the Merger, the Company entered into the following transactions that were measured at fair value and vary quarterly with the share price and other items. Any change is non-cash and is recorded as a gain or loss in other income (expense). See Note 14– Fair Value Measurements for more information. Common Stock and Warrant Offering after Merger On September 3, 2024, the Company closed an $ 8 million public offering with net proceeds of approximately $ 7.3 million, after deducting the estimated offering expenses payable by the Company, including the placement agent fees. The offering consisted of 2,882,883 shares of its common stock and warrants to purchase up to an aggregate of 2,882,883 shares of its common stock at a combined public offering price of $2.775 per share and associated common stock warrant. The warrants have an exercise price of $ 2.65 per share, are exercisable immediately upon issuance, and will expire five years following the date of issuance. The warrants are classified as a component of permanent equity because they are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, do not embody an obligation for the Company to repurchase its shares, and permit the holders to receive a fixed number of shares of common stock upon exercise. On December 24, 2024, the Company 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, 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. The Inducement Warrants are classified as a component of permanent equity because they are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, do not embody an obligation for the Company to repurchase its shares, and permit the holders to receive a fixed numbers of shares of common stock upon exercise. See Note 6 – Stockholders’ Deficit for more information. Liability as of Liability as of December 31, 2024 December 31, 2023 Earnout liability $ 23,304,808 $ 5,133,428 Senior Secured Convertible Promissory Notes - 2,825,366 Warrant liability (Public Warrants) 33,124,868 646,428 Warrant liability (Private Warrants) 1,055,750 21,557 Total liabilities measured at fair value $ 57,485,426 $ 8,626,779 Other (loss) income related to instruments recorded at fair value during the year ended December 31, 2024 and 2023 $ ( 51,825,649 ) $ 23,076,685 F-6 Table of Contents Private Placement and Public Warrants in Connection with the Merger At the Merger closing, the Company assumed 515,000 private placement warrants and 16,184,612 public warrants. On June 3, 2024, the Company permanently reduced the exercise price of such warrants from $ 11.50 per share to an exercise price of $ 7.80 per share. On November 20, 2024, the Company further reduced the exercise price of the 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. As of December 31, 2024, there were 515,000 private placement warrants and 16,158,410 public warrants outstanding. See Note 12– Private Placement and Public Warrants for more information. Business The Company is a robust AI-driven data management platform that solves complex data challenges for large institutions operating in dynamic and mission-critical environments with rapidly increasing volumes of data being ingested from a similarly rapidly growing number of data sources. The Company solves these challenges by structuring “dark” or unstructured data at the edge, the location at which the data is generated and collected, and leveraging purpose-built AI models. Unstructured, or “dark” data, which is typically categorized as qualitative data, cannot be processed and analyzed via conventional data tools and methods. Conversely, structured data, typically categorized as quantitative data, is highly organized and easily decipherable by machine learning algorithms. Structuring and then analyzing data using AI models at the edge, versus transmitting the data from the edge back to a central processing location for structuring and analysis, enables real-time decision making and data-driven operational efficiency. The Company specializes in ingesting all available metadata from edge-based sensors used by government and law enforcement agencies around the world, including surveillance cameras (video), audio, telemetry, acoustic, seismic, and autonomous devices, along with large commercial corporations with fundamentally similar capabilities and requirements. Data generated by these edge-based sensors, including video, can then be run through the Company’s trained AI models to detect objects present within the video frame. Once an object is detected, for example an automobile, additional identifying characteristics of the object can be extracted from the image including the license plate characters and the make, model, and color of the automobile. This process of analyzing, logging and categorizing ingested data is referred to as “structuring” the data. Airship AI’s software allows customers to view structured data both in real-time as well as to conduct searches on the structured data at a later point in time. Real-time structured data use includes, for example, alarms on a specific license plate or a specific make, model or color of automobile. Non-real-time structured data use includes, for example, searching a database of video data that has been previously ingested and stored to find instances of a particular license plate being visible, along with other logged vehicle characteristics such as make, model and color of an automobile. F-7 Table of Contents Additional edge deployed AI models enable similar object detection and recognition of common and custom trained objects, such as an aircraft, boat, person, animal, bag, or weapon. Airship AI’s models provide similar data points for these object types allowing analysts the ability to be notified in real-time of the detection of a specified object and similarly search for historically detected objects. Examples include detecting aircrafts and boats along with their respective tail numbers and hull registration numbers. The Company’s AI modelling process starts with pre-trained AI models from its technology ecosystem partners which the Company then customizes using proprietary datasets tailored towards its customers’ unique workflow requirements. Where customers have pre-existing AI models or engines, the Company integrates those models or engines into its edge platform allowing customers to leverage proprietary models within the Airship AI software ecosystem. The Company’s primary offerings include Outpost AI, Acropolis, and Airship Command. Its offerings allow customers to manage their data across the full data lifecycle, when and where they need it, using a highly secure permissioned based architecture. The Company employed fifty-one employees as of December 31, 2024. The employees are headquartered in Redmond, WA and are supported by a growing team at its Customer Center of Excellence located in Charlotte, NC. The Company employed eight research and development personnel in Taiwan as of December 31, 2024. 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). For periods prior to the Merger, the reported share and per share amounts have been retroactively converted by the applicable exchange ratio with the exception of the authorized shares and shares reserved for issuance. See Note 11—Reverse Recapitalization for additional information. Functional Currency The Company’s reporting currency is the U.S. Dollar. The Company’s functional currency for U.S. operations is the U.S. Dollar. The operations of Zeppelin Worldwide, Inc. and its subsidiary, Zeppelin Taiwan, Ltd. (together “Zeppelin”) use the Taiwan Dollar as its functional currency. At each period end, Zeppelin’s balance sheet is translated into U.S. Dollars based upon the period end exchange rate, while their statements of operations and comprehensive loss and statements of cash flows are translated into U.S. Dollars based upon an average exchange rate during the period. Cash and Cash Equivalents The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $ 250,000 . The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit. Revenue Recognition and Deferred Revenue The Company primarily generates revenue from sales of systems and products and the related post contract support to customers. The Company’s primary systems and products include Outpost AI, Acropolis and Airship Command. To date, the majority of the Company’s product revenue that has been recognized consists primarily of a bundled offering of hardware and software which delivers on premise solutions to its customers. Separate limited software subscription services have been delivered to customers including those customers that are able to operate in a cloud-based environment. The transaction price recognized as revenue represents the amount the Company expects to be entitled to and is primarily comprised of product revenue, net of returns and variable consideration, including sales incentives provided to customers. Payment is typically due within 30 to 90 calendar days of the invoice date. F-8 Table of Contents The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price, and (5) recognize revenue when or as the Company satisfies a performance obligation, as further described below. The Company generally provides a warranty to its customers for its software products and services. In the event that there is a failure of warranties in such agreements, the Company is generally obligated to correct the product or service to conform to the warranty provision as set forth in the applicable agreement, or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product and service (generally prorated over the contract term). For the years ended December 31, 2024 and 2023, the Company did not incur any significant warranty expenses and as such a warranty reserve was not considered necessary as of December 31, 2024 and 2023. Product Revenue Product revenue is derived primarily from sales of the Company’s system offerings, Outpost AI, Acropolis and Airship Command. The Company recognizes product revenue at a point in time when title transfers, when the products are shipped, or when control of the system is transferred to the customer, which usually is upon delivery of the system and when contractual performance obligations have been satisfied. Post Contract Support Revenue Post Contract Support (“PCS”) revenue is derived primarily from the Company’s support and software maintenance agreements (“SMA”). The Company’s PCS includes the right to receive, on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, and email and telephone support. The Company allocates a portion of the transaction price to the PCS performance obligation based on a cost-plus methodology and recognizes the associated revenue on a straight-line basis over the estimated term of the support period. The Company’s support contracts are typically one to five years with an average of four years, payment is due within 30 to 90 calendars days of the invoice date and may include options to renew. For the years ended December 31, 2024 and 2023, the Company recognized revenue of $ 339,947 and $ 196,739 , respectively, related to one-year support contracts. For the years ended December 31, 2024 and 2023, the Company recognized revenue of $ 3,994,070 and $ 4,495,748 respectively, related to multi-year support contracts. Other Services The Company earns other service revenues from installation services, training and licensing which are short-term in nature and revenue for these services are recognized at the time of performance when the service is provided. For the years ended December 31, 2024 and 2023, the Company recognized revenue of $ 0 and $ 168,052 , respectively, related to other services. Contracts with Multiple Performance Obligations The Company’s contracts with customers often contain multiple performance obligations that can include three separate obligations: (i) a hardware component (which may be bundled with hardware accessories) and the embedded firmware essential to the functionality of the hardware component delivered at the time of sale; (ii) the right to the Company’s downloadable free application and software solutions, and (iii) the right for the customer to receive post contract support (“PCS”) after the initial sale. The Company’s products and PCS offerings have significant standalone functionalities and capabilities. Accordingly, the products are distinct from the Company’s PCS services as customers can benefit from the products without the PCS services and such PCS services are separately identifiable within the contracts. The Company accounts for multiple agreements with a single customer as a single contract if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. The amount of consideration the Company expects to receive in exchange for delivering on the contract is allocated to each performance obligation based on its relative standalone selling price. F-9 Table of Contents The Company establishes the standalone selling price using the prices charged for a deliverable when sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price based on its pricing model and offering type (products or PCS services). The Company has elected the practical expedient to not assess whether a contract has a significant financing component as the Company’s standard payment terms are less than one year. The Company sells its products primarily through a direct sales force. The Company considers revenue to be earned when all of the following criteria are met: · The Company has a contract with a customer that creates enforceable rights and obligations, · Promised performance obligations are identified, · The transaction price, or the amount the Company expects to receive, is determinable and · The Company has satisfied the performance obligations to the customer. Transfer of control is evidenced upon passage of title and risk of loss to the customer unless the Company is required to provide additional services. The Company’s short-term and long-term deferred revenue balances totaled $ 3,238,483 and $ 2,951,850 as of December 31, 2024. The Company’s short-term and long-term deferred revenue balances totaled $ 4,008,654 and $ 4,962,126 as of December 31, 2023. Of the deferred revenue balance of $ 8,970,780 and $ 8,973,447 as of January 1, 2024 and 2023, the Company recognized approximately $ 4,008,654 and $ 4,168,016 during the years ended December 31, 2024 and 2023, respectively. Accounts Receivable and Provision for Credit Losses The Company generally sells its products to large governmental entities and large corporations in the United States. Accounts receivable are recorded at invoiced amounts and are non-interest bearing. The Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (codified as Accounting Standards Codification (“ASC”) 326) on January 1, 2023. ASC 326 adds to U.S. GAAP the current expected credit loss (“CECL”) model, a measurement model based on expected losses rather than incurred losses. Prior to the adoption of ASC 326, the Company evaluated receivables regularly and adjusted the allowance for doubtful accounts accordingly. The Company determined estimates of uncollectible accounts receivable based primarily on actual historical bad debt and sales return trends, customers financial condition and general economic conditions. Under the application of ASC 326, the Company’s historical credit loss experience provides the basis for the estimation of expected credit losses, as well as current economic and business conditions, and anticipated future economic events that may impact collectability. In developing its expected credit loss estimate, the Company evaluated the appropriate grouping of financial assets based upon its evaluation of risk characteristics, including consideration of the types of products and services sold. Account balances are written off against the allowance for expected credit losses after all means of collection have been exhausted and the potential for recovery is considered remote. Occasionally certain long-standing customers, who routinely place large orders, will have unusually large receivables balances relative to the total gross receivables. Management monitors the payments for these large balances closely and very often requires payment of existing invoices before shipping new sales orders. As of December 31, 2024 and 2023, the Company did not have a reserve for credit losses as all accounts receivable are considered collectible. Accounts receivable balances as of January 1, 2023, December 31, 2023 and December 31, 2024 were $705,752, $ 1,648,904 and $ 1,226,757 , respectively. F-10 Table of Contents Concentration of Credit and Sales Risk The Company sells its product to commercial and government customers under agreements that are normally paid within 30 days of contract completion. For the year ended December 31, 2024, the Company had revenue from seventy-four customers and one customer represented 57 % of total revenue, although such a high level of customer concentration is not typical. The primary reason for the high level of customer concentration for the year ended December 31, 2024 was due to one large order received in late 2023 which was fulfilled in the year ended December 31, 2024. As of December 31, 2024, four customers represent approximately 36 %, 25 %, 19 % and 12 % of outstanding account receivables. Due to the nature of the customers and timely payment history, customer concentration and credit risk in account receivables is estimated to be minimal. For the year ended December 31, 2023, three customers represented 34 %, 21 % and 12 % of total revenue from 58 customers, although such a high level of customer concentration is not typical. As of December 31, 2023, three customers represented approximately 51 %, 26 % and 17 % of outstanding account receivables. Due to the nature of the customers and timely payment history, customer concentration and credit risk in account receivables is estimated to be minimal. Inventory The Company’s purchase of inventory, primarily computer servers, is undertaken to match purchase orders received from customers. Upon receipt of inventory, the Company generally configures the servers and loads proprietary software onto the servers before shipping out. The Company holds inventory for a short period of time and as of December 31, 2024 and 2023, it had no inventory in stock. Inventory value is primarily material costs and is valued at the lower of cost (first in, first out method) or net realizable value. Long-Lived Assets The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results. The Company recorded impairment losses of $ 0 for the years ended December 31, 2024 and 2023. Research and Development Expenses Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes as well as materials, supplies and facilities used in producing prototypes. The Company’s current research and development efforts are primarily focused on improving the Company’s products. The Company is also actively involved in identifying new applications. The Company’s current internal team along with outside consultants has considerable experience working with the application of the Company’s technologies and their applications. The Company engages third party experts as required to supplement the Company’s internal team. The Company believes that continued development of new and enhanced technologies is essential to the Company’s future success. The Company incurred research and development expenses of $ 2,804,894 and $ 2,729,492 for the years ended December 31, 2024 and 2023, respectively, on development activities. Software Development Costs Costs incurred in the development of software programs for the Company’s products are charged to operations as incurred until technological feasibility of the software has been established. Generally, technological feasibility is established when the software module performs its primary functions described in its original specifications, contains features required for it to be usable in a production environment, is completely documented and the related hardware portion of the product is complete. After technological feasibility is established, any additional costs are capitalized. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use. No software development costs have been capitalized as of December 31, 2024 and 2023. F-11 Table of Contents Cost of Net Revenues Cost of net revenues for products includes components and freight. Cost of net revenues for post contract support and other services includes primarily the cost of personnel and personnel-related expenses to conduct implementations and ongoing client support. Advertising Advertising costs are charged to selling, general and administrative expenses as incurred. Advertising and marketing costs for the years ended December 31, 2024 and 2023 were $ 8,500 and $ 94,272 , respectively. Shipping and Handling of Products Amounts billed to customers for shipping and handling of products are included in net revenues. Costs incurred related to shipping and handling of products are included in cost of revenues. Fair Value Measurements Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels: Level 1 — Quoted prices in active markets for identical assets and liabilities; Level 2 — Inputs other than level one inputs that are either directly or indirectly observable; and Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement. 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 Notes, earnout liability (unvested earnout shares), and the warrants that were issued with the Convertible Promissory Notes at fair value, remeasured on a recurring basis and considered them as Level 3 instruments. The public and private warrants were considered Level 1 and 2 instruments, respectively. The fair value of the vested earnout shares was considered a Level 1 instrument. The method of determining the fair value of the Senior Secured Convertible Promissory Notes and attached warrants is described below. 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). F-12 Table of Contents Accounting for Senior Secured Convertible Promissory Notes at Fair Value The Company has elected the fair value option to account for the senior secured convertible promissory note that was issued on June 22, 2023 and the convertible notes that were issued in October and November 2023 with changes in fair value recorded in the Consolidated Statements of Operations and Comprehensive Loss. As a result of applying the fair value option, direct costs and fees related to the convertible notes are recognized in earnings as incurred and not deferred. Values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the liability. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. As of December 31, 2024, the Company has used a Monte Carlo simulation pricing model that factors in potential outcomes being consummated, such as the convertible notes being repaid in cash and the convertible notes being converted to common stock. All of these scenarios take into consideration the terms and conditions of the underlying convertible notes plus potential changes in the underlying value of the common stock. For the years ended December 31, 2024 and 2023, the Company recognized an unrealized loss of $141,636 and $240,724, respectively for the change in fair value of the senior secured convertible promissory notes and is included in the Consolidated Statements of Operations and Comprehensive Loss. The Company believes accounting for the senior secured convertible promissory notes at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility. All of the Company’s senior secured convertible promissory notes were converted to equity during the year ended December 31, 2024. Derivative Liabilities and Earnout Liabilities The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued share purchase warrants and earnout shares to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. 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). At the Merger closing, the Company assumed 515,000 private placement warrants and 16,184,612 public warrants. On June 3, 2024, the Company permanently reduced the exercise price of such warrants from $ 11.50 per share to an exercise price of $ 7.80 per share. On November 20, 2024, the Company further reduced the exercise price of the 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. As of December 31, 2024, there were 515,000 private placement warrants and 16,158,410 public warrants outstanding. See Note 12– Private Placement and Public Warrants for more information. Upon consummation of the Merger, the Company evaluated the warrants and concluded that they did not meet the criteria to be classified within the stockholders’ deficit. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The initial estimated fair value of the warrants was measured using a Monte Carlo simulation. The subsequent estimated fair value of the public warrants is based on the listed price in an active market for such warrants while the fair value of the private placement warrants continues to be measured using a Monte Carlo simulation with the key inputs being directly or indirectly observable public warrants listed price. Since the public and private warrants meet the definition of a derivative, the Company recorded the public and private warrants as liabilities on the consolidated balance sheet at fair value upon the Merger closing, with subsequent changes in the fair value recognized in the consolidated statements of operations at each reporting date. At the closing of the Merger, the Airship AI securityholders that hold shares of common stock of Airship AI, Airship AI options, Airship AI earnout warrants or Airship AI SARs have the contingent right to receive up to 5.0 million additional shares of common stock, subject to certain contingencies. These earnout shares have been categorized into two components: (i) the vested shares that are associated with stockholders with vested equity at the closing of the Merger that will be earned upon achievement of the earnout milestones and (ii) the unvested shares associated with stockholders with unvested equity at the closing of the Merger that will be earned over the remaining service period with the Company on their unvested equity shares and upon achievement of the earnout milestones. F-13 Table of Contents The earnout shares associated with vested shares are recognized as derivative liabilities in accordance with ASC 815-40, as the events that determine the number of earnout shares required to be released or issued, as the case may be, include events that were not solely indexed to the fair value of common stock of the Company. The earnout shares were measured at the Merger closing and subsequently measured at each reporting date until settled or when they met the criteria for equity classification. Accordingly, the Company recognizes the earnout shares as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The earnout shares were valued using a Monte Carlo analysis. At the closing of the Merger, the earnout shares associated with unvested underlying shares were considered to be equity instruments and valued at approximately $ 2,675,000 . This amount will be recognized as stock-based compensation going forward over the five-year vesting period. Derivative warrant and earnout shares liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of significant current assets or require the creation of current liabilities. Stock-Based Compensation The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, stock appreciation rights, incentive stock options, nonqualified stock options, unvested earnout shares and warrants to purchase shares of common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by the Company at the grant date and the fair value of the award is recognized as an expense, over the requisite service period which is generally the vesting period. The Company adjusts stock-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. Income Taxes Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The Company’s ability to realize deferred tax assets depends upon future taxable income, as well as the limitations discussed below. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized prior to expiration. The Company considers historical and future taxable income, future reversals of existing taxable temporary differences, taxable income in prior carryback years, and ongoing tax planning strategies in assessing the need for valuation. Comprehensive Gain (Loss) Comprehensive gain is defined as the change in equity of a business during a period from non-owner sources. There was other comprehensive gain of $ 9,338 and loss of $ 2,702 related to foreign exchange translation for the years ended December 31, 2024 and 2023, respectively. Going Concern Assessment The Company applies Accounting Standards Codification 205-40 (“ASC 205-40”), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , which the Financial Accounting Standards Board (“FASB”) issued to provide guidance on determining when and how reporting companies must disclose going concern uncertainties in their consolidated financial statements. ASC 205-40 requires management to perform assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s consolidated financial statements (or within one year after the date on which the consolidated financial statements are available to be issued, when applicable). Further, a company must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern” and management plans to alleviate the going concern. In February 2025, the Company analyzed its cash requirements and operations at least through February 2026 and has determined that, based upon the Company’s current available cash and operations, the Company has no substantial doubt about its ability to continue as a going concern. F-14 Table of Contents Use of Estimates In preparing these consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s consolidated financial statements relate to the calculation of revenue recognition, stock-based compensation, valuation of common stock, valuation of senior secured convertible notes, warrant liability, earnout share liabilities, accruals for potential liabilities including income taxes, valuation of deferred tax assets and valuation assumptions related to share-based compensation. (Loss) Income Per Share Basic (loss) income per share is based upon the net (loss) income for the years ended December 31, 2024 and 2023 divided by the weighted average shares of common stock outstanding. Diluted net income per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, warrants, convertible notes payable and stock appreciation rights) outstanding during the period using the treasury stock method for the year ended December 31, 2023. Common stock equivalents for the year ended December 31, 2024 are not included in the calculation of diluted earnings (loss) per share given the Company incurred a loss and they are anti-dilutive. See Note 15—Earnings per share. Reportable Segments 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. 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 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. Accordingly, all operations are considered by the CODM 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. Recent Accounting Pronouncements All recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements. 3. Advances due to and from Founders Advances due to Founders Prior to 2023, the founders had advanced the Company a net $ 600,000 . In the year ended December 31, 2023, Mr. Huang and Mr. Xu advanced Airship AI a total of $ 1,350,000 and were repaid a total of $ 200,000 , with $ 1,750,000 recorded as advances from founders as of December 31, 2023. During 2024, Mr. Huang and Mr. Xu advanced Airship AI $ 2,100,000 and were repaid $ 2,550,000 , with $ 1,300,000 recorded as advances from founders as of December 31, 2024. The outstanding advances as of December 31, 2024 are non-interest bearing and the Company expects to pay the balance off within a one-year period. F-15 Table of Contents Master Loan Agreement 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 %. The Company paid interest for the 2024 advances (described under “Founder Advances” above) 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. The $ 284,478 fair value of the warrant is recorded in permanent equity in the consolidated balance sheets and was fully expensed on the date of grant. There are no outstanding advances under this Master Loan Agreement as of December 31, 2024. 4. Revenues Disaggregation of Revenue The Company’s net revenues for the years ended December 31, 2024 and 2023 consisted of approximately $ 18.7 million and $ 7.4 million of hardware and software bundled systems for which revenue is transferred at a point in time. The Company’s remaining net revenue of approximately $ 4.3 million and $ 4.9 million relates to PCS revenue and other services which are transferred over time. Within each product category, contract terms, conditions and economic factors affecting the nature, amount, timing, and uncertainty around revenue recognition and cash flow are substantially similar. Contract Balances A receivable is recognized in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. The Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset. Receivables are generally paid within thirty days and there is no financing element to the customer contracts. As of December 31, 2024 and 2023, there are no unbilled receivable balances. The Company’s short-term and long-term deferred revenue balances totaled $ 3,238,483 and $ 2,951,850 as of December 31, 2024. The Company’s short-term and long-term deferred revenue balances totaled $ 4,008,654 and $ 4,962,126 as of December 31, 2023. Of the deferred revenue balance of $ 8,970,780 and $ 8,973,447 as of January 1, 2024 and 2023, the Company recognized approximately $ 4,008,654 and $ 4,168,016 during the years ended December 31, 2024 and 2023, respectively. Remaining Performance Obligations As of December 31, 2024, the Company had approximately $ 6.2 million of remaining performance obligations, which were comprised of deferred service contracts not yet delivered. The Company expects to recognize approximately 52 % of its remaining performance obligations as revenue in fiscal 2025 and the remaining 48 % in fiscal 2026 and years thereafter. Costs to Obtain or Fulfill a Contract The Company does not pay any material variable compensation to obtain a customer contract. Additionally, the majority of the Company’s cost of fulfillment as a seller of products is classified as inventory and then cost of revenue when the product is sold. Other costs of contract fulfillment such as software maintenance are expensed in the period incurred and align with when the revenue is amortized. 5. Notes Payable and Convertible Notes Payable On June 22, 2023, the Company issued a $ 2,000,000 senior secured convertible promissory note to Platinum Capital Partners, Inc. F-16 Table of Contents On February 2, 2024, the Company issued an amended and restated senior secured convertible promissory note to Platinum in the principal amount of $ 2,000,000 . Interest accrued on the Platinum convertible note at the rate of 6 % per annum calculated on the basis of 360 days. At the option of Platinum, the $ 2,000,000 principal amount of the note plus any accrued but unpaid interest was convertible into shares of the Company’s common stock at a conversion price per share equal 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 $ 2.27 518, 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. In connection with the issuance of the Platinum convertible note, the Company issued to Platinum an amended and restated common stock purchase warrant dated February 2, 2024, to purchase 189,334 shares of the Company’s common stock at an exercise price per share of $3.69717. On March 18, 2024, Platinum exercised the Platinum warrant and received 137,367 shares of common stock. Platinum forfeited 51,967 shares. On June 22, 2024, the Company entered into an extension agreement related to the Platinum convertible note. The extension agreement extended the due date of the note to June 22, 2025. In consideration for entering into the extension agreement, the Company issued to Platinum 232,360 shares of the Company’s restricted common stock in payment of all interest and extension fees through June 22, 2025 with a value of $ 1,008,400 . Approximately $ 487,000 of the total payment related to the future interest periods and were initially recorded in prepaid expenses and other on the consolidated balance sheet. The Platinum convertible note was converted into equity as of December 31, 2024 and all prepaid interest was charged to expense for the year ended December 31, 2024. During the year ended December 31, 2024, the Company issued 879,051 shares of common stock related to the conversion of $ 2,000,000 of the senior secured convertible promissory note and recorded a loss on note conversion of $ 751,423 . On October 3, 2023, the Company 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, the Company issued an additional 86,198 shares of common stock related to the conversion of notes at $ 2.65 per share. The Company recognized a loss on debt conversion of $ 393,253 , respectively during the year ended December 31, 2024. The Company accounts for the notes under the fair value method of accounting and as of December 31, 2024 and December 31, 2023, the notes were recorded at $ 0 and $ 2,825,366 , respectively. During the year ended December 31, 2024, and prior to the conversion of the notes, the Company recorded an unrealized loss due to the decrease in the fair value of the convertible notes payable totaling $ 141,636 . During the year ended December 31, 2023, the Company recorded an unrealized loss due to the increase in the fair value of the convertible notes payable totaling $ 240,784 , respectively, which were recorded as gain or loss from change in fair value of convertible debt on the statement of operations and comprehensive loss. See Note 14 – Fair Value Measurements for more information. 6. Stockholders’ Deficit Authorized and Outstanding Stock The Company is a Delaware company and its affairs are governed by its certificate of incorporation, its bylaws and the Delaware General Corporation Law and the common law of the State of Delaware. The Company’s charter authorizes the issuance of 205,000,000 shares, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock, par value $ 0.0001 per share. Preferred Stock As of December 31, 2024 and 2023, there were no shares of preferred stock outstanding. F-17 Table of Contents Common Stock As of December 31, 2024 and 2023, there were 30,588,413 and 22,812,048 shares of common stock outstanding, respectively. Year Ended December 31, 2024 During the year ended December 31, 2024, the Company had the following sales of equity securities: On March 5, 2024, a private investor converted a senior secured convertible promissory note for $ 250,000 and interest into 70,502 shares of the Company’s common stock. On March 5, 2024, a private investor converted a senior secured convertible promissory note for $ 350,000 and interest into 98,702 shares of the Company’s common stock. On March 21, 2024, the Company issued 15,000 shares of common stock for services performed as of December 31, 2023 to MZHCI, LLC related to an investor relations consulting agreement. On May 16, 2024, the Company issued 50,000 shares of common stock to Pamria LLC for consulting and investor relations services. On June 22, 2024, the Company entered into an extension agreement with Platinum Capital Partners Inc. to extend the maturity date of the Platinum convertible note to June 22, 2025. In consideration for entering into the extension agreement, the Company issued to Platinum 232,360 shares of common stock in payment of all interest and extension fees through June 22, 2025. On September 3, 2024, the Company issued 2,882,883 shares of common stock at a combined price of $2.775 per share related to the closing of a public offering. On September 13, 2024, the Company issued an additional 86,198 shares of common stock related to the conversion of notes at $ 2.65 per share. During the year ended December 31, 2024, the Company issued 879,051 shares of common stock related to the conversion of $ 2,000,000 of the Platinum senior secured convertible promissory note at $ 2.27 5 per share. During the year ended December 31, 2024, the Company issued an aggregate of 415,218 shares of common stock upon the exercise of stock options at $ 0.58 weighted average price per share. During the year ended December 31, 2024, the Company issued an aggregate of 163,669 shares of common stock upon the exercise of various warrants at $ 4.92 weighted average price per share. On December 24, 2024, the Company issued 2,882,883 shares of common stock upon the exercise of warrants at an exercise price of $ 2.65 per share related to an inducement agreement. Year Ended December 31, 2023 During the year ended December 31, 2023, the Company issued 9,424,704 shares of common stock as part of the reverse recapitalization on December 21, 2023. 2023 Equity Incentive Plan The Company has adopted the 2023 Equity Incentive Plan (the “2023 Plan”), which plan was approved by stockholders at the extraordinary general meeting held in December 2023. Details on the equity incentive plan were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and filed with the SEC on April 1, 2024. The 2022 Combined Incentive and Non-Qualified Stock Option Plan (the “2022 Plan”) is no longer available for use for the grant of future awards. The 2022 Plan will continue to govern the terms of awards that have been granted under the 2022 Plan before, and that are still outstanding following the Merger. F-18 Table of Contents The aggregate number of shares of common stock initially reserved and available for grant and issuance under the 2023 Plan is 4,000,000 . Such aggregate number of shares of stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2024 and ending on January 1, 2033, in an amount equal to 2.0 % of the total number of shares of common stock outstanding on December 31 of the preceding year. The aggregate number of shares of common stock reserved for grant and issuance under the 2023 Plan is 3,178,053 as of December 31, 2024. The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period which an employee is required to provide service in exchange for the award-the requisite service period. The Company had the following stock option activity during the years ended December 31, 2024 and 2023: During the year ended December 31, 2024, the Company granted stock options to employees to purchase an aggregate of 1,590,000 shares of common stock with a weighted average exercise price of $ 3.47 per share and which vest primarily quarterly over four years and expire March to August 2034. During the year ended December 31, 2024, five employees voluntarily cancelled stock options to purchase an aggregate of 300,000 shares of common stock with a weighted average exercise price of $ 6.85 per share. Another employee forfeited 11,812 stock options with an exercise price of $ 1.64 per share. During the year ended December 31, 2024, the Company issued an aggregate of 415,218 shares of common stock and received $ 240,465 upon the exercise of stock options at a weighted average exercise prices of $ 0.58 per share. During the year ended 31, 2023, the Company granted stock options to purchase an aggregate of 502,522 shares of common stock with a weighted average exercise price of $ 1.64 per share. Stock option activity for the years ended December 31, 2024 and 2023 were as follows: Options Weighted Average Shares Exercise Price Outstanding as of January 1, 2023 4,162,067 $ 0.411 Granted 502,522 1.640 Outstanding as of December 31, 2023 4,664,589 0.54 Granted 1,590,000 3.47 Exercised ( 415,218 ) ( 0.58 ) Forfeited ( 311,812 ) ( 6.65 ) Outstanding as of December 31, 2024 5,527,559 $ 1.04 The following table summarizes information about stock options outstanding and exercisable as of December 31, 2024: Weighted Weighted Weighted Average Average Weighted Average Remaining Life Range of Number Remaining Life Average Number Exercise Price In Years - Vested Exercise Prices Outstanding In Years Exercise Price Exerciseable Exerciseable and Exercisable $ 0.12 2,427,033 4.04 $ 0.12 2,427,033 $ 0.12 4.04 0.57 922,963 3.52 0.57 922,963 0.57 3.52 1.49-1.65 1,062,750 7.46 1.64 531,779 1.64 7.46 1.90 49,813 2.98 1.90 12,453 1.90 2.98 2.86-2.95 1,065,000 9.79 2.91 65,625 2.91 9.79 5,527,559 5.74 $ 1.04 3,959,853 $ 0.48 5.74 F-19 Table of Contents There were 5,527,559 options to purchase common stock at a weighted average exercise price of $ 1.04 per share outstanding as of December 31, 2024 under the 2023 Plan and the 2022 Plan. The Company recorded $ 570,614 and $ 715,727 of compensation expense, net of related tax effects, relative to stock options for the years ended December 31, 2024 and 2023, respectively, in accordance with ASC 718. As of December 31, 2024, there was $ 2,463,249 of total unrecognized costs related to employee granted stock options that were not vested. These costs are expected to be recognized over a period of approximately 3.5 years. In August 2024, the Company cancelled out-of-the money options to exercise 300,000 shares held by current employees and replaced them with 525,000 options at lower exercise prices. The new options were subject to the same service-based vesting schedule as the original options. The Company accounted for the replacement options as a modification of the terms of the cancelled option awards and in accordance with ASC 718-20-35-2A, the Company will recognize additional $ 205,879 stock compensation expense over the remaining vesting period as the incremental cost measured as the excess of the fair value of the replaced options on the grant date using the Black-Scholes-Merton option pricing model over the fair value of the cancelled option award at the cancellation date. The significant weighted-average assumptions relating to the valuation of the Company’s stock option grants were as follows for the years ended December 31, 2024 and 2023: Assumptions 12/31/24 12/31/23 Estimated stock price $ 1.49 - 7.61 $ 1.89 Exercise price $ 1.49 - 7.61 $ 1.64 - 1.9 Dividend yield 0 % 0 % Expected life 4 years 5 years Expected volatility 57.1 % - 69.3 % 39.3 % Risk free interest rate 4.16 % - 4.31 % 4.09 % - 4.23 % There were stock incentive plan awards outstanding at December 31, 2024 totaling 5,527,559 shares with an aggregate intrinsic value of $ 28,853,133 . Stock Appreciation Rights Plan Related to the Share Exchange Agreement with Super Simple AI, Inc., on February 17, 2022, the Company’s Board of Directors approved the 2022 Stock Appreciation Rights Plan (the “SAR Plan”) to issue a maximum of 1,500,000, which was later adjusted to 2,637,150 stock appreciation rights (“SARs”) after the Merger. As of December 31, 2024 and 2023, there were 1,758,000 SARs outstanding with a base value of $0.12 and January 2028 expiration. There were no SAR grants during the years ended December 31, 2024 and 2023. Warrants to Purchase Common Stock See Note 12 for public and private placement warrants assumed after the Merger. The summary table below of outstanding warrants as of December 31, 2024 and 2023 include public and private placement warrants in Note 12. The Company had the following warrant activity during the year ended December 31, 2024: In connection with the issuance of the Platinum convertible note, the Company issued to Platinum an amended and restated common stock purchase warrant dated February 2, 2024 to purchase 189,334 shares of common stock at an exercise price per share of $3.69717. On March 18, 2024, Platinum exercised the Platinum warrant and received 137,367 shares of common stock. Platinum forfeited 51,967 shares. F-20 Table of Contents On September 3, 2024 the Company issued warrants to purchase up to 2,882,883 shares of its common stock. The warrants have an exercise price of $ 2.65 per share, are exercisable immediately upon issuance and will expire five years following the date of issuance. On December 24, 2024, the 2,882,883 warrants were exercised. On September 3, 2024 the Company issued warrants to purchase up to 216,216 shares of its common stock. The warrants have an exercise price of $ 3.47 per share, are exercisable immediately upon issuance and will expire five years following the date of issuance. On September 27, 2024, the Company 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. On December 24, 2024, the Company 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, 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 . The investor agreed to exercise the existing 2,882,883 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. In accordance with ASC Topic 815 guidance on equity classified warrant modifications, the modification is consistent with the equity issuance classification under that guidance as the reason for the modification was to induce the holders of the September 3, 2024 existing warrants to cash exercise their warrants, which raised equity capital and generated net proceeds of approximately $ 7.4 million. As the warrants issued on September 3, 2024 and December 24, 2024 were classified as equity instruments before and after the exchange, and as the exchange is directly attributable to an equity offering, the Company recognized the effect of the modification of approximately $ 6.5 million (fair value of Inducement Warrants) as an equity issuance cost. The Company determined the fair value using the Black-Scholes-Morton pricing model with the following assumptions: stock price $ 5.54 , volatility of 69 %, risk-free interest rate of 4.36 % and expected term of three years. During the year ended December 31, 2024, various investors exercised warrants for 3,046,552 shares of the Company’s common stock at a weighted average exercise price of $ 2.77 per share, and the Company received net proceeds of $ 7,704,540 . Warrant activity for the years ended December 31, 2024 and 2023 was as follows: Weighted Average Exercise Warrants Price Outstanding January 1, 2023 - $ - Issued 2,743,702 1.99 Assumed in the Merger 16,699,612 4.50 Outstanding January 1, 2024 19,443,314 4.15 Issued 5,616,795 3.41 Exercised ( 3,046,552 ) ( 2.77 ) Forfeited ( 51,867 ) ( 3.70 ) Outstanding at December 31, 2024 21,961,690 $ 4.13 F-21 Table of Contents A summary of the warrants outstanding as of December 31, 2024 were as follows: December 31, 2024 Weighted Weighted Weighted Average Average Average Number of Remaining Exercise Shares Exercise Warrants Life ( In Years) Price Exercisable Price 2,689,902 2.97 $ 1.77 2,689,902 $ 1.77 220,000 4.75 2.36 220,000 2.36 216,216 4.63 3.47 216,216 3.47 18,835,572 3.70 4.50 18,835,572 3.70 21,961,690 3.67 $ 4.13 21,961,690 $ 4.13 The significant weighted average assumptions relating to the valuation of the Company’s warrants issued for the years ended December 31, 2024 and 2023 were as follows: Assumptions 12/31/24 12/31/23 Dividend yield 0 % 0 % Stock price 2.36 - 4.50 1.89 - 13.18 Exercise price 2.36 - 4.50 1.77 - 13.18 Expected life 4 - 5 years 5 years Expected volatility 69 % 39 % Risk free interest rate 3.77 % - 4.36 % 3.41 % There were warrants outstanding and exercisable at December 31, 2024 totaling 21,961,690 shares with an aggregate intrinsic value of $46,689,726. Earnout Liability See Note 13 for common stock shares related to earnout liability. 7. Employee 401(k) Plan The Company has a 401(k) plan for its employees. The plan provides for a 3.5% match on up to 6% of deferred salary . The Company expensed $ 198,500 and $ 182,446 of contributions during the years ended December 31, 2024 and 2023, respectively. 8. Related Party Transactions Transfer of Zeppelin Membership Units In 2020, Victor Huang and Derek Xu, the Founders, officers and directors of the Company, borrowed $ 3,000,000 (“shareholder advances”) from Airship. As of January 1, 2023, the Company was owed $ 1,100,000 by the Founders. Due to the uncertainty of the timing of payment, the advances were treated as a long-term asset. The shareholders’ advances bore interest at 5 % and no interest was ever paid. On February 28, 2023, the Founders transferred their interest in Zeppelin to the Company and the $ 1,100,000 and related interest owed by the Founders to the Company was eliminated. As of December 31, 2022, Zeppelin received from the Company $ 1,095,000 , respectively, in cash advances to fund operations which commenced in 2021. These advances between the companies are eliminated in the consolidated balance sheet. As of January 1, 2023, Zeppelin owed the Founders $1,100,000 for funds they have provided for the commencement of operations in 2021. The balance was not expected to be paid in the next year and was treated as long-term liabilities. On February 28, 2023, in connection with the transfer of the Zeppelin ownership from the shareholders to the Company, the $ 1,100,000 Payable to the founders was eliminated. F-22 Table of Contents Mr. Huang and Mr. Xu originally owned all the Zeppelin membership units. When Zeppelin started, their intent was exploring the technology in-development and determining value for external customers by providing cloud based back-end products. After a period of time for Zeppelin’s development it became apparent these efforts would be of value and accretive to the Company. In 2022, the Company began utilizing research and development personnel to further develop the Company’s products. On February 28, 2023, the Founders transferred its interest in Zeppelin to the Company. Advances due to Founders Prior to 2023, the founders had advanced the Company a net $ 600,000 . In the year ended December 31, 2023, Mr. Huang and Mr. Xu advanced Airship AI a total of $ 1,350,000 and were repaid a total of $ 200,000 , with $ 1,750,000 recorded as advances from founders as of December 31, 2023. During 2024, Mr. Huang and Mr. Xu advanced Airship AI $ 2,100,000 and were repaid $ 2,550,000 , with $ 1,300,000 recorded as advances from founders as of December 31, 2024. The outstanding advances as of December 31, 2024 are non-interest bearing and the Company expects to pay the balance off within a one-year period. Warrants to Purchase Common Stock On May 8, 2023, Airship AI issued warrants to purchase 1,344,951 shares of common stock to each of Victor Huang and Derek Xu. The warrants were valued at $ 2,136,115 based on the exercise price of $ 1.77 , the fair market stock price of $ 1.89 , a five-year term, a volatility of 39.4 % and interest of 3.41 %. The warrants are treated as equity instruments and the fair value as calculated at issuance was recorded as stock-based compensation expense and as additional paid in capital. All warrants are fully vested as they were issued for services performed. Upon completion of the Merger in December 2023, the Airship AI warrants were exchanged for warrants of the Company with the same term and conditions. Master Loan Agreement 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 %. The Company paid interest for the 2024 advances (described under “Founder Advances” above) 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. The $ 284,478 fair value of the warrant is recorded in permanent equity in the consolidated balance sheets and was fully expensed on the date of grant. There are no outstanding advances under this Master Loan Agreement as of December 31, 2024. 9. Commitments, Contingencies and Legal Proceedings Legal Proceedings The Company may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently not a party to any pending legal proceeding that is not ordinary routine litigation incidental to its business. Employment Agreement On March 1, 2024, the Company entered into an employment agreement with Mark E. Scott, the Company’s Chief Financial Officer, which provides for a base salary of $ 250,000 annually. Mr. Scott is also eligible to participate in annual performance-based bonus programs established by the Board or Compensation Committee, subject to the achievement of applicable performance criteria established by the Board or Compensation Committee, which shall be determined in good faith by the Board or Compensation Committee. Mr. Scott was also granted options to purchase up to twenty-five thousand (25,000) shares of Common Stock with an exercise price equal to $ 1.49 , which options vested in full on the date of issuance. F-23 Table of Contents Properties and Operating Leases-Right of Use Asset and Lease Liability Lease agreements are evaluated to determine whether an arrangement is or contains a lease in accordance with ASC 842, Leases . Right of use lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The incremental borrowing taking into consideration the Company’s credit quality and borrowing rate for similar assets is used in determining the present value of future payments. Lease expense is recorded as general and administrative expenses on the Company’s consolidated statements of operations. The Company elected the package of transitional practical expedients, under which (1) the Company did not reassess whether any expired or existing contracts are or contain leases, (2) the Company did not reassess the lease classification for any expired or existing leases and (3) the Company did not reassess initial direct costs for any existing leases. Additionally, the Company elected the short-term lease recognition exemption for all leases that qualify, meaning it does not recognize right-of use assets or lease liabilities for those leases. The Company also elected the practical expedient to not separate lease and non-lease components for all asset classes. The Company adopted ASC 842 effective January 1, 2022 and the adoption did not have any impact on previously reported stockholders’ deficit. The Company has entered into operating leases for office and development facilities for four years and include options to renew. The Company determines whether an arrangement is or contains a lease based upon the unique facts and circumstances at the inception of the lease. Operating lease liabilities and their corresponding right-of-use asses are recorded based upon the present value of the lease payments over the expected lease term. As of December 31, 2024 and 2023, total operating lease liabilities were approximately $ 943,703 and $ 1,118,578 , respectively. Right of use assets totaled approximately $ 882,024 and $ 1,104,804 at December 31, 2024 and 2023, respectively. All of the lease current lease liabilities were $ 305,178 and $ 174,876 at December 31, 2024 and 2023, respectively. In the years ended December 31, 2024 and 2023, the Company recognized $ 430,084 and $ 591,442 in total lease costs for the leases, respectively. Cash paid for amounts included in the measurement of lease liabilities were $ 328,002 and $ 582,753 , respectively, for the years ended December 31, 2024 and 2023. Because the rate implicit in each lease is not readily determinable, the Company uses its estimated incremental borrowing rate to determine the present value of the lease payments. The weighted average remaining lease term for the operating leases was thirty-two months at December 31, 2024 and the weighted average discount rate was 7 % as of December 31, 2024 and 2023. The minimum future lease payments as of December 31, 2024 are as follows: Years Ended December 31, 2025 $ 359,563 2026 370,357 2027 316,785 Total remaining payments 1,046,705 Less Imputed Interest ( 103,002 ) Total lease liability $ 943,703 On May 1, 2019, the Company leased 31,765 square feet for its executive offices in Redmond, Washington. The Company’s net monthly payment was $ 44,440 . The monthly payment increased approximately 3 % each year and the lease was set to expire on April 30, 2024. The Company had two five-year renewal options. In April 2023, the Company and its landlord entered into an agreement whereby the Company’s office lease was terminated on September 30, 2023. During the year ended December 31, 2023, the Company recorded a net gain on lease termination of $ 78,963 as an offset to selling general and administrative expenses on the consolidated statements of operations and comprehensive loss. The gain is comprised of a $ 344,093 gain from lease liability termination and a loss of $ 265,130 for accelerated amortization of right-of-use asset. On July 13, 2023, the Company 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 the lease based on the fair market rate on October 31, 2027 . The option to extend is not considered reasonably certain as of December 31, 2024. F-24 Table of Contents On February 29, 2024, the Company extended an office lease in Mooresville, North Carolina. The Company leases 3,621 square feet and the net monthly payment is $ 6,488 . On August 27, 2024, the Company extended the lease to February 28, 2025. The Company will exit this location on February 28, 2025 . On February 1, 2025, the Company entered into an office lease in Mooresville, North Carolina. The Company leases 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. 10. Income Taxes For each of the years ended December 31, 2024 and 2023, the Company’s income tax expense was $ 0 and the effective tax rate was 0 %. The sources of (loss) income before income taxes are as follows for the years ended December 31, 2024 and 2023: The components of the provision for income taxes for the years ended December 31, 2024 and 2023 consisted of the following: A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended December 31, 2024 and 2023 are as follows: For the year ended December 31, 2024, the Company’s effective tax rate differs from the federal statutory rate principally due to non-taxable revaluation of fair value of earnout shares and warrants liabilities, change in valuation allowance and other permanent differences being excluded from the determination of taxable loss. 2024 2023 United States $ ( 56,798,677 ) $ 16,930,896 International ( 666,213 ) ( 559,762 ) (Loss) income before income taxes $ ( 57,464,890 ) $ 16,371,134 2024 2023 Current: Federal $ - $ - State - - Total current provision - - Deferred: Federal - - State - - Total deferred income taxes - - Total provision for income taxes $ - $ - 2024 2023 Federal statutory tax rate 21 % 21 % Share based compensation 0 % 5 % Non-taxable revaluation of fair value of earnout shares liability ( 7 )% ( 29 )% Non-taxable revaluation of fair value of warrants liability ( 12 )% ( 3 )% Change in valuation allowance ( 1 )% 6 % Other permanent differences ( 1 )% 0 % Effective tax rate 0 % 0 % F-25 Table of Contents The components of net deferred tax assets as of December 31, 2024 and 2023 consisted of the following: 2024 2023 Deferred tax assets: Tax credit carryforward $ 1,286,195 $ 1,286,195 Deferred revenue 1,042,047 1,009,141 Capitalized research and development costs 1,147,053 951,497 Net operating loss carry-forward 691,481 898,302 Capital loss carry-forward 52,560 52,560 Operating lease liability 198,178 234,901 Property and equipment and other 2,999 4,920 4,420,513 4,437,516 Valuation allowance ( 4,235,288 ) ( 4,205,507 ) Net deferred tax assets $ 185,225 $ 232,009 Deferred tax liabilities: Right-of-use-assets ( 185,225 ) ( 232,009 ) Total net deferred tax $ - $ - As of December 31, 2024 and 2023, the Company has a federal net operating loss carryforward totaling approximately $ 3,300,000 and $ 3,800,000 . The federal net operating loss carryforward generated from the years ended after December 31, 2017 may be carried forward indefinitely. As of December 31, 2024 and 2023, R&D tax credit carryforwards total approximately $ 1,286,000 each year and begin to expire in 2036. Realization of the carryforwards is dependent on the Company generating sufficient taxable income and may also be subject to usage limitations to the extent there are changes in the Company’s ownership. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, the Company first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which the Company operates, its financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. In addition, the Company considered both its near-term and long-term financial outlook. After considering all available evidence (both positive and negative), the Company concluded that recognition of a valuation allowance for all of its deferred tax assets was required at December 31, 2024 and 2023. The valuation allowance increased by approximately $ 30,000 and $ 786,000 in 2024 and 2023, respectively. The increase during the current year is primarily related to capitalized research and development expenditures and net operating losses. Pursuant to Sections 382 and 383 of the Internal Revenue Code, or IRC, annual use of the Company's net operating losses and tax credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The amount of annual limitation is determined based on the value of the Company immediately prior to the ownership changes. The Company is in process of performing an assessment of whether a change in ownership has occurred or whether there have been multiple changes in ownership, within the meaning of Section 382. The Company evaluates uncertain tax positions using the “more likely than not” threshold (i.e., a likelihood of occurrence greater than fifty percent). The recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are classified as a gross unrecognized tax benefit until they meet the more likely than not standard or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. As of December 31, 2024 and 2023, the unrecognized tax benefit totals approximately $ 227,000 in each year. F-26 Table of Contents The gross unrecognized tax benefits, if recognized, would not affect the effective tax rate as these unrecognized tax benefits would increase deferred tax assets that would be subject to a full valuation allowance. No material changes in the gross unrecognized tax benefits are expected over the next twelve months. Interest and penalties related to unrecognized tax benefits, if any, will be recognized as a component of income tax expense. The Company is subject to possible tax examination for the years 2014 through 2024.The Company is also subject to examination with respect to federal net operating loss carryforwards generated and carried forward from those years. There are currently no federal or state income tax audits in process. 11. Reverse Recapitalization On December 21, 2023, the Company completed the Merger and received net proceeds of $ 2.8 million, net of transaction costs of $ 6.6 million. The Merger was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, BYTS, who was the legal acquirer, was treated as the “acquired” company for accounting purposes and Airship AI was treated as the accounting acquirer. Accordingly, the Merger was treated as the equivalent of Airship AI issuing shares at the closing of the Merger for the net assets of BYTS as of the closing date, accompanied by a recapitalization. The net assets of BYTS was stated at historical cost, with no goodwill or other intangible assets recorded. Airship AI was determined to be the accounting acquirer based on evaluation of the following facts and circumstances: · Airship AI’s stockholders have the majority voting interest in the combined company; · The Airship Pubco Board is composed of one (1) director designated by BYTS and four (4) directors designated by Airship AI; · Airship AI’s senior management is the senior management of Airship Pubco; · The business of Airship AI comprises the ongoing operations of Airship Pubco; and · Airship AI is the larger entity, in terms of substantive assets. The table below summarizes the shares of common stock issued immediately after the closing of the Merger as well as the impact on the consolidated statement of stockholders’ equity as of December 21, 2023: (1) Adjusted for correction of transaction expense discussed below. Immaterial Revision of Prior Period Financial Information In connection with the preparation of its consolidated financial statements, the Company identified an immaterial error related to the classification of prepaid expenses and transaction expenses (classified in accumulated deficit as reverse recapitalization). In accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements,” the Company evaluated the error and determined that the impact was not material to its financial statements for the prior annual and current interim period, accordingly the Company revised the prior period financial information for comparative purposes. The revision does not impact the consolidated statements of operations and comprehensive loss. A summary of the revision to the Company’s previously reported consolidated balance sheets is included below for comparative purposes: As of December 31, 2023 As Reported Adjustment As Revised Prepaid expenses and other $ 913,030 $ ( 894,662 ) $ 18,368 Total current assets 5,693,577 ( 894,662 ) 4,798,915 Total assets 6,982,575 ( 894,662 ) 6,087,913 Accumulated deficit ( 16,582,038 ) ( 894,662 ) ( 17,476,700 ) Total stockholders' deficit ( 16,592,565 ) ( 894,662 ) ( 17,487,227 ) The revision had no impact to cash provided by operating activities in such period. Additional Accumulated Shares Par Amount Common Stock Paid in Capital Deficit SPAC Financing 8,891,718 $ 0.0001 $ 889 $ 8,315,186 $ - Transaction expenses (1) 532,986 0.0001 53 ( 6,651,674 ) ( 894,662 ) Earnout liability ( 4,470,918 ) ( 22,638,859 ) Warrants liability ( 2,009,105 ) - Reverse capitalization on December 21, 2023 (1) 9,424,704 $ 942 $ ( 4,816,511 ) $ ( 23,533,521 ) F-27 Table of Contents 12. Warrant Liability At the Merger closing, the Company assumed 515,000 private placement warrants and 16,184,612 public warrants. On June 3, 2024, the Company permanently reduced the exercise price of such warrants from $ 11.50 per share to an exercise price of $ 7.80 per share. On November 20, 2024, the Company further reduced the exercise price of the 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. As of December 31, 2024, there were 515,000 private placement warrants and 16,158,410 public warrants outstanding. The public warrants will expire on December 21, 2028 . The following table is a summary of the number of shares of the Company’s common stock issuable upon exercise of the public and private warrants outstanding as of December 31, 2024 and 2023: December 31, 2024 Number of Exercise Shares Price Expiration Date Fair Value Public Warrants 16,158,410 $ 4.50 December 21, 2028 $ 33,124,868 Private Warrants 515,000 $ 4.50 December 21, 2028 $ 1,055,750 December 31, 2023 Number of Exercise Shares Price Expiration Date Fair Value Public Warrants 16,184,612 $ 11.50 December 21, 2028 $ 646,428 Private Warrants 515,000 $ 11.50 December 21, 2028 $ 21,557 The Company has reviewed the terms of the Public and Private Warrants to determine whether warrants should be classified as liabilities or stockholders’ equity in its consolidated balance sheet. In order for a warrant to be classified in stockholders’ equity, the warrant must be (a)indexed to the Company’s equity and (b) meet the conditions for equity classification in ASC 815-40, Derivatives and Hedging - Contracts in an Entity’s Own Equity. If a warrant does not meet the conditions for equity classification, it is carried on the consolidated balance sheet as a warrant liability measured at fair value, with subsequent changes in the fair value of the warrant recorded in the statement of operations as change in fair value of warrants. The Company determined that all warrants are required to be carried as a liability in the consolidated balance sheet at fair value, with changes in fair value recorded in the consolidated statement of operations. At the closing of the Merger on December 21, 2023, the warrants had an initial fair value of $ 2,009,105 , which was recorded as liability and a reduction to additional paid in capital in the consolidated balance sheet. As of December 31, 2024 and 2023, the Private and Public Warrants had an aggregate fair value of $ 34,180,618 and $ 667,985 . The Company recorded a loss of $ 33,512,633 and a gain of $ 1,341,120 due to change in the fair value of the warrant liability during the years ended December 31, 2024 and 2023, respectively. See Note 16 – Fair Value Measurements for more information. F-28 Table of Contents 13. Earnout Liability At the closing of the Merger, the Airship AI securityholders that hold shares of common stock of Airship AI, Airship AI options, Airship AI earnout warrants or Airship AI SARs have the contingent right to receive up to 5,000,000 earnout shares of the Company’s common stock if the following earnout milestones are met. (A) 25% of the earnout shares if, for the period starting on the closing date and ending on the last day of the full calendar quarter immediately following the first anniversary of the closing date, (1) company revenue (as defined in the Merger Agreement) is at least $39 million, or (2) the aggregate value of new contract awards with federal law enforcement agencies has grown by at least 100% as compared to the year-over-year amount for the twelve-month period ending on the date of the Merger Agreement (the “First Operating Performance Milestone”); (B) 75% of the earnout shares if, for the period starting on the closing date and ending on the last day of the full calendar quarter immediately following the third anniversary of the closing date, company revenue is at least $100 million; (C) 50% of the earnout shares if, at any time during the period starting on the closing date and ending on the fifth anniversary of the closing date, over any twenty (20) trading days within any thirty (30) trading day period the volume weighted average price (“VWAP”) of the common stock is greater than or equal to $12.50 per share; and (D) 50% of the earnout shares if, at any time during the period starting on the closing date and ending on the fifth anniversary of the closing date, over any twenty (20) trading days within any thirty (30) trading day period the VWAP of the common stock is greater than or equal to $15.00 per share. Any earnout shares issuable under the Merger Agreement to an Airship AI securityholder in respect of each Airship AI option or Airship AI SAR held by such holder as of immediately prior to the effective time of the Merger shall be earned by such holder on the later of (i) the occurrence of the applicable earnout milestone, and (ii) the date on which the option in respect of such Airship AI option or SAR in respect of such Airship AI SAR, as applicable, becomes vested pursuant to its applicable vesting schedule, but only if such holder continues to provide services (whether as an employee, director or individual independent contractor) to the Company or one of its subsidiaries through such date. Notwithstanding the foregoing, any earnout shares that are not earned by Airship AI securityholder in respect of its options or SARs on or before the fifth anniversary of the closing date of the Merger shall be forfeited without any consideration. Any earnout shares that are forfeited pursuant to the Merger Agreement shall be reallocated to the other Airship AI securityholders who remain entitled to receive earnout shares in accordance with their respective earnout pro rata shares. These earnout shares have been categorized into two components: (i) the “Vested Shares” - those associated with earnout holders with vested equity at the closing of the Merger that will be earned upon achievement of the earnout milestones and (ii) the “Unvested Shares” - those associated with earnout holders with unvested equity at the closing of the Merger that will be earned over the remaining service period with the Company on their unvested equity shares and upon achievement of the earnout milestones. The Vested Shares, which represent 95% of the total earnout shares are classified as liabilities in the consolidated balance sheet at fair value with changes in fair value recognized in the consolidated statements of operations due to the variability in the number of earnout shares at settlement which could change upon a change of control event. The earnout arrangement contains a settlement provision that violates the indexation guidance under ASC 815-40. The Unvested Shares are equity-classified share-based compensation to be recognized over time under ASC 718 due to the service component. At the closing of the Merger on December 21, 2023, the earnout liability had an initial fair value of $ 27,109,777 , which was recorded as a long-term liability and a reduction to additional paid in capital in the consolidated balance sheet. As of December 31, 2023, the earnout liability had decreased to $ 5,133,428 as a result of the decline in the Company’s share price since the closing of the Merger. As of December 31, 2024, the estimated fair value of the earnout liability increased to $ 23,304,808 primarily due to the increase in the Company’s share price, which resulted in a loss due to the change in fair value of the earnout liability during the year ended December 31, 2024 of $ 18,171,380 and is recorded on the consolidated statements of operations and comprehensive loss. See Note 14– Fair Value Measurements for more information. F-29 Table of Contents In addition, a portion of the earnout shares may be issued to individuals with unvested equity awards. While the payout of these shares requires the achievement of the earnout milestones, the individuals must complete the remaining service period associated with these unvested equity awards to be eligible to receive the earnout shares. As a result, these unvested earn-out shares are equity-classified awards and have an aggregated grant date fair value of $ 2,675,223 (or $5.96 per share). During the years ended December 31, 2024 and 2023, the Company stock-based compensation expense for the vesting of earnout shares was $ 535,044 and $ 0 , respectively. As of December 31, 2024, unrecognized compensation cost related to unvested earnout shares totaled $ 2,140,180 . The weighted average period over which this remaining compensation cost is expected to be recognized is 4 years. As of September 30, 2024, the Company determined the First Operating Performance Milestone (A,2) was achieved and 1,250,000 shares of the Company’s common stock were issued to applicable personnel on January 7, 2025. The fair value of the 1,250,000 vested shares as of December 31, 2024 of $7,825,000 was determined using the Company’s closing trading price on December 31, 2024 and is included in the earnout liability on the consolidated balance sheet. The vested earnout shares are considered a level 1 fair value instrument. See Note 14– Fair Value Measurements for more information. 14. Fair Value Measurements The following table sets forth by level within the ASC 820, Fair Value Measurement, fair value hierarchy of the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2024: December 31, 2024 Level 1 Level 2 Level 3 Total Liabilities- Earnout liability $ 7,825,000 $ - $ 15,479,808 $ 23,304,808 Warrant liability (Public Warrants) 33,124,868 - - 33,124,868 Warrant liability (Private Warrants) - 1,055,750 - 1,055,750 Total liabilities measured at fair value $ 40,949,868 $ 1,055,750 $ 15,479,808 $ 57,485,426 The following table sets forth by level within the ASC 820, Fair Value Measurement, fair value hierarchy of the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2023: December 31, 2023 Level 1 Level 2 Level 3 Total Liabilities Earnout liability $ - $ - $ 5,133,428 $ 5,133,428 Senior Secured Convertible Promissory Notes - - 2,825,366 2,825,366 Warrant liability (Public Warrants) 646,428 - - 646,428 Warrant liability (Private Warrants) - 21,557 - 21,557 Total liabilities measured at fair value $ 646,428 $ 21,557 $ 7,958,794 $ 8,626,779 The estimated fair value of the earnout liability was determined using a Monte Carlo Model. The assumptions utilized in the calculation are based on the achievement of certain stock price milestones including projected stock price, volatility, probability of meeting the federal law enforcement agency growth and risk-free rate. The following assumptions were used in the simulation at each valuation date: December 31, 2024 December 31, 2023 Stock price $ 6.26 $ 1.70 Risk-free interest rate 4.33 % 3.84 % Expected term (in years) 4 5 Expected volatility 57.1 % 75.9 % Dividend yield 0 % 0 % F-30 Table of Contents The assumptions also included the probability of meeting the federal law enforcement agency growth milestone at 100%. The fair value of the 1,250,000 vested shares as of December 31, 2024 of $ 7,825,000 was determined using the Company’s closing trading price on December 31, 2024. The initial estimated fair value of the private warrants was measured using a Monte Carlo simulation. The estimated fair value of the public warrants is based on the listed price in an active market for such warrants and the fair value of the private placement warrants continues to be measured based on the public warrants listed price. The estimated fair value of the senior secured convertible promissory notes was measured using a Monte Carlo simulation pricing model that factors in potential outcomes being consummated, such as the convertible notes being repaid in cash and the convertible notes being converted to common stock. All of these scenarios take into consideration the terms and conditions of the underlying convertible notes plus potential changes in the underlying value of the common stock. The senior secured convertible promissory notes were fully converted to equity as of December 31, 2024. The following assumptions were used in the simulation: December 31, 2024 December 31, 2023 Stock price $ 3.18 - 3.74 $ 1.70 Effective discount rate 11.34 - 11.51 % 12.95 % Expected term (in years) 0.53 - 0.61 0.48- 0.75 Expected volatility 47.2 - 49.8 % 62.5 % Dividend yield 0 % 0 % On September 13, 2024, the vested earnout shares were transferred from Level 3 to Level 1 upon the Board approval of the achievement of the First Operating Performance Milestone (A,2). The fair value on the day of transfer was $3,400,000. There were no transfers of financial instruments between valuation levels during the year ended December 31, 2023. The changes in Level 3 liabilities measured at fair value for the year ended December 31, 2024 were as follows: Level 3 Beginning Balance Unrealized and Conversions / Transfers out Ending Balance as of January 1, 2024 Realized Loss Settlements (a) of Level 3 December 31, 2024 Liabilities- Earnout liability $ 5,133,428 $ 13,746,380 $ - $ ( 3,400,000 ) $ 15,479,808 Senior Secured Convertible Prommissory Notes 2,825,366 141,636 ( 2,967,002 ) - - $ 7,958,794 $ 13,888,016 $ ( 2,967,002 ) $ ( 3,400,000 ) $ 15,479,808 (a) The conversions and settlements represent the fair value of the Senior Secured Convertible Promissory Notes at the dates of conversion. F-31 Table of Contents 15. Earnings per Share The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders: December 31, 2024 December 31, 2023 Net (loss) income $ ( 57,464,890 ) $ 16,371,134 Weighted average shares outstanding- Basic 24,585,955 13,671,376 Add: dilutive effect of stock options, SARs and Airship warrants - 6,719,287 Diluted 24,585,955 20,390,663 (Loss) income per share- Basic $ ( 2.34 ) $ 1.20 Diluted $ ( 2.34 ) $ 0.80 The following potentially dilutive shares were not included in the calculation of diluted shares outstanding for the periods presented as the effect would have been anti-dilutive: December 31, 2024 December 31, 2023 Public Warrants 16,158,410 16,184,612 Private Warrants 515,000 515,000 Convertible debt - 452,240 Warrants 5,288,280 53,800 Outstanding stock options 5,527,559 - Earnout shares 1,250,000 - SARs 1,758,105 - 30,497,354 17,205,652 The 3,750,000 -remaining unvested earnout shares as of December 31, 2024 are excluded from basic and diluted net loss per share as such shares are contingently issuable until the Company exceeds certain milestone thresholds that have not been achieved. The 1,250,000 vested earnout shares are included as anti-dilutive shares for the year ended December 31, 2024 and were issued to applicable personnel on January 7, 2025. As a result of the Merger, the weighted-average number of shares of common stock used in the 2023 calculation of net income (loss) per share have been retroactively converted by applying the conversion ratio. 16. Subsequent Events The Company evaluated subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements were issued. Subsequent to December 31, 2024, there were the following material transaction that occurred that would require recognition or disclosure in the financial statements: As of September 30, 2024, the Company determined the First Operating Performance Milestone (A,2) of the earnout shares was achieved and 1,250,000 shares of the Company’s common stock were issued to applicable personnel on January 7, 2025. F-32 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 28, 2025 Airship AI Holdings, Inc. /s/ Victor Huang Name: Victor Huang Title: Chief Executive Officer (Principal Executive Officer) /s/ Mark E. Scott Name: Mark E. Scott Title: Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Victor Huang Chief Executive Officer and Director (principal executive officer) February 28, 2025 Victor Huang /s/ Mark E. Scott Chief Financial Officer (principal financial and accounting officer) February 28, 2025 Mark E. Scott /s/ Derek Xu Chief Operating Officer and Director February 28, 2025 Derek Xu /s/ Peeyush Ranjan Director February 28, 2025 Peeyush Ranjan /s/ Louis Lebedin Director February 28, 2025 Louis Lebedin /s/ Amit Mital Director February 28, 2025 Amit Mital 81