Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. Dollar amounts in this discussion are expressed in whole-dollars, except as otherwise noted. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed elsewhere in this Form 10-K, particularly in Part I, Item 1A, Risk Factors. We do not undertake, and expressly disclaim, any obligation to publicly update any forward-looking statements, whether as a result of new information, new developments or otherwise, except to the extent that such disclosure is required by applicable law.
Executive Overview
ConnectM is a Delaware corporation headquartered in Marlborough, Massachusetts. On July 12, 2024 (the “Closing Date”), Monterey Capital Acquisition Corporation (“ MCAC ”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectM Technology Solutions, Inc. (“ Legacy ConnectM ”) in which MCAC acquired all of the issued and outstanding shares of common stock from Legacy ConnectM shareholders (the “Business Combination”) in exchange for 14,500,000 shares of MCAC’s common stock. On the Closing Date, MCAC changed its name to ConnectM Technology Solutions, Inc (“ConnectM”) and we became a publicly listed company.
ConnectM is a constellation of companies connecting and powering next generation equipment, mobility and distributed energy—thus enabling a faster, smarter transition to a modern energy economy. We deliver an advanced, proprietary Energy Intelligence Network (EIN) platform designed to empower residential and commercial service providers and original equipment manufacturers, to optimize energy efficiency, enhance operational performance, and support sustainable innovation. Leveraging technology, data, artificial intelligence, and behavioral economics, ConnectM aims to lower energy costs and reduce carbon emissions globally. Our Service Provider-facing technology platform encompasses marketing to life cycle management, customer care to claims processing, finance to rebates/incentives. Our architecture combines artificial intelligence with human expertise, continuously learning from the data it generates. This enables us to refine and improve our technology solutions for B2B customers while maximizing customer lifetime value. In addition to digitizing electrification end-to-end, we also transform the underlying business model to minimize customer churn while maximizing trust and improving environmental impact.
Our OEM-facing technology platform provides essential hardware and software services for EV fleet management and battery diagnostics—helping to capture data, synthesize that data, and in turn monetizing that data on behalf of our enterprise customers. By empowering OEMs and mobility companies with connected operations, our portfolio companies directly contribute to their continued explosive growth.
We believe that our cocktail of enhanced user experience, aligned values, and competitive cost enjoys broad appeal. End user electrification consumption has grown over time to encompass higher value products such as heat pumps, highly efficient air conditioners, solar roof, battery storage, electric vehicles and weatherization. These progressions can generate increases in customer lifetime value. We anticipate sustained growth through predictable, recurring revenue streams and automation that reduces costs while meeting our B2B customer needs. Our data-driven architecture further enhances precision in pricing and implementing electrification solutions, creating additional value for our customers.
We derive revenue through the sale of hardware, software, and services across four different business segments: our Owned Service Network, Managed Solutions, Transportation, and Logistics. The key elements of our products and services are discussed in Part I, Item 1. “Business – Our Products and Services.” Our expenses consist primarily of payroll and benefit costs, facility costs, leasehold improvement amortization, utility costs, repair and maintenance, advertising, insurance, equipment depreciation and professional fees.
Recent Developments
On January 28, 2025, the Company entered into a settlement and stipulation agreement (the “Settlement Agreement”) with Last Horizon, LLC (“Last Horizon”), pursuant to which the Company agreed to issue shares of the Company’s common stock to Last Horizon in exchange for the settlement of an aggregate $8,908,000 (the “Claim”) to resolve outstanding overdue liabilities with one of our lenders and certain of our vendors. The Company has issued 13,744,131 shares of the Company’s common stock to Last Horizon as Settlement Shares between January 28, 2025 and the date Form 10-K was issued. The issuance of common stock to Last Horizon pursuant to the terms of the Settlement Agreement is exempt from the registration requirements of the Securities Act pursuant to Section 3(a)(10) thereof, as an issuance of securities in exchange for bona fide outstanding claims.
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On March 26, 2025, we were awarded our first Home and Building Electrification (HBE) project in India through a strategic partnership with Zenith Energy Services Pvt. Ltd.
During the quarter ended March 31, 2025, 2,737,168 shares of our common stock were issued in connection with the share reset derivative liabilities.
During the three months ended March 31, 2025, the Company entered into twelve convertible note agreements in exchange for aggregate gross proceeds of $2,530,000 to eleven lenders (the “Q1 2025 Convertible Notes”). The Q1 2025 Convertible Notes bear interest at a rate of 20.0% per annum. The Q1 2025 Convertible Notes have maturity dates that range from 40-days to one year from the convertible note issuance date, optional conversion period that ranges from thirty to ninety days, and a conversion price that ranges from $1.00 to $1.15. The Company entered into convertible note agreements with two related-party investors holding beneficial ownership interests exceeding 5.0% of the Company's common stock. The aggregate principal amount of these convertible notes was $500,000.
On April 2, 2025, the forward purchase agreement with Meteora was terminated. There were 1,618,948 shares of our common stock held by Meteora which were deemed free and clear of obligations and $500,000 termination payment owed to us from Meteora.
On April 11, 2025, the Company held a special meeting of shareholders. The shareholders voted to approve a reverse stock split and issuance of up to 25,000,000 shares via a standby equity purchase agreement. The terms of the reverse stock split are not yet finalized as of the date of this filing.
In April 2025, we acquired all of the issued and outstanding equity securities of Air Temp Service Co, Inc. ("Air Temp") and Solar Energy Systems of Brevard, Inc ("SES") in exchange for the issuance of 4,900,000 shares of our common stock with a fair value of $3,200,000, as determined using the closing share price on the date of issuance in May 2025. Air Temp Services is considered a related party due to its ownership by SriSid LLC and Arumilli LLC, which are related parties to the Company. The Company had a Managed Services Agreement in place with Air Temp during the reporting period.
On May 5, 2025, the Company's board of directors designated 100,000 shares of preferred stock as Series A Convertible Preferred Stock, par value $0.0001 per share (the "Series A Stock") and 100,000 shares of preferred stock as Series B Convertible Preferred Stock, par value $0.0001 per share (the "Series B Stock"). The Series A Stock and the Series B Stock have an initial stated value of $100.00 per share, subject to adjustment in the event of a stock split, combination or other similar recapitalization. Further terms are detailed in the Subsequent Events section.
On May 6, 2025, the Company received a determination letter (the "Delisting Notification") from the Nasdaq Hearings Advisor stating that the Panel has determined to delist the Company's common stock, par value $0.0001 per share from the Nasdaq Capital Market, and Nasdaq suspended the trading of the Company's Common Stock on May 7, 2025 because the Company has not demonstrated compliance with the MVLS Rule, nor does it meet any of the alternative requirements under Nasdaq Listing Rule 5550 (b) and has failed to demonstrate that additional time to regain compliance is appropriate.
On May 15, 2025, the Company completed its acquisition of Cambridge Energy Resources Ltd. ("CER"), a privately held India - based Energy - Management - as - a - Service provider, following receipt of all necessary regulatory approvals. Under the terms of the transaction, ConnectM paid INR 120 million (approximately $1.4 million). CER brings an established operating presence in India's rooftop solar and telecommunication energy - management sectors, complementing the Company's Owned Service Network segment and Energy Intelligence Network. Management expects the integration of CER to accelerate strategic growth across distributed energy and telecom infrastructure markets in India. With the acquisition, the Company projects India - based operations to expand from approximately 5% to 15% of global revenue (approximately $10 million annualized) over the next twelve months.
During April 2025 and May 2025, the Company entered into twenty five note exchange agreements with twelve of its lenders under which sixteen secured promissory notes totaling $4,435,000, nine convertible notes totaling $1,840,000, and accrued interest and fees totaling $1,189,939 were exchanged for 15,290,930 shares of the Company's common stock with a fair value of $8,224,386, as determined on the issuance date using the reported closing share price. Certain of these note exchanges involved related parties, including Arumilli LLC, SriSid LLC, Win - Light Global Co. Ltd., and W4 Partners LLC.
The Company entered into six promissory note agreements in exchange for aggregate gross proceeds of $735,000 during April 2025 and May 2025. Each of the notes bears interest at a rate of 20.0% per annum and matures 180 days from its respective issuance date. Five of the promissory notes were held by W4 Partners LLC, a related party due to its equity ownership in the Company.
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During May 2025, we amended three of our business loan and security agreements, extending the maturity dates through November 2026 and December 2026 and reducing monthly payments from approximately $23,000 to $8,000.
During May 2025 and June 2025, we issued 485,000 shares of our common stock to certain advisers with a fair value of approximately $108,000, as determined on the issuance date using the reported closing share price.
During May 2025 and June 2025, we issued 1,622,222 shares of our common stock to its directors and employees as consideration for past services performed with a fair value of approximately $372,000, as determined on the issuance date using the reported closing share price.
During May 2025 and June 2025, we sold 3,658,333 shares of our common stock for gross proceeds of approximately $805,000 with a fair value of approximately $948,000, as determined on the issuance date using the reported closing share price.
The Company entered into six convertible note agreements in exchange for aggregate gross proceeds of $1,026,000 to six lenders during April 2025, May 2025, and June 2025 (the "Q2 2025 Convertible Notes"). The Q2 2025 Convertible Notes bear interest at a rate of 20.0% per annum. Five of the Q2 2025 Convertible Notes have maturity dates that range from 40 - days to one year, optional conversion periods that range from thirty to 180 days, and conversion prices that either range from $0.60 to $1.15 or is convertible at a conversion price equal to the quotient obtained by dividing (x) the sum of the principal and accrued by unpaid interest by (y) 90.0% of the VWAP on the primary trading market of the Company's common stock the three trading day period immediately preceding the measurement date. One of the Q2 Convertible Notes bears interest at a rate of 20.0% per annum, matures 210 days from the agreement date, and is convertible any time before the maturity date at the option of the holder into shares of the Company's common stock at a conversion price equal to the lower of (i) $0.25 or (ii) the quotient obtained by dividing (x) the sum of the principal and accrued by unpaid interest by (y) 90.0% of the VWAP on the primary trading market of the Company's common stock the three trading day period immediately preceding the measurement date.
During July 2025, the Company entered into a convertible note agreement in exchange for aggregate gross proceeds of $500,000 to a lender (the "Q3 2025 Convertible Note"). The Q3 2025 Convertible Note bears interest at a rate of 20.0% per annum and matures 210 days from the agreement date. The Q3 2025 Convertible Note is convertible any time before the maturity date at the option of the holder into shares of the Company's common stock at a conversion price equal to the lower of (i) $0.25 or (ii) the quotient obtained by dividing (x) the sum of the principal and accrued by unpaid interest by (y) 90.0% of the VWAP on the primary trading market of the Company's common stock the three trading day period immediately preceding the measurement date.. The number of shares issuable upon conversion is determined by dividing the sum of the outstanding principal and accrued interest by the conversion price.
As of the date of this filing, the Company has not made certain scheduled payments under the SEPA Convertible Note or made timely SEC filings and is therefore in default under the agreement. However, Yorkville has not issued a formal notice of default, and the Company remains in ongoing discussions with Yorkville regarding a potential resolution and restructuring of the outstanding obligations. The Company is required to maintain a minimum cash balance equal to the lesser of (a) $2,000,000 and (b) the sum of the next three Installment Payments, as defined in the promissory note, coming due. As of December 31, 2024, the minimum cash balance required was approximately $833,000.
Comparability of Financial Information
Our historical operations and consolidated balance sheets may not be comparable to our operations and balance sheets as a result of the Business Combination and becoming a public company.
Business Combination and Public Company Costs
On July 12, 2024, we consummated the merger contemplated by the Merger Agreement with Legacy ConnectM surviving the merger as a wholly owned subsidiary of MCAC.
Immediately prior to the closing of the Business Combination,
● each outstanding share of Legacy ConnectM preferred stock was converted into Legacy ConnectM common stock based on a one-to-one ratio. The Business Combination is accounted for with a retrospective application of the Business Combination that results in 2,427,791 shares of preferred stock converting into the same number of shares of Legacy ConnectM common stock
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● convertible note payable totaling $2,250,000 were converted into shares of Legacy ConnectM common stock at $7.00 per share, resulting in the issuance of 321,428 shares of Legacy ConnectM common stock.
Upon consummation of the Business Combination, each share of Legacy ConnectM stock issued and outstanding was cancelled and converted into the right to receive 3.3214 shares of the Company’s common stock.
Upon the closing of the Business Combination, MCAC’s certificate of incorporation was amended and restated to, among other things, set the total number of authorized shares of capital to 110,000,000 shares, of which 100,000,000 were designated as common stock, $0.0001 par value per share, and of which 10,000,000 shares were designated as preferred stock, $0.0001 par value per share.
Legacy ConnectM was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The determination was primarily based on Legacy ConnectM’s shareholders prior to the Business Combination having a majority of the voting interests in the combined company, Legacy ConnectM’s ability to exert control over the majority of the board of directors of the combined company, Legacy ConnectM’s ability to maintain control of the board of directors on a go-forward basis, Legacy ConnectM’s senior management comprising the senior management of the combined company; and Legacy ConnectM’s operations prior to the Business Combination comprise the ongoing operations of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy ConnectM issuing stock for the net assets of MCAC, accompanied by a recapitalization. The net assets of MCAC were stated at fair value, with no goodwill or other intangible assets recorded.
As a result of the Business Combination, we became a publicly traded company, which will require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit, compliance and legal fees.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including but not limited to those discussed in Item 1A “Risk Factors”.
We expect to derive future revenue from (i) our existing high margin recurring revenue products, (ii) our expanded service offerings leveraging our existing customer and developer networks, (iii) expanding our existing software capabilities through development of additional software tools that are capable of analyzing prospective customer properties to assist in identifying attractive opportunities for us and our customers, and (iv) an expanded customer base through client referrals and our customized, relationship-focused sales process.
Reportable Segments
Our reportable operating segments include:
● Owned Service Network focuses on the decarbonization of homes and businesses by providing installation and maintenance services to residential and light commercial customers for heat and cooling solutions and advanced solar solutions. The installed equipment is connected to the Company’s AI-driven energy intelligence platform to ensure peak performance and efficiency of the equipment as well as allow the Company to remotely monitor maintenance needs.
● Managed Solutions provides a selection of servicing offerings that customers can select that include human resources management, procurement services, omnichannel marketing and lead generation as well as access to short-term working capital loans.
● Logistics focuses on the facilitation of business-to-business transportation of heavy goods using the Company’s last mile delivery software.
● Transportation focuses on the management of connected operations using the Company’s IIoT platform to remotely monitor the performance of equipment for original equipment manufacturers (“OEMs”).
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Key Components of Our Results of Operations
Revenue
Our revenue is derived from customer contracts and consists of equipment and product sales, installation of equipment, service agreements associated with equipment sold to customers, provision of managed services, and delivery services. We fulfill obligations and recognize revenue under a contract with a customer by transferring products and services in exchange for consideration from the customer. Payments received or consideration billed in advance are recorded as deferred revenue. For projects expected to be completed within one-year, we have elected to recognize revenue in the amount billable to the end-consumer.
Under our contracts in the managed solutions segment, working capital adjustments may be processed quarterly, if year-to-date costs incurred by the customer exceed the percentage of the customer’s revenue and are recorded as a reduction of selling, general and administrative expenses as it represents the customer’s reimbursement of costs incurred by us.
We exclude from revenue the taxes collected from customers and remitted to government authorities related to sales of our inventory. Shipping and handling costs that are billed to customers are included in net sales.
Cost of Revenue
Cost of Revenue consists of personnel-related expenses, including salaries, benefits and stock-based compensation, and facility costs for our operations and manufacturing teams. Cost of Revenue also includes expenses for costs of equipment and professional services related to the maintenance or installation of equipment. ConnectM expects its operations costs to increase in the foreseeable future as it continues to invest in the expansion of its operations.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, depreciation and amortization, and allocated facility costs for our business development, marketing, corporate, executive, finance, legal, human resources, IT, and other administrative functions. General and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance, and other administrative expenses.
We expect our selling, general and administrative expenses to increase for the foreseeable future as it scales headcount with the growth of its business, and because of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, increased insurance expenses, investor relations activities, and other administrative and professional services.
Other Expense, net
Other income (expense), net consists primarily of interest expense incurred on our debt obligations, remeasurement gains or losses associated with the change in the fair value on our convertible notes payable and forward purchase agreement derivative liabilities, gains and losses on the extinguishment of liabilities, a gain on the modification of our forward purchase agreement and other miscellaneous income or expenses incurred throughout the period.
Results of Operations
The following table summarizes our financial results for the period indicated:
Years Ended December 31,
Change
2024
2023
$
%
Revenues
$
22,652,885
$
19,972,239
$
2,680,646
13.4
%
Costs and expenses:
Cost of revenues
16,706,177
14,934,962
1,771,215
11.9
%
Selling, general and administrative expenses
15,145,429
12,320,295
2,825,134
22.9
%
Loss on impairment
2,403,628
181,853
2,221,775
1,221.7
%
Total Cost and Expenses
34,255,234
27,437,110
6,818,124
24.9
%
Loss from operations
(11,602,349)
(7,464,871)
(4,137,478)
55.4
%
Total other expense, net
(10,905,859)
(1,733,983)
(9,171,876)
528.9
%
Net loss
$
(22,508,208)
$
(9,198,854)
$
(13,309,354)
144.7
%
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Revenues
Revenue increased $2,680,646, or 13.4%, to $22,652,885 for the year ended December 31, 2024 from approximately $19,972,000 for the year ended December 31, 2023. This increase was primarily driven primarily by the Company’s new managed solutions offering, which yielded an increase in revenues of $ 3,812,088 for the year ended December 31, 2024, and increases in the Company’s transportation segment with an increase to revenue of $4,307,602 for the year ended December 31, 2024. This increase was primarily offset by declines in the Company’s owned service network segment of $6,207,326. These decreases in the electrification and decarbonization segments were mostly driven by inclement weather during the year ended December 31, 2024, which caused a decline in solar installations during this period.
Costs and Expenses
Cost of Revenues increased approximately $1,771,000, or 11.9%, to $16,706,177 for the year ended December 31, 2024 from approximately $14,935,000. This increase was primarily driven by an increase in our managed solutions offering segments $4,002,916, which increased along with the revenues for this segment, as described above, and higher material costs for the year ended December 31, 2024. This increase was primarily offset by the Company’s owned service network segments and transportation segments, which yielded a decrease in cost of revenues for the year ended December 31, 2024 of $5,520,576 and $158,565, respectively.
Selling, general and administrative expenses increased approximately $2,825,134, or 22.9% to $15,145,429 for the year ended December 31, 2024 from approximately $12,320,000 for the year ended December 31, 2023. The increase was primarily due to the Company incurring approximately $2,859,000 of onetime costs associated with its initial public offering for the year ended December 31, 2024.
Loss on impairment increased approximately $2,222,000, or 1,221.7%, to $2,403,628 for the year ended December 31, 2024 from approximately $182,000 for the year ended December 31, 2023. The increase was due to the Company recording impairment losses during the year ended December 31, 2024 attributed to recurring losses for two consecutive years at two subsidiaries and significantly declining sales at one of those subsidiaries.
Other Income (Expense)
Interest expense increased $1,282,694 to $2,714,048 for year ended December 31, 2024 from $1,431,354 for the year ended December 31, 2023. This increase was primarily driven by the issuance of the Company’s secured promissory notes and convertible notes throughout the years ended December 31, 2024 and 2023.
During the year ended December 31, 2024, we amended certain of our debt agreements and concluded that the amended terms of the agreements were substantially different from the terms of the initial agreements. As a result of this determination, we accounted for this amendment as extinguishments of the previous debt facility and recognized a loss of extinguishment of debt of $1,645,443. We also recognized expenses attributable to the changes in fair value of our forward purchase agreement of $8, 254,390 and a change in the fair value of convertible notes of $1,707,747.
During the year ended December 31, 2024, we recognized a gain on extinguishment of certain of our debt agreements of $2,257,638 and a gain on our forward purchase agreement modification of $1,572,236 related to the conversion of the convertible notes in connection with the transaction with MCAC and further the new convertible notes.
Liquidity and Capital Resources
Our consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As of December 31, 2024, the Company had cash of approximately $2,408,000. The Company had a working capital deficit of approximately $26,247,000 at December 31, 2024 and incurred a net loss and generated negative cash flow from operating activities of approximately $22,508,000 and $5,959,000, respectively, for the year ended December 31, 2024. These are indicators of substantial doubt as to our ability to continue as a going concern for at least one year from issuance of our consolidated financial statements. Our ability to continue as a going concern is dependent upon the management of expenses and ability to obtain necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due, and upon profitable operations.
If additional equity or debt financing is required from outside sources, we may not be able to raise it on terms acceptable to it or at all. If we are unable to raise additional capital on acceptable terms when needed, its results of operations and financial condition would be materially and adversely affected. Any such financing likely would be dilutive to our existing stockholders and could result in significant financial operating covenants that would negatively impact our business.
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Based on the foregoing, our management has concluded there is substantial doubt as to our ability to continue as a going concern within one year after the date the consolidated financial statements are issued. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities should we be unable to continue as a going concern.
Cash Flows
The following table summarizes ConnectM’s cash flows for the period indicated:
Year Ended December 31,
Change
2024
2023
$
%
Net cash used in operating activities
$
(5,959,133)
$
(4,621,692)
$
(1,337,441)
28.9
%
Net cash used in investing activities
$
(107,665)
$
(465,711)
$
358,046
(76.9)
%
Net cash provided by financing activities
$
7,286,542
$
4,227,160
$
3,059,382
72.4
%
Net used in operating activities
Net cash used in operating activities for the year ended December 31, 2024 was $5,959,133. Net cash used in operating activities consisted primarily of net loss of approximately $22,508,000 offset by approximately $13,261,000 of noncash items, primarily related to the loss on extinguishment of debt of $1,645,443, loss on fair value measurement of debt of $1,707,747, change in fair value of forward purchase agreement put option liability resulting in a loss of $8,254,390 depreciation and amortization of long-lived assets and intangible assets of $745,741 offset by a gain on modification of forward purchase agreement of $1,572,236, impairment loss on goodwill and intangible assets of $2,403,628 and the gain on extinguishment of debt of $2,257,638. In addition, for the year ended December 31, 2024, net changes in operating assets and liabilities resulted in cash provided by operating activities of $3,287,725.
Net cash used in operating activities for the year ended December 31, 2023 was $ 4,621,692. Net cash used in operating activities consisted primarily of net loss of $9,198,854, offset by $2,174,197 of noncash items, primarily related to the depreciation and amortization of long-lived assets and intangible assets of $776,397, amortization of the Company’s debt discount recorded on its different debt facilities of $346,557, a write down of inventory due to obsolescence of $187,098, a loss on impairment of $181,853, and a loss on the extinguishment of debt of $370,320. In addition, for the year ended December 31, 2023, net changes in operating assets and liabilities resulted in cash provided by operating activities of $2,402,965.
Net cash used in investing activities
Net cash used in investing activities for year ended December 31, 2024 was $107,665. Investing activities primarily included the purchase of capitalized software development costs of $186,103 and purchases of property and equipment of $27,044, cash paid for a noncontrolling interest of $60,000 offset by proceeds received from acquisitions of businesses of $152,482.
Net cash used in investing activities for the year ended December 31, 2023 was $465,711. Investing activities primarily included the issuance of convertible notes to MCAC for $445,000, with other immaterial investing activities primarily relating to the purchase of property and equipment and capitalized software.
Net cash provided by financing activities
Net cash provided by financing activities for the year ended December 31, 2024 was $7,286,542. Financing activities consisted primarily of proceeds from the business acquisition of $35,770,959, proceeds advance from lenders of $1,057,275, the issuance of debt of $6,614,400 and the issuance of convertible debt of $4,940,000, and Reimbursement for Recycled Shares related to Forward Purchase Agreement of $1,000,000. These financing activities were offset by cash transferred in connection with forward purchase agreement of $36,727,814 and payments on the Company’s debt facilities of $2,262,401, repayment of convertible debt of $50,000, cash paid for debt issuance costs of $1,015,114, advance to related party Monterey Capital Acquisition Corporation of $1,933,695 and payment on finance leases of $107,068.
Net cash provided by financing activities for the year ended December 31, 2023 was $4,227,160. Financing activities consisted primarily of the issuance of different debt facilities of $9,047,344 offset by the payment of extension fees into MCAC’s trust account of $2,491,431, payments on the Company’s debt facilities of $2,153,487, payments of deferred offering costs of $984,857, and payments on finance leases of $90,409.
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Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the SEC rules and regulations.
Commitments and Contractual Obligations
We are required to maintain a minimum cash balance equal to the lesser of (a) $2,000,000 and (b) the sum of the next three Installment Payments, as defined in the promissory note, coming due by our standby equity purchase agreement with YA II PN, LTD as described in Note 12 to our audited consolidated financial statements. As of December 31, 2024, our minimum cash balance requirement was approximately $833,000.
Critical Accounting Policies and Significant Management Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.
While our significant accounting policies are described in Note 3 to our audited consolidated financial statements, we believe that the following accounting estimates require a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Derivative Financial Instruments
We evaluate our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC 815, Derivatives and Hedging (“ASC 815”). Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met and depend on the nature of the host contract. Derivative financial instruments are recognized at fair value on the grant date with changes in the fair value reported recognized in the consolidated statements of operations and comprehensive loss and each reporting date and are included in this Report under “Item 8. Financial Statements”. 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.
Bifurcated embedded derivatives are classified with the related host contract on the Company’s consolidated balance sheets. Derivative assets and liabilities are classified in the consolidated balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
Any change in one of the significant assumptions detailed below or the terms of the underlying agreements of our derivative financial instruments would likely have an impact on the concluded fair value of the derivative financial instruments. See Note 14 - Derivatives and Note 15 - Fair Value Measurements to our audited consolidated financial statements for additional detail of the valuation methodologies and related assumptions utilized in determining the fair value or our derivative financial instruments
Forward Purchase Agreement (“FPA”)
Our FPA was initially recorded as a part of our Business Combination and was recorded at MCAC’s fair value on the Closing Date. The FPA was amended in August 2024 (the “FPA Amendment”) and December 2024 (the “Second FPA Amendment”). We re-measured the FPA to fair value at assumption and immediately prior to the FPA Amendment using a Black-Scholes pricing model which included certain subjective assumptions based on the term of the host contract including expected term, the estimated volatility of our stock price over the term.
The FPA Amendment and the Second FPA Amendment provided two separate settlement options. We re-measured the FPA to fair value immediately prior to the December 2024 amendment, subsequent to the December 2024 amendment, and at December 31, 2024 using a Monte Carlo simulation model that applies a probability of occurrence to the present value of each settlement scenario.
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Debt Conversion Adjustments and SEPA Derivative Liability
Our bifurcated embedded derivatives include the debt conversion adjustment provisions included in nine conversion agreements and the SEPA derivative liability. The fair value of these derivatives was determined utilizing a Monte Carlo simulation model in order to incorporate subjective assumptions based on the terms of the specific host contracts and represent our best estimate at the valuation date. The inputs to the model for each instrument include significant assumptions such as the drift term, volume-weighted average price (“VWAP”) based on a specified period of time as defined in the host contract and the estimated volatility of our stock price over the term which was determined by examining the historical volatilities of a group of industry peers, as the Company did not have significant trading history for our ConnectM common stock.
Convertible Debt
We evaluate convertible debt in accordance with ASC 470, “Debt with Conversion and Other Options” (“ASC 470”) to determine if embedded conversion features present in the convertible instrument shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. Debt issuance costs are allocated proportionately to the debt host and conversion feature. Convertible notes payable are reflected at fair value as the Company elected to measure these financial instruments with the fair value option. Each period, the fair value of the convertible notes payable are calculated and the resulting gains and losses from the change in fair value of the convertible notes associated with non-credit components are recognized in income, while the change in fair value associated with credit components are recognized in accumulated other comprehensive income (“AOCI”), and subsequently released from AOCI upon maturity.
Significant assumptions used in the calculation of fair value for the Amended 2022 Convertible Notes, 2023 Convertible Notes and 2024 convertible notes include the probabilities of the various conversion scenarios based on the terms of the host contract which include the estimated probability of conversion at maturity, voluntary conversion and automatic conversion.
The Assumed 2024 Note is re-measured to fair value each reporting period with the most significant unobservable input used in the calculation of the is the expected average volume weighted average price for a share of our common stock for the five-business day period preceding the maturity date of the Company at the maturity date.
The fair value of the SEPA Convertible Note was determined using a Monte Carlo simulation model which incorporates subjective assumptions based on the terms of the specific host contract and represent our best estimate at the valuation date. We included the estimated volatility of our stock price over the term of the note as of the measurement date, the remaining term of the host contract at the measurement date, the risk-free interest rate based upon United States Treasury interest rates appropriate for the expected term, and the estimated drift term. Any change in one of the significant assumptions detailed above would likely have an impact on the concluded fair value of the SEPA Convertible Note.
See Notes 10 – Convertible Debt and Note 15 - Fair Value Measurements to our audited consolidated financial statements for additional detail.
Contingent Consideration Obligation
The fair value of the Contingent Consideration Obligation was determined using a Monte Carlo simulation model which incorporates subjective assumptions based on the terms of the specific host contract and represent our best estimate at the valuation date. We included the estimated revenue and EBITDA volatility over the term, the term to payment of the host contract at the measurement date, the earnout and long-term risk-free interest rates based upon United States Treasury interest rates appropriate for the expected term. Any change in one of the significant assumptions detailed above would likely have an impact on the concluded fair value of the Contingent Consideration Obligation.
Business Combinations
We account for business combinations using the acquisition method of accounting. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed, and noncontrolling interest requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items.
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Reverse Recapitalization
Legacy ConnectM was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The determination was primarily based on Legacy ConnectM’s shareholders prior to the Business Combination having a majority of the voting interests in the combined company, Legacy ConnectM’s ability to exert control over the majority of the board of directors of the combined company, Legacy ConnectM’s ability to maintain control of the board of directors on a go-forward basis, Legacy ConnectM’s senior management comprising the senior management of the combined company; and Legacy ConnectM’s operations prior to the Business Combination comprise the ongoing operations of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy ConnectM issuing stock for the net assets of MCAC, accompanied by a recapitalization. The net assets of MCAC were stated at fair value with no goodwill or other intangible assets recorded. See Note 5 – Reverse recapitalization to our audited consolidated financial statements for additional detail.
Long lived assets
We determined that long-lived assets, which include our goodwill and intangible assets, represent critical accounting estimates, as they involve significant judgment, estimates, and assumptions and to the extent that our estimates and assumptions materially change or if actual circumstances differ from those in the assumptions, our financial statements could be materially impacted.
Acquired intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets assessed as having indefinite lives are not amortized, but are assessed for indicators that the useful life is no longer indefinite or for indicators of impairment each period. Indicators we review, as applicable, include whether there has been a significant adverse change in the extent or manner in which our assets are being used, a significant adverse change in legal factors affecting our assets, customer attrition, and/or a cash flow loss. Each reporting period, we evaluate the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization.
During the year ended December 31, 2024, we identified impairment indicators to our long lived assets attributed to recurring losses for two consecutive years at two subsidiaries and significantly declining sales at one of those subsidiaries. During the year ended December 31, 2023, we identified impairment indicators attributed to our decision to wind down the operations of two subsidiaries and based upon the contractual terms of a noncompete agreement in connection with an acquisition. We recognized an impairment loss of $1,567,812 and $157,103 on our goodwill for the years ended December 31, 2024 and 2023, respectively. We recognized an impairment loss on our intangible assets of $835,816 and $24,750 for the years ended December 31, 2024 and 2023, respectively.
Share-based Compensation
We account for share-based payments that involve the issuance of shares of our common stock to employees and nonemployees and meet the criteria for share-based awards as stock-based compensation expense based on the grant-date fair value of the award. We have elected to recognize the adjustment to stock-based compensation expense in the period in which forfeitures occur. We recognize compensation expense for awards with only service conditions on a straight-line basis over the requisite service period for the entire award.
If factors change, and we utilize different assumptions including the probability of achieving performance conditions, share-based compensation cost on future award grants may differ significantly from share-based compensation cost recognized on past award grants. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost. Share-based compensation cost affects our compensation and benefits expenses. In addition to the below, see Note 13 – Stock Based Compensation to our audited consolidated financial statements for additional detail.
For periods prior to the Business Combination, we issued stock option awards to employees and nonemployees under the Legacy ConnectM 2019 Equity Incentive Plan (the “2019 Plan”). Legacy Options converted into an option to purchase a number of shares of Company common stock equal to the product of the number of shares of Legacy ConnectM common stock and the Exchange Ratio at an exercise price per share equal to the exercise price of the Legacy Option divided by the Exchange Ratio. Each exchanged option is governed by the same terms and conditions applicable to the Legacy Option prior to the Business Combination. No further grants can be made under the 2019 Plan. The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model in order to measure the compensation cost associated with the award. This model incorporates the following assumptions for inputs: the expected volatility in the market value of the underlying common stock, the expected term of the contractual option, the risk-
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free interest rate based upon quoted market yields for United State Treasury instruments with terms that were consistent with the expected term of the stock options and the expected dividend yield of the underlying common stock.
For periods subsequent to the Business Combination share-based awards will be issued under the 2023 Equity Incentive Plan (the “2023 Plan”) which was approved on July 10, 2024 in connection with the Business Combination and will be administered by our Board. As of December 31, 2024, no awards were issued under to date under the 2023 Plan.
Warrants
We account for warrants as either equity- classified or liability classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing liabilities from equity (“ASC 480”), and ASC 815. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance, modification, and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a non-cash gain or loss on the accompanying consolidated statements of operations and comprehensive loss. We assess the classification of our warrants at each reporting date to determine whether a change in classification between equity and liability is required.
Income taxes
We determined that income taxes involve critical accounting estimates because management makes significant estimates, assumptions, and judgments to determine our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets, and to the extent that our estimates and assumptions materially change, or if actual circumstances differ materially from those in the assumptions, our financial statements could be materially impacted.
We utilize the asset and liability method for computing our income tax provision. Deferred tax assets and liabilities reflect the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities as well as operating loss, capital loss, and tax credit carryforwards, using enacted tax rates. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. Assessing the need for a valuation allowance requires a great deal of judgement and we consider all available evidence, both positive and negative, to determine whether it is more likely than not that our deferred tax assets are recoverable. We evaluate all available evidence including, but not limited to, history of earnings and losses, forecasts of future taxable income, and the weight of evidence that can be objectively verified. See Note 17 - Income taxes of the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for details of changes in our valuation allowance for the years ended December 31, 2024 and 2023.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized within provision for income taxes.
For U.S. federal tax purposes, digital asset transactions are treated on the same tax principles as property transactions. We recognize a gain or loss when digital assets are exchanged for other property, in the amount of the difference between the fair market value of the property received and the tax basis of the exchanged digital assets. Receipts of digital assets in exchange for goods or services are included in taxable income at the fair market value on the date of receipt.
Reportable Segments
Our operations are organized into four reporting segments: owned service network, transportation, logistics, and managed solutions. The structure is designed to allow us to evaluate the performance of our different solutions offerings, provide improved service and drive future growth in a cost efficient manner. See Note 20 to the Consolidated Financial Statements for certain segment information about our business required by GAAP.
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Recently Issued and Adopted Accounting Standards
See Note 3 for a discussion of any recent accounting pronouncements relevant to our Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As a smaller reporting company, we are not required to make disclosures under this Item.
Item 8. Financial Statements and Supplementary Data.
Our financial statements and the notes thereto begin on page F-1 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.