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Item 7. Management’s Discussion and Analysis

2026-03-30 compared with 2025-03-31 · 200 added, 199 removed, 3 unchanged (99% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

We are a blank check company

incorporated in the Cayman Islands on April 4, 2024 formed for the purpose of effecting a merger, amalgamation, share exchange, asset

acquisition, share purchase, reorganization or other similar business combination with one or more businesses.

We intend to effectuate

our business combination using cash derived from the proceeds of the Initial Public Offering and the sale of the Private Placement Warrants,

our shares, debt or a combination of cash, shares and debt.

We expect to continue to incur

significant costs in the pursuit of our acquisition plans.

We cannot assure you that our plans to complete a business combination will

be successful.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TERRESTRIAL ENERGY

Unless the context otherwise requires, all references in this section to “we”, “us”, “our”, “its”, “Terrestrial Energy”, or the “Company” refer to Terrestrial Energy Inc.

and its subsidiaries.

The following discussion and analysis of the financial condition and results of operations of Terrestrial Energy includes information that Terrestrial Energy’s management believes is relevant to an assessment and understanding of Terrestrial Energy’s consolidated results of operations and financial condition.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements for the years ended December 31, 2025 and 2024, together with the respective notes thereto.

This discussion contains forward-looking statements reflecting current plans, estimates and assumptions concerning events and financial trends that may affect future operating results or financial position, which involve risks and uncertainties.

Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors.

For an overview of the Company, see the information above presented under the section labeled “Item 1.

Business,” which is in “Part I” of this Annual Report.

Corporate History

HCM II Acquisition Corp.

(“HCM II”) was a special purpose acquisition company incorporated on April 4, 2024, as a Cayman Islands exempted corporation for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.

On October 23, 2025, HCM II domesticated as a Delaware corporation and changed its name to “Terrestrial Energy Inc.” (the “Company”).

On October 28, 2025, pursuant to the Business Combination Agreement, dated as of March 26, 2025, as amended, the Company completed the Business Combination with Terrestrial Energy Development Inc., (“TEDI”), a Delaware corporation, with TEDI surviving as a wholly owned subsidiary of the Company.

Following the Business Combination, the Company became a holding company whose operations are conducted through TEDI and whose primary asset is its equity interest in TEDI.

For accounting and financial reporting purposes, the Business Combination was accounted for as a reverse recapitalization, with TEDI treated as the accounting acquirer and HCM II treated as the accounting acquiree.

Recent Developments

On March 26, 2025, the Company entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified

from time to time in accordance with its terms, the “Business Combination Agreement”) by and among the Company, Terrestrial

Energy Inc., a Delaware corporation (“Terrestrial Energy”), and HCM II Merger Sub Inc., a Delaware corporation and a direct

wholly owned subsidiary of Company (“Merger Sub”), pursuant to which, among other things and subject to the terms and conditions

contained therein, Merger Sub will merge with and into Terrestrial Energy (the “Merger”), with Terrestrial Energy continuing

as the surviving entity (the “Surviving Company”).

The transactions contemplated by the Business Combination Agreement are

referred to herein as the “Business Combination.” The combined company’s business will continue to operate through Terrestrial

Energy and its subsidiaries.

The Business Combination Agreement and the Business Combination were unanimously approved by the board of

directors of the Company and the board of directors of Terrestrial Energy.

The Business Combination is expected to close in the fourth

quarter of 2025, subject to the receipt of the required approvals by Company’s shareholders and the fulfilment of other customary

closing conditions.

In addition to the Merger, the Company will, subject to obtaining the required shareholder approvals and at least one

(1) day prior to the date of the closing of the Business Combination (the “Closing”), change its jurisdiction of incorporation

by deregistering as a Cayman Islands exempted company and continuing and domesticating as a corporation incorporated under the laws of

the State of Delaware (the “Domestication”).

The Company will provide its public shareholders the opportunity to elect, at

least two (2) business days prior to the Company shareholder’s meeting, to redeem their shares on the terms and conditions set forth

in the Business Combination Agreement and the Company’s governing documents (the “Redemption”).

Subject to the receipt

of approval from shareholders of the Company, and at least one (1) day prior to the Domestication, the Company will carry out the Redemption.

virtue of the Domestication and subject to the satisfaction or waiver of the conditions of the Business Combination Agreement, including

approval of the Company’s shareholders:

(i) immediately prior to the Domestication, each of the then issued and outstanding Class

B Ordinary Shares of the Company will convert automatically, on a one-for-one basis, into one (1) Class A Ordinary Share, par value of

$0.0001 per share, of the Company (the “Sponsor Share Conversion”);

and (ii) immediately following the Sponsor Share Conversion,

in connection with the Domestication, (x) each then issued and outstanding Class A Ordinary Share (other than any Class A Ordinary Share

included in the Cayman Purchaser Units (as defined in the Business Combination Agreement)) will convert automatically, on a one-for-one

basis, into one (1) share of common stock, par value $0.0001 per share, of the Company (after the Domestication) (the “Domesticated

Common Stock”);

(y) each of the then issued and outstanding warrants (other than any Cayman Purchaser Public Warrants (as defined

in the Business Combination Agreement) included in the Cayman Purchaser Units) representing the right to purchase one (1) Class A Ordinary

Share will convert automatically into a warrant to acquire one (1) share of Domesticated Common Stock (each a “Domesticated Warrant”);

and (z) each of the then issued and outstanding Cayman Purchaser Units will be cancelled and each holder thereof will be entitled to one

(1) share of Domesticated Common Stock and one-half (1/2) of one (1) Domesticated Warrant.

The Company has also entered into subscription

agreements (collectively, the “PIPE Subscription Agreements”), each dated as of March 26, 2025, with certain investors (collectively,

the “PIPE Investors”), pursuant to which, among other things, the Company has agreed to issue and sell, in private placements

to close immediately prior to or substantially concurrently with the Closing, an aggregate of 5,000,000 shares of Domesticated Common

Stock for a purchase price of $10.00 per share (the “PIPE Financing”).

The PIPE Investors are permitted, under the PIPE Subscription

Agreements, to satisfy their commitments thereunder if they hold shares of Domesticated Common Stock that qualify as Non-Redeemed Shares

(as defined in the PIPE Subscription Agreements), subject to certain conditions and restrictions set forth in the PIPE Subscription Agreements.

Department of Energy (“DOE”) Advanced Nuclear Reactor Pilot Program

On August 12, 2025, the Company announced that it had been selected for the DOE’s Advanced Reactor Pilot Program, established by the Trump administration’s May 2025 executive order to fast-track commercial licensing activities for small and modular nuclear plants that use advanced reactor technologies, expediting their broad deployment.

We believe this represents a significant milestone in Terrestrial Energy’s commercialization pathway, leveraging the program’s fast-track approach to advance the licensing and deployment of the Company’s proprietary IMSR technology.

DOE Advanced Nuclear Fuel Line Pilot Project

On September 30, 2025, the Company announced that it had been selected for the DOE’s Advanced Nuclear Fuel Line Pilot Project, established by the Trump administration’s May 2025 executive order to fast-track commercial licensing activities for small and modular nuclear plants that use advanced reactor technologies, expediting their broad deployment.

The selection of Terrestrial Energy to the Fuel Line Pilot Project will expand access to the advanced fuel required to test our design and accelerate the transition from demonstration to deployment.

When combined with our selection to the Advanced Nuclear Reactor Pilot Program, and our use of standard assay low enriched uranium (“SALEU”) fuel, we believe this represents another significant milestone in Terrestrial Energy’s commercialization pathway as we won’t have to rely on scarce fuel in the commercialization of our proprietary IMSR technology.

DOE Other Transaction Authority (“OTA”) Agreements

In January 2026, the Company executed two OTA agreements with the DOE under programs established by Executive Order 14301.

The first agreement, for Project TETRA under the DOE's Advanced Reactor Pilot Program, provides for the construction and operation of a pilot reactor utilizing the Company's IMSR technology and SALEU fuel, enabling the Company to advance from design to operation under DOE authorization outside traditional federal contracting constraints.

The second agreement, for Project TEFLA under the DOE's Fuel Line Pilot Program, provides for a pilot production facility to demonstrate the Company's proprietary IMSR Fuel Salt production technology using SALEU feedstock.

Fuel produced under Project TEFLA will support the Company’s Project TETRA test reactor project, being developed under DOE’s Advanced Reactor Pilot Program.

Together, these agreements are intended to support the commercialization of the Company's IMSR Plant.

Results of Operations

We have neither engaged in

any operations nor generated any revenues to date.

Our only activities from April 4, 2024 (inception) through December 31, 2024 were organizational

activities, those necessary to prepare for the Initial Public Offering, described below, and, after our Initial Public Offering, identifying

a target company for a business combination.

We do not expect to generate any operating revenues until after the completion of our business

We generate non-operating income in the form of interest income on marketable securities held in the trust account.

expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due

diligence expenses.

For the period from April

4, 2024 (inception) through December 31, 2024, cash used in operating activities was $318,768.

Net income of $3,408,788 was affected by

operating costs paid by Sponsor in exchange for issuance of Class B founder shares of $12,463, payment of operation costs through promissory

note of $45,200 and interest earned on marketable securities held in the trust account of $4,043,585.

Changes in operating assets and

liabilities was affected by $258,366 of cash provided for operating activities.

Factors That May Adversely Affect our Results

of Operations

Our results of operations

and our ability to complete an initial business combination may be adversely affected by various factors that could cause economic uncertainty

and volatility in the financial markets, many of which are beyond our control.

Our business could be impacted by, among other things,

downturns in the financial markets or in economic conditions, increases in oil prices, inflation, increases in interest rates, supply

chain disruptions, declines in consumer confidence and spending, public health considerations, and geopolitical instability, such as the

military conflicts in Ukraine and the Middle East.

We cannot at this time predict the likelihood of one or more of the above events, their

duration or magnitude or the extent to which they may negatively impact our business and our ability to complete an initial business combination.

For the years ended December 31, 2025 and 2024

The following tables set forth our consolidated statement of operations for the years ended December 31, 2025 and 2024, and the dollar and percentage change between the two periods:

For the Year ended

Operating expenses:

Research and development costs

General and administrative

Depreciation and amortization

Total Operating Expenses

Operating loss

Other (expense) income:

Government grants

Interest expense

Interest expense – related party

Loss on extinguishment of debt

Interest and dividend income

Foreign exchange gain (loss)

Other (expense) income

Net loss before income taxes

Income tax expense

During 2024, the Company provided engineering services to a customer, which was recognized over time as the services were performed.

The Company’s contracts with customers are typically to provide a significant service by integrating a complex set of agreed tasks into a single deliverable.

Consequently, the entire contract is accounted for as one performance obligation.

The Company recognizes revenue from engineering services over time using an input method as performance obligations have no alternative use for the Company and the contracts would require payment to be received for the time and effort spent by the Company on progressing the contracts in the event of the customer cancelling the contract prior to completion for any reason other than the Company’s failure to perform its obligations under the contract.

Specifically, labor hours incurred are used to measure progress towards complete satisfaction of the service.

This is considered a faithful depiction of the transfer of services as the contracts are initially priced on the basis of anticipated hours to complete the projects and, therefore, also represents the amount to which the Company would be entitled based on its performance to date.

Revenue for the years ended December 31, 2025 and 2024 was $0.0 million and $0.3 million, respectively.

The decrease in revenue in 2025 is attributed to the completion of a contract with a customer in the oil and gas sector for pre-construction and use-specific engineering services, which was completed during 2024 and did not provide any revenue in 2025.

Operating Expenses

Research and development expense

R&D expenses represent costs incurred to design and engineer the IMSR Plant, including the costs of developing design tools.

All research and development costs related to product development are expensed as incurred.

R&D expense for the years ended December 31, 2025 and 2024 was $9.8 million and $5.2 million, respectively.

The increase in 2025 is attributed to an increase in R&D activities performed by the Company in 2025, compared to 2024, as the Company increased its expenditures in testing activities and expanded headcount.

General and administrative expense

General and administrative expenses consist of costs, such as rent or lease costs, legal, audit and accounting services, and other professional fees, marketing costs, stock compensation, as well as personnel-related expenses for employees, executives and contractors.

General and administrative expense for the years ended December 31, 2025 and 2024 was $14.3 million and $4.2 million, respectively.

The increase in 2025 compared to 2024 is primarily attributable to additional stock-based compensation expense associated with stock options and restricted stock units issued, along with overall operational growth including headcount as part of the business growth strategy.

Depreciation and amortization

Depreciation and amortization consist primarily of depreciation of our computer software and equipment and amortization of our patents and trademarks.

Depreciation and amortization expense for the years ended December 31, 2025 and 2024 was $1.2 million and $1.3 million, respectively.

The decrease in 2025 was primarily due to certain fixed assets becoming fully depreciated in fiscal 2024.

Other Income and Expenses

Government Grants

Government grants decreased by $0.4 million, or 54% for the year ended December 31, 2025, as compared to the year ended December 31, 2024.

Interest expense and Interest expense - related parties

Interest expense and interest expense - related parties increased by $3.0 million, or 231%, for the year ended December 31, 2025 compared to the year ended December 31, 2024.

The increase was primarily due to the issuance of convertible debt securities by the Company in the third and fourth quarters of 2024 and the first quarter of 2025 which accrued interest expense and the write-off of debt discount for a portion of 2024, and for ten months of the year in 2025.

Additionally, average borrowings outstanding were higher during 2025 compared to 2024.

Interest and Dividend Income

Interest and dividend income increased by $1.2 million for the year ended December 31, 2025 compared to the same period in 2024 as a result of higher short-term investment balances.

Foreign exchange gain (loss)

Foreign exchange gain (loss) decreased by $0.7 million for the year ended December 31, 2025 compared to the same period in 2024 due to the volatility of the US dollar to Canadian dollar exchange rate.

Liquidity and Capital Resources

Until the consummation of

the Initial Public Offering, our only source of liquidity was an initial purchase of shares of Class B Ordinary Shares, par value $0.0001

per share, by the Sponsor and loans from the Sponsor.

On August 19, 2024, we consummated

the Initial Public Offering of 23,000,000 Units, which includes the full exercise by the underwriters of their over-allotment option in

the amount of 3,000,000 Units generating gross proceeds of $230,000,000.

Simultaneously with the closing of the Initial Public Offering,

we consummated the sale of an aggregate of 6,850,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, in

a private placement to the Sponsor and Cantor Fitzgerald & Co., generating gross proceeds of $6,850,000.

We intend to use substantially

all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less income taxes

payable), to complete our Business Combination.

To the extent that our share capital or debt is used, in whole or in part, as consideration

to complete our Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the

operations of the target business or businesses, make other acquisitions and pursue our growth strategies.

We intend to use the funds

held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target

businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners,

review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business

For the period from April

4, 2024 (inception) through December 31, 2024, cash used in operating activities was $323,234.

Net income of $3,408,788 was affected by

operating costs paid by Sponsor in exchange for issuance of Class B founder shares of $12,463, payment of operation costs through promissory

note of $45,200 and interest earned on marketable securities held in the trust account of $4,043,585.

Changes in operating assets and

liabilities was affected by $253,900 of cash provided for operating activities.

As of December 31,2024, we

had marketable securities held in the trust account of $235,193,585.

We intend to use substantially all of the funds held in the Trust

Account, including any amounts representing interest earned on the Trust Account (less income taxes payable), to complete our Business

To the extent that our share capital or debt is used, in whole or in part, as consideration to complete our Business Combination,

the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses,

make other acquisitions and pursue our growth strategies.

As of December 31,2024, we

had cash held outside of the trust account of $672,555 available for working capital needs.

We intend to use the funds held outside the

Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel

to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate

documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business Combination.

We have until August 19, 2026

to consummate the initial Business Combination (assume no extensions).

If we do not complete a Business Combination, we will trigger an

automatic winding up, dissolution and liquidation pursuant to the terms of the Amended and Restated Memorandum and Articles of Association.

Notwithstanding management’s belief that we would have sufficient funds to execute its business strategy, there is a possibility

that business combination might not happen within the 24-month period from the date of the auditors’ report.

In connection with our assessment of going concern considerations in accordance with ASC 205-40, Going Concern, as of December 31, 2024,

we may need to raise additional capital through loans or additional investments from Sponsor, stockholders, officers, directors, or third

Our officers, directors and Sponsor may, but are not obligated to, loan us funds, from time to time or at any time, in whatever

amount they deem reasonable in their sole discretion, to meet our working capital needs.

Accordingly, we may not be able to obtain additional

If we are unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could

include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead

We cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all.

Management plans to

address this uncertainty through a Business Combination.

If a Business Combination is not consummated by the end of the Combination

Period, currently August 19, 2026, there will be mandatory liquidation and subsequent dissolution of the Company.

Management has

determined that the liquidity condition raises substantial doubt about our ability to continue as a going concern.

No adjustments

have been made to the carrying amounts of assets or liabilities should be required to liquidate after the Combination Period.

intend to complete the initial Business Combination before the end of the Combination Period.

However, there can be no assurance

that we will be able to consummate any Business Combination by the end of the Combination Period.

Off-Balance Sheet Financing Arrangements

We have no obligations, assets

or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2024.

We do not participate in transactions

that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which

would have been established for the purpose of facilitating off-balance sheet arrangements.

We have not entered into any off-balance

sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased

any non-financial assets.

Contractual Obligations

We do not have any long-term

debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay the Sponsor a total

of $15,000 per month for office space, utilities and secretarial and administrative support services.

The underwriter will be entitled

to a deferred underwriting discount of 4.40% of the gross proceeds of the Initial Public Offering held in the Trust Account other than

those sold pursuant to the underwriters’ over-allotment option and 6.40% of the gross proceeds sold pursuant to the underwriter’s

over-allotment option, $10,720,000 in the aggregate, payable upon the completion of the Company’s initial Business Combination subject

to the terms of the underwriting agreement

Critical Accounting Estimates

The preparation of financial

statement and related disclosures in conformity with accounting principles generally accepted in the United States of America requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets

and liabilities at the date of the financial statement, and income and expenses during the periods reported.

Making estimates requires

management to exercise significant judgement.

It is at least reasonably possible that the estimate of the effect of a condition, situation

or set of circumstances that existed at the date of the financial statement, which management considered in formulating its estimate,

could change in the near term due to one or more future confirming events.

Accordingly, the actual results could materially differ from

those estimates.

As of December 31, 2024, we did not have any critical accounting estimates to be disclosed.

Recent Accounting Pronouncements

In November 2023, the FASB

issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

The amendments

in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided

to the chief operating officer decision maker (“CODM”), as well as the aggregate amount of other segment items included in

the reported measure of segment profit or loss.

The ASU requires that a public entity disclose the title and position of the

CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding

how to allocate resources.

Public entities will be required to provide all annual disclosures currently required by Topic 280 in

interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments

in this ASU and existing segment disclosures in Topic 280.

This ASU is effective for fiscal years beginning after

December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

Management does not believe

that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s

financial statement.

Historically, the Company’s primary sources of liquidity have been cash flows from private fundraising offerings from related parties or other investors and other financing activities to fund operations.

For the years ended December 31, 2025 and 2024, the Company reported operating losses of $25.2 million and $10.4 million, respectively, and negative cash flows from operations of $16.5 million and $8.2 million, respectively.

As of December 31, 2025, the Company had $97.2 million in cash and cash equivalents and $200.6 million in short-term investments.

The Company had net working capital of $293.6 million and an accumulated deficit of $124.6 million.

Management expects that significant on-going expenditures will be necessary to successfully implement our business plan.

The Company commenced trading on Nasdaq under the symbol “IMSR” on October 29, 2025, after completing its business combination with HCM II on October 28, 2025.

Pursuant to the closing of the business combination, the Company received in excess of $292 million in gross proceeds before expenses, which included gross proceeds of $50.0 million from the sale of common stock in a private placement (the “PIPE”) and approximately $242.0 million from HCM II’s trust account following redemptions of less than 1%.

The Company’s future capital requirements will depend on many factors, including the timing and extent of spending to support further sales and marketing, research and development efforts, the Company’s commercial development and deployment of its IMSR Plant, and future revenues.

The Company may seek to obtain additional financing to commercialize the IMSR Plant technology through possible public or private equity offerings, debt financings, corporate collaborations, and other means.

We believe that we have sufficient cash and cash equivalents and investments, along with continued access to capital markets, to satisfy our cash requirements for the next 12 months and beyond based on current operating plans.

Cash flows for the years ended December 31, 2025 and 2024

The following table summarizes the Company’s cash flows from operating, investing and financing activities for the years ended December 31, 2025 and 2024:

For the year ended

Net cash used in operating activities

Net cash used in investing activities

(200,638,289)

Net cash provided by financing activities

Cash flows used in operating activities

Net cash used in operating activities for the year ended December 31, 2025 and 2024 was $16.5 million and $8.2 million, an increase of $8.3 million.

The increase was primarily due to an increase in the Company’s operating loss after non-cash items.

The cause of the increase in the Company’s operating loss was an increase in engineering costs and general and administrative costs as discussed above.

Cash flows used in investing activities

Net cash used in investing activities for the year ended December 31, 2025 was $200.6 million.

The corresponding amount for the year ended December 31, 2024 was cash used of $0.7 million.

The increase was primarily related to an increase in the purchases of property and equipment and short-term investments.

Cash flows provided by financing activities

Cash provided by financing activities for the year ended December 31, 2025 was $311.4 million compared to $7.3 million for the year ended December 31, 2024, an increase of $304.1 million.

The increase was a result of the net proceeds from the recapitalization of $220.8 million, net proceeds of $49.5 million from the PIPE, proceeds from the exercise of stock options and warrants of $4.5 million, proceeds from issuance of convertible notes of $11.0 million, and proceeds from issuance of preferred stock of $25.8 million.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on its financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

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

generally accepted accounting principles.

In the preparation of these consolidated financial statements, we are required to use judgment in the making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods.

On an ongoing basis, we evaluate our estimates and assumptions.

Our actual results may differ from these estimates under different assumptions or conditions.

We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the consolidated financial statements.

See Note 2, Significant Accounting Policies, in our accompanying consolidated financial statements for a description of our significant accounting policies.

Accordingly, these are the policies and estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:

Foreign Currency

The Company’s reporting currency is the US dollar.

The functional currency of each subsidiary is determined by the currency of the primary economic environment in which the entity operates.

The functional currency of TEON is the Canadian dollar, that of Terrestrial Energy Limited, a company incorporated under the laws of England and Wales, the Pound Sterling, and that of Terrestrial Energy USA, Inc., the United States dollar.

Assets and liabilities of the operating subsidiaries are translated at the spot rate in effect at the applicable reporting date.

Revenues and expenses of the operating subsidiaries are translated at the average exchange rates in effect during the applicable period.

The resulting foreign currency translation adjustment is recorded as Accumulated other comprehensive income (loss), which is reflected as a separate component of Stockholders’ Equity.

The functional currency is translated into U.S.

dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet date, and for revenue and expense accounts using a weighted-average exchange rate during the fiscal year.

The transactions in foreign currency (that is a different currency than the functional currency of the entity) are converted at the exchange rate prevailing to the date of the transaction.

The assets and liabilities denominated in foreign currencies are evaluated in the current period on the date of the closing or at the opening rate, when applicable.

The translation adjustments are deferred as a separate component of equity in “Accumulated other comprehensive income (loss)”.

Gains or losses resulting from transactions denominated in foreign currencies and intercompany debt that is not of a long-term investment nature are included in Foreign exchange (gain) loss in the consolidated statements of operations and comprehensive loss.

Fair Value Measurements

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

The authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are from sources independent of the Company.

Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.

The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The hierarchy is broken down into three levels:

Inputs are quoted prices in active markets for identical assets or liabilities.

Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.

Inputs are unobservable for the asset or liability.

The carrying amounts of certain financial instruments, such as cash equivalents, prepaid expenses and other current assets, short-term investments, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

Convertible Notes

The Company may enter into convertible notes, some of which contain, predominantly, fixed rate conversion features, whereby the outstanding principal and accrued interest may be converted by the holder, into common shares at a fixed discount to the market price of the common stock at the time of conversion.

In this case, the convertible notes represent a financial instrument other than an outstanding share that embodies a conditional obligation that the issuer must or may settle by issuing a variable number of its equity shares.

The Company records the convertible note liability at its fixed monetary amount by measuring and recording a premium, as applicable, on the convertible notes date in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”).

The Company reviews the terms of warrants to purchase its common stock to determine whether warrants should be classified as liabilities or stockholders’ deficit in its consolidated balance sheets.

In order for a warrant to be classified in stockholders’ deficit, the warrant must be (i) indexed to the Company’s equity and (ii) meet the conditions for equity classification.

If a warrant does not meet the conditions for stockholders’ deficit classification, it is carried on the consolidated balance sheets as a warrant liability measured at fair value, with subsequent changes in the fair value of the warrant recorded in other items in the consolidated statements of operations and comprehensive loss.

If a warrant meets both conditions for equity classification, the warrant is initially recorded, at its relative fair value on the date of issuance, in stockholders’ deficit in the consolidated balance sheets, and the amount initially recorded is not subsequently remeasured at fair value.

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements granted to employees in accordance with ASC 718, “Compensation:

Stock Compensation”, by measuring the grant date fair value of the award and recognizing the resulting expense over the period during which the employee is required to perform service in exchange for the award.

Equity-based compensation expense is only recognized for awards subject to performance conditions if it is probable that the performance condition will be achieved.

The Company accounts for forfeitures when they occur.

The Company uses the Black-Scholes option pricing model to determine the grant date fair value of its stock options granted.

This model requires the Company to estimate the expected volatility and the expected term of the stock options, which are highly complex and subjective variables.

The Company uses an expected volatility of its stock price during the expected life of the options that is based on the historical performance of the Company’s stock price as well as including an estimate using similar companies.

The expected term is computed using the simplified method as the Company’s best estimate given its lack of actual exercise history.

The Company has selected a risk-free rate based on the implied yield available on U.S.

Treasury securities with a maturity equivalent to the expected exercise term of the stock option.

The Company grants restricted stock units (“RSUs”) to employees and non-employee directors as part of its equity-based compensation program.

RSUs represent the right to receive shares of the Company’s common stock upon vesting, subject to specified service and/or performance conditions.

RSUs do not have voting or dividend rights prior to the issuance of shares, except for dividend equivalents if and when declared, as applicable under the terms of the award agreements.

The Company accounts for RSUs in accordance with ASC 718, Compensation—Stock Compensation.

Compensation expense for RSUs is measured at the grant-date fair value, which is equal to the closing market price of the Company’s common stock on the date of grant.

For RSUs subject solely to service-based vesting conditions, compensation expense is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award.

The Company accounts for forfeitures as they occur.

Upon vesting, each RSU is converted into one share of the Company’s common stock.

The Company may withhold shares to satisfy statutory tax withholding requirements.

The issuance of shares upon vesting results in an increase to common stock and additional paid-in capital.

Government Grants

Government grants are recognized where there is reasonable assurance that the grant will be received, and all attached conditions will be complied with.

When the grant relates to an expense item, the grant is recognized in other income as government grants, deferred over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate.

Where the grant relates to an asset, it is recognized as deferred income, and then recognized as income over the useful life of the related depreciable asset.

Merger and Reverse Recapitalization

Our consolidated financial statements reflect the results of the Merger, which was accounted for as a reverse recapitalization in accordance with U.S.

The accounting for the Merger required management to make significant estimates and judgments, particularly in identifying the accounting acquirer and evaluating the classification of certain financial instruments.

Under the guidance in ASC 805 — “Business Combinations,” the determination of the accounting acquirer required management to consider a variety of factors, including the relative voting rights of the pre-combination shareholders, the composition of the board of directors and senior management of the combined entity, and the intended purpose and substance of the transaction.

After considering this guidance, the Merger was accounted for as a reverse recapitalization, with no goodwill or intangible assets recognized.

The net assets of the combined entity are stated at historical cost, and the shares and per-share information presented in the consolidated financial statements were retroactively adjusted to reflect the exchange ratio established in the merger agreement.

Because the accounting for the Merger and reverse recapitalization involved estimates that relied on management’s assumptions regarding market conditions, valuation methodologies, and the interpretation of complex contractual terms, it represents a critical accounting estimate.

Recently Adopted Accounting Standards

A discussion of recently issued accounting standards applicable to the Company is described in Note 2, Recent Accounting Pronouncements, in the notes to our audited consolidated financial statements as of and for the years ended December 31, 2025 and 2024 contained elsewhere in this annual report.

Emerging Growth Company Status

In April 2012, the JOBS Act was enacted.

Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards.

Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

The Company has elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies.

As a result of the accounting standards election, the Company will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of its financials to those of other public companies more difficult.

The Company expects to retain its emerging growth company status until the earliest of:

● The end of the fiscal year in which its annual revenues exceed $1.2 billion;

● The end of the fiscal year in which the fifth anniversary of its public company registration has occurred;

● The date on which it has issued more than $1.0 billion in non-convertible debt during the previous three-year period;

● The date on which it qualifies as a large accelerated filer.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis