Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, all references in this subsection to the “Company,” “we,” “us” or “our” refer to Legacy ICI prior to the consummation of the Business Combination and the business of MSAI after the consummation of the Business Combination.
The following discussion and analysis of our financial condition and results of operations provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2025, and 2024, together with the related notes thereto, included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report on Form 10-K.
Overview
We build and deploy integrated condition monitoring and early threat detection solutions that connect multiple sensor types through a unified edge-to-cloud software architecture. Our software platform integrates multiple sensing modalities such as thermal, visual and acoustic, among others, to detect anomalies at earlier stages. Our customers use our products to protect uptime, enhance safety, and extend the useful life of critical assets across industrial operations.
We are focused on growing our position as a Software as a Service (“SaaS”) leader in predictive maintenance. As of December 31, 2025, we had approximately 730 active sensors connected to our software platform, MSAI Connect, as compared to approximately 460 as of December 31, 2024. This represents an 59% increase year over year. We anticipate significant opportunities to drive increased recurring revenues with our solutions.
During 2025, we realigned our market strategy to target industries and countries where, we believe, the largest opportunity exists for our current platform offerings. These industries include distribution and logistics; manufacturing; and data centers in the United States, Canada, European Union member states, and the United Kingdom. This realignment resulted in the deprioritization of certain industries, products, and services. Regarding industries, we have deprioritized oil and gas and metals and mining, where the applications generally require specialized sensors and customized solutions to handle the often-harsh environmental conditions in which monitoring is being performed. Regarding products, we made the strategic decision to cease marketing, development, and sale of drone related product offerings given the high degree of customization required and limited overlap with our software platform. Regarding services, we discontinued offering training and inspection related services which were ancillary to our core offerings. We believe this realignment will allow us to focus on our core competencies and offerings and position us for success in 2026 and beyond.
In the distribution and logistics market, we believe our solutions, through enhanced predictive maintenance, provide value by minimizing unplanned downtime to reduce labor and maintenance costs and increase throughput. We are particularly encouraged by over $1.5 million in purchase orders received in the fourth quarter of 2025 from our large global distributor customer, which will increase the number of sensors deployed in their facilities. These orders represented approximately $0.3 million in hardware revenue recognized in the fourth quarter of 2025. Software subscription revenue for these orders will be recognized predominately over a period of four years beginning upon the commencement of the subscriptions, which is expected to occur in the first quarter of 2026. We are also excited by new pilots which we received purchase orders for in the fourth quarter of 2025. Manchester Airport Group selected our platform to help elevate the reliability and performance of its baggage-handling operations. Initial deployments at Manchester Airport were completed in the first quarter of 2026. Additionally, we received a purchase order from a global direct-to-consumer food solutions company to leverage our solution for monitoring critical assets in cold storage facilities.
In the manufacturing market, our go-to market strategy centers on our early threat detection solution. We continue to work closely with two of the Big 3 automakers on our ongoing pilot programs for lithium-ion battery pack monitoring and the application of dual vision hardware sensors and remain engaged in identifying additional applications for our solutions.
In the data center market, our focus is on the infrastructure surrounding and supporting a data center. This includes using MSAI Connect solutions to monitor power and cooling control systems. During the fourth quarter of 2025, we began discussions to pilot these solutions with several large data center owners and operators, and shortly after year-end, we received our first purchase order for a pilot implementation with a U.S. based data center.
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Strategic Cost Optimization Initiatives
We have executed and continue to execute strategic cost optimization initiatives to align our expense base with current operations to enhance long-term profitability, preserve agility, and position MSAI for scalable and efficient growth. These initiatives include a reduction in employee headcount and professional fees, a consolidation of real estate, employee benefits realignment and vendor renegotiations. Specifically, in July 2025, the Company implemented a reduction in force impacting 10 employees across various departments. The Company incurred approximately $65 thousand of expense, primarily related to severance payments recorded in Selling, general and administrative on the Consolidated Statements of Operations during the year ended December 31, 2025.
Merger
On December 19, 2023, SportsMap Tech Acquisition Corp. (“Legacy SMAP”), through its Merger Sub, and Infrared Cameras Holdings Inc (“Legacy ICI”) consummated the closing of the transactions contemplated by the Business Combination Agreement initially entered on December 5, 2022, by and among Legacy SMAP, Legacy ICI, and Merger Sub (the “Business Combination”). Pursuant to the terms of the Business Combination Agreement, a merger of Legacy SMAP and Legacy ICI was effected by the merger of Merger Sub with and into Legacy ICI, with Legacy ICI surviving the Business Combination as a wholly-owned subsidiary of Legacy SMAP. As a result of the consummation of the Business Combination, Legacy SMAP changed its name from “SportsMap Tech Acquisition Corp.” to “Infrared Cameras Holdings, Inc.” (“ICI”). In February 2024, ICI changed its name to “MultiSensor AI Holdings, Inc.” (“MSAI”).
The Business Combination was accounted for as a reverse acquisition. Under this method of accounting, Legacy SMAP is treated as the “acquired” company for accounting purposes. The net assets of Legacy SMAP were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination were those of Legacy ICI. Under this method of accounting, Legacy ICI has been determined to be the accounting acquirer, as it held the majority composition of the executive management and was greater in overall asset, revenue and employee size following the Business Combination.
Recent Developments
On March 13, 2026, we entered into an at market issuance sales agreement (the “2026 Sales Agreement”) with Roth Capital Partners, LLC and H.C. Wainwright & Co., LLC as sales agents or principals (the “Agents”), under which we may offer and sell shares of our Common Stock having an aggregate market value of up to $60 million from time to time through the Agents. We intend to use the net proceeds from sales of Common Stock under the 2026 Sales Agreement, if any, for working capital and general corporate purposes.
Revenue Sources
Our revenues are derived from multiple sources. The following are descriptions of principal revenue generating activities:
Hardware
Our sensor hardware covers a large range of the electromagnetic and mechanical spectrums, encompassing visible-light imagers, shortwave, midwave, and longwave infrared imagers, ultraviolet imagers, acoustic imagers, and tunable diode laser emitter-detector pairs for laser absorption spectrometry. The Company’s infrared cameras are available in multiple configurations, from lower resolution models suitable for basic equipment monitoring to high-resolution cameras that provide detailed thermal images crucial for detecting subtle anomalies in complex machinery. Each camera model also offers different field of view options, enabling precise targeting and comprehensive coverage, essential for effective predictive maintenance. This flexibility allows users to choose the optimal hardware setup based on their specific requirements, whether they are monitoring large production floors or focusing on high-detail components. Our acoustic imagers detect and visualize sound patterns, making them highly effective for identifying issues such as gas leaks, electrical discharge, and mechanical anomalies in industrial equipment. Revenue is recognized when control of the hardware is transferred to the customer.
Software
MSAI Connect is an innovative platform that enables predictive asset reliability and process control in industrial environments, available both as cloud-based subscription service and as an on-premises deployment. This technology harnesses the power of continuous data inputs from advanced thermal imaging, acoustic imaging, visible imaging, and vibration sensing hardware solutions,
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which are strategically placed in customer's facilities to continuously monitor the health and performance of a customer's critical equipment and processes. MSAI Connect can process and analyze vast amounts of data in real-time, providing actionable insights and enabling predictive analytics. This supports a customer with proactively identifying potential issues, preventing costly downtime, and optimizing their operations for maximum efficiency and reliability. MSAI Connect, when deployed and connected to the cloud, is a subscription service and is contracted for a period of 12 months to 48 months. Subscription payments are generally collected in advance and revenue is recognized ratably over the subscription period. MSAI Connect, when deployed on-premises, is sold as both a term-based software license which generally provides access to the software for a period of 12 months and as a perpetual license. Revenue for the software licenses are recognized upfront upon delivery of the software license.
Services
The Company offers installation services that cover on-site hardware mounting, sensor commissioning, and connectivity into the MSAI Connect platform. MSAI Solution Architects configure camera views, assists with establishing initial alerting thresholds and defining regions of interest so customers can quickly realize the full benefits of the MSAI Connect platform. The Company also performs calibrations and maintenance on hardware. The Company previously performed training through August 2025 and inspections through September 2025. Services are recognized at the point in time when service is completed .
Results of Operations
Year ended December 31, 2025 compared to Year ended December 31, 2024
The following table presents summary results of operations for the periods indicated, in thousands:
Year Ended December 31,
Amount
%
2025
2024
Change
Change
Revenue, net
$
5,551
$
7,402
$
(1,851)
(25)
%
Cost of goods sold (exclusive of depreciation)
2,638
2,582
56
2
%
Inventory impairment
511
2,272
(1,761)
(78)
%
Operating expenses:
Selling, general and administrative
11,482
15,655
(4,173)
(27)
%
Share-based compensation expense
1,665
3,382
(1,717)
(51)
%
Depreciation
1,299
1,140
159
14
%
Loss (gain) on asset disposal
(33)
322
(355)
(110)
%
Other loss
—
930
(930)
(100)
%
Total operating expenses
14,413
21,429
(7,016)
(33)
%
Operating loss
(12,011)
(18,881)
6,870
(36)
%
Interest expense (income), net
(77)
63
(140)
(222)
%
Change in fair value of convertible notes
—
475
(475)
(100)
%
Change in fair value of warrants liabilities
—
(39)
39
(100)
%
Loss on financing transaction
—
1,553
(1,553)
(100)
%
Other expense (income), net
(189)
1,027
(1,216)
(118)
%
Loss before income taxes
(11,745)
(21,960)
10,215
(47)
%
Income tax expense (benefit)
(32)
(465)
433
(93)
%
Net loss
$
(11,713)
$
(21,495)
$
9,782
(46)
%
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Revenue: Revenue for the year ended December 31, 2025 was $5.6 million, compared to $7.4 million for the year ended December 31, 2024. The decrease in revenue is primarily attributable to reduced standalone hardware sales, which was offset by an increase in software revenues of $0.9 million, which was an 88% increase year over year. Revenue streams from each of our products and services are summarized below for the years ended December 31, 2025 and 2024.
Year Ended December 31,
2025
2024
Hardware
$
3,214
$
5,694
Software
1,884
1,003
Services
453
705
Total revenue, net
$
5,551
$
7,402
Cost of Goods Sold: Cost of goods sold for the year ended December 31, 2025 was $2.6 million, an increase of 2% compared to the year ended December 31, 2024. The increase in cost of goods sold was attributable to a change in product mix and quantity of hardware sold.
Inventory Impairment: Inventory impairment for the year ended December 31, 2025 was $0.5 million, compared to $2.3 million for the year ended December 31, 2024. The impairment recorded during the year ended December 31, 2025, was primarily related to drone-related sensor payloads and accessories. The impairment recorded during the year ended December 31, 2024, was primarily related to thermal cameras specifically designed for medical applications that have been unable to be converted to alternative applications for which there is customer demand.
Selling, General and Administrative Expense: Selling, general and administrative expense for the year ended December 31, 2025 was $11.5 million, compared to $15.7 million for the year ended December 31, 2024. The decrease in selling, general and administrative expenses was primarily due to a reduction of professional fees of $2.6 million driven by the Company reevaluating its professional services vendor relationships and scope of outsourced work, as well as a reduction in payroll expenses of $1.0 million primarily driven by a reduction of force in July 2025.
Share-Based Compensation Expense: Share-based compensation expense for the year ended December 31, 2025 was $1.7 million, compared to $3.4 million for the year ended December 31, 2024. The decrease in share-based compensation expense was primarily related to 1,382,909 vested restricted stock units granted during the year ended December 31, 2024 to certain employees, offset by awards granted throughout 2025 which recognize expense over the requisite service period related to the awards, which is generally four years.
Depreciation Expense: Depreciation expense for the year ended December 31, 2025 was $1.3 million, compared to $1.1 million for the year ended December 31, 2024. The increase in depreciation expense was primarily due to increases in property, plant, and equipment, primarily software associated with our development of MSAI Connect.
Loss (gain) on asset disposal: The decrease in loss on asset disposal, was primarily the result of the Company disposing of aged or inoperable assets, primarily in the machinery, equipment, and demo category, resulting in a loss on disposal of $0.3 million during the year ended December 31, 2024, which did not occur in 2025.
Other loss: The decrease in other loss was primarily due to the write-down of a deposit of $0.9 million which was recorded in the third quarter of 2024, which did not occur in 2025.
Change in fair value of convertible notes: The decrease in loss (gain) in fair value of convertible notes was the result of the convertible notes being converted in fiscal year 2024, which did not occur in 2025.
Loss on financing transaction: The decrease in loss on financing transaction was the result of the Financing Notes being converted to equity in fiscal year 2024, which did not occur in 2025.
Other Expenses (Income), net: The change is primarily associated with the Company’s former equity line of credit (“ELOC”). During the year ended December 31, 2025, the Company was notified by B. Riley that the ELOC make-whole obligation was resolved resulting in a gain of $0.2 million. During the year ended December 31, 2024, the Company incurred a fee to enter into the ELOC arrangement of $0.5 million along with a make-whole obligation which was remeasured based on the stock price as of December 31, 2024 resulting in a $0.2 million loss.
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Income tax expense (benefit): Income tax benefit decreased due to a $0.5 million tax benefit primarily driven by a tax refund due to the Company from the filing of the Legacy SMAP short period 2023 federal income tax return recorded during the year ended December 31, 2024, which did not occur in 2025.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA, are supplemental non- GAAP financial measures used by management. We define EBITDA as net (loss) income before (i) interest expense (net interest income), (ii) depreciation and (iii) taxes. We define “Adjusted EBITDA” as EBITDA before share-based compensation expenses, change in fair value of convertible notes and warrant liabilities, inventory impairment, loss on financing transaction, other expense (income) and loss (gain) on disposal of assets.
We believe EBITDA and Adjusted EBITDA, are useful performance measures because they facilitate comparison of our results of operations from period to period without regard to our financing methods or capital structure or other items that impact comparability of financial results from period to period such as fluctuations in interest expense or effective tax rates, levels of depreciation, non-cash charges such as share based compensation expenses or unusual items that are not considered an indicator of ongoing performance of our operations. In addition, we believe that such non-GAAP financial measures are used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance. EBITDA and Adjusted EBITDA should not be considered as alternatives to, or more meaningful than, net income (loss) or any other measure as determined in accordance with GAAP. Our computations of EBITDA and Adjusted EBITDA may not be comparable to EBITDA or Adjusted EBITDA of other companies. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.
EBITDA and Adjusted EBITDA, when viewed in a reconciliation to respective GAAP measures, provide an additional way of viewing the Company’s results of operations and factors and trends affecting the Company’s business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP. The following tables present a reconciliation of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for each of the periods indicated, in thousands:
Year Ended December 31,
Adjusted EBITDA
2025
2024
Net loss
$
(11,713)
$
(21,495)
Interest expense (income), net
(77)
63
Income tax expense (benefit)
(32)
(465)
Depreciation
1,299
1,140
EBITDA
$
(10,523)
$
(20,757)
Change in fair value of convertible notes
—
475
Change in fair value of warrants liabilities
—
(39)
Share-based compensation expense
1,665
3,382
Inventory impairment
511
2,272
Loss on financing transaction
—
1,553
Other expense (income), net
(189)
1,027
Other loss
—
930
Loss (gain) on asset disposal
(33)
322
Adjusted EBITDA
$
(8,569)
$
(10,835)
Liquidity and Capital Resources
We incurred losses for the years ended December 31, 2025 and 2024. We have historically funded our operations with internally generated cash flows, equity financings, debt, convertible notes, and promissory notes with stockholders and related parties.
We may require additional capital in order to execute on our business plan and may require capital to fund our operations or to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances, and we may determine to raise capital through equity or debt financings or enter into credit
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facilities for other reasons. In order to maintain our anticipated growth trajectory and to further business relationships with current or potential customers or partners, or for other reasons, we may issue equity or equity-linked securities to such current or potential customers or partners. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all, as these plans are subject to market conditions and are not within the Company’s control. There is no assurance that the Company will be successful in implementing its plans. If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities or if we issue equity or equity-linked securities to current or potential customers to further business relationships, our existing stockholders could experience significant dilution. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited and our business could be materially and adversely affected.
As a result of the Company’s equity financings in October 2025 and November 2025, detailed further below, the Company has obtained additional capital that significantly improved its liquidity position. After considering the proceeds from these equity financings, the Company’s current cash flow forecasts, and its planned operating and investing activities, management has concluded that the previously disclosed substantial doubt regarding the Company’s ability to continue as a going concern has been alleviated for a period of at least 12 months following the date of these consolidated financial statements.
Equity Line of Credit
On April 16, 2024, we entered into a purchase agreement (the “Purchase Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley.”). Pursuant to the Purchase Agreement, we had the right, but not the obligation, to sell to B. Riley up to $25 million worth of Common Stock (the “Purchase Shares”) over the term of the Purchase Agreement, beginning only after certain conditions set forth in the Purchase Agreement have been satisfied. In accordance with the Purchase Agreement, on April 16, 2024, we issued shares of our Common Stock to B. Riley as consideration for its commitment to purchase the Purchase Shares under the Purchase Agreement (the “Commitment Shares”). Under the terms of the Purchase Agreement, in certain circumstances, we may be required to pay B. Riley up to $500 thousand (or 2.0% of the total commitment value under the Purchase Agreement), in cash, as a “make-whole” payment to the extent the aggregate amount of cash proceeds, if any, received by B. Riley from the resale of the Commitment Shares prior to certain times set forth in the Purchase Agreement, is less than $500 thousand, in exchange for B. Riley returning to us for cancelation all of the Commitment Shares we originally issued to B. Riley upon execution of the Purchase Agreement that were not previously resold. On January 8, 2025, B. Riley notified the Company that it had sold the Commitment Shares, which resolved the liability.
Through December 31, 2025 and 2024, the Company utilized the B. Riley Committed Equity Facility to sell 1,814,731 and 23,999 shares of Common Stock for cash proceeds totaling $4.7 million and $58 thousand, respectively. Effective February 2, 2026, the Company terminated the Purchase Agreement.
At the Market Sales Agreement
On March 28, 2025, we entered into an at market issuance sales agreement (the “2025 Sales Agreement”) with B. Riley Securities, Inc., as sales agent or principal (“B. Riley Securities”), pursuant to which the Company could offer and sell shares of the Company’s Common Stock, having an aggregate market value of up to $8.6 million from time to time through B. Riley Securities. B. Riley Securities is entitled to compensation at a fixed commission rate of the gross sales price of the shares of Common Stock sold pursuant to the 2025 Sales Agreement. Through December 31, 2025, 151,072 shares were sold under the 2025 Sales Agreement for cash proceeds totaling $0.1 million.
Effective February 2, 2026, the Company terminated the 2025 Sales Agreement.
2025 Private Placement
On October 24, 2025, the Company entered into a securities purchase agreement (the “2025 Purchase Agreement”) with 325 Capital, LLC (“325 Capital”) and certain other accredited investors signatory thereto (collectively with 325 Capital, the “Investors”), pursuant to which it agreed to sell to the Investors (i) 34,229,826 shares of Common Stock at a purchase price of $0.409 per share and (ii) the warrants (the “2025 Warrants”) to purchase up to 68,459,652 shares of Common Stock (collectively, the “2025 Private Placement”), with an exercise price of $0.409 per share, for an aggregate purchase price of $14 million before deducting placement agent fees and offering expenses. 325 Capital and its affiliates beneficially own more than 5.0% of the outstanding Common Stock. In addition, Daniel M. Friedberg, who is a Managing Member of 325 Capital, serves on the Company’s board of directors.
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The 2025 Purchase Agreement and the 2025 Warrants provide that each Investor’s beneficial ownership of Common Stock, including after taking into account the full exercise of such Investor’s 2025 Warrant, shall in no event exceed 49.5% of the issued and outstanding Common Stock (the “Maximum Ownership Limitation”). In the event that an Investor’s 2025 Warrant is not exercisable for shares of Common Stock due to the beneficial ownership of such Investor exceeding the Maximum Ownership Limitation, the applicable 2025 Warrant will be exercisable for shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), that are convertible into an equivalent number of shares of Common Stock for which the 2025 Warrant is exercisable. The 2025 Warrants will expire seven years from the date of issuance.
At the initial closing of the Private Placement on October 30, 2025, the Company issued to the Investors 6,970,890 shares of Common Stock and 2025 Warrants to purchase up to 13,941,780 shares of Common Stock, for gross proceeds of $2.85 million before deducting placement agent fees and offering expenses.
On December 23, 2025, the final closing occurred and the Company issued 27,258,936 shares of Common Stock and 2025 Warrants to purchase up to 54,517,872 shares of Common Stock to the Investors for gross proceeds of $11.15 million before deducting placement agent fees and offering expenses.
2025 Registered Direct Offering
On November 4, 2025, the Company entered into a common stock purchase agreement with a single institutional investor, pursuant to which the Company agreed to issue and sell (i) 4,595,000 shares (the “2025 Registered Direct Shares”) of the Company’s Common Stock and (ii) pre-funded warrants (the “2025 Pre-Funded Warrants”) to purchase up to 6,100,000 shares of Common Stock (the “2025 Pre-Funded Warrant Shares”) in a registered direct offering (the “2025 Registered Direct Offering”). The 2025 Registered Direct Shares, 2025 Pre-Funded Warrants and 2025 Pre-Funded Warrant Shares are registered pursuant to an effective shelf registration statement on Form S-3 (File No. 333-284437), and a base prospectus and prospectus supplement relating to the 2025 Registered Direct Offering, in each case filed with the SEC. The offering price was $1.35 per share of Common Stock and $1.3499 per Pre-Funded Warrant, which is the price of each share of Common Stock sold in the 2025 Registered Direct Offering, minus the $0.0001 exercise price per 2025 Pre-Funded Warrant.
The 2025 Registered Direct Offering closed on November 5, 2025, and resulted in gross proceeds to the Company of approximately $14.4 million, before deducting advisory fees and offering expenses payable by the Company. Following the delivery of exercise notices to the Company on November 5, 2025 and November 6, 2025, the 2025 Pre-Funded Warrants were exercised in full.
2024 Public Equity Offering
On July 1, 2024, we consummated a public offering (the “2024 Public Offering”) of 6,250,000 shares of Common Stock, which was sold at a public offering price of $1.60 per share less the underwriting discount, generating gross proceeds to us of $10 million before deducting underwriting discounts, commissions and offering expenses. In connection with the 2024 Public Offering, the underwriters were granted a 45-day option from the date of the prospectus to purchase up to 937,500 additional shares of Common Stock at the public offering price, less the underwriting discount, and on June 28, 2024, the underwriters fully exercised the over-allotment option, generating additional gross proceeds of $1.5 million to us before deducting underwriting discounts, commissions and offering expenses.
2024 Private Placement
On July 1, 2024, we issued and sold in a private placement (the “2024 Private Placement”) (i) 2,772,561 shares (the “Placement Shares”) and (ii) pre-funded warrants to purchase 6,602,439 shares of Common Stock (the “Pre-Funded Warrants”) for aggregate gross proceeds of $15.0 million before deducting placement agent fees and offering expenses. The purchase price of the Placement Shares was $1.60 per share, and the purchase price of each Pre-Funded Warrant was $1.5999. The exercise price for each share of Common Stock issuable upon exercise of the Pre-Funded Warrants is $0.0001 per share. The Pre-Funded Warrants were not exercisable unless or until approved by the Company’s stockholders, are not subject to any redemption provision and, once exercisable, can be exercised for cash or on a cashless basis at the discretion of the holder. The Pre-Funded Warrants do not have any voting rights but have the right to participate in any dividends or distributions made by the Company.
On June 27, 2024, we also entered into a securities purchase agreement (the “Securities Purchase Agreement”) with 325 Capital (collectively with its affiliates, the “Purchaser”), pursuant to which the Purchaser agreed to purchase all of the Placement Shares and
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Pre-Funded Warrants offered in the 2024 Private Placement. Pursuant to the Securities Purchase Agreement, we have made the following corporate governance changes, which are to remain in effect for so long as the Purchaser beneficially owns at least 10.0% of the then-outstanding shares of Common Stock:
● our board of directors (the “Board”) appointed a representative of the Purchaser as a member of the Board and as a member of the Board’s compensation and nominating and corporate governance committees;
● the Board established a new finance committee consisting of four independent directors, with the purpose of improving the Company’s operational and financial performance, including evaluating the Company’s budgets, capital allocation practices and policies and review of strategic alternatives, and making recommendations to the Board on the foregoing matters; and
● the Board amended the Amended and Restated Bylaws of the Company to permit any single director to be able to call a special meeting of the Board and bring forward business at any regular or special meeting of the Board.
O n September 24, 2024, the holders of the Pre-Funded Warrants exercised their warrants in exchange for Common Stock.
Cash Flows
Year ended December 31, 2025, Compared to Year ended December 31, 2024
The following table summarizes our cash flows for the periods indicated, in thousands:
Year ended December 31,
2025
2024
Net cash provided by (used in) operating activities
$
(8,020)
$
(15,567)
Net cash provided by (used in) investing activities
(1,607)
(2,667)
Net cash provided by (used in) financing activities
29,584
21,587
Net increase/(decrease) in cash, cash equivalents, and restricted cash equivalents
$
19,957
$
3,353
Operating Activities
Net cash used in operating activities was $8.0 million for the year ended December 31, 2025, a decrease of $7.6 million, as compared to $15.6 million of net cash used in operating activities for the year ended December 31, 2024. The decrease in net cash used in operating activities was primarily related to our strategic cost optimization initiatives to align our expense base with current operations to enhance long-term profitability, preserve agility, and position MSAI for scalable and efficient growth. These initiatives have included a reduction in employee headcount and professional fees, a consolidation of real estate, employee benefits realignment and vendor renegotiations.
Investment Activities
Net cash used in investing activities was $1.6 million for the year ended December 31, 2025, as compared to $2.7 million for the year ended December 31, 2024. The decrease in net cash used in investing activities was primarily attributable to a decrease in cash paid for capital expenditures.
Financing Activities
Net cash provided by financing activities was $29.6 million for the year ended December 31, 2025, an increase of $8.0 million, as compared to $21.6 million of net cash provided by financing activities for the year ended December 31, 2024. The increase in net cash provided by financing activities is primarily attributable to proceeds from 2025 Private Placement and 2025 Registered Direct Offering.
Off-Balance Sheet Arrangements
As of December 31, 2025, we did not have any off-balance sheet arrangements.
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
The critical accounting policies, assumptions, and judgements that we believe have the most significant impact on our consolidated financial statements are described below.
Inventory
Inventory is stated at the lower of cost and net realizable value (“NRV”). NRV is based upon an estimated average selling price reduced by the estimated costs of disposal. The determination of net realizable value involves certain judgments including estimating average selling prices based on recent sales. We reduce the value of our inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the NRV.
The valuation of inventory requires us to evaluate whether inventory held is in excess of future estimated market demand or has become technologically obsolete. We believe the risk of technological obsolescence of certain hardware is not significant, as device technology and functionality is stable and the devices that the Company has in its inventory are deployable with the Company’s integrated solutions offerings. The Company’s excess and obsolescence analysis is therefore focused on assessing the extent to which inventory is in excess of future estimated market demand. The determination of excess inventory is estimated based on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand, which is dependent on various internal and external factors requiring the use of judgment.
We evaluate the short-term and long-term classification of hardware and component inventory quarterly using our forecast of customer demand, which is dependent on various internal and external factors requiring the use of judgment. We classify as short-term inventory hardware or components that are expected to be sold in the subsequent twelve months. We classify as long-term inventory hardware or components that are not expected to be sold in the following twelve months but for which ones there is an active market and we have not identified any indicator of impairment.
Revenue Recognition
Contracts with our customers may include various combinations of hardware, subscriptions and services. Our hardware has significant standalone functionalities and capabilities. Accordingly, hardware is distinct from our subscriptions and services as the customer can benefit from the product without these subscriptions or services and such subscriptions and services are separately identifiable within the contract. The amount of consideration we expect to receive in exchange for delivering on the order is allocated to each performance obligation based on its relative standalone selling price.
We establish standalone selling price using the prices charged for a deliverable when sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price based on our pricing model. As our business offerings evolve over time, we may be required to modify our estimated standalone selling prices, and as a result the timing and classification of our revenue could be affected.
Income Taxes
We are required to reduce our deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of appropriate character during the periods in which those temporary differences become deductible. Management considers the weight of available evidence, both positive and negative, including the scheduled reversal of deferred tax assets and liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. To the extent we believe that we do not meet the test that recovery is more likely than not, we establish a valuation allowance. To the extent that we establish a valuation allowance or change this allowance in a period, we adjust the tax provision or tax benefit in the consolidated statement of
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operations. Management uses its best judgment in determining provisions or benefits for income taxes, and any valuation allowance recorded against previously established deferred tax assets.
Recently Issued Accounting Standards
Refer to Note 2 of the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K for our assessment of recently issued and adopted accounting standards.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company can opt out of such “extended exemption period” and delay adopting new or revised accounting standards until such a time as those standards apply to private companies.
Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), or (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. We have elected to opt out of this extended exemption period. We may take advantage of these exemptions until December 31, 2026, or until we are no longer an emerging growth company, whichever is earlier. We will cease to be an emerging growth company prior to the end of such five-year period if certain earlier events occur, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.235 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will be able to take advantage of these scaled disclosures for so long as our voting and non-voting Common Stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting Common Stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
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