What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-03-28 compared with 2024-03-29 · 182 added, 253 removed, 75 unchanged (85% of the section changed)

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.

2 unchanged sentences

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.

We manufacture and distribute highly sensitive and accurate infrared cameras and other sensor systems, comprising hardware and software, for thermographic and other use in a variety of industrial applications.

We also provide services, including training, calibration, and repairs for our customers.

Most of our customers are in the United States and operate in the distribution and logistics, manufacturing, utilities and oil & gas sectors.

The sponsor of SportsMap Tech Acquisition Corp.

(“Legacy SMAP”) was SportsMap, LLC (the “Sponsor”).

The registration statement for Legacy SMAP’s IPO was declared effective on October 18, 2021 (the “Effective Date”).

On October 21, 2021, Legacy SMAP consummated the IPO of 11,500,000 units (the “Units” and, with respect to the common stock included in the Units being

offered, the “public shares”) at $10.00 per Unit, including the full exercise of the underwriters’ over-allotment of 1,500,000 Units, generating gross proceeds to Legacy SMAP of $115,000.

Simultaneously with the consummation of the IPO, Legacy SMAP consummated the private placement of 675,000 units at a price of $10.00 per Unit to the Sponsor and the representative of the underwriters and/or certain of their designees or affiliates, generating gross proceeds to Legacy SMAP of $6.75 million.

On December 19, 2023, Legacy SMAP, through its subsidiary ICH Merger Sub Inc.

(“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”).

The Company and its wholly owned subsidiaries provide turn-key predictive maintenance and process control solutions, which combine cutting edge imaging and sensing technologies with AI-powered enterprise software.

Our software leverages a continuous stream of data from thermal imaging, visible imaging, acoustic imaging, vibration sensing, and laser sensing devices to provide comprehensive, real-time condition monitoring for a customer’s critical assets, processes, and manufactured outputs.

Our cloud and edge solutions are deployed by organizations to protect critical assets across a wide range of industries including distribution and logistics;

manufacturing and oil and gas.

In tandem with these solutions, we provide various services for our customers including training, calibration, and repair.

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.”

In February 2024, ICI changed its name to “MultiSensor AI Holdings, Inc.” (“MSAI”).

The Business Combination was accounted for as a reverse acquisition.

3 unchanged sentences

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.

Legacy ICI will be the successor for financial reporting purposes, meaning that Legacy ICI’s financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC.

As a result of having common stock that is registered under the Exchange Act and is listed for trading on a U.S.

national stock exchange, we will need 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 and legal and administrative resources, including increased audit and legal fees.

Under the Business Combination Agreement, the surviving company would have been obligated under certain circumstances to issue 2.4 million shares of common stock following the Business Combination (the “Earnout Shares”).

The Earnout Shares would be issued pro rata to the holders of Legacy ICI common stock prior to the Business Combination, under certain qualifying conditions, if either (a) during the period beginning six months after the closing of the Business Combination and ending on December 31, 2024, the common stock of the Company achieved a market price of $12.50 per share for a specified number of days, or the Company consummated a transaction in which its stockholders have the right to receive consideration implying a value of at least $12.50 per share, or (b) the Company achieved revenue of $68.5 million during the fiscal year ending December 31, 2024.

The earnout provision under the Business Combination Agreement was subsequently cancelled on March 7, 2024.

Financing Transaction

In connection with the Business Combination, a number of purchasers (each, a “Financing Investor”) purchased from the Company an aggregate of $6.8 million in convertible promissory notes in connection with the closing of the Business Combination (the “Financing Notes”).

Of the $6.8 million in Financing Notes, $1.3 million were issued in exchange for cancellation of an equal amount of existing promissory notes of Legacy SMAP (rather than having such notes repaid at the closing of the Business Combination), $1.0 million were rolled over from an existing related party promissory note of Legacy ICI (rather than having such note repaid at closing of the Business Combination), and $4.5 million were cash proceeds to the combined company.

Each Financing Note will mature on the third anniversary of the closing of the Business Combination (the “Maturity Date”) and is convertible at any time at the Financing Investors’ option at a conversion price of $10.00 per share, subject to certain customary adjustments (such shares issuable upon conversion of Financing Notes, the “Conversion Shares”).

Except with the consent of the holder of the applicable Financing Note (the “Holder”), we may not repay any principal amount of any Financing Note prior to the Maturity Date.

We will pay interest on the aggregate unconverted and then outstanding principal amount of such notes at the rate of 9% per annum, payable (i) quarterly on January 1, April 1, July 1 and October 1, beginning April 1, 2024, (ii) on each date on which a Holder elects to convert any amount of Financing Notes and (iii) on the Maturity Date (each such date, an “Interest Payment Date”), in cash or, if the Holder elects to receive interest on the Financing Note in the form of shares of our common stock.

If the Holder elects to receive interest in shares of our common stock, such interest shall be payable at a rate of 11% per annum in duly authorized, validly issued, fully paid and non-assessable shares of our common stock at a volume-weighted average price for the 30 consecutive trading days ending on the trading day immediately prior to the applicable Interest Payment Date (which shall not be less than $1.00) (such shares payable in lieu of cash interest, the “Interest Shares”).

Failure to pay interest is deemed an event of default and the interest rate shall increase automatically to 15% per annum until repaid.

As part of the financing transaction, we also issued warrants (the “Financing Warrants”) to the Financing Investors to purchase an aggregate of 340,250 shares of our common stock (such shares issuable upon exercise of the Financing Warrants, the “Financing Warrant Shares”), at an exercise price of $11.50 per Financing Warrant Share.

The Financing Warrants were allocated ratably among the Financing Investors in accordance with their respective investment amounts.

The Financing Warrants are exercisable at any time before the fifth anniversary of the closing of the Business Combination.

The Financing Warrants are not subject to any redemption provision, and can be exercised for cash or on a cashless basis at the discretion of the holder.

In addition, in order to induce the Financing Investors’ investments, certain holders of SMAP’s founder shares and stockholders of Legacy ICI transferred, and Legacy ICI issued prior to the closing of the Business Combination for exchange at the Exchange Ratio at Closing, an aggregate of 680,500 shares of our common stock to the Financing Investors at the closing.

Growth and Long-Term Strategy

Our long-term strategy is to grow hardware and software revenues over the medium term by:

● Expanding our sales and marketing capabilities .

We will strive to increase market share by scaling our commercial capabilities, including sales, marketing, account management, and technical support, to meet customers’ requirements in the oil and gas, distribution and logistics, manufacturing, and utilities sectors.

● Increasing software capabilities and applications .

We will continue to invest in our SmartIR SaaS platform in order to increase its user-case-specific functionality and value to customers across the four main industry verticals.

● Executing on our product roadmaps.

We will focus on innovation and product development in hardware, software, and implementations in our four main industry verticals.

We believe these investments and innovations will help drive improved functionality for our customers and reduce the total cost of ownership for their critical assets.

We will also work to improve compatibility with various complementary software platforms and competing hardware.

● Growing wallet share with existing enterprise customers and acquiring new customers.

We plan to continue expanding our presence in our existing large enterprise customers by rolling out integrated solutions for more of their relevant facilities and manufacturing processes, in addition to acquiring new customers.

● Expanding our network of distributors and strategic channel partners.

We will continue to build and capitalize on our extensive network of specialty distributors and strategic channel partners to drive revenue growth in our four main industry verticals.

● Pursuing strategic acquisitions.

We intend to secure additional commercial capabilities and technology through opportunistic acquisitions of key strategic targets, focused on increasing market penetration in our four main industry verticals.

Components of Our Operating Results

Our revenues are derived mainly from product sales (infrared cameras and other sensors and components), Software as a Service (SaaS) and ancillary services.

Most of our products are sold directly to customers or through distributors, and they are

frequently bundled as multiple-camera systems, with integrated software and ancillary services in multi-year subscriptions.

These systems require initial and ongoing technical support, which is bundled into system pricing.

Revenue is recognized net of allowances for returns and any sales taxes collected from customers.

Cost of Goods Sold

Cost of goods sold primarily consists of inventory, materials, supplies, and shipping costs.

Cost of goods sold also includes employee costs related to our production process and to services provided to our clients and write-down of inventories.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expenses consists mainly of payroll and benefits, marketing and advertising, travel, insurance, leases, professional fees, taxes, and stock-based compensation expense.

We recognize SG&A expenses in the period incurred.

Depreciation includes the depreciation expense on property, plant and equipment, as well as on the proprietary software deployed as part of our camera systems.

Casualty losses, net of recoveries

Casualty losses relate to losses due to a flood that occurred in October 2022 in our Beaumont, Texas warehouse, net of the proceeds recovered from the insurance claim relating to the inventory loss.

Interest Expense

Interest expense relates to the line of credit and convertible notes.

Interest Expense, related parties

Interest expense , related parties relate to the shareholder promissory notes issued in July 2020.

Change in fair value of convertible notes

Change in fair value of convertible notes includes the gain or loss related to the fair value of the convertible notes issued in December 2022, January 2023, June 2023, July 2023, August 2023, September 2023, and December 2023.

Change in warrants liability

Change in fair value of warrants liability includes the gain or loss related to the fair value of the Financing Warrants issued in December 2023.

Tariff refund

Tariff refund includes refunds from the U.S.

Customs and Border Protection (“CBP”) resulting from overpayment of customs duties, taxes, and fees.

Loss on Financing Transaction

Loss on financing transaction relates to the financing transaction described above under “—Financing Transaction”.

The loss was a result of the added incentives in the financing transaction, including the Financing Warrants and transferred shares of common stock.

Other (Income) Expenses, net

Other expenses, net includes mainly donations, a gain on disposal of assets, and miscellaneous expenses.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists of federal and state income taxes in the United States and related deferred taxes.

Revenue Sources

Our revenues are derived from multiple sources.

The following are descriptions of principal revenue generating activities:

The Company sells a dynamic range of advanced infrared cameras, optical gas imaging cameras and acoustic imagers, designed and manufactured by us or through various partnerships with other manufacturers.

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.

MSAI Connect is an innovative, cloud-based, AI-powered software, that enables predictive asset reliability and process control in industrial environments.

This technology harnesses the power of continuous data inputs from advanced thermal imaging, acoustic imaging, visible imaging, and vibration sensing hardware solutions, 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 predictive analytics.

This enables businesses to proactively identify potential issues, prevent costly downtime, and optimize their operations for maximum efficiency and reliability.

MSAI Connect is a subscription service and is generally contracted for a period of 12 months.

Annual subscription payments are generally collected in advance and revenue is recognized ratably over the subscription period.

MSAI Edge is an “on premises” software.

Seamlessly integrating with existing operational systems, MSAI Edge utilizes advanced thermal imaging, acoustic imaging, visible imaging, and vibration sensing hardware solutions strategically deployed throughout facilities.

This setup enables continuous monitoring of critical equipment and processes, delivering real-time insights into their health and performance, and is readily integrated into existing operational and business intelligence systems.

MSAI Edge 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.

The Company performs condition-based monitoring and preventive maintenance inspection services.

Our mission is to help our clients transform how they approach asset management, creating safer, more efficient, and more profitable operations across a variety of industries.

Inspections can include the use of thermography, optical gas imaging, and acoustic imaging to recognize future equipment failures or inefficiencies, detect spills or leaks, or identify electrical anomalies.

The Company also performs calibrations and maintenance on hardware for our customers along with training services.

Services derived from inspections, calibrations, maintenance and training are recognized at a point in time when service is provided to the client.

Recent Developments

On January 7, 2025, we sold 1,581,213 shares of Common Stock under the ELOC .

As a result of such sales, we received net proceeds of approximately $4.3 million.

Results of Operations

3 unchanged sentences

Cost of goods sold (exclusive of depreciation)

Inventory Impairment

Operating expenses:

Selling, general and administrative

Casualty losses, net of recoveries

Share-based compensation expense

Loss (gain) on asset disposal

Total operating expenses

1 unchanged sentence

Interest expense

Interest expense, related parties

Change in fair value of convertible notes

Tariff refund

Change in fair value of warrant liabilities

Change in fair value of warrants liabilities

Loss on financing transaction

1 unchanged sentence

Loss before income taxes

Income tax expense

Revenue for the year ended December 31, 2023, was approximately $5.4 million, and decreased $1.8 million, or 25%, from approximately $7.3 million for the year ended December 31, 2022.

The decrease in revenues was due to decreased unit volumes, particularly in the higher-priced end of the product range (e.g., UAVs and fixed-mount systems).

We made an effective exit from the biorisk market and the direct sale of products into the veterinary market.

Our traditional core business, selling infrared and other sensor solutions into the industrial market, was relatively steady.

We also launched our SmartIR cloud-software product suite in the second quarter of 2023, however we did not earn significant revenue during the year ended December 31, 2023, for our SmartIR cloud-software product.

Sales returns were not material for the years ended December 31, 2023, or 2022.

Income tax expense (benefit)

Revenue for the year ended December 31, 2024 was $7.4 million, compared to $5.4 million for the year ended December 31, 2023.

The increase in revenue was primarily due to an increase in units sold, which was partially offset by $2.9 million in sales returns for the twelve months ended December 31, 2024.

The sales returns are related to a transaction with a long-standing customer who also is a launch customer for MSAI Connect.

Under the terms of this transaction, certain biorisk-related devices sold to this customer in prior years were exchanged for devices appropriate for industrial use, when combined with the MSAI Edge and MSAI Connect software.

The customer paid cash as well as credit for the returned devices.

There were no sales returns for the twelve months ended December 31, 2023.

Cost of Goods Sold:

Cost of goods sold for the year ended December 31, 2023, was approximately $4.0 million and decreased $1.0 million, or 20%, from approximately $5.0 million for the year ended December 31, 2022.

The decrease in cost of goods sold was attributable to the corresponding decrease in product sales, resulting in a decrease in materials and supplies purchased as well as outbound shipping costs, and included the recognition of an inventory write down to net realizable value of $1.7 million in the year ended December 31, 2023.

Gross margin is the percentage obtained by dividing (a) revenue less cost of goods sold (exclusive of depreciation) by (b) revenue.

Gross margin for the year ended December 31, 2023, was approximately 27%, compared to 32% for the year ended December 31, 2022.

The decrease in gross margin in 2023 compared to 2022 was primarily attributable to the recognition of an inventory write-down to net realizable value of $1.7 million in the year ended December 31, 2023, that was recorded to costs of goods sold.

The recognition of this write- down adversely impacted gross margin by 31 percentage points for 2023.

Cost of goods sold for the year ended December 31, 2024 was $2.6 million, compared to $2.3 million for the year ended December 31, 2023.

The increase in cost of goods sold was attributable to increased sales as well as a change in product mix.

Inventory Impairment:

Inventory impairment for the year ended December 31, 2024 was $2.3 million , compared to $1.7 million for the year ended December 31, 2023.

The increase in inventory impairment 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, 2023, was approximately $22.1 million and increased $8.5 million, or 62%, from approximately $13.6 million for the year ended December 31, 2022.

The increase in selling, general and administrative expenses was attributable to an increase in share-based compensation of $13.4 million, which was partially offset by a decrease in payroll expense of $2.5 million, a decrease in professional fees by approximately $1.5 million, and a decrease in sales commissions by approximately $0.4 million.

SG&A expense for the year ended December 31, 2024 was $15.7 million, compared to $8.0 million for the year ended December 31, 2023.

The increase in SG&A expense was attributable to an increase in professional and legal expenses associated with the cost of compliance as a public company.

Share-Based Compensation Expense:

Share-based compensation expense for the year ended December 31, 2024 was $3.4 million, compared to $14.1 million for the year ended December 31, 2023.

The decrease in share-based compensation expense was primarily attributable to a reduced level of equity grants compared to the year ended December 31, 2023 in which the certain restricted stock units related to the Business Combination were issued, and the issuance of such grants at lower prices in the year ended December 31, 2024.

Depreciation Expense:

Depreciation expense for the year ended December 31, 2023, was approximately $0.9 million and increased by $0.3 million, or 55%, from approximately $0.6 million for the year ended December 31, 2022.

The increase in depreciation expense relates to an increase in additions to property, plant, and equipment during the year ended December 31, 2023.

Interest Expense and Interest Expense, related parties:

Interest expense for the year ended December 31, 2023, was approximately $94 thousand and decreased by $21 thousand, or 18% from approximately $115 thousand for the year ended December 31, 2022.

The decrease in interest expense was due to the termination of the line of credit agreement in July 2022.

Depreciation expense for the year ended December 31, 2024 was $1.1 million, compared to $0.9 million for the year ended December 31, 2023.

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:

Loss on asset disposal for the year ended December 31, 2024 was $0.3 million, compared to a gain of $0.06 million for the year ended December 31, 2023.

The increase in loss on asset disposal, was primarily the result of the Company disposing of certain aged or inoperable assets, primarily in the machinery and equipment category, resulting in a loss on disposal of $0.3 million during the year ended December 31, 2024.

Other loss for the year ended December 31, 2024 was $0.9 million due to the write-down of a deposit of $0.9 million.

Interest Expense:

Interest expense for the year ended December 31, 2024 was $0.06 million, compared to $0.09 million for the year ended December 31, 2023.

The decrease in interest expense was due to the settlement of debt during 2024.

Change in fair value of convertible notes:

Change in fair value of convertible notes for the year ended December 31, 2024 was $0.5 million, compared to $(1.0) million for the year ended December 31, 2023.

The increase in change in fair value of convertible notes was the result of notes being remeasured prior to being converted in 2023 and 2024.

Change in fair value of warrants liabilities:

Change in fair value of warrants liabilities for the year ended December 31, 2024 was $(0.04) million, compared to $(0.2) million for the year ended December 31, 2023.

The increase in change in fair value of warrants liabilities was primarily due to the decrease in the share price during the period.

Loss on financing transaction:

Loss on financing transaction for the year ended December 31, 2024 was $1.6 million, compared to $4.0 million for the year ended December 31, 2023.

The decrease in loss on financing transaction was primarily due to the loss being incurred due to two separate transactions in each year.

Other (Income) Expenses, net:

Other expenses, net for the year ended December 31, 2023, was approximately $44 thousand and decreased $4 thousand, or 8%, as compared to $48 thousand of other expenses, net for the year ended December 31, 2022.

The decrease in other income expenses, net was primarily attributable to a decrease in donations and non-operating income and expenses.

The decrease in other income was primarily attributable to a decrease in non-operating income and expenses.

Other (income) expenses, net for the year ended December 31, 2024 was $1.0 million, compared to $0.01 million for the year ended December 31, 2023.

Other (income) expense, net increased primarily due to costs associated with our ELOC during the twelve-month period ended December 31, 2024.

Income tax expense (benefit):

Income tax benefit increase 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.

Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin

Earnings before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin are supplemental non-GAAP financial measures used by management.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA, are supplemental non-generally accepted accounting principles (“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 and other non-operating income and expenses.

We define EBITDA Margin as EBITDA divided by revenue and Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue.

We believe EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin 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.

We define “Adjusted EBITDA” as EBITDA before share-based compensation expenses and other non-operating income or expenses or other non-cash items.

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 or any other measure as determined in accordance with GAAP.

1 unchanged sentence

We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.

The following table presents a reconciliation of EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin to the GAAP financial measure of net income for each of the periods indicated (unaudited), in thousands:

Years Ended December 31,

Interest expense

Interest expense, related parties

Income tax expense

EBITDA margin % (of revenue)

Years Ended December 31,

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 for each of the periods indicated (unaudited), in thousands:

Year Ended December 31,

Adjusted EBITDA

Interest expense

Interest expense, related parties

Income tax expense

Transaction costs

Income tax expense (benefit)

Change in fair value of convertible notes

Change in fair value of warrants

Change in fair value of warrants liabilities

Share-based compensation expense

Casualty losses, net of recoveries

Inventories impairment

Inventory impairment

Loss on financing transaction

Tariff refund

Other (income) expenses, net

Other expenses, net

Loss (gain) on asset disposal

Adjusted EBITDA

Adjusted EBITDA margin % (of revenue)

Liquidity and Capital Resources and Going Concern

We incurred losses and negative cash flow from operations for the year ended December 31, 2023, due to a decrease in revenue, negative cash flows from operations, negative net working capital excluding deferred transaction costs and other current assets that are not settled in cash and increase in investment in technology innovation and commercial capabilities compared to the prior year periods.

We have historically funded our operations with internally generated cash flows, lines of credit with banks, and promissory notes with shareholders and related parties.

We will require additional capital in order to execute on our business plan and may additionally 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 facilities for other reasons.

In order to stay on 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.

Liquidity and Capital Resources

We incurred losses for the year ended December 31, 2024, due to negative net working capital excluding deferred transaction costs and other current assets that are not settled in cash, and an increase in investment in technology innovation and commercial capabilities as compared to year ended December 31, 2023.

We have historically funded our operations with internally generated cash flows, lines of credit with banks, convertible notes, and promissory notes with stockholders and related parties.

We will 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 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.

3 unchanged sentences

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 noted in the Company’s consolidated financial statements, there is substantial doubt as to our ability to fund our planned operations for the next twelve months and to continue to operate as a going concern.

We have assessed our ability to continue as a

going concern, and, based on our need to raise additional capital to finance our future operations and recurring losses from operations incurred since inception, we have concluded that there is substantial doubt about our ability to continue as a going concern for a period of one year from the date that the consolidated financial statements included in this Annual Report on Form 10-K are issued.

As noted in the Company’s consolidated financial statements, there is substantial doubt as to our ability to fund our planned operations in both the short- and long-term and to continue to operate as a going concern.

We have assessed our ability to continue as a going concern, and, based on our need to raise additional capital to finance our future operations, recurring losses from operations incurred since inception, and an expectation of continuing operating losses for the foreseeable future, we have concluded that there is substantial doubt about our ability to continue as a going concern for a period of one year from the date that these consolidated financial statements are issued.

The Company will continue to pursue obtaining additional liquidity which may include raising additional funds from investors (in the form of debt, equity, or equity-like instruments) and reducing operating expenses.

Equity Line of Credit

On April 16, 2024, we entered into the Purchase Agreement with B.

Pursuant to the Purchase Agreement, we have 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, including that the registration statement registering the Purchase Shares for resale (the “Registration Statement”) shall have been declared effective under the Securities Act of 1933, as amended.

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.

Concurrently with entering into the Purchase Agreement, we entered into a registration rights agreement with B.

Riley pursuant to which we agreed to register the resale of the Purchase Shares and Commitment Shares that have been and may be issued to B.

Riley under the Purchase Agreement pursuant to the Registration Statement (the “Registration Rights Agreement”).

The Registration Statement was filed with the SEC on April 29, 2024 (File No.

333-278979) and was declared effective by the SEC on May 13, 2024.

Through December 31, 2024, the Company utilized the B.

Riley Committed Equity Facility to sell 23,999 shares of Common Stock for cash proceeds totaling $58 thousand.

Public Equity Offering

On July 1, 2024, we consummated a public offering (the “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 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.

Private Placement Equity Offering

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, LLC (collectively with its affiliates, the “Purchaser”), pursuant to which the Purchaser agreed to purchase all of the Placement Shares and 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;

● 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.

In connection with the closing of the 2024 Private Placement, the Company entered into a registration rights agreement, dated as of July 1, 2024, with the Purchaser pursuant to which the Company is required to file a registration statement with the SEC to register the resale of the Placement Shares and the shares of Common Stock issuable upon exercise of the Pre-Funded Warrants.

All fees relating to the filing of such resale registration statement shall be borne by the Company.

On January 23, 2025, the Company registered the Placement Shares.

In addition, upon the closing of the 2024 Private Placement, the Company entered into a voting agreement, dated as of July 1, 2024, with certain stockholders of the Company representing greater than 50% of the issued and outstanding Common Stock of the Company (prior to the Public Offering and 2024 Private Placement) to support the transactions contemplated by the Securities Purchase Agreement, including of the authorization by the Company’s stockholders for the Company to issue the shares of Common Stock underlying the Pre-Funded Warrants in accordance with applicable Nasdaq rules.

On August 23, 2024, the issuance of the shares of Common Stock underlying the Pre-Funded Warrants was approved by our stockholders, and on September 24, 2024, the holders of the Pre-Funded Warrants exercised their warrants in exchange for Common Stock.

Year ended December 31, 2024, Compared to Year ended December 31, 2023

The following table summarizes our cash flows for the periods, in thousands:

Years Ended December 31,

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and cash equivalents

The following table summarizes our cash flows for the periods indicated, in thousands:

Year Ended December 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase (decrease) in cash, cash equivalents, and restricted cash equivalents

Operating Activities

Net cash used in operating activities was $4.6 million for the year ended December 30, 2023, an increase of $1.4 million as compared to $3.2 million of net cash used in operating activities for the year ended December 31, 2022.

The increase in net cash used in operating activities was primarily attributable to collective changes from non-cash balances including a change of $13.4 million share-based compensation expense, a change of accrued expenses of $3.3 million, a change of $4.0 million in loss on financing transaction, a change in deferred transaction costs of $1.1 million, and a change in fair value of convertible notes of $1.0 million for the year ended December 31, 2023, compared to the year ended December 31, 2022.

Net cash used in operating activities was $15.6 million for the year ended December 31, 2024, an increase of $11.0 million, as compared to $4.6 of net cash used in operating activities for the year ended December 31, 2023.

The increase in net cash used in operating activities was primarily attributable to payments made to reduce our liabilities during the year, in an effort to improve our capital structure.

Investment Activities

Net cash used in investing activities was $1.5 million for the year ended December 31, 2023, a decrease of $0.1 million as compared to $1.6 million of net cash used in investing activities for the year ended December 31, 2022.

The decrease in net cash used in investing activities was primarily due to a decrease in proceeds from sale of equipment for the year ended December 31, 2023, compared to the year ended December 31, 2022.

Net cash used in investing activities was $2.7 million for the year ended December 31, 2024, as compared to $1.5 million for the year ended December 31, 2023.

The increase in net cash used in investing activities was primarily attributable to an increase in capital expenditures related to software development for the year ended December 31, 2024, compared to the year ended December 31, 2023.

Financing Activities

Net cash provided by financing activities was $21.6 million for the year ended December 31, 2024, an increase of $15.0 million, as compared to $6.6 million of net cash provided by financing activities for the year ended December 31, 2023.

The increase by financing activities for the year ended December 31, 2023, is primarily due to the proceeds to us from the Business Combination and related financing transactions.

The increase in net cash provided by financing activities is primarily attributable to proceeds from the issuance of Common Stock, offset by repayments of borrowings.

Contractual Obligations

Our principal commitments consist of lease obligations for corporate offices and production facilities.

The net present value of operating lease liabilities for the years ended December 31, 2023 and 2022 is $0.1 million and $0.1 million, respectively.

Our principal commitments consist of lease obligations for our corporate office and production facility.

The net present value of operating lease liabilities as of December 31, 2024, and 2023 is $1.1 million.

Off-Balance Sheet Arrangements

4 unchanged sentences

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 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.

Inventories are stated at the lower of actual cost and net realizable value (“NRV”).

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.

Should actual market conditions differ from the Company’s estimates, future results of operations could be materially affected.

The Company reduces the value of its inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the NRV.

For the year ended December 31, 2023, the Company updated its operating plan and recorded an inventory write down of $1.7 million, which was charged to costs of goods sold in our Consolidated Statements of Operations, related to products that are not expected to be sold and based on customer demand and current market conditions.

No inventory write down was recognized for the year ended December 31, 2022.

The valuation of inventory also requires the Company to estimate excess and obsolete inventory.

As noted below, the Company believes the risk of technological obsolescence is not significant, so this analysis is weighted toward assessing the extent to which inventory is in excess of market demand.

The determination of excess inventory is estimated based on a comparison of the quantity and cost of inventory on hand to the Company’s forecast of customer demand, which is dependent on various internal and external factors and requires the Company to use judgment in forecasting future demand for its products.

The Company also considers the rate at which new products will be accepted in the marketplace and how quickly customers will transition from older products to newer products.

If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Our inventories are exposed to significant risks that may adversely affect our results of operations due to customer demands, gross profit margins, and fluctuations in the market conditions of the warehouse and logistics, manufacturing, utilities and oil and gas sectors.

Technological obsolescence is not considered a significant risk to the Company.

With respect to hardware, device technology and functionality is not changing very much and the devices that the Company has in its inventory are more than adequate technically for MSAI’s integrated solutions offerings.

With respect to software, the Company is continuously updating and upgrading the on-device and cloud-based software on its existing devices to keep pace with technological advances.

Upgraded software is easily downloaded onto the devices, which keeps the devices current in terms of functionality.

The Company manages and controls its software and ensures all software updates are compatible with the devices held in inventory.

At the end of each quarter the Company evaluates its inventory based on (i) its current operating plan to estimate the demand of inventories based on market environment, current portfolio of customers and risk-adjusted pipeline opportunities (i.e., expected upcoming purchase orders from customers), (ii) full count of inventory at year end and 80% coverage count on a quarterly basis to identify if there are any inventories that are not sold in the operating business cycle, and/or have slow movement, and (iii) an assessment of whether the carrying costs of specific items in inventory are greater than net realizable value and should be written down to net realizable value.

Also at the end of each quarter, the Company reviews short-term and long-term classification of inventories related to infrared cameras, as well as to replacement, maintenance and spare parts.

Using similar analyses and sources of information as for the inventory write down to net realizable value assessment, the Company makes the following determinations:

● MSAI classifies as short-term inventories that are expected to be sold in the subsequent twelve months.

● MSAI recognizes an inventory write down for inventories that cannot be sold in the market and net realizable value is below cost.

● MSAI classifies as long-term inventories the inventory that are not expected to be sold in the following twelve months but for which ones there is an active market and the Company has not identified any indicator of impairment.

We have assessed the impact of a variety of known business, competitive and economic factors on our ability to sell inventory.

Except as described below, however, we do not believe that these factors have materially hindered our ability to sell inventory in 2022 and 2023.

Specifically, we do not believe that broader economic factors had any material impact on our ability to sell inventory.

Also, competitive factors were only relevant to the extent that our products were not sufficiently differentiated from competitors’ products until we launched our SmartIR software in 2023.

We believe that the additional functionality of the SmartIR software creates significant differentiation, and alleviates the competitive factors as assessed.

The most relevant known factors that materially hindered our ability to sell inventory in 2022 and 2023 related specifically to our business itself.

The primary business factors that we considered in our assessment included (i) the recency of the commercial launch of our Smart IR software platform, which we believe will drive significant sales of integrated device and software solution sales over time, and (ii) the early stage of development of our commercial capabilities, specifically the small size and limited reach of our direct sales force and marketing teams and the nascency of our strategic channel partner relationships.

We believe that the business factors we considered are easing over time through the growth and maturation of our commercial capabilities.

Based on the current operating plan, the ongoing expansion of our commercial capabilities, and the strong “product market fit” between our remaining inventory and our targeted industry verticals and use cases – the Company has not identified any indications that additional impairment of these inventories would be required.

In addition, when the Company prepares its operating plan, it considers the following risks and factors that could materially impact the recoverability of inventories i) slow-moving inventories that are not expected to be sold into the current focus customer base in the current market environment during the next twelve months, ii) estimation of underlying demand, prices, and profit margins, iii) customer demand in the four sub-vertical sectors:

warehouse and logistics, manufacturing, utilities, and oil and gas sectors, and iv) demand from the current portfolio of customers and potential new customers.

Offering Costs

The Company complies with the requirements of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”.

Offering costs consist of underwriting, legal, accounting and other expenses incurred through the balance sheet date that are directly related to the IPO.

Offering costs are allocated to the separable financial instruments to be issued in the IPO based on a relative fair value basis, compared to total proceeds received.

Offering costs directly attributable to the issuance of an equity contract to be classified in equity are recorded as a reduction of equity.

Offering costs for equity contracts that are classified as assets and liabilities are expensed immediately.

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 hardware is not significant, as device technology and functionality is stable and the devices that the Company has in its inventory are more deployable with for 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

Revenue is accounted for under ASC 606, Revenue from Contracts with Customers through the following steps:

● Identify the contract with a customer;

● Identify the performance obligations in the contract;

● Determine the transaction price;

● Allocate the transaction price to performance obligations in the contract;

● Recognize revenue when or as we satisfy a performance obligation.

Revenue is recognized net of allowances for returns and any sales taxes collected from customers.

Revenue Sources

Our revenues are derived from multiple sources.

The following are descriptions of principal revenue generating activities, performance obligations and revenue recognition criteria:

— Product Sales

Products sales related to infrared cameras and sensor devices are considered separate performance obligations.

We recognize revenue from product sales at a point in time, at the amount to which it expects to be entitled when control of the products is transferred to its customers.

Control is transferred at FOB Destination.

Payment for products is collected within 30-90 days following transfer of control.

Product sales are distinct from the SaaS subscriptions as product sales have a standalone functionality and can work independently of SaaS.

— Software as a Service (“SaaS”) and Related Services

We sell SaaS subscriptions that comprise access to the cloud platform and technical support and upgrades of the software.

The software license is accounted for as a separate service performance obligation as it can be used with another infrared camera or sensor device not sold by ICI.

The access to the cloud platform has standalone functionality and represents a distinct performance obligation.

The technical support and upgrades of the software are considered distinct from each other and are not considered critical for the functionality of the software.

Therefore, they are considered a stand ready obligation and are accounted as a series of distinct services as a distinct performance obligation.

Our SaaS subscriptions services are generally contracted for a period of 12-36 months.

Annual subscription payments are made in advance, are initially recognized as customer prepayments and revenue is recognized ratably over the subscription period.

— Ancillary Services

Ancillary services derived from the calibration of infrared cameras, maintenance and training are recognized at a point in time when service is provided to the client.

Clients send the cameras to our warehouse to perform the calibration and maintenance.

This service is considered a different promise, distinct and separately identifiable as the customer benefits from the service on its own.

Therefore, it is considered a separate performance obligation.

Additionally, we arrange training with clients to teach them the use and functionality of cameras.

Training is considered a different promise, distinct and separately identifiable as the customer benefits from the service on its own.

Therefore, it is considered a separate performance obligation.

Shipping and Handling

Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in the cost of goods sold as incurred.

Transaction Price Allocated to Performance Obligations

We allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price (SSP) basis.

Contract Liabilities

Contract liabilities include billed and unbilled amounts resulting from in-transit shipments, as we have an unconditional right to payment upon the completion of all performance obligations.

Contract liabilities also include customer prepayments which mainly consist of advances from customers related to products and SaaS subscriptions, as well as repair and service agreements, for which we have not yet recognized revenue.

Share-Based Compensation

We recognize all employee and non-employee share-based compensation as a cost in the consolidated financial statements.

Equity-classified awards are measured at the grant date fair value of the award and are amortized on straight line basis over the employee’s requisite service period, generally the vesting period of the award.

Shared-based compensation expense for Transaction RSU Awards (as defined below) have only service vesting conditions.

Expense will be recognized on a straight-line basis for all RSU awards with only service conditions.

In the event that a RSU grant holder is terminated before the award is fully vested for RSUs granted under the Plan, the full amount of the unvested portion of the award will be recognized as a forfeiture in the period of termination.

We estimate grant-date fair value using the Black-Scholes-Merton option-pricing model.

The use of a valuation model requires management to make certain assumptions with respect to selected model inputs.

We grant stock options at exercise prices determined equal to the fair value of common stock on the date of the grant.

The fair value of the ICI Common Stock is based on our historical and projected financial performance (as determined by an independent 409A valuation Section 409A means Section 409A of the Code and all regulations, guidance, compliance programs and other interpretative authority thereunder.) and by observable arms-length sales of our capital stock.

The computation of the expected option life is based on an average of the vesting term and the maximum contractual life of our stock options, as we do not have sufficient history to use an alternative method to the simplified method to calculate expected life for employees.

Since our shares have not historically been publicly or privately traded, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares.

The risk-free rate for the expected term of the options is based on the U.S.

Treasury yield curve at the date of the grant.

Forfeitures are recognized as they occur.

On December 19, 2023, prior to the closing of the combination, the Board of Directors of Legacy ICI authorized that the shares of common stock (the “Transaction RSU Awards”) subject to the awards will be delivered, in accordance with the terms of the Restricted Stock Unit Agreement.

All Transaction RSU Awards issued were valued using a fair value of $6.82, which was the closing share price of our common stock on that date.

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.

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 changes this allowance in a period, we adjust the tax provision or tax benefit in the consolidated statement of 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

1 unchanged sentence

Emerging Growth Company and Smaller Reporting Company Status

We are an emerging growth company under the JOBS Act.

The JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such a time as those standards apply to private companies.

(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 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.

2 unchanged sentences

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.

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.

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.

Financial Statements and Supplementary Data.

The financial statements required to be filed pursuant to this Item 8 are appended to this report.

An index of those financial statements is found in Item 15 of Part IV of this Annual Report on Form 10-K.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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