VEEA INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the financial condition and results of operations of Veea should be read together with the “Item 1. Business” section and our audited financial statements as of the years ended December 31, 2024 and 2023, and related notes and other information included elsewhere in this Annual Report. In addition to our historical consolidated financial information, this discussion includes forward-looking information regarding our business, results of operations and cash flows, and contractual obligations and arrangements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from any future results expressed or implied by such forward-looking statements as a result of various factors, including, but not limited to, those discussed in the sections of this Annual Report entitled “Cautionary Note Regarding Forward-Looking Information” below and “Risk Factors” included elsewhere in this Annual Report. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Veea,” “we”, “us”, “our”, and the “Company” are intended to refer to (i) following the Business Combination, the business and operations of Veea Inc. and its consolidated subsidiaries, and (ii) prior to the Business Combination, Private Veea (the predecessor entity in existence prior to the consummation of the Business Combination) and its consolidated subsidiaries. Throughout this report, the terms “our,” “we,” “us,” “Veea” and the “Company” refer to Veea Inc. Company Overview We are dedicated to simplifying the journey towards creating a world in which virtually everyone and everything is intelligently connected, while bringing applications and AI to the edge of the network. Most service providers, equipment suppliers, system integrators and even hyperscalers have adopted or advocated for similar solutions to various degrees either independently or in collaboration with the Company. However, to our knowledge, we are the first to market with patented technologies that a) bring virtualized data center capabilities to the far edge of the network, commonly referred to as the Device Edge, where all wired and wireless devices connect to the network, b) spawns hyperconvergence of computing, multiaccess communications and storage, c) provides for Cloud-managed applications at the Edge, d) enables machine learning with AI training, inferencing, and agentic AI at the Edge including AI-driven cybersecurity for heterogenous networks. Such networks are given rise through any combination of our developed devices and third-party devices, with CPUs, GPUs, TPUs, DPUs and/or NPUs, that run the Veea Edge Platform Ô software stack. Veea has developed several generations of highly integrated all-in-one devices that incorporate a Linux server, with a virtualized software environment, supporting our patented secured docker containers, together with a Wi-Fi Access Point (AP) with a mesh router, a firewall, an IoT gateway, NVMe data storage and 4G/5G modules, referred to as the “VeeaHub” product. With an extensive patent portfolio of 125 granted patents and 25 pending patent applications that cover 26 patent families, our end-to-end Hybrid Edge-Cloud Computing platform represents a new product category that has the potential for wide scale customer adoption in large segments of consumer and enterprise markets. Veea Edge Platform’s products, applications, and services with a distributed computing architecture, offered as a Platform-as-a-Service capability, empower companies to capitalize on the transformative potential of Edge AI, where most of the data from smartphones, tablets, laptops, cameras, sensors, and other devices is generated, with data privacy and sovereignty, reliability, low latency for real-time decisions, bandwidth efficiency, scalability, and reduced costs compared to alternatives. VeeaHub products, about the size of a typical Wi-Fi Access Point (AP), are offered in variety of forms with different capabilities for indoor and outdoor coverage and are both locally- and cloud-managed. Veea Edge Platform architecture and business model, VeeaHub Ò and third-party devices on Veea Edge Platform with Hybrid Edge-Cloud Computing and AI-enabled applications and services resemble the Android OS platform architecture and business model for Android devices. The Veea Edge Platform offers a complement, and in some cases an alternative, to cloud computing by enabling the formation of highly secure, but easily accessible, private clouds and networks across one or multiple user(s) or enterprise location(s) across the globe. Benefits of the Veea Edge Platform include optimal latency, lower data transport costs, data privacy, security and ownership, Edge AI, as well as “always-on” availability for mission critical applications, and contextual awareness for people, devices and things connected to the Internet. leading technology, telecom, Veea earns revenue primarily from the sale of its VeeaHub® devices, licenses and subscriptions. Recent Developments Business Combination On September 13, 2024 Plum Acquisition Corp. I. (“Plum”) (NASDAQ: PLMI), a special purpose acquisition company, Private Veea consummated its previously announced Business Combination. In connection with the consummation of the Business Combination (the “Closing”) (i) Plum de-registered from the Register of Companies in the Cayman Islands by way of continuation out of the Cayman Islands and into the State of Delaware, migrating to and domesticating as a Delaware corporation (the “Domestication”), and (ii) the merger (the “Merger”) of Plum Merger Sub with and into the Private Veea was completed and the separate corporate existence of Plum Merger Sub ceased, with Private Veea as the surviving corporation becoming a wholly owned subsidiary of Plum. Following the Closing, Plum changed its name from “Plum Acquisition Corp. I” to “Veea Inc.” and Private Veea changed its name from “Veea Inc.” to “VeeaSystems Inc.” 53 The Business Combination was accounted for as a “reverse recapitalization,” with no goodwill or other intangible assets recorded, in accordance with GAAP. A reverse recapitalization did not result in a new basis of accounting, and the financial statements of the combined entity represent the continuation of the financial statements of Private Veea in many respects. Under this method of accounting, Plum was treated as the “acquired” company for financial reporting purposes. For accounting purposes, Private Veea was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization of Private Veea (i.e., a capital transaction involving the issuance of stock by Plum for the stock of Private Veea). Accordingly, the consolidated assets, liabilities and results of operations of Private Veea became the historical financial statements of the combined company, and Plum’s assets, liabilities and results of operations were consolidated with the Company’s beginning on the acquisition date. Operations prior to the Business Combination were presented as those of Private Veea in future reports. The net assets of Private Veea were recognized at carrying value, with no goodwill or other intangible assets recorded. Private Placements Simultaneously with the closing of the Business Combination, the Company and Private Veea issued convertible notes under note purchase agreements (the “Note Purchase Agreements”) with certain accredited investors unaffiliated with Plum and Private Veea (each, an “Investor”) for the sale of unsecured subordinated convertible promissory notes (the “September 2024 Notes”) as part of a private placement offering of up to $15 million in purchase price for such September 2024 Notes in the aggregate (the “Financing Closing”). The Company received $1.45 million in proceeds from the issuance of its convertible promissory note with a commitment from a convertible note purchaser for the remaining unfunded amount of $13.55, which is to be funded on or prior to November 15, 2024, subsequently extended to December 15, 2024. In addition, each Investor received as a transfer from NLabs immediately prior to the Financing Closing a number of shares of Private Veea’s Series A-1 Preferred Stock that upon the Closing became a number of registered shares of our common stock equal to such Investors’ original principal note amount divided by $7.50 (the “Transferred Shares”). 2,000,000 Transfer Shares were delivered to Investors at the Financing Closing. The Note Purchase Agreements include customary registration rights. The Transferred Shares were recorded at a fair value of $21.6 million on the Company’s consolidated financial statements, which reflected a significant discount to the face amount of the September 2024 Notes, In addition to the cash received at the Financing Closing, one of the Investors committed to purchase approximately $13.6 million (the “Commitment Amount”) of September 2024 Notes, on or prior to November 15, 2024, which date was subsequently extended to December 15, 2024. On December 31, 2024, the Company and the Investor entered into a mutual Settlement and Release Agreement pursuant to which the Company agreed to terminate the Investor’s obligation to purchase a note in the Commitment Amount and provided for a mutual release of claims, in exchange for a payment to the Company of an aggregate amount of approximately $5.4 million, which amount includes payments previously made to the Company in respect of the Commitment Amount. As the Company received approximately $1.5 million of the total expected $15 million proceeds at the Financing Closing, a proportional amount (approximately $19.5 million) of the substantial discount had been deferred and recorded as a deferred financing asset on the Company’s consolidated financial statements. At December 31, 2024, the deferred financing assets was reversed on the Company’s consolidated financial statements. The Company and Private Veea are co-borrowers under each September 2024 Note (together, the “Borrowers”) and are jointly responsible for the obligations to each Investor thereunder. Each September 2024 Note has a maturity date of 18 months after the Financing Closing but is prepayable in whole or in part by the Borrowers at any time without penalty. The outstanding obligations under each September 2024 Note accrue interest at a rate equal to the Secured Overnight Financing Rate plus 2% per annum, adjusted quarterly, but interest is only payable upon the maturity of the September 2024 Notes as long as there is no event of default thereunder. Each September 2024 Note is unsecured and expressly subordinated to any senior debt of the Borrowers. The September 2024 Notes and the Note Purchase Agreements do not include any operational or financial covenants for the Borrowers. Each September 2024 Note includes customary events of default for failure to pay amounts due on the maturity date, for failure to otherwise comply with the Borrowers’ covenants thereunder or for Borrower insolvency events, in each case, with customary cure periods, and upon an event of default, the Investor may accelerate all obligations under its September 2024 Note and the Borrowers will be required to pay for the Investor’s reasonable out-of-pocket collection costs. The outstanding obligations under each September 2024 Note are convertible in whole or in part into shares of our common stock (the “Conversion Shares”) at a conversion price of $7.50 per share (subject to equitable adjustment for stock splits, stock dividends and the like with respect to our common stock after the Financing Closing) (the “Conversion Price”) at any time after the Financing Closing at the sole election of the Investor. The outstanding obligations under each September 2024 Note will automatically convert at the Conversion Price if (i) the Company or its subsidiaries consummate one or more additional financings for equity or equity-linked securities for at least $20 million in the aggregate or makes one or more significant acquisitions valued in the aggregate (based on the consideration provided by the Company and its subsidiaries) to be at least $20 million, (ii) the Investors holding a majority of the aggregate outstanding obligations under the September 2024 Notes expressly agree to convert all obligations under the September 2024 Notes or (iii) the Common Stock trades with an average daily VWAP of at least $10.00 (subject to equitable adjustment for stock splits, stock dividends and the like with respect to the Common Stock after the Financing Closing) for ten (10) consecutive trading days. The obligations under each September 2024 Note will also automatically convert in connection with a Brokerage Transfer, as described below. 54 The September 2024 Notes and the Conversion Shares are subject to a lock-up for a period of 6 months after the Financing Closing (subject to early release for a liquidation, merger, share exchange or other similar transaction that results in all of the Company’s stockholders having the right to exchange their equity holdings in the Company for cash, securities or other property, and subject to customary permitted transfer exceptions). The Transferred Shares are not be subject to any lock-up restrictions, but for a period of 6 months after the Closing they will be separately designated by SPAC’s transfer agent and kept as book entry shares on the transfer agent’s records and will not be eligible to be held by Depository Trust Company (“DTC”) without the Investor first notifying the Company of its intent to transfer any such Transferred Shares to a brokerage account and/or to be held by DTC or another nominee (a “Brokerage Transfer”). If the Investor provides such notice or otherwise has any Transferred Shares subject to a Brokerage Transfer within 6 months after the Closing, a portion of the outstanding obligations under such Investor’s Note will automatically convert into a number of Conversion Shares equal to the number of Transferred Shares subject to such Brokerage Transfer, and the lock-up period for such Conversion Shares will be extended for an additional 6 months to 12 months after the Financing Closing. As of December 31, 2024 $250,000 in aggregate principal amount of the September 2024 Notes, together with associated interest, had automatically converted upon the occurrence of a Brokerage Transfer. Equity Line of Credit On December 2, 2024, the Company entered into a common stock purchase agreement (“Common Stock Purchase Agreement”) and related registration rights agreement (the “White Lion Registration Rights Agreement”) with White Lion Capital, LLC ( “White Lion”). Pursuant to the Common Stock Purchase Agreement, the Company has the right, but not the obligation, to direct White Lion to purchase up to 25,000,000 shares of Common Stock, subject to certain limitations and conditions as described below (the "ELOC Program") at a purchase price equal to (i) 96.5% of the volume weighted average stock price for the three consecutive business days after a purchase notice is given, (ii) 98% of the volume weighted average stock price on the day a notice is delivered, or (iii) the lowest traded price for a given purchase date. The Company controls the timing and amount of any sales to White Lion, which depended on a variety of factors including, among other things, market conditions, the trading price of the Company’s common stock, and determinations by the Company as to appropriate sources of funding for its business and operations. However, White Lion’s obligation to purchase shares is subject to certain conditions, including the daily trading volume of the Company’s stock. In all instances, the Company may not sell shares of its common stock under the Purchase Agreement if it would result in White Lion and its affiliate beneficially owning more than 4.99% of its outstanding voting power or shares of common stock at any one point in time, or the aggregate number of shares of common stock would not exceed 19.99% of the voting power of the issued and outstanding common. As of December 31, 2024, the Company had sold no shares under the ELOC Program. Components of Results of Operations Revenue, net The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The Company generates revenue from hardware sales and the sale of licenses and subscriptions. The Company applies a five-step approach as defined in ASC 606, Revenue from Contracts with Customers, in determining the amount and timing of revenue to be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when a corresponding performance obligation is satisfied. Most contracts with customers are to provide distinct products or services within a single contract. However, if a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling price. For licenses of technology, recognition of revenue is dependent upon whether the Company has delivered rights to the technology, and whether there are future performance obligations under the contract. Revenue from non-refundable upfront payments is recognized when the license is transferred to the customer and the Company has no other performance obligations. Revenue for licenses delivered under a subscription model having terms between one and twelve-months are recognized over-time. Subscription revenue is generated through sales of monthly subscriptions. Customers pay in advance for the licenses and subscriptions. Revenue is initially deferred and is recognized using the straight-line method over the term of the applicable subscription period. 55 Cost of Goods Sold Cost of goods sold consists primarily of the cost of finished goods, components purchased for manufacturing and freight. Cost of goods sold also includes third-party vendor costs related to cloud hosting fees. Operating Expenses We classify our operating expenses into the following categories: ● Product development expenses . Product development expenses primarily consist of employee compensation, employee benefits, stock-based compensation related to technology developers and product management employees, as well as fees paid for outside services and materials. ● Sales and marketing expenses . Sales and marketing expenses consist of compensation and other employee-related costs for personnel engaged in selling, marketing and sales support functions. Selling expenses also include marketing and the costs associated with customer evaluations. The Company does not currently incur advertising costs. ● General and administrative expenses . General and administrative expenses consist of compensation expense (including stock-based compensation expense) for employees and executive management, and expenses associated with finance, tax, and human resources. General and administrative expenses also includes transaction costs, expenses associated with facilities, information technology, external professional services, legal costs and settlement of legal claims and other administrative expenses. ● Depreciation and amortization : Depreciation and amortization expense consists of depreciation of Veea’s property and equipment and amortization of Veea’s patents and other intellectual property. ● Impairment: Impairment consists of impairment charges related to our in-process research and development (“IPR&D”) Results of Operations The following tables set forth the results of our operations for the periods presented, as well as the changes between periods. The period-to-period comparison of financial results is not necessarily indicative of future results. 56 For the year ended December 31, 2024 compared to year ended December 31, 2023: December 31, 2024 December 31, 2023 Variance $ Variance % Sales, net $ 141,760 $ 9,072,130 $ (8,930,370 ) -98 % Cost of Goods Sold 83,290 466,802 $ (383,512 ) -82 % Gross profit (loss) 58,470 8,605,328 Operating Expenses: Product development 1,373,351 693,448 $ 679,903 98 % Sales and marketing 811,537 215,332 $ 596,205 277 % General and administrative 26,638,816 17,238,184 $ 9,400,632 55 % Transaction costs including those incurred with contingent Earn-out Share Liability 55,038,544 0 $ 55,038,544 100 % Depreciation and amortization 273,772 818,203 $ (544,431 ) -67 % Total operating expenses 84,136,020 18,965,167 Loss from operations (84,077,550 ) (10,359,839 ) Other Income and (Expense): Interest income - 1,942 $ (1,942 ) -100 % Other income, net 21,390 59,982 $ (38,592 ) -64 % UK R&D tax credit 1,251,243 - $ 1,251,243 NM Loss on initial issuance of convertible note (1,770,933 ) - $ (1,770,933 ) NM Change in fair value of conversion note option liability 840,933 - $ 840,933 NM Change in fair value of warrant liabilities 200,124 - $ 200,124 NM Change in fair value of Earn-out Share Liability 38,040,000 - $ 38,040,000 NM Other expense (244,732 ) (21,857 ) $ (222,875 ) 1020 % Interest expense (1,808,243 ) (5,318,817 ) $ 3,510,574 -66 % Total other income and expense 36,529,782 (5,278,750 ) Net loss $ (47,547,768 ) $ (15,638,589 ) 57 Revenue, net The Company generated revenue of $141,760 and $9,072,130 for the years ended December 31, 2024 and 2023, respectively. Revenue has been principally earned from paid pilots for our VeeaHub ® devices. The decrease was due to $9 million income recognized in connection with the license of AdEdge™ in 2023. Our focus over the past several years has been on field testing and refining our product to meet customer needs as well as market developments. As a result of these efforts, we expect revenue to grow over the next several quarters through the sales of our hardware, licenses and subscriptions. We are especially focused in four principal market opportunities: 1) Digital Equity and Inclusion, 2) Energy and Sustainability solutions for Smart Buildings and Climate Smart Agriculture, 3) Convergence of Fixed, Wireless, and 5G Networks, and 4) Smart Retail and Smart Warehouses. Cost of Goods Sold Cost of goods sold decreased by $383,512, or 82%, in the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease is immaterial as it is related to the costs incurred to generate our revenue earned from paid pilots for our VeeaHub ® devices. Product Development Expense Product development expense increased by $679,903, or 98%, in the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in product development expenses was due to increased internal development and additional costs incurred of outside contractors related to software development and product manufacturing during the period. Sales and Marketing Expense Sales and marketing expense increased by $596,205, or 277%, in the year ended December 31, 2024 compared to the year ended December 31, 2023. The year-to-date increase was due primarily to an increase in customer evaluations and fees paid to third-party marketing firm during the period. General and Administrative Expense General and administrative expense increase by $9.4 million, or 55%, in the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase is primarily related to a $6.3 million increase to share based compensation, $1.2 million for employee benefits and other office related expenditures, $0.7 million increase related to professional fees, a the foreign exchange gain of $0.7 million and a $0.5 million increase in our inventory reserve for the year ended December 31, 2024 The year-to-date overall increase was primarily due to an increase in net foreign exchange losses, as well as an increase in professional and consulting fees relating to the Business Combination. 58 Transaction costs including those incurred with Earn-Out Share Liability Following the closing of the Business Combination, holders of certain capital stock of Private Veea immediately prior to the closing will have the contingent right to receive up to 4.5 million additional shares of the Company’s common stock if certain trading-price based milestones of the Company’s common stock are achieved or a change of control transaction occurs during the ten-year period following the Closing. Under accounting principles, the Company’s obligation to issue the earnout shares is recorded as a contingent liability (the “Earn-Out Share Liability”). The initial value of the Earn-out Share Liability of approximately $55 million is recorded as a transaction cost within operating expenses. The fair value of the Earn-out Share Liability was estimated using Monte Carlo simulation utilizing assumptions related to the contractual term of the instruments, estimated volatility, and current interest rates and the price of our Common Stock on the Closing Date and at December 31, 2024. A significant driver of the value of the earnout at the close of the Business Combination was our closing stock price on September 13, 2024 which was $12.00 per share and our closing stock price on December 31, 2024 was $3.81 per share. Additionally, the Company incurred approximately $1.4 million of professional fees relating to the Business Combination. Depreciation and Amortization Depreciation and amortization decreased by $544,431, or 67%, in the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was due to certain intangibles reaching the end of their useful lives. UK R&D Tax Credit The increase is related to the receipt of an R&D tax credit of $1.3 million received by the Company’s UK subsidiary. Loss on initial issuance of September 2024 Notes The loss on initial measurement of the September 2024 Notes was $1,770,993 is recorded as a transaction cost within operating expenses. Change in fair value of derivative liabilities Change in fair value of derivative liabilities comprised of the fair value adjustment to the conversion option, Private Warrants, and earnout shares at balance sheet date. The gain on the change in fair value of conversion note option liability was $840,933 for the year ended December 31, 2024 was determined using a Black-Scholes option pricing model. The loss on the change in fair value of warrant liabilities was $200,124 for the year ended December 31, 2024 was determined based on the trading value of the public warrants. The loss on the change in fair value of the Earn-out Share Liability was $38.0 million for the year ended December 31, 2024 was determined using a Monte Carlo simulation. A significant driver of the value of the earnout at the close of the Business Combination was our closing stock price on December 31, 2024 which was $3.81. These derivative instruments were entered into in 2024 related to the Business Combination. Other expense Other expenses relate to immaterial non-operating expenses incurred during the period. These amounts were immaterial for the years ended December 31, 2024 and 2023. Interest expense Interest expense decreased by $3.5 million, or 66%, in the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was due to loans coming to term or being converted into equity. 59 Liquidity and Capital Resources To date, we have financed our operations primarily through private placements of equity securities and debt to related parties. We plan to fund our operations and capital funding needs through a combination of private and public equity and debt offerings, or a combination thereof. Since our inception, we have incurred significant operating losses and negative cash flows. As of December 31, 2024 and 2023, we had an accumulated deficit of $217.8 million and $170.3 million, respectively. As of December 31, 2024 and 2023, we had cash of $1.7 million and $6.0 million, respectively. As of December 31, 2024 we had $13.9 million outstanding debt, of which approximately $1.2 million was outstanding under the September 2024 Notes and $12.7 million was outstanding under our working capital facility. During the year ended December 31, 2024 compared to the year ended December 31, 2023, the Company has incurred net losses of $47.5 million and $15.6 million, respectively, and had an accumulated deficit of $217.8 million as of December 31, 2024. The Company expects to continue to incur net losses as it continues to grow and scale its business. Historically, the Company’s activities have been financed through private placements, of equity securities and debt to related parties. Although we have incurred recurring losses each year since our inception, we plan to fund our operations and capital funding needs through a combination of private and public equity and debt offerings, or a combination thereof, including, (1) available cash proceeds from equity sales under the ELOC Program, (2) cash proceeds from a substantial strategic investment anticipated to close in the second quarter of 2025, and (3) savings from planned expense reduction measures. Taking into account these plans as well as (1) the expected cash tax refund of up to $2.0 million in respect of the Company’s UK subsidiary’s 2023 and 2024 research and development activities, (2) the anticipated refund by June 30, 2025, of up to $5.0 million of the Company’s prepayment for purchased inventory and (3) potential additional investments in the form of debt or equity to fund operating deficits from existing investors, including related parties, which may include the Company’s CEO and his affiliates, the Company expects it will be able to fund its operations over the next twelve months. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company, if at all. Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use Adjusted EBITDA, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may differ from similarly titled measures used by other companies, is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Adjusted EBITDA The primary financial measure we use is Adjusted EBITDA. EBITDA is defined as net (loss) income, before interest, taxes, depreciation, and amortization. We define Adjusted EBITDA as net (loss) income excluding income tax provision, interest expense, net of interest income from related party loans, depreciation and amortization, stock-based compensation expense and non-core expenses/losses (gains), including transaction-related costs, litigation-related costs, management fees, change in fair value of warrant liability, change in fair value of Earn-out Share Liability and other expense, which includes asset impairments. Our management uses this measure internally to evaluate the performance of our business and this measure is one of the primary metrics by which our internal budgets are based. We exclude the above items as some are non-cash in nature, and others are non-recurring that they may not be representative of normal operating results. This non-GAAP financial measure adjusts for the impact of items that we do not consider indicative of the operational performance of our business. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared and presented in accordance with GAAP. 60 The following table provides a reconciliation of net loss to adjusted EBITDA to net loss for the periods presented: For the Year Ended December 31, 2024 December 31, 2023 ADJUSTED EBITDA: Net (loss) Income $ (47,547,768 ) $ (15,638,589 ) Adjustments: UK R&D tax credit (1,251,243 ) - Interest expense 1,808,243 5,318,817 Depreciation and amortization 273,772 818,203 EBITDA (46,716,996 ) (9,501,569 ) Other income, net (21,390 ) (59,982 ) Other expense 244,732 21,857 Loss on initial issuance of September 2024 Notes 1,770,933 - Change in fair value of conversion note option liability (840,933 ) - Change in fair value of warrant liabilities (200,124 ) - Change in fair value of Earn-out Shares Liability (38,040,000 ) - Transaction costs incurred with contingent Earn-out Share Liability 55,038,544 - Share-based compensation expense 6,699,040 76,431 ADJUSTED EBITDA $ (22,066,194 ) $ (9,463,263 ) Critical Accounting Policies and Estimates Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with GAAP. In preparing our financial statements, we make estimates, assumptions, and judgments that can have a significant impact on our reported revenue, results of operations, and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions, and judgments are necessary because future events and their effects on our results of operations and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. We believe that the assumptions and estimates associated with the following critical accounting policies involve significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements. Revenue Recognition The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The Company generates revenue from hardware sales and the sale of licenses and subscriptions. Most contracts with customers are to provide distinct products or services within a single contract. However, if a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling price. Revenue from all sales types is recognized at the transaction price - the amount management expects to be entitled to in exchange for transferring goods or providing services. Transaction price is calculated as selling price net of variable consideration which may include estimates for future returns, price protection, warranties, and other customer incentive programs based upon the Company’s expectation and historical experience. 61 For licenses of technology, recognition of revenue is dependent upon whether the Company has delivered rights to the technology, and whether there are future performance obligations under the contract. Revenue from non-refundable upfront payments is recognized when the license is transferred to the customer and the Company has no other performance obligations. Revenue for licenses delivered under a subscription model having terms between one and twelve-months are recognized over-time. Subscription revenue is generated through sales of monthly subscriptions. Customers pay in advance for the licenses and subscriptions. Revenue is initially deferred and is recognized using the straight-line method over the term of the applicable subscription period. Revenue from hardware sales is recognized at a point-in-time, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred. Certain of the Company’s product’s performance obligations include proprietary operating system software, which typically is not considered separately identifiable. Therefore, sales of these products and the related software are considered one performance obligation. The Company has service arrangements where net sales are recognized over time. These arrangements include a variety of post-contract support service offerings, which are generally recognized over time as the services are provided, including maintenance and support services, and professional services to help customers maximize their utilization of deployed systems. A contract liability for deferred revenue is recorded when consideration is received or is unconditionally due from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Deferred revenue balances typically result from advance payments received from customers for product contracts or from billings in excess of revenue recognized on services arrangements. Inventory The Company values inventory at the lower of cost or net realizable value. Cost is computed using standard cost which approximates actual cost on a first-in, first-out basis. At each reporting period, the Company assesses the value of its inventory and writes down the cost of inventory to its net realizable value, if required, for estimated excess or obsolescence. Factors influencing these adjustments include changes in future demand forecasts, market conditions, technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration, and quality issues. The write down for excess or obsolescence is charged to the provision for inventory, which is a component of cost of goods sold in the Company’s consolidated statements of operations and comprehensive loss. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Fair Value of Equity-Based Awards We estimate the fair value of stock option awards granted using the Black-Scholes option pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make, including expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. Due to the lack of company-specific historical and implied volatility data, we base the estimate of expected stock price volatility on the historical volatility of a representative group of publicly traded companies for which historical information is available. The historical volatility is generally calculated for a period of time commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero, as we have never paid dividends and do not have current plans to pay any dividends on our Common Stock. As there was no public market for Private Veea’s common stock prior to the closing of the Business Combination, the estimated fair value of our common stock was previously approved by our Board of Directors, with input from management, as of the date of each award grant, considering our most recently available independent third-party valuations of Private Veea’s common stock and its board of directors’ assessment of additional objective and subjective factors deemed relevant that may have changed from the date of the most recent valuation through the date of the grant. Fair Value of Certain Debt and Liability Instruments, and the Fair Value Option of Accounting When financial instruments contain various embedded derivatives which require bifurcation and separate accounting of those derivatives apart from the host instruments, if eligible, GAAP allows issuers to elect the fair value option (“FVO”) of accounting for those instruments. The FVO allows the issuer to account for the entire financial instrument, including accrued interest, at fair value with subsequent remeasurements of that fair value recorded through the statements of operations. We elected the FVO of accounting for the September 2024 Notes, including contingently issuable common stock and accrued interest, as discussed in Note 3, Summary of Significant Accounting Policies and Note 4, Reverse Recapatialization to the accompanying consolidated financial statements included elsewhere in this Annual Report. 62 The September 2024 Notes, which include the related contingently issuable common stock, contain embedded derivatives, which require bifurcation and separate accounting under GAAP, for which the Company elected the FVO for the September 2024 Notes. The September 2024 Notes and accrued interest at their stated interest rates were initially recorded at fair value as liabilities on the consolidated balance sheets and are subsequently re-measured at fair value at the end of each reporting period presented within the consolidated financial statements. The changes in the fair value of the September 2024 Notes are recorded in changes in fair value of convertible debt, included as a component of other income and expenses, net, in the consolidated statements of operations. The change in fair value related to the accrued interest components is also included within the single line of change in fair value of September 2024 Notes on the consolidated statements of operations. See additional information on valuation methodologies and significant assumptions used in Note 7, Debt and Note 11, Fair Value Measurement to the accompanying consolidated financial statements included elsewhere in this Annual Report. The Earn-out Share Liability Certain shareholders of the Company are eligible to receive up to 4.5 million earnout shares of the Company's common stock, contingent upon the fulfillment of certain milestones. Each earnout is deemed achieved if, at any time within ten years following the Business Combination, (i) the volume-weighted average price of the Company's common stock reaches or exceeds either $12.50 or $15.00, in each case, for any twenty trading days within a thirty trading day period or (ii) a change of control occurs resulting in the shareholders receiving a per share price, or an implied value per share equal to or in excess of $12.50 or $15.00 per share. As the issuance of the earnout shares is contingent solely on meeting the earnout milestones, the Company’s obligation to issue the earnout shares is recorded as a contingent liability on the Company’s consolidated balance sheet. The Earn-out Share Liability was initially measured at fair value at the closing of the Business Combination and subsequently remeasured at the end of each reporting period. The change in fair value of the Earn-out Share Liability is recorded as part of “Other income and (expense)” in the consolidated statement of operations. The estimated fair value of the Earn-out Share Liability was determined using a Monte Carlo analysis of 30,000 simulations of the future path of the Company’s stock price over the earnout period. The assumptions utilized in the calculation are based on the achievement of certain stock price milestones including projected stock price, volatility, and the risk-free rate. See additional information on valuation methodologies and significant assumptions used in Note 3, Summary of Significant Accounting Policies and Note 4, Reverse Recapatialization , to the accompanying consolidated financial statements included elsewhere in this Annual Report. Goodwill Goodwill represents the excess of the aggregate purchase consideration over the fair value of the net assets acquired. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. In conducting its annual impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that the fair value of the reporting unit is less than its carrying amount, the Company performs a quantitative assessment, and the fair value of the reporting unit is determined by analyzing the expected present value of future cash flows. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill is calculated and an impairment loss equal to the excess is recorded. The Company’s goodwill was recorded in connection with an acquisition consummated by Private Veea in June 2018. See additional information on valuation methodologies and significant assumptions used in Note 3, Summary of Significant Accounting Policies and Note 6 , Goodwill and Intangible Assets , to the accompanying consolidated financial statements included elsewhere in this Annual Report. Impairment of Long-Lived Assets Long-lived assets with finite lives consist primarily of property and equipment, operating lease right-of-use assets, and intangible assets which are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. See additional information on valuation methodologies and significant assumptions used in Note 3, Summary of Significant Accounting Policies and Note 6 , Goodwill and Intangible Assets , to the accompanying consolidated financial statements included elsewhere in this Annual Report. Recently Adopted Accounting Pronouncements See Note 3, Summary of Significant Accounting Policies to the accompanying consolidated financial statements included elsewhere in this Annual Report for a description of recently adopted accounting standards. Recently Issued Accounting Pronouncements See Note 3, Summary of Significant Accounting Policies to the accompanying consolidated financial statements included elsewhere in this Annual Report for a description of certain recently issued accounting standards which may impact our financial statements in future reporting periods. 63 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1) under the Securities Act.