MSAI 10-K & 10-Q changes, risk factors and insider trading

You should carefully consider the risks described below, as well as the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, growth prospects and stock price. Below is a summary of our risk factors with a more detailed discussion following:

We have incurred net losses or low income in recent years, as we pivoted the Company from primarily stand-alonestandalone device sales to pairing device sales with sales of our software solutions. We incurred a net loss of approximately $22,268,000$21.5 million for the year ended December 31, 2023,2024, and approximately $21,495,000$11.7 million for the year ended December 31, 2024.2025. We believe that we may continue to incur operating and net losses each year until at least such time as we begin to realize the anticipated benefits of our investment in sales and marketing efforts, though those benefits may not be as great as we anticipate or may occur later than we anticipate or not at all. Even if we successfully develop and sell our devices and software solutions, there can be no assurance that it will be commercially successful. We believe achieving sustained profitability will be dependent upon the successful development and successful commercial introduction and acceptance of our solutions, which may not occur.

Our relationships with many of our existing customers are limited as they may not be prepared to select us as a long-term supplier given the relatively recent nature of our business relationship. To establish preliminary relationships with certain customers and to build their confidence, we have entered, and may continue to enter, into pilot agreements, spot buy purchase orders, non-binding letters of intent and strategic customer agreements. These agreements are largely non-binding, generally do not include any minimum obligation to purchase any quantities of any products, and do not require that the parties enter into a subsequent definitive, long-term, binding agreement. If we are unable to build confidence with our existing customers, either through these preliminary agreements (due to any failure to enter into or perform under the agreements) or otherwise, or if we are unable to secure opportunity from these non-binding agreements, involving strategic customer agreements, we may be unable to produce accurate forecasts or increase our sales.

With respect to newprospective customers, they may be less confident in our business and less likely to purchase our solutions because of a lack of awareness about our solutions. They may also not be convinced that our business will succeed because of the absence of an established sales, service, support and operating history. To address this, we must, among other activities, grow and improve our marketing capability and brand awareness, which may be costly. These activities may not be effective or could delay our ability to capitalize on the opportunities that we believe are suitable to our technology and products and may prevent us from successfully commercializing our products.

Our future growth depends on penetrating new markets, adapting existing products to new applications and customer requirements, and introducing new and effective products on a timely basis that then achieve market acceptance. To remain competitive, we develop new products and upgrades to our software and will need to continue to do so. In connection with this development, we plan to incur substantial, and potentially increasing, research and development costs. Because we account for research and development as an operating expense, theseThese expenditures could adversely affect our results of operations in the future.

The promise of new products and successful research and development may decrease our expected and actual revenue attributable to existing products as customers may delay or cancel outstanding purchasing commitments for current generation products in anticipation of the release of new generation products from us. Additionally, new hardware products may trigger increased warranty costs as information on such products is augmented by actual usage.

Our estimate of TAM is subject to numerous uncertainties. If we have overestimated the size of our TAM nowor ordo so in the future, our future growth rate may be limited.

Our estimates of TAM are based on a combination of the total number of estimated potential customers in a given market, our expectations regarding the scope of potential use cases for our thermal infrared technology solutions in such markets, our estimates of average selling prices for our products in those markets and the potential opportunity for software solutions to increase the utility of thermal infrared technology solutions.

We cannot assure you of the accuracy or completeness of our estimates. While we believe our market size estimates are reasonable, such information is inherently imprecise. If internally-generated data used in our estimates proves to be inaccurate or we make errors in our assumptions based on such data, our actual market may be more limited than our estimates. In addition, these inaccuracies or errors may cause us to misallocate capital and other critical business resources, which could harm our business. Even if our TAM meets our size estimates and experiences growth, we may not continue to grow our share of the market. Our growth is subject to many factors, including the successful implementation of our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates of our TAM included in this Annual Report should not be taken as indicative of our ability to grow.

As a manufacturer and distributor of a wide variety of products used in the oil and gas, distribution and logistics and manufacturing markets, ourOur results of operations are susceptible to adverse publicity regarding the quality or safety of our products. Product liability claims challenging the quality or safety of our products may result in a decline in sales for a product, which could adversely affect our results of operations. This could be the case even if the claims themselves are proven to be untrue or settled for immaterial amounts. Product recalls can be expensive and tarnish our reputation and have a material adverse effect on the sales of our products. Awarded damages could be more than our accruals. We cannot assure that we will not have product liability claims or that we will not recall any products.

Our revenue and margins could be adversely affected if we fail to maintain competitive average selling prices or high sales volumes, or if we fail to reduce product costs.

Cost-cutting initiatives adopted by our customers can place increased downward pressure on our average selling prices.prices for hardware, software, or services. We also expect that any long-term or high-volume agreements with customers may require step-downs in pricing over the term of the agreement. Our average selling price may be driven down by customer-specific selling price fluctuations such as non-standard discounts on large volume purchases. These lower than average selling prices on large volume purchases may cause fluctuations in revenue and gross margins on a quarterly and annual basis and ultimately adversely affect our profitability.

We may also experience declines in the average selling prices of our productshardware, software subscriptions, or services generally as our customers negotiate lower prices and as our competitors produce and commercialize lower cost competing technologies. To achieve profitability and maintain margins, we will also need to continually reduce product and manufacturing costs. Reductions in product and manufacturing costs are principally achieved by scaling production volumes and through step changes in manufacturing and continued engineering of the most cost-effective designs for our products.products and platform. In addition, we must continuously drive initiatives to reduce platform costs, labor cost, improve worker efficiency, reduce the cost of materials,materials or data, use fewer materialsmaterials, adjust data transmitted, and further lower overall product costs by carefully managing component prices, inventoryprices and shippingcloud cost.services. We need to continually increase sales volume and introduce new, lower-cost products in order to maintain our overall gross margin. If we are unable to maintain competitive average selling prices, increase our sales volume or successfully introduce new, low-cost products, our revenue and overall gross margin would likely decline.

We sell a portion of our products through third parties such as distributors and manufacturersmanufacturers’ representatives. Using third parties for distribution exposes us to many risks, including concentration risk, credit risk and legal risk because, under certain circumstances, we may be held responsible for the actions of those third-party sales channels. We may rely on one or more key distributors for selling a product, and the loss of these distributors could reduce our revenue. Our distributors may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivables and financial results. Competitors could also block our access to such parties. Failing to manage risks related to our use of third-party sales channels may reduce sales, increase expenses, and weaken our competitive position, and could result in sanctions against us.

The period of time from initiating dialogue with potential customers to implementation (sales cycle) is longlong, and we are subject to the risks of cancellation or postponement of the contract or unsuccessful implementation.

Prospective customers generally must make significant commitments of resources to test and validate products like those produced by us and confirm that they can integrate these products with other technologies before including them in any particular system, product, or process. The selling cycle for our products with new customers varies widely depending on the application, market, customer, and the complexity of the product. In the warehouseproduct and logistics market, for example, this selling cycle can be a year (or more).more. These selling cycles result in us investing our resources prior to realizing any revenue from commercialization. Further, we are subject to the risk that customers cancel or postpone implementation of our technology solutions or our customers are unable to integrate our technology solution successfully into a larger system. If our customers face financial difficulties, they may also cancel current or future product programs that could materially and adversely impact our financial results. Further, our revenue could be less than forecasted if the system, product, or process that includes our products is unsuccessful, including for reasons unrelated to our technology. Long selling cycles and product cancellations or postponements may adversely affect our business, results of operations, and financial condition.

Our manufacturing strategy focuses on engaging contract manufacturers for our manufacturing needs while maintaining the design, engineering, prototyping, testing, and pilot manufacturing in-house at our facility in Beaumont, Texas. We currently have agreements with certain contract manufacturers to provide contract manufacturing, testing, and delivery of certain of our products. These arrangements are intended to lower our operating costs, but they also reduce our direct control over certain aspects of our operations. This diminished control may have an adverse effect on the quality or quantity of products or services, or our flexibility to respond to changing conditions.

Reliance on contract manufacturers reduces our control over the manufacturing process, including reduced control over quality, product costs, and product supply and timing. We may experience delays in shipments or issues concerning product quality from our contract manufacturers. If any of our contract manufacturers experience interruptions, delays, or disruptions in supplying our products, including by natural disasters, epidemics or outbreaks of contagions, increased military conflict or tensions, such as in the Middle East, Eastern Europe or Asia,tensions or work stoppages or capacity constraints, our ability to ship products would be delayed. In addition, unfavorable economic conditions could result in financial distress among contract manufacturers upon which we rely, thereby increasing the risk of disruption of supplies necessary to fulfill our production requirements and meet customer demands.

In addition to the existing market competitors, new competitors may be preparing to enter or are entering the market in which we compete that may disrupt the commercial landscape of target markets in ways that we may not be able to prepare for, including customers of our products who may be developing their own competitive solutions. We do not know how close any of our current and potential competitors are to commercializing their similar products and services, if at all, nor what they intend to develop as part of their product roadmaps. The already competitive landscape of the thermal infrared technology market, along with both foreseeable and unforeseeable entries of competitors and similar technology from those competitors in our target markets, may result in pricing pressure, reduced margins and may impede our ability to increase the sales of our products or cause us to lose market share, any of which will adversely affect our business, results of operations and financial condition.

To provide for an appropriate level of inventory supply, we forecast inventory needs and expenses, placesintending to place orders sufficiently in advance with our suppliers and manufacturing partners and manufactures products based on our estimates of future demand. Fluctuations in the adoption of our products may affect our ability to forecast our future operating results, including revenue, gross margins, cash flows and profitability. Our ability to accurately forecast demand for our products could be affected by many factors, including the rapidly changing nature of our current target markets, the uncertainty surrounding the market acceptance and commercialization of our technology, the emergence of new markets, an increase or decrease in customer demand for our products or for products and services of our competitors, product introductions by competitors, health epidemics and outbreaks, and any associated work stoppages or interruptions, unanticipated changes in general market conditions and the weakening of economic conditions or consumer confidence in future economic conditions. We may face challenges acquiring adequate supplies to manufacture our products and we and our partners may not be able to manufacture our products at a rate necessary to satisfy the levels of demand, which would negatively affect our short-term and long-term growth. This risk may be exacerbated by the fact that we may not carry or be able to obtain from our suppliers a significant amount of inventory to satisfy short-term demand increases. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale.

We willmay need to raise additional capital in the future in order to execute our business plan, which may not be available on terms acceptable to us, or at all.

We willmay require additional capital in order to execute on our business plan and may additionally require capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. In order to stay on our growth trajectory and 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.

In order to generate future sales growth, we will need to expand the size and geographic coverage of our field organization, including marketing, direct sales, customer support and technical services. Accordingly, our future success will depend largely on our ability to hire, train, retain, and motivate skilled regional sales managers and direct sales representatives with significant technical knowledge and understanding of our products. Because of the competition for their skill set, we may not be able to attract or retain such personnel on reasonable terms, if at all. If we are unable to grow our sales and marketing organization, we may not be able to increase our revenue, which would adversely affect our business, financial condition and results of operations.

Additionally, we rely on a network of independent distributors to help generate sales of our products. If a dispute arises with a distributor, if we terminate our relationship with a distributor or if a distributor goes out of business, it may take time to identify an alternative distributor, to train new personnel to market our products, and our ability to sell those products in a region formerly serviced by a terminated distributor could be harmed. In addition, our distributors may not successfully market and sell our products and may not devote sufficient time and resources that we believe are necessary to enable our products to develop, achieve or sustain market acceptance. Any of these factors could reduce our revenue or impair our revenue growth in affected markets, increase our costs in those markets or damage our reputation. In addition, if an independent distributor were to depart and be retained by one of our competitors, we may be unable to prevent that distributor from soliciting business from our existing customers, which could further adversely affect us. As a result of our relianceuse onof third-party distributors, we may be subject to disruptions and increased costs due to factors beyond our control, including labor strikes, third-party errors and other issues. If the services of any of these third-party distributors become unsatisfactory, we may experience delays in meeting our customers’ demands and we may be unable to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products in a timely manner may damage our reputation and could cause us to lose potential customers.

If appropriate opportunities become available, we may seek to acquire businesses, assets, technologies or products to enhance our business. In connection with any acquisitions, we could issue additional equity securities, which would dilute our existing stockholders, incur substantial debt to fund the acquisitions or assume significant liabilities.

Acquisitions involve many diverse risks and uncertainties, including problems evaluating or integrating the purchased operations, assets, technologies or products, as well as with unanticipated costs, liabilities, and economic, political, legal and regulatory challenges due to our inexperience operating in new regions or countries and we may fail to successfully integrate acquired companies or retain key personnel from the acquired company. To date, we have limited experience with acquisitions and the integration of acquired technology and personnel. Acquisitions may divert ourmanagement’s time and attention from our core business. Acquisitions may require us to record goodwill and non-amortizable intangible assets that will be subject to testing on a regular basis and potential period impairment charges, incur amortization expenses related to certain intangible assets, and incur write offs and restructuring and other related expenses, any of which could harm our operating results and financial condition.

We cannotmay guarantee we willnot optimally manage our lines of business or product lines.

Consistent with our strategy to emphasize growth in our target markets, we continually evaluate our businesses so that they are aligned with our strategy and objectives. Over the years, we have also reorganized certain of our product lines, for example, to de-emphasize products used primarily for biorisk applications as the impact of the global COVID-19 pandemic began to lessen.lessen or our discontinuation of inspection and training services. We may not be able to realize efficiencies and cost savings from our reorganization activities. There is no assurance that our efforts will be successful. If we do not successfully manage our lines of business or product lines, or any other similar activities that we may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Our ability to dispose of, exit or reconfigure businesses that may no longer be aligned with our growth strategy will depend on many factors, including the terms and conditions of any asset purchase and sale agreement or lease agreement, as well as industry, business and economic conditions. We cannotmay provide any assurance that we willnot be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of product lines or closure, may not be available to us or may be more costly than anticipated.

We sell certain of our products directly to small and mid-sized businesses and other customers. Our outstanding trade receivables are not covered by collateral, third-party bank support or financing arrangements or credit insurance. Our exposure to credit and collectability risk on our trade receivables is higher in certain markets and our ability to mitigate such risks may be limited. If one or more of our major customers would bewere unable to pay our invoices as they become due or a customer simply refuses to make such payments if it experiences financial difficulties, our business would be adversely affected. If a major customer were to enter into bankruptcy proceedings or similar proceedings whereby contractual commitments are subject to stay of execution and the possibility of legal or other modification, we could be forced to record a substantial loss. From time to time, we may make prepayments associated with long-term supply agreements to secure supply of inventory components. While we are implementing procedures to monitor and limit exposure to credit risk on our trade and supplier non-trade receivables, there can be no assurance such procedures will effectively limit our credit risk and avoid losses.

Many of our current and potential customers are large corporations that often possess significant leverage over their suppliers, and can successfully demand contract terms favorable to themselves, such as reserving the right to terminate their supply contracts for convenience. This disparate power has required, and may require in the future, that we accept less favorable contract terms. These large corporations also have exacting technical specifications and requirements that we may be unable to meet, thereby precluding our ability to secure sales. Meeting the technical requirements to secure and maintain significant contracts with any of these companies will require a substantial investment of our time and resources, and if we fail to comply with our customers’ technical specifications and standards, we may lose existing and future business. Even when we succeed in securing contracts, these large companies have been and may continue to be uncertain about their technical specifications for our products and may terminate our agreement or make a later determination that our products are not satisfactory. We therefore have no assurance that we can establish relationships with these companies, that our products will meet the needs of these or other companies, or that a contract with these companies will culminate in significant, or any, product sales. Even when we secure agreements with these companies, we may not be effective in negotiating contract terms or managing such relationships, which could adversely affect our future results of operations.

Significant increases in the cost of certain components used in our products, to the extent they are not timely reflected in the price we charge our customers, could materially and adversely impact our results. For example, we have experienced significant increases in prices for certain electronic components,components and optical lenses, as well as significantly increased lead times. We sought to address these increases by carrying safety stock of critical components on deposit with our suppliers, evaluating alternative components, suppliers and processes, reviewing component substitution opportunities, and aggressively negotiating larger quantities with our vendors to provide for adequate supply. Certain of our key component manufacturers and suppliers have the ability, in our contracts, to periodically increase their prices. Accordingly, we cannot assure that it will not face increased prices in the future or, if we do, whether we will be effective in containing margin pressures from any further component price increases.

We rely on third parties to supply key components of our products. If any of our major third-party component suppliers experience interruptions, delays or disruptions in supplying their products or services, including by natural disasters, health epidemics and outbreaks, or work stoppages or capacity constraints, our ability to ship products to distributors and customers may be delayed. In addition, unfavorable economic conditions could result in financial distress among third-party suppliers upon which we rely, thereby increasing the risk of disruption of supplies necessary to fulfill our production requirements and meet customer demands. For example, in 2024, due to the reorganization of a vendor, we recorded a write down of a deposit of approximately $930,000.$0.9 million. Additionally, if any of these third parties on whom we rely were to experience quality control problems in their operations and our products do not meet customer or regulatory requirements, we could be required to cover the cost of repair or replacement of any defective products. These delays or product quality issues could have an immediate and material adverse effect on our ability to fulfill orders and could have a negative effect on our operating results. In addition, such delays or issues with product quality could adversely affect our reputation and our relationship with our customers and distributors.

If these third parties experience financial, operational, manufacturing capacity or other difficulties, or experience shortages in required components, our supply may be disrupted, we may be required to seek alternate suppliers and we may be required to re-designredesign our products. It would be time-consuming, and could be costly and impracticable, to begin to use new suppliers and such changes could cause significant interruptions in supply. Such changes could also have an adverse effect on our ability to meet our scheduled product deliveries and may subsequently lead to the loss of sales.

We believe there are a limited number of competent, high-quality suppliers in the industry that meet our strict quality and control standards, and as we seek to obtain additional or alternative supplier arrangements in the future, there can be no assurance that we wouldmay not be able to do so on satisfactory terms, in a timely manner, or at all. Our suppliers could also discontinue or modify components used in our products. In some cases, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our requirements or to fill customer orders in a timely manner. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect our ability to meet our scheduled product deliveries to our customers. This could adversely affect our relationships with customers and distributors and could cause delays in shipment of our products and adversely affect our operating results.

TheOur Companysensor sellshardware covers a dynamiclarge range of advancedthe electromagnetic and mechanical spectrums, encompassing visible-light imagers, shortwave, midwave, and longwave infrared cameras,imagers, opticalultraviolet gas imaging cameras andimagers, acoustic imagers, designed and manufacturedtunable bydiode uslaser oremitter-detector throughpairs variousfor partnershipslaser withabsorption other manufacturers.spectrometry. The Company'sCompany’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,innovative cloud-based, AI-powered software,platform that enables predictive asset reliability and process control in industrial environments.environments, available both as cloud-based subscription service and as an on-premises deployment. This technology harnesses the power of continuous data inputs from advanced thermal imaging, acoustic imaging, visible imaging, and vibration sensing hardware solutions, which are strategically placed in customer's facilities to continuously monitor the health and performance of a customer's critical equipment and processes. MSAI Connect can process and analyze vast amounts of data in real-time, providing actionable insights and enabling predictive analytics. This enablessupports businessesa tocustomer with proactively identifyidentifying potential issues, preventpreventing costly downtime, and optimizeoptimizing their operations for maximum efficiency and reliability. MSAI ConnectConnect, when deployed and connected to the cloud, is a subscription service and is generally contracted for a period of 12 months to 48 months. Annual subscriptionSubscription payments are generally collected in advance and revenue is recognized ratably over the subscription period. MSAI Connect, when deployed on-premises, is sold as both a term-based software license which generally provides access to the software for a period of 12 months and as a perpetual license. Revenue for the software licenses are recognized upfront upon delivery of the software license.

Selling, General and Administrative ExpenseRevenue: SG&A expenseRevenue for the year ended December 31, 20242025 was $15.7$5.6 million, compared to $8.0$7.4 million for the year ended December 31, 2023.2024. The increasedecrease in SG&Arevenue expenseis wasprimarily attributable to reduced standalone hardware sales, which was offset by an increase in professionalsoftware revenues of $0.9 million, which was an 88% increase year over year. Revenue streams from each of our products and legalservices expensesare associatedsummarized withbelow for the costyears ofended complianceDecember as31, a2025 publicand company.2024.

InterestCost Expenseof Goods Sold: InterestCost expenseof goods sold for the year ended December 31, 20242025 was $0.06$2.6 million, an increase of 2% compared to $0.09 million for the year ended December 31, 2023.2024. The decreaseincrease in interestcost expenseof goods sold was dueattributable to thea settlementchange in product mix and quantity of debthardware during 2024.sold.

OtherSelling, (Income)General Expenses,and netAdministrative Expense: OtherSelling, (income)general expenses,and netadministrative expense for the year ended December 31, 20242025 was $1.0$11.5 million, compared to $0.01$15.7 million for the year ended December 31, 2023.2024. OtherThe (income)decrease expense,in netselling, increasedgeneral and administrative expenses was primarily due to costsa associatedreduction withof ourprofessional ELOCfees duringof $2.6 million driven by the twelve-monthCompany periodreevaluating endedits Decemberprofessional 31,services 2024.vendor relationships and scope of outsourced work, as well as a reduction in payroll expenses of $1.0 million primarily driven by a reduction of force in July 2025.

Income tax expense (benefit): Income tax benefit increasedecreased 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, 2024.2024, which did not occur in 2025.

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

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA, are supplemental non-generallynon- 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 expensesexpenses, change in fair value of convertible notes and otherwarrant non-operatingliabilities, incomeinventory orimpairment, expensesloss oron financing transaction, other non-cashexpense items.(income) and loss (gain) on disposal of assets.

We believe EBITDA and Adjusted EBITDA, are useful performance measures because they facilitate comparison of our results of operations from period to period without regard to our financing methods or capital structure or other items that impact comparability of financial results from period to period such as fluctuations in interest expense or effective tax rates, levels of depreciation, non-cash charges such as share based compensation expenses or unusual items that are not considered an indicator of ongoing performance of our operations. In addition, we believe that such non-GAAP financial measures are used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance. EBITDA and Adjusted EBITDA should not be considered as alternatives to, or more meaningful than, net income (loss) or any other measure as determined in accordance with GAAP. Our computations of EBITDA and Adjusted EBITDA may not be comparable to EBITDA or Adjusted EBITDA of other companies. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.

EBITDA and Adjusted EBITDA, when viewed in a reconciliation to respective GAAP measures, provide an additional way of viewing the Company’s results of operations and factors and trends affecting the Company’s business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP. The following tables present a reconciliation of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for each of the periods indicated (unaudited),indicated, in thousands:

We incurred losses for the yearyears ended December 31, 2024, due to negative net working capital excluding deferred transaction costs2025 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, 2023.2024. We have historically funded our operations with internally generated cash flows, linesequity offinancings, credit with banks,debt, convertible notes, and promissory notes with stockholders and related parties.

We willmay 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. There is no assurance that the Company will be successful in implementing theirits plans. If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities or if we issue equity or equity-linked securities to current or potential customers to further business relationships, our existing stockholders could experience significant dilution. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited and our business could be materially and adversely affected.

On April 16, 2024, we entered into a purchase agreement (the “Purchase Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley.”). Pursuant to the Purchase Agreement, we havehad 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.satisfied. In accordance with the Purchase Agreement, on April 16, 2024, we issued shares of our Common Stock to B. Riley as consideration for its commitment to purchase the Purchase Shares under the Purchase Agreement (the “Commitment Shares”). Under the terms of the Purchase Agreement, in certain circumstances, we may be required to pay B. Riley up to $500 thousand (or 2.0% of the total commitment value under the Purchase Agreement), in cash, as a “make-whole” payment to the extent the aggregate amount of cash proceeds, if any, received by B. Riley from the resale of the Commitment Shares prior to certain times set forth in the Purchase Agreement, is less than $500 thousand, in exchange for B. Riley returning to us for cancelation all of the Commitment Shares we originally issued to B. Riley upon execution of the Purchase Agreement that were not previously resold. On January 8, 2025, B.RileyB. Riley notified the Company that it had sold the Commitment Shares, which resolved the liability.

Through December 31, 2025 and 2024, the Company utilized the B. Riley Committed Equity Facility to sell 1,814,731 and 23,999 shares of Common Stock for cash proceeds totaling $4.7 million and $58 thousand.thousand, respectively. Effective February 2, 2026, the Company terminated the Purchase Agreement.

2025 Private Placement Equity Offering

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in ourthe 2025 Annual Report on Form 10-K,Report, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our commonCommon stock.Stock. There have been no material changes in our risk factors since ourthe 2025 Annual Report on Form 10-K.Report.

The following discussion and analysis of our financial condition and results of operations provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 and in our unaudited condensed consolidated financial statements and notes thereto, included elsewhere in this Quarterly Report on(collectively, Form 10-Q (the “Quarterlyconsolidated Reportfinancial statements”). References to “MSAI,” the “Company,” “we,” “us,” or “our” refer to MultiSensor AI Holdings, Inc.

This Quarterly Report includes forward-looking statements based on ourthe Company’s current assumptions, expectations and projections about future events that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report. For more information on these and other factors, see “Forward-Looking Statements” herein.

The Company and its wholly owned subsidiaries build and deploy integrated condition monitoring and early threat detection solutions that connect multiple sensor types through a unified edge-to-cloud software architecture. Our condition intelligence platform integrates multiple sensing modalities such as thermal, visual and acoustic, among others. Customers deploy the MSAI Connect platform to continuously monitor critical assets and identify early degradation patterns (such as elevated operating temperatures) across electrical, mechanical, and environmental systems. This allows teams to intervene early and convert potential failures into planned maintenance before downtime, safety incidents, or operational disruption occur. Unlike traditional inspection or single-sensor monitoring solutions, MSAI combines multiple sensing technologies into a unified software platform that provides a single operational view of asset health. Our strategy is to become the software platform that connects multiple sensing technologies into a unified operational intelligence layer across critical infrastructure.

We are pursuing expansion of our position as a Software as a Service (“SaaS”) provider in predictive maintenance and believe there are significant opportunities to increase recurring revenue from our solutions. We focus on commercial environments where operational continuity is vital and automation intensity is high, including distribution and parcel logistics networks, data centers, and select manufacturing and industrial facilities. We believe our solutions offer a compelling combination of performance, scalability, and cost efficiency relative to traditional inspection and monitoring approaches. Our digital, multi-sensor software platform is designed to support the transition from intermittent, manual asset inspections towards continuous intelligent condition monitoring. By streaming and analyzing radiometric thermal data in combination with other deployed sensor inputs, our MSAI Connect software platform can surface early anomaly signals that may not be visible or detected during periodic inspections. Our system architecture is intentionally modular and extensible, allowing for the integration of additional sensing modalities and analytics capabilities over time. While our current commercial deployments are centered primarily on thermal-based monitoring enhanced by software-driven analytics and expert review, we believe MSAI Connect’s multi-sensor foundation positions us to expand into broader predictive and prescriptive use cases.

In the distribution and logistics market, we believe our solutions deliver meaningful operational value by enabling enhanced predictive maintenance capabilities that help minimize unplanned downtime, lower labor and maintenance costs, and improve facility throughput and operational continuity. During the firstsecond quarter of 2026, we completedreceived positive customer feedback on the initial deploymentslaunch of our solution at Manchester AirportAirport, andincluding athe globaladdition direct-to-consumerof foodvibration solutions provider,monitoring, further validating the applicability of our solutions across complex, mission-critical operations. In addition, weduring continuethe tosecond expandquarter ourof relationship with2026, a large global distributiondistributor customer,renewed whichits subscriptions with us and issued purchase orders for our first rollout at 10 sites in North America, with installations expected to begin during the second half of fiscal year 2026. This customer has also advised that additional projects focused on monitoring rooftop solar infrastructure and distribution facilities have been approved, with installations expected to occurbegin throughoutduring fiscalthe yearsecond half of 2026.

In the data center market, our focus is on the critical infrastructure systems that support data center reliability, uptime, and operational resilience. Through our MSAI Connect solutions, we help customers identify early signs of electrical and cooling system degradation before conventional alarms are triggered across applications such as chillers, cooling towers, automatic transfer switches, backup generators, power panels, and transformers. DuringThe two pilot projects we deployed within the data center sector during the first quarter of 2026,2026 are ongoing, and we successfullycontinue deployedto twogenerate pilotlearnings projectsfrom withinthese the data center sector.deployments. Initial customer feedback has been encouraging, and we are actively engaged in discussions to expand these deployments and pursue additional opportunities across other data center facilities.

In the manufacturing market, our go-to-market strategy is centered on delivering early threat detection and operational reliability solutions designed to enhance safety, reduce operational risk, and improve asset visibility. We continue to work closely with two of the “Big 3” automakers on our ongoing pilot programs focused on lithium-ion battery pack monitoring and the deployment of dual-vision hardware sensors. During the second quarter of 2026, one of these “Big 3” automakers renewed its subscriptions with us. In parallel, we remain actively engaged with these customers in identifying additional high-value applications for our solutions across broader manufacturing and production environments.

On April 13, 2026, we effected a 1-for-40 reverse stock split (the “Reverse Stock Split”) of our common stock.stock, par value $0.0001 per share (the “Common Stock”). As a result of the Reverse Stock Split, our outstanding commonCommon stockStock was reduced from 80,491,720 shares to 2,012,293 shares, and proportionate adjustments were made to the number of shares underlying our outstanding equity awards and equity incentive plans, including corresponding adjustments to exercise prices and performance thresholds, as applicable. The total number of authorized shares, the par value per share and other terms of our commonCommon stockStock were not affected by the Reverse Stock Split.

On October 24, 2025, we entered into that certaina Securities Purchase Agreement (the “2025 Purchase Agreement”) with 325 Capital, LLC (“325 Capital”) and certain other accredited investors signatory thereto (collectively with 325 Capital, the “Investors”), pursuant to which we sold to the investorsInvestors warrants to purchase up to 68,459,652 shares of commonCommon stockStock (the “2025 Warrants”). Pursuant to the terms of the 2025 Warrants, and as a result of the Reverse Stock Split, the exercise price of the 2025 Warrants was adjusted from $0.409 to $5.98 per share.share, Theand the number of shares of commonCommon stockStock issuable upon exercise of the 2025 Warrants was proportionately increasedadjusted to 4,682,273.85 shares. Except as provided herein, all other terms and provisions of the 2025 Warrants remain in full force and effect. During the three months ended June 30, 2026, certain Investors exercised 2025 Warrants for 175,000 shares of Common Stock at $5.98 per share, resulting in proceeds of $1.0 million.

Three months ended MarchJune 31,30, 2026 compared to three months ended MarchJune 31,30, 2025

Revenue: Revenue for the three months ended MarchJune 31,30, 2026 was $1.6$1.7 million, compared to $1.2$1.4 million for the three months ended MarchJune 31,30, 2025. Revenue streams from each of our products and services are summarized below for the three months ended MarchJune 31,30, 2026 and 2025.

The increase in revenue was primarily attributable to a $0.4 million or 169%an increase in software revenuerevenues of $0.3 million, or 85%, in line with our strategic initiative of transitioning away from salesbeing ofa MSAIhardware Connect,provider to being a solutions provider by focusing on growing our conditionSaaS intelligencebusiness. platform, and a $0.2 million or 21%This increase from sensor sales connected with new deployments of our platform and standalone hardware sales. These increases in revenue werewas partially offset by a decrease in services revenue of $0.1 millionmillion, or 84%,82%, primarily related to the discontinuation of inspection and training services in August 2025.

Cost of Goods Sold: Cost of goods sold for the three months ended MarchJune 31,30, 2026 was $0.7$0.9 million, compared to $0.5$1.1 million for the three months ended MarchJune 31,30, 2025. The increasedecrease in cost of goods sold was attributable to an increase in the quantity of sensor hardware sold as well as a change in product mix.

Selling, General and Administrative Expense: Selling, general and administrative expense for the three months ended MarchJune 31,30, 2026 was $3.0$2.8 million, compared to $4.1$2.9 million for the three months ended MarchJune 31,30, 2025. The decrease in selling, general and administrative expenseexpenses was primarily driven by a $0.7$0.3 million reductiondecrease in professional fees anddue $0.2to the Company’s continued strategic cost optimization initiatives, partially offset by a $0.1 million reductionincrease in payroll expensescosts comparedand toother the prior year period.costs.

Share-Based Compensation Expense: Share-based compensation expense for the three months ended MarchJune 31,30, 2026 was $0.2 million, compared to $0.9$0.4 million for the three months ended MarchJune 31,30, 2025. The decrease in share-based compensation expense was primarily attributablerelated to restrictedforfeitures stockof unitsunvested awards previously granted duringpredominantly the first quarter of 2025, which includedas a provision for immediate vesting of 25%result of the total award, resultingreduction in higherworkforce, expensewhich recognizedoccurred in theJuly prior-year period.2025.

Depreciation: Depreciation expense was $0.4 million for the three months ended MarchJune 31,30, 2026, compared to $0.3 million for the three months ended MarchJune 31,30, 2025. The increase in depreciation expense was primarily driven by additionsadditions, topredominantly property,in plant,the and equipment, predominatelyinternal-use software category, associated with our development of MSAI Connect, partially offset by lower depreciation expense related to machinery, equipment, and demo assets due to disposals and sales completed during fiscal year 2025.

Interest expense (income), net: Interest income was $0.2$0.1 million for the three months ended MarchJune 31,30, 2026, compared to insignificant interest income for the three months ended MarchJune 31,30, 2025. The increase in interest income was primarily due to higher average cash balances invested in interest-bearing accounts.

OtherInterest expense (income), net: OtherInterest income, netincome was insignificant$0.3 million for the threesix months ended MarchJune 31,30, 2026, compared to $0.2insignificant millioninterest income for the threesix months ended MarchJune 31,2025.30, 2025. The decreaseincrease in otherinterest income was primarily due to thehigher resolutionaverage ofcash thebalances ELOC make-whole obligation, as notified by B. Riley on January 8, 2025 (as discussed below), which resultedinvested in ainterest-bearing one-time benefit recorded in the prior-year period.accounts.

We believe EBITDA and Adjusted EBITDA, when viewed in a reconciliation to respective GAAP measures, provide an additional way of viewing the Company’s results of operations and factors and trends affecting the Company’s business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP. The following tables present a reconciliation of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) (unaudited) for each of the periods indicated, in thousands:

We incurred losses for the three and six months ended MarchJune 31,30, 2026 and 2025.2026. We have historically funded our operations with internally generated cash flows, equity financings, debt, convertible notes, and promissory notes with shareholders and related parties. As of MarchJune 31,30, 2026, we had $22.6$21.0 million of cash and cash equivalents. We expect that our current sources of liquidity, together with our projection of cash flows from operating activities, will provide us with adequate liquidity for at least the next 12 months.

We may require additional capital in order to execute on our business plan and may require capital to fund our operations or to respond to technological advancements, competitive dynamics, 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 our control. There is no assurance that we will be successful in implementing our plans. If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, or if we issue equity or equity-linked securities to current or potential customers to further business relationships, our existing stockholdersshareholders could experience significant dilution. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited and our business could be materially and adversely affected.

During the three months ended MarchJune 31,30, 2026,2025, the Company did not utilize the B. Riley ELOC andto terminatedsell the Purchase Agreement effective February 2, 2026.shares. During the threesix months ended MarchJune 31,30, 2025, the Company utilized the ELOC to sell a total of 44,793 shares of commonCommon stockStock for cash proceeds totaling $4.7 million.million, all of which occurred during the first quarter.

On March 28,13, 2025,2026, the Company entered into an at market issuance sales agreement (the “20252026 Sales Agreement”) with B.Roth RileyCapital Securities,Partners, Inc.LLC (“B.and RileyH.C. Securities”)Wainwright & Co., LLC, as sales agentagents or principal,principals, pursuant tounder which the Company couldmay offer and sell shares of its commonCommon stock,Stock having an aggregate offeringmarket pricevalue of up to $8.6$60.0 million from time to time through B. Riley Securities. B. Riley Securities was entitled to compensation at a fixed commission rate based on the gross sales price of shares sold pursuant to the 2025 Sales Agreement.time. During the three and six months ended MarchJune 31,30, 2026 and 2025,2026, the Company did not sell any shares under the 20252026 Sales Agreement. TheWe Companyintend terminatedto use the 2025net proceeds from sales of Common Stock under the 2026 Sales AgreementAgreement, effectiveif Februaryany, 2,for 2026.working capital and general corporate purposes.

As previously discussed, onOn October 24, 2025, the Company entered into the 2025 Purchase Agreement with the Investors, pursuant to which it agreed to sell to the Investors (i) 855,745 shares of commonCommon stockStock at a purchase price of $16.36 per share and (ii) the 2025 Warrants (collectively, the “2025 Private Placement”), with an exercise price of $5.98 per share, for an aggregate purchase price of $14 million before deducting placement agent fees and offering expenses. 325 Capital and its affiliates beneficially own more than 5.0% of the outstanding commonCommon stock.Stock. In addition, Daniel M. Friedberg, who is a Managing Member of 325 Capital, serves on the Company’s board of directors.

The 2025 Purchase Agreement and the 2025 Warrants provide that each Investor’s beneficial ownership of commonCommon stock,Stock, including after taking into account the full exercise of such Investor’s 2025 Warrant, shall in no event exceed 49.5% of the issued and outstanding commonCommon stockStock (the “Maximum Ownership Limitation”). In the event that an Investor’s 2025 Warrant is not exercisable for shares of commonCommon stockStock due to the beneficial ownership of such Investor exceeding the Maximum Ownership Limitation, the applicable 2025 Warrant will be exercisable for shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Stock”),share, that are convertible into an equivalent number of shares of commonCommon stockStock for which the 2025 Warrant is exercisable. The 2025 Warrants will expire seven years from the date of issuance.

At the initial closing of the 2025 Private Placement on October 30, 2025, the Company issued to the Investors 174,272 shares of commonCommon stockStock, and 2025 Warrants to purchase up to 953,543.13 shares of commonCommon stockStock (as adjusted for the Reverse Stock Split), for gross proceeds of $2.85 million before deducting placement agent fees and offering expenses.

On November 4, 2025, the Company entered into a common stock purchase agreement with a single institutional investor, pursuant to which the Company agreed to issue and sell (i) 114,875 shares (the “2025 Registered Direct Shares”) of the Company’s commonCommon stockStock and (ii) pre-funded warrants (the “2025 Pre-Funded Warrants”) to purchase up to 152,500 shares of commonCommon stockStock (the “2025 Pre-Funded Warrant Shares”) in a registered direct offering (the “2025 Registered Direct Offering”). The 2025 Registered Direct Shares, 2025 Pre-Funded Warrants and 2025 Pre-Funded Warrant Shares are registered pursuant to an effective shelf registration statement on Form S-3 (File No. 333-284437), and a base prospectus and prospectus supplement relating to the 2025 Registered Direct Offering, in each case filed with the SEC. The offering price was $54.00 per share of commonCommon stockStock and $53.9999 per 2025 Pre-Funded Warrant, which is the price of each share of commonCommon stockStock sold in the 2025 Registered Direct Offering, minus the $0.0001 exercise price per 2025 Pre-Funded Warrant.

ThreeSix months ended MarchJune 31,30, 20262026, compared to threesix months ended MarchJune 31,30, 2025

Net cash used in operating activities was $1.7$4.1 million for the threesix months ended MarchJune 31,30, 2026, aan decreaseincrease of $1.5$0.1 million as compared to $3.2$4.0 million of net cash used in operating activities for the threesix months ended MarchJune 31,30, 2025. The decreaseincrease in net cash used in operating activities was primarily driven by a lower net loss during the current period, as well as changes in working capital, including the timing of customer receipts.

InvestmentInvesting Activities

Net cash used in investing activities was $0.1$0.4 million for the threesix months ended MarchJune 31,30, 2026, a decrease of $0.3$0.5 million as compared to $0.4$0.9 million of net cash used in investing activities for the threesix months ended MarchJune 31,30, 2025. The decrease iswas primarily related to a decrease in cash paid for capital expenditures.

Net cash usedprovided inby financing activities was insignificant$1.0 million for the threesix months ended MarchJune 31,30, 2026, a decrease of $2.7 million as compared to $4.0$3.7 million of net cash provided by financing activities for the threesix months ended MarchJune 31,30, 2025. The decrease in net cash provided by financing activities was primarily attributable to $4.7$1.0 million of proceeds from the issuanceexercise of common2025 stockWarrants during the threesix months ended MarchJune 31,30, 2025,2026, withas nocompared comparableto financing$3.7 activitymillion inof net proceeds from equity financings, primarily sales under the currentELOC, period.during the six months ended June 30, 2025.

As of MarchJune 31,30, 2026, we did not have any material contractual obligations.

As of MarchJune 31,30, 2026, we did not have any off-balance sheet arrangements.

TheseOur condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in our 2025 Annual Report. There have been no significant and material changes in our Critical Accounting Policies and Estimates since the 2025 Annual Report.

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 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 PCAOBPublic Company Accounting Oversight Board 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), (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 or (v) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies. However, we have elected to opt out of this extended exemption period discussed in (v) and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards areis required for non-emerging growth companies. We may take advantage of these other exemptions until we cease to be an emerging growth company which will occur no later than December 31, 2026, orwhich untilmarks wethe arelast noday longerof anthe emergingfiscal growthyear company,following whicheverthe isfifth earlier.anniversary of the date of our initial public offering of common equity securities. We will cease to be an emerging growth company prior to the end of such five-year period if certain earlier events occur, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act,Act ourof annual1934, grossas revenues exceed $1.235 billionamended, or we issue more than $1.0 billion of non-convertible debt in any three-year period.