MultiSensor AI Holdings Inc

Notes to Condensed Consolidated Financial Statements

(Unaudited; Amounts in thousands of U.S. dollars, except share data)

Note 1 — Organization and Business Operations

MultiSensor AI Holdings, Inc. (“MSAI,” “the Company,” “we” or “our”) and its wholly owned subsidiaries provide turnkey predictive maintenance and process control solutions, which combine cutting edge imaging and sensing technologies with AI-powered enterprise software. Our software leverages a continuous stream of data from thermal imaging, visible imaging, acoustic imaging, vibration sensing, and laser sensing devices to provide comprehensive, real-time condition monitoring for a customer’s critical assets, processes, and manufactured outputs. Our cloud and edge solutions are deployed by organizations to protect critical assets across a wide range of industries including distribution & logistics, manufacturing, utilities, and oil & gas. In tandem with these solutions, we provide various services for our customers including training, calibration, and repair.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of the Company and its wholly owned subsidiaries are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The interim financial information is unaudited but reflects all normal adjustments that are necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2023 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 Annual Report”). The condensed consolidated balance sheet as of December 31, 2023 was derived from our audited financial statements.

Reclassifications

The Company has reclassified certain prior-year amounts to conform to the current-year presentation.

Principles of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated.

Going Concern

These condensed consolidated financial statements have been prepared in accordance with U.S. GAAP assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company’s liquidity has improved with the Public Equity Offering and Private Placement Equity Offering (see Note 9) which both closed in July. However, the Company is still developing its customer base and has not completed its efforts to establish a stabilized source of revenue sufficient to cover its expenses. The Company has suffered net losses, negative cash flows from operations, and negative net working capital. The Company will continue to incur losses or limited income in the future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

In response to these conditions, the Company will continue to pursue obtaining additional liquidity which may include raising additional funds from investors (in the form of debt, equity, or equity-like instruments) and reducing operating expenses. However, these plans are subject to market conditions, and are not within the Company’s control, and therefore, cannot be deemed probable. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results may differ materially from those estimates. Significant estimates reflected in the condensed consolidated financial statements include, but are not limited to revenue recognition, useful life of fixed assets, allowance for credit losses, warranty reserves, amortization of internal-use software, share-based compensation, contingencies and income taxes.

Customer Concentration

For the three months ended September 30, 2024, two customers accounted for 22% and 13% or $357 and $207 of total net revenue, which is recorded under the entity’sone operating segment.

For the nine months ended September 30, 2024, two customers accounted for 27% and 13% or $1,615 and $799 of total net revenue, which is recorded under the entity’sone operating segment.

Segment

Segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) to allocate resources and assess performance. The CODM reviews financial information presented on a consolidated basis and as such manages our business asone operating segment.

New Accounting Pronouncements

Recently Issued Accounting Standards Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard may have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard may have on our financial statement disclosures.

Note 3 — Revenue

The following tables summarize the Company’s revenue, net disaggregated by type of product and service:

Consideration promised in the Company’s contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. The Company estimates the most likely amount it will be entitled to receive and records an anticipated reduction against revenue, with an offsetting increase to accrued expenses at the time revenues are recognized. The Company recorded a sales return of $2,880 in the first quarter of 2024, which was a reduction against revenue. There have been no other returns accepted in any periods presented. There isno sales return reserve as of September 30, 2024 and December 31, 2023.

The following table summarizes revenue based upon the customers country of origin:

Contract Liabilities

Contract liabilities consist of sales of software subscriptions and related services, as well as repair and service agreements, where in most cases, the Company receives up-front payment and recognizes revenue over the term of 12-60 months. The Company classifies these contract liabilities as either current or non-current liabilities based on the expected timing of recognition of related revenue. Contract liabilities were $788 and $2,065 and non-current contract liabilities were $95 and $121 as of September 30, 2024 and December 31, 2023, respectively. The change in contract liabilities is primarily related to additional subscription sales, offset by revenue recognition over the subscription term.

Note 4— Property, Plant and Equipment

The following table summarizes our property, plant and equipment, net:

Depreciation expense was $307 and $223 for the three months ended September 30, 2024, and 2023, respectively.

Depreciation expense was $878 and $624 for the nine months ended September 30, 2024, and 2023, respectively.

During the three months ended September 30, 2024, the Company disposed of certain aged or inoperable assets, primarily in the Machinery and equipment category, resulting in a loss on disposal of $342. The related loss is recorded under Loss (gain) on asset disposal within the Condensed Consolidated Statements of Operations.

Note 5 — Inventories

The following table summarizes inventories:

The Company recorded an inventory impairment of $2,038 and $0 for the three months ended September 30, 2024 and 2023, respectively and an inventory impairment of $2,272 and $1,386 for the nine months ended September 30, 2024 and 2023, respectively. The impairment recorded during the three months ended September 30, 2024 was primarily related to thermal cameras specifically designed for medical applications that have been unable to be converted to alternative applications for which there is customer demand. The impairment recorded during the nine months ended September 30, 2023 was related to temperature reference products that were not expected to be sold based on customer demand and market conditions.

Note 6 — Other Current Assets

The following table summarizes other current assets:

During the three months ended September 30, 2024, the Company recorded a write-down of a deposit of $930 with a vendor. We determined during the three months ended September 30, 2024 specific events, including the reorganization of the vendor, which has indicated that the carrying amount of the deposit might not be recoverable or provide future economic benefit to the Company. The related loss is recorded under Other loss within the Condensed Consolidated Statements of Operations.

Note 7 — Accrued Expense

The following table summarizes accrued expenses:

Note 8 — Debt

Line of Credit

On January 22, 2023, the Company entered into an asset-based revolving credit agreement with B1 Bank (the “Line of Credit”). The Line of Credit provided an aggregate revolving credit commitment of $3,000, subject to a borrowing base consisting of eligible accounts receivable and inventory. The Line of Credit included borrowing capacity available for letters of credit and revolving loans available for working capital and other general corporate purposes. The maturity date was January 22, 2024. During the period ended September 30, 2023, the Company borrowed $900, which was repaid in December 2023.

The Line of Credit agreement has since lapsed and has not been renewed. There wasno outstanding debt balance as of both September 30, 2024, and December 31, 2023.

Shareholder Promissory Note

On July 14, 2020, the Company issued a promissory note to its majority shareholder in an amount of $29,718 (the “Shareholder Promissory Note”). The Shareholder Promissory Note bore interest at the rate of 0.45% per annum, with all principal and accrued interest due and payable in full on July 14, 2025. On May 31, 2023, the Company completed the conversion of the outstanding principal and accrued and unpaid interest of the Shareholder Promissory Note into shares of Class A Common Stock.

There wasno outstanding debt balance as of both September 30, 2024, and December 31, 2023.

First Insurance Funding line of credit

In December 2023, the Company entered into a line of credit agreement with First Insurance Funding for $647.

There was an outstanding balance of $622 as of December 31, 2023. During the nine-month period ended September 30, 2024, the company fully paid off the line of credit.

Related Party Promissory Notes

In June 2023, the Company borrowed $375 under an unsecured promissory note with a related party to fund short-term working capital needs. The notes bore an interest rate of 12%, which incurred $59 in interest during the nine-month period ended September 30, 2024. There was an outstanding balance of $375, as of December 31, 2023, which was fully paid off during the three-month period ended September 30, 2024, leavingno balance outstanding as of September 30, 2024.

In December 2023, the Company borrowed $200 under an unsecured non-interest-bearing promissory note with a related party to fund short-term working capital needs. There was an outstanding balance of $200, as of December 31, 2023. The promissory note was fully paid off during the three-month period ended March 31, 2024, leavingno balance outstanding as of September 30, 2024.

Legacy SMAP Related Party Promissory Notes

In April, May and November 2023, Legacy SMAP secured operational working capital of $1,524. The promissory notes were not interest bearing and were not convertible into any securities of the company. The promissory notes were to be payable upon consummation of an initial business combination; provided that the Company has the right to extend the repayment date for up to 12 months thereafter in the event that the minimum cash transaction is not met or would not be met but for such extension. The minimum cash transaction proceeds were not met at the closing of the Business Combination, and as such, the Company elected to extend repayment of the promissory notes beyond the Closing. The principal balance may be prepaid at any time.

On December 19, 2023, in connection with the Business Combination, $1,324 of the promissory notes was exchanged for an equal amount of Financing Notes which resulted in an outstanding balance of $200 as of December 31, 2023. The $200 promissory note was converted into shares of Common Stock at a price of $3.33 per share. This resulted in loss of $136 recorded under Loss on Financing Transaction within the Consolidated Statements of Operations as the Company agreed to issue 60,060 shares of Common Stock for each share of Common Stock to the converted principal balance.

There was an outstanding balance of $200 as of December 31, 2023. During the three-month period ended March 31, 2024, the Company converted the notes to equity, leaving no outstanding balance as of September 30, 2024.

Convertible Notes

In January 2023, the Company issued unsecured Convertible Notes with several accredited private investors in an aggregate principal amount of $150. The Convertible Notes were converted to Equity on December 19, 2023, as part of the Business Combination.

Financing Notes

On December 19, 2023, in connection with the Business Combination, the Company issued the Financing Notes to several accredited private investors in an aggregate principal amount of $6,805, including $2,324 of which were issued in exchange for other debt instruments as described above.

There was outstanding balance of $5,695 as of December 31, 2023. During the nine months ending September 30, 2024, $6,170 of the Financing Notes were converted into shares of Common Stock at a price of $5 per share for 848,677 shares of Common Stock. This resulted in a loss of $1,245 recorded under Loss on Financing Transaction within the Consolidated Statements of Operations as the Company agreed to issue additional 492,500 shares of Common Stock to the converted principal balance of the Financing Notes.

Note 9 — Stockholders’ Equity

Total authorized capital stock of the Company as of September 30, 2024, is 300,000,000 shares of common stock. As of September 30, 2024, and December 31, 2023, there were 30,441,203 and 11,956,823 shares of common stock issued andoutstanding andno shares of preferred stock issued or outstanding, respectively.

On April 16, 2024, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”), pursuant to which, upon the terms and subject to the satisfaction of the conditions contained in the Purchase Agreement, we have the right, in our sole discretion, to sell to B. Riley up to $25,000 of shares of the Common Stock (subject to certain limitations contained in the Purchase Agreement), from time to time during the term of the Purchase Agreement through a Market Open Purchase or an Intraday Purchase on any Purchase Date (each term as defined in the Purchase Agreement). Sales of Common Stock pursuant to the Purchase Agreement, and the timing of any sales, are solely at our option, and we are under no obligation to sell any securities to B. Riley under the Purchase Agreement (such transaction, the “B. Riley Transaction”). The Company evaluated this common stock purchase agreement to determine whether they should be accounted for considering the guidance in ASC 815-40, “Derivatives and Hedging - Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting as a derivative. The Company has analyzed the terms of the freestanding purchased put right and has concluded that it had insignificant value as of September 30, 2024.

Pursuant to the terms of the Purchase Agreement, at the time the Purchase Agreement and the Registration Rights Agreement, as defined below, were signed, the Company issued 171,821 shares of common stock, to B.Riley as consideration for its commitment to purchase shares of the Company’s common stock under the Purchase Agreement. The cost of this on the effective date of the equity line of credit (“ELOC”) was $500 and component of Other (Income) Expenses, Net in the accompanying Condensed Consolidated Statements of Operations. Under the terms of the Common Stock Purchase Agreement, if the aggregate proceeds received by B. Riley from its resale of the Commitment Shares is less than $500 then, upon notice by B. Riley, the Company must pay the difference between $500, and the aggregate proceeds received by B. Riley from its resale of the Commitment Shares. On September 30, 2024, the fair market value of the Commitment Shares was $371. Therefore, the Company’s make-whole obligation was $129, and this amount was recorded in Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheets. The change in the fair value of the make-whole obligation is recorded as a component of Other (Income) Expenses, Net in the accompanying Condensed Consolidated Statements of Operations. Through September 30, 2024, the Company utilized the B. Riley Committed Equity Facility to sell 23,999 shares of Common Stock for cash proceeds totaling $58. Offering costs associated with these transactions were recorded as Other (Income) Expenses, Net in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2024 and in operating activities in the Condensed Consolidated Statements of Cash Flow.

Public Equity Offering

On July 1, 2024, the Company consummated a public offering (the “Public Offering”) of 6,250,000 shares of common stock, par value $0.0001 per share. The common stock was sold at a public offering price of $1.60 per share less the underwriting discount, In connection with the Public Offering, the underwriters were granted a 45-day option from the date of the prospectus to purchase up to 937,500 additional shares of Common Stock at the public offering price, less the underwriting discount. On June 28, 2024, the underwriters fully exercised the over-allotment option. Gross proceeds from the Public Offering were $11,500 before deducting underwriting discounts, commissions and offering expenses of $1,853.

Private Placement Equity Offering

On June 27, 2024, the Company entered into a placement agency agreement for the private placement (the “2024 Private Placement”) of (i)2,772,561 shares of common stock (the “Placement Shares”); and (ii) pre-funded warrants to purchase up to 6,602,439 shares of common stock (the “Pre-Funded Warrants”). The purchase price of the Placement Shares was $1.60 per share and the purchase price of each Pre-Funded Warrant was $1.5999. The exercise price for each share of Common Stock issuable upon exercise of the Pre-Funded Warrants is $0.0001 per share. The closing of the 2024 Private Placement occurred simultaneously with the closing of the Public Offering on July 1, 2024.

Upon the closing of the 2024 Private Placement, the Company entered into a voting agreement, dated as of July 1, 2024, with certain stockholders of the Company representing greater than 50% of the issued and outstanding Common Stock of the Company (prior to the Public Offering and 2024 Private Placement) to support an authorization by the Company’s stockholders for the Company to issue the share of Common Stock underlying the Pre-Funded Warrants in accordance with applicable Nasdaq rules. On August 23, 2024, the proposal was voted upon and approved by our stockholders, and on September 24, 2024, the holders of the pre-funded warrants exercised their warrants in exchange for common stock. Gross proceeds from the 2024 Private Placement were $15,000 before deducting underwriting discounts, commissions and offering expenses of $2,418.

Note 10 — Earnings per Share

The following table summarizes the computation of basic and diluted earnings per share:

The table above does not include (i) up to 8,625,000 shares of new Common Stock that will be issuable upon exercise of the Company’s outstanding public warrants at an exercise price of $11.50 per share for cash, (ii) up to 506,250 shares of new Common Stock that will be issuable upon exercise of the Company’s outstanding private warrants at an exercise price of $11.50 per share, (iii) up to 340,250 shares of Common Stock that will be issuable upon exercise of the Financing Warrants at an exercise price of $11.50 per share for cash, (iv) shares of Common Stock that will be issuable upon the exercise of Company’s Options, (v)1,886,166 shares of Common Stock underlying the Company’s RSU Awards that were vested at January 1, 2024 but not issued as of September 30, 2024, (vi)1,382,909 shares of Common Stock underlying the Company’s RSU Awards that were vested at April 1, 2024 but not issued as of September 30, 2024 or (vii)150,000 RSU awards issued under the 2023 Incentive Award Plan as of September 30, 2024.

The Company’s vested RSU Awards above will be settled in shares of Common Stock in 12 equal monthly installments, with the first installment on December 20, 2024.

Note 11 — Share-Based Compensation

Stock Options

On October 9, 2020, the Company implemented the 2020 Equity Incentive Plan, (the “Plan”) pursuant to which the Company’s Board of Directors may grant stock options to employees and non-employees.

In December 2020, May 2021 and December 2021, the Plan was amended to increase the number of stock options granted for issuance under the Plan by an additional 43,257,40,000 and 40,000 shares, respectively.

Stock options could be granted under the Plan with an exercise price equal to the share’s fair value at the grant date. The options vest and become fully exercisable over service periods ranging fromtwo tofour years from the date of grant. The options expireten years after issuance. The recognized total share -based compensation expense related to stock options for the three and nine months ended September 30, 2023, was $89 and $262, respectively, under share-based compensation expense on the Condensed Consolidated Statements of Operations. The total unrecognized compensation costs were recognized upon vesting as part of the Business Combination on December 19, 2023, leaving no unvested stock options outstanding as of December 31, 2023.

Restricted Stock Units

Prior to the effective time of the Business Combination, the Company granted 1,886,166 Transaction RSU Awards to certain employees. Each Transaction RSU Award vested on January 1, 2024. In addition, each Transaction RSU Award is expected to be settled in twelve substantially equal monthly installments starting on the date following the first anniversary of the closing of the Business Combination. These RSUs were assigned a fair value of $6.82, which is based on the fair value of the Company’s common stock on the date of the grant. The Company recognized a total share-based compensation expense related to RSUs of $12,864 during the year ended December 31, 2023, under Share-based compensation expense on the Condensed Consolidated Statements of Operations.

On December 21, 2023, the Company implemented the 2023 Equity Incentive Plan pursuant to which the Company’s Board of Directors may grant restricted stock units to employees and non-employees.

The Company granted an additional 1,382,909 restricted stock units to certain employees upon the effectiveness of the Form S-8 on April 1, 2024. These RSUs were assigned a fair value of $2.26, which is based on the fair value of the Company’s common stock on the date of the grant. The Company recognized a total share-based compensation expense related to RSUs from these grants of $3,125 for the nine-month period ended September 30, 2024, under Share-based compensation expense on the Condensed Consolidated Statements of Operations.

During the three months ended September 30, 2024, the Company granted 150,000 restricted stock units at a weighted average price of $2.17, which was based on the fair value of the Company’s common stock on the date of the grant. The Company recognized share-based compensation expense related to RSUs of $9 for the three and nine-month period ended September 30, 2024, under Share-based compensation expense on the Condensed Consolidated Statements of Operations.

Equity Grants

During the three-month period ended September 30, 2024, the Company granted to non-employee directors on its board of directors 8,969 shares at a weighted average price of $2.23. During the nine-month period ended September 30, 2024, the Company granted to the non-employee directors on its board of directors a total of 101,559 shares at a weighted average price of $2.18. The fair value was based on the Company’s common stock on the date of the grants. The Company recognized a total share-based compensation expense related to board of directors equity grants of $20 and $221 for the three- and nine-month period ended September 30, 2024, respectively, under Share-based compensation expense on the Condensed Consolidated Statements of Operations.

Note 12— Related Party Transactions

Shareholder Promissory Note and Related Party Promissory Note

See Note 8.

Leases

The Company leases its corporate office and production facility from a related party. During the three-month period ended September 30, 2024, the Company renewed its leases with the related party for thetwo locations for periods of 12 months, which resulted in the Company recording $105 to right-of-use assets and right-of useliabilities as a result of the renewals. Total cash payments to the related party for the leases were $26 and $79 for the three- and nine-month periods ended September 30, 2024, respectively.

Note 13 — Commitment and Contingency

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

In the ordinary course of the business, the Company is subject to periodic legal or administrative proceedings. As of September 30, 2024, the Company is not involved in any material claims or legal actions which, in the opinion of management, the ultimate disposition would have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or liquidity.

Note 14 — Income Taxes

The Company has determined that a discrete year-to-date method of reporting would provide more reliable results for the three and nine months ended September 30, 2024, and September 30, 2023, due to the difficulty in projecting future results.

The Company recorded income tax benefit of $395 for the three months ended September 30, 2024 and an income tax benefit of $8 September 30, 2023. The Company recorded income tax benefit of $351 for the nine months ended September 30, 2024, and $11 tax benefit for the nine-months ended September 30, 2023.

The increased tax benefit when compared to the prior year three- and nine-month period is primarily the result of a $354 tax benefit driven by a tax refund due to the Company from the filing of the Legacy SMAP short period 2023 federal income tax offset by changes in our valuation allowance, state current tax expense, and accrued interest and penalties on the federal and state income tax liabilities. The Company maintains a valuation allowance on its deferred tax assets and intends to do so until there is sufficient evidence to support the reversal of all or some portion of this allowance.

For the three- and nine-months ended September 30, 2024, and 2023, the Company’s effective income tax rates were as follows:

The effective tax rates for the three and nine-month periods ended September 30, 2024 and 2023 are below the U.S. statutory tax rate of 21% primarily due to losses generated by the Company and the Company’s valuation allowance.

On July 1, 2024, the Company experienced an ownership change as defined under Internal Revenue Code Section 382. The result of the ownership change is subjecting tax attributes to an annual limitation which includes the utilization of the Company’s net operating losses. Additionally, as a result of the Merger, the Company absorbed pre-merger tax attribute net operating losses. These net operating losses are fully limited under section 382. The Company will continue to monitor ownership changes throughout future periods.

Note 15 — Fair value measurements

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, and accounts payable where the carrying value approximates fair value due to the short - term nature of each instrument.

The Company uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. A three-tiered hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value. This hierarchy requires that the Company use observable market data, when available, and minimize the use of unobservable inputs when determining fair value:

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payables, where the carrying amount approximates fair value due to the short-term nature of each instrument.

The fair value of the Company’s outstanding warrants as of September 30, 2024, and December 31, 2023, was $10 and $49, respectively, and was classified as Level 3 within the fair value hierarchy.

The make-whole obligation liability related to the ELOC is measured at fair value categorized within Level 1 of the fair value hierarchy. See Note 9.