CLOUDASTRUCTURE, INC.

Cloudastructure, Inc.

Notes to the Financial Statements

Note 1 -Nature of Operations

Cloudastructure, Inc. (“Cloudastructure,” “we,” “us,” “our” or the “Company”) was formed on March 28, 2003, as a corporation organized under the laws of the State of Delaware and is headquartered in Palo Alto California. We are a technology service provider that that focuses on intelligent devices and software for physical security applications. Since inception, we have relied primarily on financing activities, including an offering under Regulation A of the Securities Act of 1933, as amended (the “Securities Act”), and the sale of preferred stock, to fund our operations.

Note 2 –Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America (“U.S. GAAP”). In the opinion of management, all adjustments considered necessary for the fair presentation of the financial statements for the years presented have been included and are of a normal and recurring nature.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the footnotes thereto. Actual results could differ from those estimates.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). Under Section 107 of the JOBS Act, emerging growth companies are permitted to use an extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards that have different effective dates for public and private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.

Risks and Uncertainties

We have a limited operating history. Our business and operations are sensitive to general business and economic conditions in the United States. A host of factors beyond our control could cause fluctuations in these conditions. Adverse conditions may include recession, downturn or otherwise, inflation, changes in regulations or restrictions on imports, tariffs, competition or changes in consumer taste. These adverse conditions could affect our financial condition and our results of operations.

Cash and Cash Equivalents

We consider short-term, highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash consists of funds held in our checking account. We maintain our cash with a major financial institution located in the United States, which we believe to be creditworthy. The Federal Deposit Insurance Corporation insures balances up to $250,000, but at times we may maintain balances in excess of the federally insured limits.

Receivables and Credit Policy

Trade receivables from customers are uncollateralized customer obligations due under normal trade terms, Trade receivables are stated at the amount billed to the customer. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoice. We routinely assess our outstanding accounts receivable and recorded a reserve for estimated uncollectible accounts of $17,204 and $5,816 at December 31, 2025, and 2024, respectively.

Inventory

Inventories are stated at the lower of weighted-average cost or net realizable value. Cost includes all expenditures incurred in bringing each product to its present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

The Company maintains a reserve for obsolescence for estimated excess, slow-moving, or unmarketable inventory based on periodic reviews of inventory levels, historical usage, and future sales forecasts. When the carrying value exceeds net realizable value, a write-down is recorded as a charge to cost of sales, establishing a new, lower cost basis that is not subsequently increased for future recoveries in value.

Property and Equipment

Property and equipment are recorded at cost if the expenditure exceeds $2,500. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the balance sheet accounts and the resultant gain or loss is reflected in income.

Depreciation is provided using the straight-line method, based on useful lives of the assets which range from two to five years depending on the asset type.

We review the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.

Sales Taxes

Various states impose a sales tax on our sales to non-exempt customers. We collect the sales tax from customers and remit the entire amount to each respective state. Our accounting policy is to exclude the tax collected and remitted to the states from revenue and cost of sales.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker (the “CODM”) in deciding how to allocate resources and assess performance. We haveone reportable segment focused on cloud-based AI video surveillance and remote guarding security services. Our CODM, who is our Chief Executive Officer, manages operations on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. For additional information on our segment reporting, seeNote 8, Segment Reporting.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When fair value measurements are used, valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.

U.S. GAAP has established a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability.

Income Taxes

We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

We have incurred taxable losses since inception but are current in our tax filing obligations. We are not presently subject to any income tax audit in any taxing jurisdiction.

Reverse Stock Split

On October 24, 2024, we effected a 1-for-6 reverse stock split of all classes of our issued and outstanding capital stock (the “Reverse Stock Split”). All share and per share information is presented after giving effect to the Reverse Stock Split retrospectively for all periods presented. For additional information about the Reverse Stock Split, seeNote 7, Reverse Stock Split.

Revenue Recognition

We recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services, net of estimated sales volatility, such as returns or discounts.

To determine revenue recognition for arrangements that an entity determines are within the scope of Financial Accounting Standards Board (“Financial Accounting Standards Board” or “FASB”) Accounting Standards Codification (“ASC”) Topic 606,Revenue from Contracts with Customers (“ASC 606”), we perform the following steps:

(i) identify the contract(s) with a customer,

(ii) identify the performance obligations in the contract,

(iii) determine the transaction price,

(iv) allocate the transaction price to the performance obligations in the contract, and

(v) recognize revenue when (or as) the entity satisfies a performance obligation.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company generally acts as the principal in its arrangements and records revenue on a gross basis. Our contracts typically do not contain a significant financing component.

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of revenue recognition from the Company's contracts with customers. The Company primarily generates deferred revenue from annual service subscriptions.

These advance payments are recognized as revenue when control of the promised goods or services is transferred to the customer. Deferred revenue that is expected to be recognized as revenue within the next twelve months is classified as a current liability, while the remaining portion is classified as non-current.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718,Compensation — Stock Compensation (“ASC 718”). Under ASC 718, the Company measures and recognizes compensation expense for all stock-based awards granted to employees and non-employee directors based on the estimated grant date fair value of those awards. The fair value of stock option awards is estimated on the date of grant using the Black-Scholes option pricing model. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of each award, which is generally the vesting period. Forfeitures are recognized as they occur in accordance with ASU 2016-09. Stock-based compensation expense is included in non-cash operating expenses on the consolidated statements of operations. For additional information regarding the Company's equity incentive plan, stock option activity, and related assumptions, see Note 5 — Share Capital.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of identifiable net assets of businesses acquired. Our indefinite-lived intangible asset consists of assets acquired from Visionful Holding Inc. (“Visionful”) and in connection with our acquisition of Infrastructure Proving Grounds (“IPG”). We assess goodwill for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate a potential impairment.

During the fourth quarter of 2023, following a thorough assessment of goodwill for impairment, management determined that goodwill attributed to Visionful and IPG had become impaired due to underutilization of the acquired assets in revenue generation and on December 31, 2023, a non-cash loss on impairment was recorded reflecting goodwill impairment charges totaling $1.67 million. Despite this impairment, the technology acquired remains the property of Cloudastructure and retains potential for future utilization.

Net Loss per Share

Net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and restricted stock units outstanding.

During the years ended December 31, 2025, and 2024, the calculation of the effect of dilutive stock options, warrants, conversion of preferred stock, and restricted stock units excluded all stock options, warrants, conversion of preferred stock, and restricted stock units outstanding during the period due to their anti-dilutive effect.

Foreign Currency Translation Adjustments

The Company’s wholly-owned subsidiary’s functional currency is not the United States dollar, which is the Company’s reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included in the accumulated other comprehensive income (loss).

Liquidity

Our future needs for liquidity will depend on a variety of factors, including, without limitation, our ability to generate cash flows from operations and the timing and availability of net proceeds from any future financing activities that we may conduct. Economic uncertainty, fluctuating interest rates, market volatility, slowdowns in transaction volume, delays in financing from banks and other lenders and other negative trends may, in the future, adversely impact our ability to timely access potential sources of liquidity. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected.

Between November 2024 and December 2025, the Company completed multiple equity financing transactions designed to strengthen liquidity and support ongoing operations. Please seeNote 5, Share Capital below for more information. We believe the Series 2 Equity Financing, the Equity Line, and the ATM Facility described inNote 5, Share Capital, together with our cash on hand and anticipated cash flows from operations, will be sufficient to address any going concern uncertainties and will be sufficient to meet our liquidity and capital resource requirements to ensure that we are able to meet our obligations and continue operations for at least one year from the issuance date of these financial statements.

Our ability to continue as a going concern is dependent on our ability to further implement our business plan. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The 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 the uncertainties described above.

Consolidation and Foreign Currency Policies

The financial statements of the Company’s foreign subsidiary are translated into U.S. dollars for consolidation purposes. Assets and liabilities are translated using exchange rates in effect at the balance sheet date. Equity accounts are translated using historical exchange rates in effect at the dates of the related transactions. Income and expense accounts are translated using average exchange rates for the period, unless transaction-specific rates are more appropriate*.*

Translation adjustments resulting from the application of different exchange rates to assets and liabilities as compared to equity accounts are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. These translation adjustments are referred to as cumulative translation adjustment (“CTA”). CTA does not affect net income and will remain in accumulated other comprehensive income unless and until the Company substantially liquidates or disposes of its foreign subsidiary, at which time the related CTA balance would be reclassified into earnings in accordance with ASC 830.

Intercompany balances and transactions between the Company and its foreign subsidiary have been eliminated in consolidation. Foreign currency transaction gains and losses related to intercompany balances that are not of a long-term investment nature are recognized in earnings; however, no material such gains or losses were recognized for the year ended December 31, 2025.

The Company is exposed to foreign currency exchange rate risk primarily related to its operations in India. The Company does not currently use derivative instruments to hedge foreign currency exposure. Fluctuations in exchange rates may affect the Company’s consolidated financial position, results of operations, and accumulated other comprehensive income.

Recent Accounting Pronouncements

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 (“ASU 2023-07”). ASU 2023-07 is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, and requires single reporting entities to comply with the expanded reportable segment disclosures outlined in the ASU. The expanded reportable segment disclosures are intended to enhance certain disclosures surrounding significant segment expenses.

This standard became effective for the Company for the annual reporting period ended December 31, 2024, using the retrospective method. The adoption of this standard resulted in additional disclosure but did not have a material impact on our financial position or results of operations. SeeNote 8, Segment Reporting, for our updated segment presentation.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosure” (“ASU 2023-09”). ASU 2023-09 is effective for public entities for fiscal years beginning after December 15, 2024, and interim periods in fiscal years beginning after December 15, 2025, and establishes new income tax requirements in addition to modifying and eliminating certain existing requirements. Under ASU 2023-09, entities must consistently categorize and provide greater disaggregation of information in the rate reconciliation and further disaggregate income taxes paid. The Company is currently evaluating the impact of the new standard on our financial statements.

In March 2024, the Securities and Exchange Commission (the “SEC”) adopted final rules under Release No. 33-11275,The Enhancement and Standardization of Climate-Related Disclosures for Investors(the “Climate Rules”). The Climate Rules require quantitative and qualitative disclosure of certain climate-related information in registration statements and annual reports filed. These disclosures include financial statement footnote disclosure related to the effects of certain severe weather events and other natural conditions. In April 2024, the SEC issued an order staying the Climate Rules pending completion of a judicial review of certain petitions challenging their validity. If the stay is lifted, the effective dates remain unchanged and we remain a smaller reporting company, emerging growth company or non-accelerated filer, the Climate Rules will be effective for our fiscal year ending December 31, 2027. The Company is currently evaluating the impact of the Climate Rules on our financial statements.

Note 3 –Revenue from Contracts with Customers

The following table presents the Company’s revenue disaggregated by the nature of the goods or services and the timing of revenue recognition for the years ended December 31, 2025, and December 31, 2024, respectively:

Note 4 –Basic and Diluted Loss Per Share

Preferred Dividends and Deemed Distributions

The Company calculates earnings per share (“EPS”) by adjusting the net loss for the impact of preferred dividends and deemed distributions. During the year ended December 31, 2025, the Company recognized a non-cash deemed dividend of $1,963,146, representing the beneficial conversion feature of the Preferred Stock at issuance and upon subsequent trigger events. Additionally, the Company recorded $513,276 in preferred dividends associated with the issuance of preferred shares in lieu of cash returns. These amounts are subtracted from the net loss to arrive at the Net Loss Attributable to Common Stockholders.

Two-Class Method

The Series 1 and Series 2 Preferred Stock are non-participating securities as they do not possess the right to participate in dividends or other distributions with the Common Stock. Accordingly, the Company does not apply the two-class method, and all losses are allocated to common stockholders.

Weighted-Average Common Shares Tie-Out

The following table reconciles the Common Stock activity to the weighted-average shares used in the basic and diluted EPS calculations for the years ended December 31, 2025, and 2024:

The number of shares used to calculate basic and diluted loss per share for the year ended December 31, 2025, and 2024 were as follows:

For the year ended December 31, 2025 and 2024, approximately 16.2 million and 17.9 million shares, respectively, issuable upon the exercise or conversion of stock options, convertible notes, and warrants outstanding were excluded from the calculation of diluted loss per share because such amounts were antidilutive.

Note 5 –Share Capital

Regulation A Equity Financings

Beginning in 2020, the Company commenced a public offering of units pursuant to the exemption from registration provided by Tier 2 of Regulation A. Each unit consisted of two shares of the Company’s Class A common stock and one warrant to purchase shares of Class A common stock.

Through August 24, 2021, units were offered at a purchase price of $6.00 per unit, with each warrant exercisable at $4.50 per share. Effective August 25, 2021, the Company amended the terms of the Regulation A offering to increase the unit purchase price to $7.20 and the warrant exercise price to $5.40 per share. Issued warrants were immediately exercisable and had an 18-month term from the date of issuance.

On May 19, 2022, the Company further amended the offering terms, increasing the unit purchase price to $12.00 per unit and the warrant exercise price to $9.00 per share.

As of December 31, 2024, an aggregate of 1,457,465 warrants had been exercised,3,853,146 warrants had expired, and 4,317 warrants remained outstanding. As of December 31, 2025, there wereno warrants outstanding related to the Regulation A offering.

Through December 31, 2025, the Company issued an aggregate of approximately 12.1 million shares of Class A common stock and 5.3 million warrants pursuant to the Regulation A offering and received cumulative net proceeds of approximately $33.1 million, after deducting issuance costs.

The following table is a summary of the outstanding Class A common stock warrants at December 31, 2024 and 2025:

Preferred Stock Financings

The Company is authorized to issue 150,000,000 shares of preferred stock, par value $0.0001 per share. As of December 31, 2025, the Board of Directors has designated 30,000 shares as Series 1 Convertible Preferred Stock (the “Series 1 Preferred”) and 40,000 shares as Series 2 Convertible Preferred Stock (the “Series 2 Preferred”).

Series 1 Convertible Preferred Stock

On November 25, 2024, the Company entered into a Securities Purchase Agreement, as subsequently amended, with Streeterville Capital, LLC, a Utah limited liability company (“Streeterville”), for the issuance and sale of $6.3 million of shares of Series 1 Preferred, together with 720,000 shares of Class A common stock as pre-delivery shares (the “Series 1 Equity Financing”). This Series 1 Equity Financing closed on January 29, 2025. All of these shares of Series 1 Preferred were subsequently converted into shares of the Company’s Class A common stock. As of December 31, 2025, no shares of Series 1 Preferred were issued or outstanding.

Each share of Series 1 Preferred has a stated value of $1,111, subject to an automatic 10% increase upon the occurrence of (i) a Series 1 Trigger Event (defined below), (ii) if the Company fails to fully comply with any covenant, obligation, or agreement or fail to pay any amount when due and payable, and such failure is not cured within the applicable cure period, or (iii) upon the occurrence of any bankruptcy, insolvency, or similar event (each of (ii) and (iii) an “Event of Default”) (the “Series 1 Stated Value”).

Except as otherwise set forth in the Series 2 Certificate of Designations (defined below) or as required by applicable law, the Series 1 Preferred and the Series 2 Preferred rank equally (including with respect to dividends and distributions and upon any voluntary or involuntary liquidation, dissolution, or winding up of the Company (a “Liquidation Event”)) and are identical in all respects. Except to the extent that the holders of at least a majority of the outstanding Series 1 Preferred shares and the Series 2 Preferred shares, voting together as a single class, expressly consent to the creation of capital stock that is either senior orpari passu in rank with the Series 1 Preferred and the Series 2 Preferred, all other shares of capital stock of the Company will be junior in rank.

The Series 1 Preferred accrues a 10% per annum rate of return on the Series 1 Stated Value (the “Series 1 Preferred Return”) from the date of issuance. The Series 1 Preferred Return is payable on a quarterly basis, and is subject to quarterly compounding, either in cash or via the issuance of additional shares of Series 1 Preferred, at the Company’s discretion. Following the occurrence of an Event of Default, the preferred return will increase to 15% per annum until such Event of Default has been cured.

In the event of a Liquidation Event or Deemed Liquidation Event (defined below), the Series 1 Preferred will be paid an amount equal to (i) the Series 1 Stated Value at such time, plus (ii) any accrued and unpaid Series 1 Preferred Return (the “Series 1 Preferred Liquidation Amount”), prior to any payments being made to the holders of the Company’s common stock. Following payment of the Series 1 Preferred Liquidation Amount, the Series 1 Preferred will not participate in the distribution of any remaining assets of the Company.

A “Deemed Liquidation Event” will occur (i) if the Company merges or consolidates with another entity and its stockholders immediately prior to such transaction do not continue to hold a majority of the voting power immediately after such transaction, or (ii) if the Company sells, leases, transfers, exclusively licenses, or otherwise disposes of all or substantially all of its assets.

The Series 1 Preferred is convertible at any time into (i) the number of shares of Series 1 Preferred being converted multiplied by their then Series 1 Stated Value (the “Series 1 Conversion Amount”), divided by (ii) the Series 1 Conversion Price (defined below).

Prior to a Series 1 Trigger Event (defined below) or an Event of Default, the conversion price (“Series 1 Conversion Price”) is $9.00 per share of Class A common stock or, if lower, the price at which the Company issues Class A common stock or rights to receive Class A common stock (the “Series 1 Fixed Conversion Price”). Following a Series 1 Trigger Event or Event of Default, the Series 1 Conversion Price is the lesser of the (i) Series 1 Fixed Conversion Price, and (ii) greater of (x) 85% multiplied by the lowest daily volume weighted average price (VWAP) of the Class A common stock during the ten business day period prior to the measurement date, and (y) $1.00.

A “Series 1 Trigger Event” will occur (i) upon the Company’s receipt of a letter of noncompliance from Nasdaq, (ii) upon the Company’s average market capitalization during any 10 business day period falling below $75,000,000, and (iii) in any quarter beginning with the first calendar quarter of 2025 where (x) the Company’s stockholder equity is less than $2,500,000, (y) the Company incurs a net loss greater than $1,000,000, or (z) the Company’s net sales are less than $500,000.

Notwithstanding the foregoing, the Company will not give effect to any conversion of Series 1 Preferred to the extent that, following such conversion, the holder individually (without aggregating with its affiliates) would beneficially own in excess of 4.99% of the outstanding Class A common stock (the “Maximum Percentage”); provided, that the Maximum Percentage for a holder of Series 1 Preferred together with such holder’s affiliates will be 9.99%. The Maximum Percentage is enforceable, unconditional, and non-waivable and shall apply to all affiliates and assigns of each holder of the Series 1 Preferred.

The Company has the right at any time after the date that is six months from the earlier of (i) the effective date of the registration statement registering the shares of Class A common stock into which the Series 1 Preferred shares are convertible, and (ii) the date that such shares of Class A common stock are eligible for resale pursuant to Rule 144 under the Securities Act, to elect, in the Company’s sole discretion, to redeem all or any portion of the Series 1 Preferred then outstanding by paying an amount in cash equal to the Series 1 Preferred Liquidation Amount multiplied by 115%. In addition, the Company may, at its election, use at least 25% of any funds that the Company raises through an equity financing to redeem outstanding shares of Series 1 Preferred.

The Series 1 Preferred are not entitled to participate in any dividends, distributions, or payments to the holders of the Company’s common stock. However, the Series 1 Preferred shares are entitled to the Series 1 Preferred Return described above.

The Series 1 Preferred shall vote together with holders of the Class A common stock and Class B common stock on an as-converted basis, and not as a separate class, at any annual or special meeting of stockholders, and may act by written consent in the same manner as holders of the Class A common stock and Class B common stock. In addition, for so long as any shares of Series 1 Preferred are outstanding, the affirmative vote of a majority of the Series 1 Preferred then outstanding shall be required to (i) alter or change adversely the powers, preferences or rights given to the Series 1 Preferred or alter or amend the Series 1 Certificate of Designations, or (ii) enter into any agreement with respect to any of the foregoing.

Notwithstanding the foregoing, in no event shall a holder of Series 1 Preferred (together with such holder’s affiliates, and any “persons” acting as a “group” (as such terms are defined under Sections 13(d) and 14(d) of the Exchange Act and the rules and regulations promulgated thereunder) together with such holder or such holder’s affiliates (such persons, “Attribution Parties”)) be entitled to vote, on an as-converted basis and in aggregate with respect to any other shares of the Class A common stock, Class B common stock, Series 2 Preferred or other preferred stock beneficially owned by such holder of Series 1 Preferred or any affiliates or Attribution Parties of such holder, more than 4.99% of the Company’s outstanding voting shares as of the applicable record date, as adjusted for any stock splits, reverse stock splits, stock dividends, reclassifications, reorganization, recapitalizations or other similar transaction.

Pursuant to the Series 1 Certificate of Designations, for so long as any shares of Series 1 Preferred remain outstanding, the Company has agreed to comply with a number of covenants restricting its ability to take certain actions or engage in certain activities, which restrictions are typical for protecting holders of preferred shares such as the Series 1 Preferred. In particular, at any time that any shares of Series 1 Preferred are outstanding, the Company will not issue any preferred stock or other securities (except for certain limited issuances), will not enter into certain fundamental transactions (including, without limitation, mergers, business combinations or similar transactions), and will not incur any debt (other than trade payables incurred in the ordinary course of business) without, in each case, the prior written consent of the holders of a majority of the Series 1 Preferred shares then issued and outstanding.

Series 2 Convertible Preferred Stock

On March 21, 2025, the Company entered into a second Securities Purchase Agreement with Streeterville for the issuance and sale of up to $40.0 million of shares of Series 2 Preferred (the “Series 2 Equity Financing”). At the initial closing of the Series 2 Equity Financing on March 25, 2025, the Company sold $4.5 million of shares of Series 2 Preferred. The Company subsequently sold to Streeterville an additional $3.0 million of Series 2 Preferred on April 10, 2025, and an additional $3.5 million of Series 2 Preferred on December 15, 2025. As of December 31, 2025, there were 5,166 shares of Series 2 Preferred issued and outstanding. All other shares of Series 2 Preferred have been converted into shares of the Company’s Class A common stock.

Each share of Series 2 Preferred has a stated value of $1,111, subject to an automatic 10% increase upon the occurrence of an Event of Default (the “Series 2 Stated Value”).

Except as otherwise set forth in the Series 2 Certificate of Designations or as required by applicable law, the Series 1 Preferred and the Series 2 Preferred rank equally (including with respect to dividends and distributions and upon any Liquidation Event) and are identical in all respects. Except to the extent that the holders of at least a majority of the outstanding Series 1 Preferred shares and the Series 2 Preferred shares, voting together as a single class, expressly consent to the creation of capital stock that is either senior orpari passu in rank with the Series 1 Preferred and the Series 2 Preferred, all other shares of capital stock of the Company will be junior in rank.

The Series 2 Preferred accrues a 9.5% per annum rate of return on the Series 2 Stated Value (the “Series 2 Preferred Return”) from the date of issuance. The Series 2 Preferred Return is payable on a quarterly basis, and is subject to quarterly compounding, either in cash or via the issuance of additional shares of Series 2 Preferred, at the Company’s discretion. Following an Event of Default, the Series 2 Preferred Return increases to 15% per annum until such Event of Default has been cured.

In the event of a Liquidation Event or Deemed Liquidation Event, the Series 2 Preferred will be paid an amount equal to (i) the Series 2 Stated Value at such time, plus (ii) any accrued and unpaid Series 2 Preferred Return (the “Series 2 Preferred Liquidation Amount”), prior to any payments being made to the holders of the Company’s common stock. Following payment of the Series 2 Preferred Liquidation Amount, the Series 2 Preferred will not participate in the distribution of any remaining assets of the Company.

The Series 2 Preferred is convertible at any time into (i) the number of shares of Series 2 Preferred being converted multiplied by their then Series 2 Stated Value (the “Series 2 Conversion Amount”), divided by (ii) the Series 2 Conversion Price (defined below).

Prior to a Series 2 Trigger Event (defined below) or an Event of Default, the conversion price (“Series 2 Conversion Price”) is $10.00 per share of Class A common stock or, if lower, the price at which the Company issues Class A common stock or rights to receive Class A common stock (the “Series 2 Fixed Conversion Price”). Following a Series 2 Trigger Event or Event of Default, the Series 2 Conversion Price is the lesser of the (i) Series 2 Fixed Conversion Price, and (ii) greater of (x) 88% multiplied by the lowest daily VWAP of the Class A common stock during the eight business day period prior to the measurement date, and (y) the 20% of the “Minimum Price” as defined in Nasdaq Rule 5635 calculated as of the most recent date on which Series 2 Preferred has been issued.

A “Series 2 Trigger Event” will occur (i) upon the Company’s receipt of a letter of noncompliance from Nasdaq, (ii) upon the Company’s average market capitalization during any three business day period following April 1, 2025 falling below $125,000,000, and (iii) in any quarter beginning with the first calendar quarter of 2025 where (x) the Company’s stockholder equity is less than $2,500,000, (y) the Company incurs a net loss greater than $1,000,000, or (z) the Company’s net sales are less than $500,000.

On April 11, 2025, the Company entered into a Supplement Terms Agreement with Streeterville (the “First Series 2 Supplemental Terms”), in connection with the Company’s issuance and sale of 3,000 shares of Series 2 Preferred (the “Tranche 2 Shares”) to Streeterville. The First Series 2 Supplemental Terms provides that, irrespective of the terms of the Series 2 Certificate of Designations, Streeterville will not have the right to convert the Tranche 2 Shares into shares of the Company’s Class A common stock at a conversion price of less than $1.00 per share prior to 30 days following the occurrence of a First Supplemental Terms Trigger Event (defined below), at which time the Company may elect to pay the conversion amount in cash or by issuance of additional shares of Class A common stock, at the Company’s discretion. A “First Supplemental Terms Trigger Event” will occur when the daily VWAP of our Class A common stock is below $1.00 for five or more business days during any given 15-day period.

In addition, on December 15, 2025, the Company entered into a second Supplement Terms Agreement with Streeterville (the “Second Series 2 Supplemental Terms”), in connection with its issuance and sale of 3,500 shares of Series 2 Preferred (the “Tranche 3 Shares”) to Streeterville. The Series 2 Supplemental Terms provides that, irrespective of the terms of the Series 2 Certificate of Designations, Streeterville will not have the right to convert the Tranche 3 Shares into shares of Class A common stock at a at a conversion price of less than $0.75 per share prior to 20 days following the date that the daily VWAP of the Class A Stock is below $0.75 (the “Cooling Off Period”). Following the Cooling Off Period, if Streeterville seeks to convert any of the Tranche 3 Shares with a conversion price below $0.75 per share, the Company may elect to pay the conversion amount in cash or by issuance of additional shares of Class A common stock, at the Company’s discretion. Only one Cooling Off Period may occur unless the daily VWAP of the Class A Stock is above $0.75 for 90 consecutive days, after which a subsequent Cooling Off Period may occur.

Notwithstanding the foregoing, the Company will not give effect to any conversion of Series 2 Preferred to the extent that, following such conversion, the holder individually (without aggregating with its affiliates) would beneficially own in excess of 4.99% of the outstanding Class A common stock (the Maximum Percentage); provided, that the Maximum Percentage for a holder of Series 2 Preferred together with such holder’s affiliates will be 9.99%. The Maximum Percentage is enforceable, unconditional, and non-waivable and shall apply to all affiliates and assigns of each holder of the Series 2 Preferred.

The Company has the right at any time after the date that is six months from the earlier of (i) the effective date of the registration statement registering the shares of Class A common stock into which the Series 2 Preferred shares are convertible, and (ii) the date that such shares of Class A common stock are eligible for resale pursuant to Rule 144 under the Securities Act, to elect, in the Company’s sole discretion, to redeem all or any portion of the Series 2 Preferred then outstanding by paying an amount in cash equal to the Series 2 Preferred Liquidation Amount multiplied by 115%. In addition, the Company may, at its election, use at least 25% of any funds that it raises through an equity financing to redeem outstanding shares of Series 2 Preferred.

The Series 2 Preferred are not entitled to participate in any dividends, distributions, or payments to the holders of the Company’s Class A common stock. However, the Series 2 Preferred shares are entitled to the Series 2 Preferred Return described above.

The Series 2 Preferred shall vote together with holders of Class A common stock and Class B common stock on an as-converted basis, and not as a separate class, at any annual or special meeting of stockholders, and may act by written consent in the same manner as holders of Class A common stock and Class B common stock. In addition, for so long as any shares of Series 2 Preferred are outstanding, the affirmative vote of a majority of the Series 2 Preferred then outstanding shall be required to (i) alter or change adversely the powers, preferences or rights given to the Series 2 Preferred or alter or amend the Series 2 Certificate of Designations, or (ii) enter into any agreement with respect to any of the foregoing.

Notwithstanding the foregoing, in no event shall a holder of Series 2 Preferred (together with such holder’s affiliates, and any “persons” acting as a “group” (as such terms are defined under Sections 13(d) and 14(d) of the Exchange Act and the rules and regulations promulgated thereunder) together with Attribution Parties) be entitled to vote, on an as-converted basis and in aggregate with respect to any other shares of our Class A common stock, Class B common stock, Series 1 Preferred or other preferred stock beneficially owned by such holder of Series 2 Preferred or any affiliates or Attribution Parties of such holder, more than 4.99% of the outstanding voting shares as of the applicable record date, as adjusted for any stock splits, reverse stock splits, stock dividends, reclassifications, reorganization, recapitalizations or other similar transaction.

Pursuant to the Series 2 Certificate of Designations, for so long as any shares of Series 2 Preferred remain outstanding, the Company has agreed to comply with a number of covenants restricting its ability to take certain actions or engage in certain activities, which covenants are substantially similar to the covenants in the Series 1 Certificate of Designations described above. In particular, at any time that any shares of Series 2 Preferred are outstanding, the Company will not issue any preferred stock or other securities (except for certain limited issuances), will not enter into certain fundamental transactions (including, without limitation, mergers, business combinations or similar transactions), and will not incur any debt (other than trade payables incurred in the ordinary course of our business) without, in each case, the prior written consent of the holders of a majority of the Series 2 Preferred shares then issued and outstanding.

Under the Series 2 Equity Financing, Streeterville initially had the right, but not the obligation, to reinvest up to an additional $4.0 million in one or more tranches, which was reduced to $3.0 million following the April 2025 issuance, and further reduced to $0 following the December 2025 issuance, as well as participation rights in up to 30% of future debt or equity financings, subject to specified time limitations. These arrangements superseded similar reinvestment and participation rights under the Series 1 Equity Financing and further enhanced the Company’s liquidity and financial flexibility.

For the year ended December 31, 2025, the Company elected to pay the return on the Series 2 Preferred by issuing additional shares of Series 2 Preferred.

Equity Line Financing

On November 25, 2024, we also entered into an Equity Purchase Agreement (the “Equity Purchase Agreement” or “Equity Line”) with Atlas Sciences, LLC, a Utah limited liability company (“Atlas”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Atlas will purchase up to an aggregate of $50.0 million of our Class A common stock over the 24-month term of the Equity Line. In consideration of Altas’s commitment to purchase shares pursuant to the Equity Line, we issued 143,472 shares of our Class A common stock to Atlas on February 6, 2025, and an additional 229,662 shares of our Class A common stock on July 9, 2025, as a result of the decline in the market price of our Class A common stock since signing the Equity Line. As of the date of this report, we have not sold any shares to Atlas pursuant to the Equity Line, other than the commitment shares described in the preceding sentence.

Equity Distribution Agreement

On February 2, 2026, we entered into an Equity Distribution Agreement (the “ATM Facility”) with Maxim Group LLC (“Maxim”) to create an at-the-market equity program. Under the ATM Facility, we may offer and sell shares of our Class A common stock from time to time having an aggregate offering amount of up to $9,0 million during the term of the ATM Facility, through Maxim, as sales agent. The ATM Facility requires us to pay Maxim a commission equal to 3.0% of the gross sales price from the sales of shares of Class A common stock pursuant to the ATM Facility.

Any sales of our Class A common stock under the ATM Facility may be made through any method permitted by law to be “at-the-market equity offerings” as defined in applicable SEC rules, including sales directly on The Nasdaq Capital Market, at market prices or as otherwise agreed with Maxim. We have no obligation to sell any shares pursuant to the ATM Facility, and no assurance can be given that we will sell any shares pursuant to the ATM Facility, or if we do, as to the price or number of shares to be sold or the dates on which any such sales will take place. The ATM Facility will terminate on the earliest of (a) the sale, pursuant to the ATM Facility, of shares having an aggregate offering price of $9.0 million, (b) February 2, 2027, and (c) earlier termination in certain situations, as set forth in the ATM Facility.

Stock-Based Compensation

The Company maintains the Cloudastructure, Inc. Amended and Restated 2024 Equity Incentive Plan (the “Incentive Plan”), which was adopted by the board of directors on June 27, 2025, and approved by the Company's stockholders in September 2025. The Incentive Plan is an amendment and restatement of the Company's previous 2024 Stock Option Plan. Under the Incentive Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, and other stock-based awards to employees, directors, and consultants. As of December 31, 2025, there were the equivalent of 2,419,163 shares available for future issuance under the Incentive Plan.

Stock options granted under the Incentive Plan are generally exercisable into shares of the Company's Class B common stock or Class A common stock. Since the Company's Nasdaq listing in January 2025, options have been granted at an exercise price equal to the closing price of the Company's Class A common stock on the date of grant. Since January 1, 2025, all standard stock grants have been for Class A common stock. Options generally vest over four years, with an initial one-year cliff, and expire ten years from the date of grant.

The fair value of stock option awards is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes model requires the use of subjective assumptions, including (i) the estimated fair value of the underlying stock on the measurement date, (ii) the expected term of the option, (iii) the expected volatility of the Company's stock price, and (iv) the risk-free interest rate. Due to the Company's limited trading history as a publicly listed company, expected volatility is estimated based on the historical volatility of the stock prices of comparable publicly traded companies over a period commensurate with the expected term. The expected term is estimated using the simplified method permitted under SEC Staff Accounting Bulletin No. 107, as the Company does not have sufficient historical exercise data to provide a reasonable basis for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the expected term.

The following table summarizes the assumptions used to estimate the fair value of options granted during the years ended December 31, 2025 and 2024:

The following summarizes stock option activity for the year ended December 31, 2025:

As of December 31, 2025, total unrecognized compensation cost related to unvested stock option awards was approximately $3,397,977, which is expected to be recognized over a weighted-average period of approximately 1.9 years.

During the years ended December 31, 2025 and 2024, the Company recognized stock-based compensation expense of $2,329,000 and $2,035,000, respectively. Stock-based compensation expense is included in non-cash operating expenses on the consolidated statements of operations.

Outstanding Warrants

There were 814,167 Class A Common Stock warrants at an exercise price of $2.16 outstanding as of December 31, 2025.

Note 6 – Related Party Transactions

The following transactions occurred between related parties; therefore, there can be no guarantee that the terms, conditions, interest rates, or prices were transacted at an arm’s-length rate.

Aircraft Lease

On September 1, 2023, the Company and Cloud Transport Operations LLC (“Cloud Transport”) entered into a dry lease agreement (the “Dry Lease”) for a Cessna T210N Turbo Centurion plane. The Dry Lease allows the Company to lease the plane for $350 per hour plus insurance and maintenance costs. Rick Bentley (“Bentley”), the Company’s Founder and its Chief Executive Officer at the time the Dry Lease was signed, has an indirect ownership interest in Cloud Transport. In addition, also effective September 1, 2023, the Company and Hydro Hash, Inc. (“HH”) entered into a side agreement related to the Dry Lease, pursuant to which HH agreed, in exchange for use of the plane, to cover 40% of the insurance and maintenance costs for the plane under the Dry Lease. Mr. Bentley is the Chairman and a significant stockholder of HH. On March 25, 2025, the Company exercised its right to cancel the Dry Lease by providing 120 days notification of termination.

Issuance of Shares for Note Receivable

On February 20, 2020, the Company issued 250,000 shares of Class A common stock to Mr. Bentley in exchange for a promissory note with a principal amount of $6,000. The note receivable bore interest at an annual rate of 1.86% and was scheduled to mature in February 2030. The note was repaid in full on November 12, 2025, including cumulative interest of $639.93.

Data Center Lease

On January 1, 2024, the Company entered into a month-to-month lease agreement (the “Lease”) with Hydrohash (HH), a related party, for additional data center space. The Lease includes space, power, and high-speed internet access and qualifies as a short-term lease under ASC 842. Accordingly, lease costs are recognized as lease expense on a straight-line basis over the lease term, and no right-of-use asset or lease liability has been recorded. Under the Lease, the Company pays fixed monthly base rent of approximately $5,000. In addition, the Company pays a fixed monthly amount of approximately $3,000 to reimburse HH for third-party bandwidth services.

Note 7 –Reverse Stock Split

Our board of directors and stockholders each approved a 1-for-6 reverse stock split of all classes of the Company’s issued and outstanding capital stock. On October 24, 2024, we filed an amended and restated certificate of incorporation with the State of Delaware to immediately effectuate the Reverse Stock Split. All share and per share information are presented after giving effect to the Reverse Stock Split retrospectively for all periods presented.

Note 8 –Segment Reporting

We operate asone operating segment focused on cloud-based AI video surveillance and remote guarding security services. Operating segments are defined as components of an enterprise for which separate financial information is available for evaluation by the CODM in deciding how to allocate resources and assess performance. Our CODM evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. There is no expense or asset information supplemental to the information disclosed in these financial statements that is regularly provided to the CODM. The allocation of resources and assessment of performance of the operating segment is based on net income as shown in our statement of operations. The CODM considers net income in the annual forecasting process and reviews actual results when making decisions about allocating resources. Since we operate as one operating segment, financial segment information, including profit or loss and asset information, can be found in these financial statements.

Major Customers

For the year ended December 31, 2025, two customers each individually accounted for 10% or more of the Company's consolidated revenues. Revenue from Hasta Capital was approximately $861,000 (17% of total revenues) and revenue from RV Mobile Power was approximately $861,000 (17% of total revenues). Both customers are reported within the Company's single reportable segment. No other customer accounted for 10% or more of total revenues during the year ended December 31, 2025.

For the year ended December 31, 2024, two customers each individually accounted for 10% or more of the Company's consolidated revenues. Revenue from SunRoad Enterprises was approximately $246,000 (18% of total revenues) and revenue from Avenue 5 was approximately $150,000 (11% of total revenues). Both customers are reported within the Company's single reportable segment.

Note 9 – Income Tax

As of December 31, 2025, the Company had net operating loss carryforwards of approximately $34,570,000 and $21,064,000 available to reduce future taxable income, if any, for both federal and state income tax purposes, respectively. The federal net operating loss carryforwards begin expiring in 2035 and the state net operating loss carryforwards begin expiring in 2035. The amount of federal net operating loss that does not expire is $33,699,000.

As of December 31, 2025, the Company had credit carryforwards of approximately $506,000 and $326,000 available to reduce future taxable income, if any, for both federal and California state income tax purposes, respectively. The federal R&D credit carryforwards begin expiring in 2039 and the California credits carryforward indefinitely. Valuation allowances have been reserved, where necessary.

Utilization of the net operating loss carryforward may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss before utilization.

On January 1, 2009, the Company adopted the provisions of FASB Accounting Standards Codification (ASC 740-10), “Accounting for Uncertainty in Income Taxes.” ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. It is unlikely that the amount of liability for unrecognized tax benefits will significantly change over the year. No liability related to certain tax positions is recorded on the financial statements.

As of December 31, 2024, and December 31, 2025, the Company had unrecognized tax benefits of $232,000 and $291,000, respectively.

The following table summarizes the activity related to the Company's unrecognized tax benefits:

The Company’s tax years 2003 through 2025 will remain open for examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss credits.

Note 10 –Subsequent Events

Management’s Evaluation

Management has evaluated subsequent events to determine if events or transactions occurring after the balance sheet date through the date the financial statements were issued require potential adjustment to or disclosure in the financial statements and has concluded that all such events or transactions that would require recognition or disclosure have been recognized or disclosed.