CLOUDASTRUCTURE, INC.

Notes to the Condensed Consolidated Interim Financial Statements

(Unaudited)

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”). The unaudited condensed consolidated interim financial statements included within this Report have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2025 included in our Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements contain all the adjustments necessary to present fairly our financial condition as of March 31, 2026, and the results of operations for the three-month periods ended March 31, 2026 and 2025. The results of operations for the three-months ended March 31, 2026 are not necessarily indicative of the results to be expected for the full year.

Revision of Previously Issued Financial Statements

In connection with the preparation of these unaudited condensed consolidated interim financial statements for the three months ended March 31, 2026, the Company identified errors in the accounting for the Company's Series 1 Convertible Preferred Stock (the “Series 1 Shares”) and Series 2 Convertible Preferred Stock (the “Series 2 Shares” and, together with the Series 1 Shares, the “Preferred Shares”). The errors relate to two matters:

Error 1 -- Embedded Derivative Bifurcation

The Series 1 Shares and Series 2 Shares each contain an embedded conversion feature with a variable conversion price that, upon the occurrence of specified trigger events, adjusts to a percentage of the lowest volume-weighted average price over a specified lookback period, subject to a floor price. The Company previously accounted for each series of Preferred Shares as a single unit classified entirely within permanent stockholders' equity. Upon further analysis under ASC 815-15, the embedded conversion features fail the indexation criteria of ASC 815-40-15 due to the variable conversion price formula and accordingly are required to be bifurcated and accounted for as compound embedded derivative liabilities measured at fair value, with changes in fair value recognized in earnings each reporting period. No derivative liability was recognized in any previously filed financial statement from inception of each instrument (January 29, 2025 for the Series 1 Shares and March 25, 2025 for the Series 2 Shares) through December 31, 2025. The Series 1 Shares were fully converted during the second quarter of 2025 and accordingly carry a zero derivative liability balance as of December 31, 2025 and March 31, 2026.

Error 2 -- Mezzanine Classification

Separately, each series of Preferred Stock host instrument, after bifurcation of the embedded derivative, contains redemption features that are contingently exercisable upon the occurrence of events not solely within the control of the Company. Under ASC 480-10-S99-3A (ASR 268), the host instruments are required to be classified in temporary equity (mezzanine), presented between liabilities and stockholders' equity on the condensed consolidated balance sheet, rather than within permanent stockholders' equity as previously reported. As the Series 1 Shares were fully converted during the second quarter of 2025, the mezzanine balance for the Series 1 Shares is zero as of December 31, 2025 and March 31, 2026. As of December 31, 2025 and March 31, 2026, there were Series 2 Shares outstanding, which are classified as temporary equity (mezzanine) as of those dates.

Materiality Assessment

Management performed a materiality assessment under SAB Topics 1.M and 1.N (SAB 99 and SAB 108) and concluded that neither error, individually or in the aggregate, was material to any previously filed interim or annual financial statement. Error 1 is an accumulating income statement error; because correcting the cumulative effect in the current period would disproportionately distort the three months ended March 31, 2026, the Company has revised the prior period comparative financial information presented in this Report in accordance with ASC 250-10-45-23. This revision does not represent a restatement of previously issued financial statements. Error 2 is a classification error with no effect on net income, earnings per share, total assets, total liabilities, or net assets; it has been corrected as an immaterial out-of-period reclassification. The prior period financial statements were not and are not considered materially misstated.

The accounting errors described above relate solely to the technical classification of the Preferred Stock on the balance sheet and, with respect to Error 1, to the measurement of the embedded derivative liability. These errors had no impact on the Company’s cash position, liquidity, operating cash flows, revenue, cost of goods sold, operating expenses, or ability to meet its obligations. The revision to correct Error 2 (mezzanine classification) is purely a reclassification within total equity on the balance sheet, with no effect on net income, net loss per share, total assets, total liabilities, or total equity. The revision to correct Error 1 (derivative bifurcation) results in a reclassification of amounts between stockholders’ equity and derivative liabilities and changes the presentation of certain non-cash items within the statement of operations (specifically, the recognition of changes in fair value of derivative liabilities and the reclassification of preferred dividends as deemed dividends below net loss), but does not affect operating loss, cash flows from operations, or the Company’s ability to fund its business. As described in Note 9, subsequent to March 31, 2026, on June 29, 2026, the Company amended and restated the terms of the Series 2 Shares to eliminate the contractual provisions that gave rise to both errors and believes the amended terms support permanent equity classification for the Series 2 Shares on a prospective basis. The Series 1 Shares were converted into our Class A common stock during the second quarter of 2025, and no Series 1 Shares were outstanding as of either December 31, 2025 or March 31, 2026.

Method of Correction

The comparative condensed consolidated balance sheet as of December 31, 2025, the comparative condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2025, the comparative condensed consolidated statement of stockholders' equity for the three months ended March 31, 2025, and the comparative condensed consolidated statement of cash flows for the three months ended March 31, 2025 have been revised to reflect the correction of both errors. The derivative liability fair value at each measurement date was determined using a Monte Carlo simulation model with Level 3 inputs, including 90-day trailing realized equity volatility, estimated sell-rate as a fraction of average daily trading volume, and the contractual floor price. Additionally, the original issue discount on each series of Preferred Stock has been recognized as accretion to the host instrument carrying value in mezzanine, with a corresponding deemed dividend charge to accumulated deficit. The tables below present the effect of the revisions on the affected financial statement line items.

Effect of Revisions on the Condensed Consolidated Balance Sheet as of December 31, 2025

Effect of Revisions on the Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2025

(in thousands, except per share data)

Effect of Revisions on the Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2025

Note: The revisions to the statement of cash flows are reclassifications within the operating activities and between the operating activities and the financing activities. Net cash used in operating activities decreased by $83,000, net cash provided by financing activities decreased by $83,000, while net cash used in investing activities was unchanged.

Effect of Revisions on the Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited) (As Revised) for the Three Months Ended March 31, 2025

Effect of Revisions on the Condensed Consolidated Statements of Temporary Equity and Stockholders’ Equity (Deficit) (Unaudited) (As Revised) for the Three Months Ended March 31, 2026

Reclassification of Operating Expenses

In connection with the preparation of these condensed consolidated interim financial statements, the Company changed the presentation of operating expenses on the condensed consolidated statements of operations. In prior periods, the Company presented stock-based compensation, depreciation, and certain other non-cash charges as a single aggregated line item (“Non-cash expenses”) within operating expenses. Beginning with these financial statements, the Company has allocated these charges to the functional expense categories to which they relate (general and administrative, research and development, sales and marketing, and operations) and has added an operations category to better reflect the Company's current organizational structure. The Company also reclassified certain personnel and overhead costs among functional categories to align with how costs are managed and evaluated by the CODM. This change in presentation provides a more faithful depiction of the nature and function of the Company's operating expenses and is consistent with Regulation S-X, Rule 5-03. Prior period amounts have been reclassified to conform to the current period presentation. Total operating expenses for the three months ended March 31, 2025, were not affected by these reclassifications.

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 $44,153 and $17,204 at March 31, 2026, and December 31, 2025, 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.

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 returns, discounts, and allowances.

To determine revenue recognition for arrangements that an entity determines are within the scope of Financial Accounting Standards Board (“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 applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees, upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation costs related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award which contains both a performance and a market condition, and where both conditions must be satisfied for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable the performance condition will be met. If the performance condition is ultimately not met, compensation costs related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied.

The Company will recognize forfeitures of such equity-based compensation as they occur.

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 outstanding.

During the periods ended March 31, 2026, and December 31, 2025, the calculation of the effect of dilutive stock options, warrants, and conversion of preferred stock excluded all stock options, warrants, and conversion of preferred stock outstanding during the period due to their anti-dilutive effect.

Under the revised accounting for the Series 2 Shares, the 9.5% preferred return and the original issue discount accretion are accounted for as deemed dividends, which reduce net loss available to common stockholders in the computation of basic and diluted net loss per share. For the three months ended March 31, 2025, deemed dividends related to the Series 2 Shares totaled approximately $301,000. These amounts were previously reported as preferred dividend expense within other income/(expenses) and have been reclassified to deemed dividends below net loss as part of the revision described in Note 2.

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 gains or losses of this nature were recognized for the year ended December 31, 2025 or the quarter ended March 31, 2026.

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.

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. Carrying values were assumed to approximate fair value for assets and liabilities since they are short term in nature.

Fair Value of Bifurcated Derivative Liabilities and Carrying Value of the Host Preferred Stock

With respect to its outstanding Preferred Stock, the Company is required to bifurcate the embedded conversion feature and account for it as a derivative liability measured at fair value at each reporting date, with changes recognized in earnings. The fair value of the bifurcated derivative is estimated using a Monte Carlo simulation model incorporating Level 3 inputs under the ASC 820 fair value hierarchy, including 90-day trailing realized equity volatility, estimated conversion sell-rate as a fraction of average daily trading volume, and the applicable contractual floor price. The Company evaluates the embedded conversion feature for bifurcation under ASC 815-15 at inception and upon any modification of the instrument's terms.

The fair value of the bifurcated derivative at issuance also directly determines the initial carrying value of the host preferred stock instrument, which is measured as cash proceeds received, reduced by the original issue discount, allocated issuance costs, and the derivative fair value. The resulting discount on the host is accreted to the Series 2 Preferred Liquidation Amount over the expected life of the instrument.

Because the derivative valuation and host carrying value share critical assumptions, particularly expected term and equity volatility, changes in those assumptions affect both the fair value of the derivative liability and the accretion pattern recognized on the host instrument and could have a material impact on the Company's condensed consolidated financial statements. The Company classifies the derivative liability as a current liability based on the holder's ability to exercise conversion rights at any time. The host preferred stock instrument is classified in temporary equity (mezzanine) in accordance with ASC 480-10-S99-3A. As of March 31, 2026, the aggregate fair value of the derivative liabilities was $1,392,433 and the net carrying value of the host instruments was $4,199,853. For the quarter ended March 31, 2026, the net change in fair value of the derivative liabilities recognized in earnings was a loss of $127,742, reflecting the period mark-to-market measurement of the bifurcated derivative under Monte Carlo simulation.

The Company measures certain financial instruments at fair value on a recurring basis in accordance with ASC 820,Fair Value Measurement. The following tables present information about the Company's financial liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values.

Fair Value Hierarchy

The following table presents the Company's financial liabilities measured at fair value on a recurring basis, categorized by level within the fair value hierarchy:

Derivative Liability -- Level 3 Fair Value Rollforward

Issuances represent the Day-1 fair value of the compound embedded derivative bifurcated from the host preferred stock instrument at each issuance or PIK dividend date under ASC 815-15. Settlements on conversion represent the derecognition of the derivative liability allocated to converted preferred shares, with the offset recorded to additional paid-in capital. Net (gains) losses represent the change in fair value of the derivative liability recognized in the condensed consolidated statements of operations within "Change in fair value of derivative liabilities."

For the year ended December 31, 2025 (as revised), issuances of $4,764,474 represent the Day-1 bifurcation of compound embedded derivatives on the Series 1 Preferred Stock and the Series 2 Preferred Stock Tranches as well as Series 1 and Series 2 PIK Shares. Settlements of $2,894,390 represent the derecognition of derivative liability on Series 1 Shares and Series 2 Shares converted during 2025. The Series 1 Preferred Stock was fully converted and retired during Q2 2025.

For the three months ended March 31, 2026, issuances of $20,805 represent the day-1 bifurcation of the compound embedded derivative on 75 PIK shares issued January 5, 2026. Settlements of $77,319 represent the derecognition of derivative liability on the conversion of 280 shares of Series 2 Shares.

Significant Unobservable Inputs

The fair value of the compound embedded derivative liability is estimated using an internally developed Monte Carlo simulation model. The significant unobservable inputs used in the Monte Carlo simulation as of March 31, 2026 included 90-day trailing realized equity volatility of 110%, an estimated sell-rate of 20% of average daily trading volume, and a contractual floor price of $0.20 per share. The following table summarizes the significant unobservable inputs and their directional impact on fair value:

Changes in the significant unobservable inputs identified above could materially affect the estimated fair value of the derivative liability. The most significant driver of fair value is the assumed sell-rate, which determines the expected pace of conversion and the resulting dilutive impact on the common stockholders. An increase in the sell-rate assumption from 20% to 30% of ADV would increase the estimated fair value of the derivative liability, while a decrease to 10% of ADV would decrease the estimated fair value. The 90-day trailing realized equity volatility is derived from observable market data but is classified as Level 3 because it is a significant input to a model-based valuation that also relies on unobservable inputs. The contractual floor price of $0.20 per share represents 20% of the Nasdaq Minimum Price as of the most recent Tranche 3 issuance date, as defined in the Certificate of Designations.

Management performed an internal valuation using a Monte Carlo simulation with 100,000 paths per measurement date. The model simulates the daily stock price path, applies the contractual conversion mechanics (including the 88% of lowest 8-business-day VWAP conversion price formula), and estimates the fair value of the embedded conversion feature as the expected present value of the conversion discount. All underlying mathematical formulas, code scripts, and unobservable inputs are available for review by the Company's independent auditors.

Recent Accounting Pronouncements

In November 2023, the 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.

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.

On November 25, 2024, we entered into a Securities Purchase Agreement (as subsequently modified, the “Series 1 Equity Financing”), with Streeterville Capital, LLC, a Utah limited liability company (“Streeterville”), pursuant to which we issued and sold 6,300 shares of our Series 1 Shares and 720,000 shares of our Class A common stock to Streeterville. The Series 1 Equity Financing closed on January 29, 2025 and resulted in aggregate gross proceeds to the Company of $6.3 million. We no longer have the ability to issue any additional Series 1 Shares in connection with the Series 1 Equity Financing.

On March 21, 2025, we entered into a second Securities Purchase Agreement (as subsequently modified, the “Series 2 Equity Financing”) with Streeterville, pursuant to which we may issue and sell, subject to the terms and conditions of the Series 2 Equity Financing, up to $40.0 million of our Series 2 Shares to Streeterville at a price of $1,000 per share. On March 25, 2025, at the initial closing of the Series 2 Equity Financing, we sold 4,500 Series 2 Shares to Streeterville, for an aggregate purchase price of $4.5 million. On April 10, 2025, we sold an additional 3,000 Series 2 Shares to Streeterville for an aggregate purchase price of $3.0 million. On December 15, 2025, we sold an additional 3,500 Series 2 Shares to Streeterville for an aggregate purchase price of $3.5 million.

On November 25, 2024, we also entered into an Equity Purchase Agreement (as subsequently modified, the “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.

On February 2, 2026, we entered into an Equity Distribution Agreement (the “ATM Facility”) with Maxim Group, LLC, a Delaware limited liability company (“Maxim”), that allows us to sell shares of our Class A common stock in an “at-the-market” offering through Maxim, as sales agent, for aggregate gross proceeds of $9.0 million, subject to the terms and conditions of that agreement.

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.

We believe that our cash on hand, anticipated cash flows from operations, and financing available to us pursuant to the Equity Line and ATM Facility (subject to meeting the conditions of those financing arrangements) 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 12 months from the date of this Report. However, there is no assurance additional capital will be available to us pursuant to the Equity Line or ATM Facility as we may be unable to meet the conditions necessary to issue shares of our Class A common stock pursuant to either such financing arrangement. Please see the “Risk Factors” in our Annual Report on Form 10-K for more information.

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 three months ended March 31, 2026, and March 31, 2025, respectively:

Note 4 –Basic and Diluted Loss Per Share

The weighted average number of shares used to calculate basic and diluted loss per share for the three-month periods ended March 31, 2026, and 2025 were as follows:

For the three months ended March 31, 2026 and 2025, deemed dividends of $449,000 and $384,000, respectively, were deducted from net loss to arrive at net loss available to common stockholders. The first quarter 2026 amount relates to the Series 2 Shares and consists of original issue discount accretion of $251,000, and the 9.5% preferred return accrual of $133,000. The first quarter 2025 amount consists of $301,000 of original issue discount accretion and the 10.0% preferred return accrual of $83,000 on the Series 1 Shares.

For the three months ended March 31, 2026 and 2025, approximately 15.9 million and 16.1 million shares, respectively, issuable upon the exercise or conversion of stock options, convertible preferred stock, 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

Between 2020 and 2023, the Company sold units consisting of two shares of Class A common stock and one warrant to purchase one share of Class A common stock pursuant to Regulation A under the Securities Act (“Regulation A”). The warrants were immediately exercisable and expired 18 months from the date of issuance. Pursuant to these Regulation A offerings, the Company issued a total of 12.1 million shares of Class A common stock and 5.3 million warrants and received cumulative net proceeds of approximately $33.1 million, after deducting issuance costs.

All warrants issued pursuant to the Regulation A offerings expired on or before December 31, 2025. As of March 31, 2026, no warrants issued pursuant to the Regulation A offerings were still outstanding.

Preferred Stock Financings

The Company is authorized to issue 150,000,000 shares of preferred stock, par value $0.0001 per share. As of March 31, 2026, the Board of Directors has designated 30,000 shares as Series 1 Shares and 40,000 shares as Series 2 Shares.

Series 1 Convertible Preferred Stock

On November 25, 2024, the Company entered into the Series 1 Equity Financing with Streeterville for the issuance and sale of $6.3 million of Series 1 Shares, together with 720,000 shares of Class A common stock as pre-delivery shares. This Series 1 Equity Financing closed on January 29, 2025. All of these Series 1 Shares were subsequently converted into shares of the Company’s Class A common stock. As of March 31, 2026, and December 31, 2025, no Series 1 Shares were issued or outstanding. We no longer have the ability to issue any additional Series 1 Shares in connection with the Series 1 Equity Financing.

Each Series 1 Share had 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 failed 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 of Preferences and Rights of Series 2 Convertible Preferred Stock (the “Series 2 Certificate of Designations”) or as required by applicable law, the Series 1 Shares and the Series 2 Shares ranked 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 were identical in all respects. Except to the extent that the holders of at least a majority of the outstanding Series 1 Shares and the Series 2 Shares, voting together as a single class, expressly consented to the creation of capital stock that was either senior orpari passu in rank with the Series 1 Shares and the Series 2 Shares, all other shares of capital stock of the Company will be junior in rank.

The Series 1 Shares accrued 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 was payable on a quarterly basis, and was subject to quarterly compounding, either in cash or via the issuance of additional Series 1 Shares, at the Company’s discretion. Following the occurrence of an Event of Default, the preferred return would increase to 15% per annum until such Event of Default was cured.

In the event of a Liquidation Event or Deemed Liquidation Event (defined below), the Series 1 Shares were entitled to 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 Shares would 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 Shares were convertible at any time into (i) the number of Series 1 Shares 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”) was $9.00 per share of Class A common stock or, if lower, the price at which the Company issued 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 was to be 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 was not required to give effect to any conversion of Series 1 Shares 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 was 9.99%. The Maximum Percentage was enforceable, unconditional, and non-waivable and applied to all affiliates and assigns of each holder of Series 1 Shares.

The Company had the right at any time after the date that was 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 Shares were convertible, and (ii) the date that such shares of Class A common stock were 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 Shares then outstanding by paying an amount in cash equal to the Series 1 Preferred Liquidation Amount multiplied by 115%. In addition, the Company had the right, at its election, to use at least 25% of any funds that the Company raised through an equity financing to redeem outstanding Series 1 Shares.

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

The Series 1 Shares voted 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 holders of Series 1 Shares were permitted to 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 Series 1 Shares were outstanding, the affirmative vote of a majority of the Series 1 Shares then outstanding was required to (i) alter or change adversely the powers, preferences or rights given to the Series 1 Shares 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 was a holder of Series 1 Shares (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”)) 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 Shares or other preferred stock beneficially owned by such holder of Series 1 Shares 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 Series 1 Shares remained outstanding, the Company 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 Shares. In particular, at any time that any Series 1 Shares were outstanding, the Company agreed not to issue any preferred stock or other securities (except for certain limited issuances), not to enter into certain fundamental transactions (including, without limitation, mergers, business combinations or similar transactions), and not to 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 Shares then issued and outstanding.

Series 2 Convertible Preferred Stock

On March 21, 2025, the Company entered into Series 2 Equity Financing with Streeterville. At the initial closing of the Series 2 Equity Financing on March 25, 2025, the Company sold $4.5 million of Series 2 Shares. The Company subsequently sold to Streeterville an additional $3.0 million of Series 2 Shares on April 10, 2025, and an additional $3.5 million of Series 2 Shares on December 15, 2025. As of March 31, 2026, and December 31, 2025, there were 4,961 and 5,166 Series 2 Shares issued and outstanding, respectively. All other Series 2 Shares have been converted into shares of the Company’s Class A common stock.

Each Series 2 Share 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 Shares and the Series 2 Shares 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 Shares and the Series 2 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 Shares and the Series 2 Shares, all other shares of capital stock of the Company will be junior in rank.

The Series 2 Shares accrue 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 Series 2 Shares, 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 Shares 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 Shares will not participate in the distribution of any remaining assets of the Company.

The Series 2 Shares are convertible at any time into (i) the number of Series 2 Shares 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 Series 2 Shares (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.

As of March 31, 2026, and since the first calendar quarter of 2025, one or more Series 2 Trigger Events have been in effect. Specifically, the Company has incurred a net loss in excess of $1,000,000 and its stockholders' equity has been less than $2,500,000 in each quarter since the first calendar quarter of 2025. As a result, since the first calendar quarter of 2025, the Series 2 Conversion Price has been determined as the lesser of (i) the Series 2 Fixed Conversion Price of $10.00 per share and (ii) the greater of (x) 88% of the lowest daily VWAP of the Class A common stock during the eight business day period prior to each applicable measurement date and (y) 20% of the Minimum Price as defined in Nasdaq Rule 5635 calculated as of the most recent date on which Series 2 Shares were issued. During the three months ended March 31, 2026, the 280 Series 2 Shares that were converted to Class A common stock were converted at a weighted-average conversion price of approximately $0.5626 per share. The Trigger Event and resulting variable conversion price are reflected in the Monte Carlo simulation model used to determine the fair value of the bifurcated derivative liability at each measurement date.

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 Series 2 Shares (the “Tranche 3 Shares”) to Streeterville. The Second 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 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 Shares 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 Shares 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 Shares.

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 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 Shares 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 Series 2 Shares.

The Series 2 Shares 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 Shares are entitled to the Series 2 Preferred Return described above.

The Series 2 Shares 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 Series 2 Shares are outstanding, the affirmative vote of a majority of the Series 2 Shares then outstanding shall be required to (i) alter or change adversely the powers, preferences or rights given to the Series 2 Shares 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 Shares (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 Shares, or other preferred stock beneficially owned by such holder of Series 2 Shares 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 Series 2 Shares 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 Series 2 Shares 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 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 periods ended March 31, 2026 and December 31, 2025, the Company elected to pay the return on the Series 2 Shares by issuing additional Series 2 Shares. On January 5, 2026, pursuant to the terms of our Series 2 Shares, we issued Streeterville an additional 75 Series 2 Shares as dividend payments. During the three months ended March 31, 2026,280 Series 2 Shares were converted to 552,932 shares of Class A common stock. As of March 31, 2026, there were 4,961 Series 2 Shares issued and outstanding. Subsequent to March 31, 2026, on June 29, 2026, the Company filed an Amended and Restated Certificate of Designations for the Series 2 Shares that eliminated the variable conversion price feature and the Deemed Liquidation Event provision, and reduced the Fixed Conversion Price to $0.40 per share. In addition, on June 30, 2026, the Company and Streeterville entered into an Exchange Agreement pursuant to which 1,170 Series 2 Shares were exchanged for an unsecured Promissory Note in the principal amount of $1,299,870. See Note 9 for additional details regarding these subsequent events.

Mezzanine (Temporary) Equity Rollforward

The following table presents the activity in the carrying value of the Series 1 Shares and Series 2 Shares classified in temporary equity for the three months ended March 31, 2026 and 2025:

Accretion of the original issue discount and the 9.5% preferred return are recognized as increases to the temporary equity carrying value with corresponding charges to additional paid-in capital and accumulated deficit as deemed dividends. Upon conversion of Series 2 Shares to Class A common stock, the host instrument carrying value at the conversion date is reclassified from temporary equity to additional paid-in capital, and the related bifurcated derivative liability is derecognized at fair value with the offset recorded to additional paid-in capital.

Equity Line Financing

On November 25, 2024, we entered into the Equity Line with 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 Atlas’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 the ATM Facility with 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, subject to the terms and conditions of the ATM Facility. 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 March 31, 2026, there were the equivalent of 2,268,167 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 stock option 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 three-month periods ended March 31, 2026 and 2025:

All equity grants are issued at current stock price on the day of grant, using the average of the day’s high and low stock price. For the three months ended March 31, 2026, this range was between $0.65 - 0.76 per share. For the three months ended March 31, 2025, the stock price and exercise price was $6.75 per share.

Outstanding Warrants

There were 814,167 Class A common stock warrants at an exercise price of $2.16 outstanding as of December 31, 2025, and March 31, 2026.

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 Hydro Hash (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.

Consulting Agreement

On February 16, 2026, the Company entered into a month-to-month consulting agreement (the “Agreement”) with Melissa Hargis, a related party, for software engineering services. The Agreement provides for Ms. Hargis to provide software engineering services to the Company on a monthly basis at a rate of $8,000 per month. During the three-month period ended March 31, 2026, the Company incurred $8,000 of expense related to the Agreement.

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.

Note 9 –Subsequent Events

In light of the change in how the Series 2 Shares are accounted for, as described in Note 2 above, the Company and Streeterville have renegotiated the terms of the Series 2 Shares so they will no longer be considered mezzanine equity. On June 29, 2026, the Company amended and restated the original certificate of designations for the Series 2 Shares to address the accounting classification issues described in Note 2 above and to align the contractual terms of the Series 2 Shares with the Company’s and Streeterville’s original intent that such instrument be classified as permanent equity.

On June 29, 2026, the Company filed an Amended and Restated Certificate of Designations of Preferences and Rights of Series 2 Convertible Preferred Stock (the “Amended Certificate”) with the Secretary of State of the State of Delaware, which was approved by the Board of Directors and by Streeterville, as the sole holder of all outstanding Series 2 Shares. The Amended Certificate eliminates the provisions that previously gave rise to the mezzanine (temporary) equity classification, including: (i) removal of the “Deemed Liquidation Event” provision that previously entitled holders to receive the Series 2 Preferred Liquidation Amount upon certain change-of-control transactions not solely within the Company’s control; (ii) reduction of the Fixed Conversion Price from $10.00 to $0.40 per share, thereby eliminating the variable conversion price feature that required bifurcation of the embedded derivative under ASC 815-15; and (iii) limitation of the liquidation preference to apply solely upon an actual voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, with explicit exclusion of mergers, consolidations, sales of assets, and other business combinations. The Company expects that the amended terms will support classification of the Series 2 Shares within permanent stockholders’ equity prospectively from the date of the amendment.

On June 30, 2026, the Company entered into an Exchange Agreement with Streeterville pursuant to which Streeterville exchanged 1,170 Series 2 Shares for an unsecured Promissory Note of the Company in the original principal amount of $1,299,870 (the “Exchange Note”). The exchange was effected as a Section 3(a)(9) exchange under the Securities Act of 1933, as amended, without any additional consideration paid by Streeterville. The Exchange Note bears interest at 9.5% per annum (compounding daily on a 360-day year basis) and matures on July 30, 2027, 13 months from the date of issuance. Beginning July 30, 2026, Streeterville has the right to redeem up to $108,332.50 (plus accrued interest) of the Exchange Note per calendar month. Upon the occurrence of specified trigger events or events of default (including failure to pay, insolvency, delisting, or breach of covenants), Streeterville may accelerate the Exchange Note and the outstanding balance increases by 10%. Following the exchange, the 1,170 Series 2 Shares were cancelled.

The Company expects to account for the exchange as an extinguishment of the Series 2 Shares surrendered for exchange by Streeterville and issuance of a new debt instrument. Accordingly, as of June 30, 2026, the carrying value of the 1,170 Series 2 Shares will be derecognized, the Exchange Note will be recorded at fair value, and any difference will be recognized in additional paid-in capital or as a deemed dividend/contribution, as applicable. The Company will evaluate the Exchange Note for embedded features requiring bifurcation under ASC 815-15.

In connection with the revision of prior period financial information described in Note 2 above, the Company performed a recovery analysis pursuant to its compensation recovery policy adopted in compliance with Exchange Act Rule 10D-1 and the applicable Nasdaq listing standards. Based on this analysis, the Company determined that the revisions did not result in any erroneously awarded incentive-based compensation to any current or former executive officer during the applicable recovery period. Accordingly, no recovery of compensation was required under the Company’s compensation recovery policy.

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.