As filed with the U.S. Securities and Exchange Commission on February 6, 2024.

 

Registration No. 333-

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

Airship AI Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

7372

 

93-4974766

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

8210 154th Ave NE

Redmond, WA  98052

Tel: (877) 462-4250

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Victor Huang

8210 154th Ave NE

Redmond, WA  98052

Tel: (877) 462-4250

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Mitchell S. Nussbaum

David J. Levine

Loeb & Loeb LLP

345 Park Avenue

New York, NY 10154

Telephone: (212) 407-4000

 

Approximate date of commencement of proposed sale to public: From time to time after the effective date hereof.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the SEC, acting pursuant to Section 8(a) of the Securities Act, may determine.

 

 

 

 

The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION DATED FEBRUARY 6, 2024

 

AIRSHIP AI HOLDINGS, INC.

 

12,406,202 Shares of Common Stock

16,184,612 Shares of Common Stock Underlying Public Warrants

2,689,902 Shares of Common Stock Underlying Converted Warrants

1,758,105 Shares of Common Stock Underlying Converted Options

1,019,989 Shares of Common Stock Underlying Platinum Convertible Note

189,334 Shares of Common Stock Underlying Platinum Warrant

 

We are registering for resale by certain selling securityholders named herein (the “Selling Securityholders”) up to (i) 12,406,202 shares of our common stock, $0.0001 par value per share (“Common Stock”); (ii) 2,689,902 shares of Common Stock issuable upon the exercise of warrants to purchase shares of Common Stock issued in connection with the Business Combination (as defined below) as a result of the conversion of Airship Warrants (as defined below) held by certain of the Selling Securityholders (the “Converted Warrants”); (iii) 1,758,105 shares of Common Stock issuable upon the exercise of options to acquire shares of Common Stock issued in connection with the Business Combination as a result of the conversion of Airship Options (as defined below) held by certain of the Selling Securityholders (the “Converted Options”); (iv) 1,019,989 shares of Common Stock issuable upon the conversion of an amended and restated senior secured convertible promissory note issued by us to Platinum Capital Partners Inc. (“Platinum”) in a private placement on February 2, 2024 (the “Platinum Convertible Note”); and (v) 189,334 shares of Common Stock issuable upon the exercise of an amended and restated common stock purchase warrant issued by us to Platinum in a private placement on February 2, 2024 (the “Platinum Warrant”).

 

In addition, this prospectus relates to the issuance by us of up to 16,184,612 shares of Common Stock that are issuable upon the exercise of the public warrants (the “Public Warrants” or the “Warrants”), which shares were previously registered in connection with the Business Combination.

 

The Selling Securityholders may offer, sell or distribute all or a portion of the securities hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any of the proceeds from such sales of the shares of their Common Stock. On February 2, 2024, the last reported sales price of our Common Stock was $1.50.  The exercise price per share of the Public Warrants is $11.50, the exercise price per share of the Converted Warrants is $1.77 and the exercise price per share of the Platinum Warrant is $3.69717. The exercise price of the Public Warrants is significantly higher than the current market price of our Common Stock and accordingly, it is highly unlikely that holders of the Public Warrants will exercise their Public Warrants in the foreseeable future. Cash proceeds associated with the exercises of the Public Warrants, the Converted Warrants and the Platinum Warrant are dependent on our stock price and given the recent price volatility of our Common Stock and relative lack of liquidity in our stock, we may not receive any cash proceeds in relation to such outstanding warrants. We will bear all costs, expenses and fees in connection with the registration of these securities, including with regard to compliance with state securities or “blue sky” laws. The Selling Securityholders will bear all commissions and discounts, if any, attributable to their sale of shares of Common Stock. See “Plan of Distribution.”

 

Our Common Stock is listed on The Nasdaq Global Market under the symbol “AISP”. Our Public Warrants are listed on The Nasdaq Capital Market under the symbol “AISPW”. On February 2, 2024, the last reported sales price of our Common Stock was $1.50 per share and the last reported sales price of our Public Warrants was approximately $0.06 per warrant.

 

The shares of Common Stock being registered for resale in this prospectus will constitute a considerable percentage of our “public float” (defined as the number of our outstanding shares of Common Stock held by non-affiliates). In addition, a portion of the shares of Common Stock being registered for resale hereunder were purchased by the Selling Securityholders at prices below the current market price of our Common Stock. Given the substantial amount of redemptions in connection with the Business Combination (see “Prospectus Summary”), and the relative lack of liquidity in our stock, sales of our Common Stock under the registration statement of which this prospectus is a part could result in a significant decline in the market price of our securities.

 

Investing in our securities involves a high degree of risk. You should review carefully the risks and uncertainties described under the heading “Risk Factors” beginning on page 8 of this prospectus, and under similar headings in any amendment or supplements to this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is               , 2024.

 

 

i

 

 

TABLE OF CONTENTS

 

FREQUENTLY USED TERMS

2

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

3

 

 

PROSPECTUS SUMMARY

4

 

 

THE OFFERING

7

 

 

RISK FACTORS

8

 

 

USE OF PROCEEDS

30

 

 

MARKET INFORMATION OF OUR SECURITIES

31

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

32

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AIRSHIP AI

48

 

 

DESCRIPTION OF AIRSHIP AI’S BUSINESS

58

 

 

DIRECTORS AND EXECUTIVE OFFICERS

65

 

 

EXECUTIVE COMPENSATION

70

 

 

BENEFICIAL OWNERSHIP OF SECURITIES

77

 

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE

79

 

 

DESCRIPTION OF OUR SECURITIES

82

 

 

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

93

 

 

SELLING STOCKHOLDERS

97

 

 

PLAN OF DISTRIBUTION

99

 

 

EXPERTS

101

 

 

LEGAL MATTERS

101

 

 

WHERE YOU CAN FIND MORE INFORMATION

101

 

 

INDEX TO FINANCIAL STATEMENTS

F-1

  

No one has been authorized to provide you with information that is different from that contained in this prospectus. This prospectus is dated as of the date set forth on the cover hereof. You should not assume that the information contained in this prospectus is accurate as of any date other than that date.

 

For investors outside the United States: We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

 
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FREQUENTLY USED TERMS

 

Unless otherwise indicated or the context otherwise requires, references in this prospectus to the “Company,” “we,” “our,” “us” or similar terms refer to Airship AI Holdings, Inc., a Delaware corporation, and its subsidiaries, including Airship AI, Inc., a Washington corporation. In addition, in this prospectus:

 

Airship AI” refers to Airship AI, Inc. (formerly known as Airship AI Holdings, Inc.), a Washington corporation.

 

Board” refers to the board of directors of the Company.

 

Business Combination” refers to the transactions contemplated by the Merger Agreement, including the Domestication and the Merger, which closed on December 21, 2023.

 

BYTS” refers to BYTE Acquisition Corp., a Cayman Islands exempted company, prior to the Business Combination and its domestication as a Delaware corporation.

 

Charter” refers to the Certificate of Incorporation of the Company, as amended, which took effect upon the Closing.

 

Closing” refers to the closing of the Business Combination.

 

Closing Date” refers to December 21, 2023, the date on which the Business Combination is consummated.

 

Code” refers to the Internal Revenue Code of 1986, as amended.

 

Common Stock” refers to our common stock, par value $0.0001.

 

Domestication” refers the domestication of BYTS as a Delaware corporation, in which BYTS de-registered from the Register of Companies in the Cayman Islands by way of continuation out of the Cayman Islands and into the State of Delaware so as to migrate to and domesticate as a Delaware corporation. Following the Domestication, BYTS was renamed “Airship AI Holdings, Inc.”

 

Exchange Act” refers to the Securities Exchange Act of 1934, as amended.

 

IPO” refers to the initial public offering of 30,000,000 units of BYTS consummated on March 23, 2021, including the 2,369,251 units after the partial exercise of the over-allotment option on April 7, 2021.

 

Merger” means the statutory merger of Merger Sub with and into Airship AI pursuant to the terms of the Merger Agreement, with Airship AI continuing as the surviving entity and a wholly-owned subsidiary of the Company and changing its name to “Airship AI, Inc.”

 

Merger Agreement” refers to that certain Merger Agreement, dated as of June 27, 2023 and amended as of September 22, 2023, by and among BYTS, BYTE Merger Sub, Inc., a Washington corporation and a direct, wholly-owned subsidiary of BYTS (“Merger Sub”), and Airship AI.

 

 

Private Warrants” refers to the warrants included as part of the private units which were issued in a private placement in connection with the IPO, with each whole warrant entitling the holder to purchase one share of Common Stock at an exercise price of $11.50 per share.

 

Securities Act” refers to the Securities Act of 1933, as amended.

 

Sponsor” refers to Byte Holdings LP, a Cayman Islands exempted limited partnership and the sponsor of BYTS.

 

US Dollars,” “$” and “USD$” refer to the legal currency of the United States.

 

U.S. GAAP” refers to accounting principles generally accepted in the United States.

 

 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this prospectus may constitute “forward-looking statements” for purposes of the federal securities laws. Forward-looking statements include, but are not limited to, statements regarding the Company or its management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “appear,” “approximate,” “believe,” “continue,” “could,” “estimate,” “expect,” “foresee,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “would” and similar expressions (or the negative version of such words or expressions) may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements are based on the current expectations of the management of the Company, as applicable, and are inherently subject to uncertainties and changes in circumstances and their potential effects and speak only as of the date of such statement. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in “Risk Factors,” those discussed and identified in public filings made with the SEC by the Company and the following:

 

 

·

changes in the competitive industries and markets in which the Company operates or plans to operate;

 

 

 

 

·

changes in applicable laws or regulations affecting the Company’s business;

 

 

 

 

·

the Company’s ability to implement business plans, forecasts, and other expectations after the completion of the Business Combination, and identify and realize additional opportunities;

 

 

 

 

·

risks related to the Company’s potential inability to achieve or maintain profitability and generate significant revenue;

 

 

 

 

·

current and future conditions in the global economy, including as a result of economic uncertainty, and its impact on the Company, its business and the markets in which it operates;

 

 

 

 

·

the Company’s potential inability to manage growth effectively;

 

 

 

 

·

the Company’s ability to recruit, train and retain qualified personnel;

 

 

 

 

·

estimates for the prospects and financial performance of the Company’s business may prove to be incorrect or materially different from actual results;

 

 

 

 

·

costs related to the Business Combination and the failure to realize anticipated benefits of the Business Combination;

 

 

 

 

·

risks related to the Company’s marketing and growth strategies;

 

 

 

 

·

the effects of competition on the Company’s business;

 

 

 

 

·

expectations with respect to future operating and financial performance and growth, including when the Company will generate positive cash flow from operations;

 

 

 

 

·

the Company’s ability to raise funding on reasonable terms as necessary to develop its products in the timeframe contemplated by its business plan;

 

 

 

 

·

the inability to maintain the listing of the Company’s securities on Nasdaq following the Business Combination.

 

In addition, there may be events that the Company’s management is not able to predict accurately or over which the Company has no control.

 

Should one or more of these risks or uncertainties materialize or should any of the assumptions made by the management of the Company proves incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

 

All subsequent written and oral forward-looking statements concerning the Business Combination or other matters addressed in this prospectus and attributable to the Company or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this prospectus. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

 
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PROSPECTUS SUMMARY

 

 

This summary highlights selected information from this prospectus and does not contain all of the information that is important to you in making an investment decision. This summary is qualified in its entirety by the more detailed information included in this prospectus. Before making your investment decision with respect to our securities, you should carefully read this entire prospectus, including the information under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements included elsewhere in this prospectus.

 

Unless otherwise indicated or the context otherwise requires, references in this prospectus to the “Company,” “we,” “our,” “us” and other similar terms refer to Airship AI Holdings, Inc. and its subsidiaries, including Airship AI.

 

The Company

 

Airship AI Holdings, Inc. is a United States (U.S.) owned and operated technology company headquartered in Redmond, Washington. Airship AI is an AI-driven video, sensor and data management surveillance platform that improves public safety and operational efficiency for public sector and commercial customers by providing predictive analysis of events before they occur and meaningful intelligence to decision makers.

 

On March 23, 2021, BYTS consummated its IPO of 30,000,000 units at $10.00 per unit. The underwriter was granted a 45-day option from the date of the final prospectus relating to the IPO to purchase up to 4,500,000 additional units to cover over-allotments, if any, at $10.00 per unit. On April 7, 2021, the underwriter exercised the over-allotment option in part and purchased an additional 2,369,251 units. Simultaneously with the closing of the IPO, BYTS consummated the private placement of 1,030,000 private units at a price of $10.00 per units.

 

On June 27, 2023, BYTS entered into the Merger Agreement with Merger Sub and Airship AI. On December 20, 2023, BYTS de-registered from the Register of Companies in the Cayman Islands by way of continuation out of the Cayman Islands and into the State of Delaware so as to migrate to and domesticate as a Delaware corporation, and changed its name to “Airship AI Holdings, Inc.” Effective December 21, 2023, following the Domestication, Merger Sub merged with and into Airship AI pursuant to the terms of the Merger Agreement, with Airship AI continuing as the surviving entity and a wholly-owned subsidiary of the Company and changing its name to “Airship AI, Inc.”

 

In connection with the Domestication, (x) immediately prior to the Domestication, the Sponsor surrendered to BYTS for no consideration the sole issued and outstanding Class B ordinary share of BYTS and (y) at the effective time of the Domestication, (i) each then issued and outstanding Class A ordinary share of BYTS converted automatically, on a one-for-one basis, into one share of Common Stock; (ii) each then issued and outstanding warrant to purchase one BYTS Class A ordinary share became exercisable for one share of Common Stock pursuant to the terms of the Warrant Agreement, dated as of March 18, 2021, by and between BYTS and Continental Stock Transfer & Trust Company, as warrant agent; and (iii) each then issued and outstanding unit of BYTS separated and converted automatically into one share of Common Stock and one-half of one Warrant.

 

At the Closing, pursuant to the terms of the Merger Agreement, the total consideration paid by BYTS to Airship AI securityholders in connection with the Merger was $225.0 million in the form of shares of Common Stock (at a deemed value of $10.00 per share).

 

In addition, Airship AI securityholders who held shares of common stock of Airship AI (“Airship Common Stock”), Airship Options (as defined below), Airship Earnout Warrants (as defined in the Merger Agreement) or Airship SARs (as defined below) (the “Airship Earnout Holders”) have the contingent right to receive up to 5.0 million additional shares of Common Stock (the “Earnout Shares”), in accordance with, and subject to, the contingencies set forth in the Merger Agreement.

 

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (A) options to purchase shares of Airship Common Stock (the “Airship Options”) that were outstanding as of immediately prior to the Effective Time converted into options to purchase shares of Common Stock, on substantially the same terms and conditions as were in effect with respect to such Airship Options immediately prior to the Effective Time, (B) warrants to acquire shares of Airship Common Stock (the “Airship Warrants”) that were outstanding as of immediately prior to the Effective Time converted into warrants to purchase shares of Common Stock, on substantially the same terms and conditions as were in effect with respect to such Airship Warrants immediately prior to the Effective Time, and (C) stock appreciation rights granted under Airship AI’s stock appreciation rights plan (the “Airship SARs”) that were outstanding immediately prior to the Effective Time were assumed by the Company and converted into stock appreciation rights denominated in shares of Common Stock, subject to substantially the same terms and conditions as were applicable to such Airship SARs immediately prior to the Effective Time.

 

 

 
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The Company’s bylaws provide that the shares of Common Stock issued as merger consideration will be subject to lock-up obligations set forth in the bylaws, unless waived by the unanimous approval of the board of directors; provided, that such lockup obligations do not apply to the lock-up shares of any lock-up holder that have been released from the lock-up obligations set forth therein in writing by the Company prior to the Closing Date.

 

On December 21, 2023, the Business Combination, among other transactions contemplated by the Merger Agreement, was completed.

 

Our principal executive offices are located at 8210 154th Ave NE, Redmond, WA 98052 and our telephone number is (877) 462-4250. Our corporate website address is https://airship.ai. The Company’s website and the information contained on, or that can be accessed through, the website is not deemed to be incorporated by reference in, and is not considered part of, this prospectus.

 

Private Placement

 

On February 2, 2024, the Company issued in a private placement an Amended and Restated Senior Secured Convertible Promissory Note to Platinum Capital Partners Inc. (“Platinum”) in the principal amount of $2,000,000 (the “Platinum Convertible Note”).  The Platinum Convertible Note amends and restates in its entirety the Senior Secured Convertible Promissory Note issued to Platinum in the principal amount of $2,000,000 on June 22, 2023. The repayment amount of the Platinum Convertible Note is 110% of the principal amount ($2,200,000) and matures in full on June 22, 2024. Interest accrues on the Platinum Convertible Note at the rate of 6% per annum calculated on the basis of 360 days.  At the option of Platinum, the principal amount of the Platinum Convertible Note plus any accrued but unpaid interest is convertible into shares of Common Stock at a conversion price per share equal to the lower of (i) $3.69717, subject to appropriate adjustment as provided in the Platinum Convertible Note, and (ii) 65% of the VWAP for the Common Stock for the preceding five trading days immediately prior to any conversion, but in no event below $2.27518, subject to appropriate adjustment as provided in the Platinum Convertible Note. The Platinum Convertible Note contains “weighted average” anti-dilution protection for issuances of shares of Common Stock or Common Stock equivalents at a price less than the conversion price then in effect.

 

In connection with the issuance of the Platinum Convertible Note, the Company also issued to Platinum an Amended and Restated Common Stock Purchase Warrant (the “Platinum Warrant”) dated February 2, 2024 to purchase 189,334 shares of Common Stock at an exercise price per share of $3.69717.  The term of the Platinum Warrant expires on June 22, 2028. The Platinum Convertible Note may not converted, and the Platinum Warrant may not be exercised, to the extent that after giving effect to such conversion and/or exercise, Platinum (together with its affiliates) would beneficially own in excess of 4.99% of the Common Stock outstanding immediately after giving effect to such conversion and/or exercise.

 

The obligations under the Platinum Convertible Note are secured by a blanket lien on all assets of the Company pursuant to an Amended and Restated Security Agreement dated February 2, 2024 (the “Security Agreement”) and are guaranteed pursuant to an Amended and Restated Guaranty dated February 2, 2024 (the “Guaranty”).  The Company also concurrently entered into an Amended and Restated Subordination Agreement.

 

Risk Factors Summary

 

Investing in our securities involves risks. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our securities. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our securities would likely decline, and you may lose all or part of your investment. Set forth below is a summary of some of the principal risks we face:

 

Risks Related to Airship AI’s Business and Industry

 

·   The market for Airship AI’s edge AI services and products is relatively new, and may decline or experience limited growth, and Airship AI’s business is dependent on its clients’ continuing adoption and use its services and products.

 

·   Airship AI’s sales efforts involve considerable time and expense and its sales cycle is often long and unpredictable.

 

·   Historically, existing customers have expanded their relationships with Airship AI, which has resulted in a limited number of customers accounting for a substantial portion of its revenue.

 

 

 
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•   If Airship AI does not successfully develop and deploy new technologies to address the needs of its customers, its business and results of operations could suffer.

 

•   Issues raised by the use of artificial intelligence (“AI”) (including machine learning) in Airship AI’s platforms may result in reputational harm or liability.

 

•   Real or perceived errors, failures, defects, or bugs in Airship AI’s platforms could adversely affect its results of operations and growth prospects.

 

•   Airship AI may not be able to adequately protect or enforce its intellectual property rights or prevent unauthorized parties from copying or reverse engineering its solutions.

 

•   Airship AI has not been profitable in the past and may not achieve or maintain profitability in the future.

 

•   Airship AI requires substantial additional funding, which may not be available to Airship AI on acceptable terms, or at all.

 

•   Unavailability of materials or higher costs could adversely affect Airship AI’s financial results.

 

•   If Airship AI’s security measures are breached or fail and unauthorized access is obtained to a customer’s data, our service may be perceived as insecure, the attractiveness of its services to current or potential customers may be reduced, and Airship AI may incur significant liabilities.

 

•   Airship AI depends on its management team and other key employees and the ability to attract and retain highly skilled employees.

 

•   Airship AI’s management team has limited experience managing a public company and regulatory compliance may divert their attention from the day-to-day management of Airship AI’s business.

 

•   Airship AI’s business depends, in part, on sales to government organizations, and significant changes in the contracting or fiscal policies of such government organizations could have an adverse effect on Airship AI’s business and operating results.

 

•   If Airship AI fails to maintain effective internal control over financial reporting or identify a material weakness or significant deficiency in its internal control over financial reporting, Airship AI’s ability to report its financial condition and results of operations in a timely and accurate manner could be adversely affected, investor confidence in Airship AI company could diminish, and the value of its stock may decline.

 

•   Airship AI could be subject to additional tax liabilities.

 

Risks Related to Our Securities

 

•   There may not be enough liquidity in our securities to enable stockholders to sell their securities.

 

•   The market price of our equity securities may be volatile, and you could lose a significant part of your investment.

 

•   Our executive officers and directors exercise significant control over us, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.

 

•   The requirements of being a public company may strain the Company’s resources and distract management and we will incur substantial costs as a result of being a public company.

 

•   We do not intend to pay any cash dividends in the foreseeable future.

 

•   If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.

 

 
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THE OFFERING

 

Issuer

 

Airship AI Holdings, Inc.

 

 

 

Shares of Common Stock offered by the Selling Securityholders

 

We are registering for resale by the Selling Securityholders up to (i) 12,406,202 shares of Common Stock; (ii) 2,689,902 shares of Common Stock issuable upon the exercise of Converted Warrants held by certain of the Selling Securityholders; (iii) 1,758,105 shares of Common Stock issuable upon the exercise of Converted Options held by certain of the Selling Securityholders; (iv) 1,019,989 shares of Common Stock issuable upon the conversion of the Platinum Convertible Note; and (v) 189,334 shares of Common Stock issuable upon the exercise the Platinum Warrant.

 

 

Securities registered for primary issuance

 

We are registering the primary issuance of an aggregate of up to 16,184,612 shares of Common Stock underlying the Public Warrants, which shares were previously registered in connection with the Business Combination.

 

 

 

Terms of the offering

 

The Selling Securityholders will determine when and how they will dispose of the shares of Common Stock registered under this prospectus for resale. See “Plan of Distribution.”

 

 

 

Shares outstanding prior to this offering

 

22,812,048

 

 

 

Shares outstanding after this offering

 

42,895,885 (assuming the conversion of the Platinum Note into 1,019,989 shares of Common Stock and exercise for cash of outstanding Public Warrants to purchase 16,184,612 shares of Common Stock, outstanding Converted Warrants to purchase 2,689,902 shares of Common Stock and the outstanding Platinum Warrant to purchase 189,334 shares of Common Stock).

 

 

 

Use of proceeds

 

We will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Securityholders except with respect to amounts received by us due to the cash exercise of the Public Warrants, Converted Warrants and the Platinum Warrant. On February 2, 2024, the last reported sales price of our Common Stock was $1.50. The exercise price per share of the Public Warrants is $11.50, the exercise price per share of the Converted Warrants is $1.77 and the exercise price per share of the Platinum Warrant is $3.69717. The exercise price of the Public Warrants is significantly higher than the current market price of our Common Stock and accordingly, it is highly unlikely that holders of the Public Warrants will exercise their Public Warrants in the foreseeable future. Cash proceeds associated with the exercises of the Public Warrants, the Converted Warrants and the Platinum Warrant are dependent on our stock price and given the recent price volatility of our Common Stock and relative lack of liquidity in our stock, we may not receive any cash proceeds in relation to such outstanding warrants. We expect to use the proceeds received from the exercise of such warrants, if any, for working capital and general corporate purposes. See “Use of Proceeds.”

 

 

 

Risk factors

 

You should carefully read the “Risk Factors” beginning on page 8 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our Common Stock or Warrants.

 

 

 

Nasdaq ticker symbols

 

Our Ordinary Shares are listed on The Nasdaq Global Market under the symbol “AISP” and our Public Warrants are listed on The Nasdaq Capital Market under the symbol “AISPW”.

 

 
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RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not known to us or that we consider immaterial as of the date of this prospectus. The trading price of our securities could decline due to any of these risks, and, as a result, you may lose all or part of your investment. The following discussion should be read in conjunction with Airship AI’s financial statements and notes thereto included herein. You should carefully consider the following risk factors in addition to the other information included in this prospectus, including matters addressed in the section titled “Cautionary Statement Regarding Forward-Looking Statements.”

 

Unless the context requires otherwise, references to “Airship AI,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Airship AI prior to the Business Combination and the business and operations of the Company as directly or indirectly affected by Airship AI by virtue of the Company’s ownership of the business of Airship AI following the Business Combination.

 

Risks Related to Airship AI’s Business and Industry

 

The market for Airship AI’s edge AI services and products is relatively new, and may decline or experience limited growth, and Airship AI’s business is dependent on its clients’ continuing adoption and use its services and products.

 

The edge AI market is relatively new and is subject to a number of risks and uncertainties. Airship AI has developed an edge AI platform system. Through this platform, we deliver our edge AI services to our clients, which include law enforcement, military, and commercial enterprise organizations. Airship AI believes that our future success will significantly depend on the growth, if any, of this market and the use of our services and products, including our Nexus real-time analytics technology.

 

The use of edge AI is still relatively new, and consumers may not recognize the need for or benefits of our services and products. If consumers do not recognize the need for and benefits of our services and products, then they may decide to adopt alternative services to satisfy some portion of their business needs. In order to grow our business and extend our market position, Airship AI intends to focus on educating potential customers about the benefits of our services and products, expanding the range of Airship AI’s services and bringing new technologies to market to increase market acceptance and use of our platform. Airship AI’s ability to expand the market that our services and products address depends upon a number of factors, including the cost, performance and perceived value associated with our services and products. The market for our services and products could fail to grow significantly or there could be a reduction in demand for our services and/or products as a result of a lack of acceptance, technological challenges, competing services, a decrease in spending by current and prospective customers, weakening economic conditions and other causes. If the edge AI market does not experience significant growth, or demand for its services and/or products decreases, then our business, financial condition and results of operations could be adversely affected.

 

If Airship AI does not develop enhancements to its services and introduce new services that achieve market acceptance, its growth, business, results of operations and financial condition could be adversely affected.

 

Airship AI’s ability to attract new clients and increase revenue from existing clients depends, in part, on its ability to enhance and improve its existing services, increase adoption and usage of its services, and introduce new services. The success of any enhancements or new services depends on several factors, including timely completion, adequate quality testing, actual performance quality, market accepted pricing levels and overall market acceptance.

 

Enhancements, such as additional technology features, and new services, such as software licenses and data services, that Airship AI develops may not be introduced in a timely or cost-effective manner, may contain errors or defects, may have interoperability difficulties with its platform or other services or may not achieve the broad market acceptance necessary to generate significant revenue. Furthermore, Airship AI’s ability to increase the usage of its services depends, in part, on the development of new uses for its services, which may be outside of its control. Its ability to generate usage of additional services by its data consumers may also require increasingly sophisticated and more costly sales efforts and result in a longer sales cycle. If Airship AI is unable to successfully enhance its existing services to meet evolving data consumer requirements, increase adoption and usage of its services, develop new services, or if its efforts to increase the usage of its services are more expensive than Airship AI expects, then its business, results of operations and financial condition would be adversely affected.

 

 
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Airship AI has experienced moderate growth in the past several years, and if Airship AI fails to effectively manage its growth, then its business, results of operations and financial condition could be adversely affected.

 

Airship AI has experienced moderate growth in its business since 2016 when Airship AI developed its edge AI capabilities in video analytics and cyber analytics. For example, Airship AI has also experienced significant growth in the number of data consumers, usage and amount of data that its platform and associated infrastructure support. This growth has placed, and may continue to place, significant demands on its corporate culture, operational infrastructure and management. Any failure to manage Airship AI’s anticipated growth and organizational changes in a manner that preserves the key aspects of its culture and services could adversely affect Airship AI’s overall chance for future success, including its ability to recruit and retain personnel, and effectively focus on and pursue its corporate objectives. This, in turn, could adversely affect its business, financial condition and results of operations.

 

In addition, Airship AI’s ability to manage its operations and future growth will require Airship AI to continue to improve its operational, financial and management controls, compliance programs with multiple and changing international laws and regulations and reporting systems. Airship AI is currently in the process of strengthening its compliance programs, including its compliance programs related to data protection, privacy and cybersecurity and anti-corruption. Airship AI may not be able to implement improvements in an efficient or timely manner and may discover deficiencies in existing controls, programs, systems and procedures, which could have an adverse effect on its business, reputation, results of operations and financial condition.

 

Airship AI’s sales efforts involve considerable time and expense and its sales cycle is often long and unpredictable.

 

Airship AI’s results of operations may fluctuate, in part, because of the intensive nature of our sales efforts and the length and unpredictability of our sales cycle. As part of our sales efforts, we invest considerable time and expense evaluating the specific organizational needs of our potential customers and educating these potential customers about the technical capabilities and value of our platforms and services. We often also provide our platforms to potential customers at no or low cost initially to them for evaluation purposes through short-term pilot deployments of our platforms, and there is no guarantee that we will be able to convert customers from these short-term pilot deployments to full revenue-generating contracts. In addition, we have a growing direct sales force, and our sales efforts have historically depended on the significant involvement of our senior management team. The length of our sales cycle, from initial demonstration of our platforms to sale of our platforms and services, tends to be long and varies substantially from customer to customer. Our sales cycle often lasts six to nine months but can extend to a year or more for some customers. Because decisions to purchase our platforms involve significant financial commitments, potential customers generally evaluate our platforms at multiple levels within their organization, each of which often have specific requirements, and typically involve their senior management.

 

Our results of operations depend on sales to government and commercial enterprise organizations, which make product purchasing decisions based in part or entirely on factors, or perceived factors, not directly related to the features of the platforms, including, among others, that customer’s projections of business growth, uncertainty about macroeconomic conditions (including as a result of the ongoing COVID-19 pandemic, the ongoing Russia-Ukraine war and related economic sanctions, rising inflation and interest rates, or monetary policy changes), capital budgets, anticipated cost savings from the implementation of our platforms, potential preference for such customer’s internally-developed software solutions, perceptions about our business and platforms, more favorable terms offered by potential competitors, and previous technology investments. In addition, certain decision makers and other stakeholders within our potential customers tend to have vested interests in the continued use of internally developed or existing software, which may make it more difficult for us to sell our platforms and services. As a result of these and other factors, our sales efforts typically require an extensive effort throughout a customer’s organization, a significant investment of human resources, expense and time, including by our senior management, and there can be no assurances that we will be successful in making a sale to a potential customer. If our sales efforts to a potential customer do not result in sufficient revenue to justify our investments, including in our growing direct sales force, our business, financial condition, and results of operations could be adversely affected.

 

Historically, existing customers have expanded their relationships with Airship AI, which has resulted in a limited number of customers accounting for a substantial portion of its revenue. If existing customers do not make subsequent purchases from Airship AI or renew their contracts with Airship AI, or if its relationships with its largest customers are impaired or terminated, Airship AI’s revenue could decline, and its results of operations would be adversely impacted.

 

We derive a significant portion of our revenue from existing customers that expand their relationships with us. Increasing the size and number of the deployments of our existing customers is a major part of our growth strategy. We may not be effective in executing this or any other aspect of our growth strategy.

 

 
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For the nine months ended September 30, 2023, two customers represented 50% and 16% of total revenue from 48 customers, although such a high level of 50% customer concentration is not typical. We are not substantially dependent on this customer or any one customer. The primary reason for the increase in reliance on a single customer for the nine months ended September 30, 2023 was due to the lag-time in delivering on a large order received in late 2022 from one division of a customer which was not fulfilled until 2023. For the year ended December 31, 2022, two customers represented 28% and 17% of total revenue from 45 customers, which is more representative of our typical customer concentration. Our top customers by revenue have been long term customers. From time to time, we may lose a major customer. It is not possible for us to predict the future level of demand from our larger customers for our platforms and applications.

 

We do not have any master service agreements with our customers. For our government agency customers, we must submit and complete standard bidding forms which contain all the applicable terms and conditions for our service offerings. In order to bid and secure government agency contracts, we either work directly with certain governmental agencies or work with and through the entity that has the prime bidding relationship with the government agencies. For our commercial customers, they submit detailed purchase orders which generally contain all the key terms and conditions, but such purchase orders may be supported by separate statements of works for particular projects.

 

Airship AI’s customer awards, either through commercial or government customers, come in a variety of forms depending on if the relationship with the customer is a direct relationship or if it is through a partner. For direct relationships, Airship AI receives the award directly from the commercial customer or government agency, either in the form of a purchase order or the requisite government form. For indirect or partner based awards, Airship AI receives the award in the form of a purchase order or task order against the specific effort being awarded.

 

Regardless of the form of the purchase order and/or the customer vertical, Airship AI has standard terms and conditions which are applied to all awards accepted. These include the specific line items by quantity being acquired, the delivery period for which Airship AI has to deliver the products and services awarded, the support and maintenance offering desired, and the total period of performance for the award (single year or multi-year). Payment is due within 30 days of when the invoice is received irrespective of the type of customer.

 

While we generally offer contract terms up to five years in length, our customers sometimes enter into shorter-term contracts, such as one-year subscriptions, which may not provide for automatic renewal and may require the customer to opt-in to extend the term. Our customers have no obligation to renew, upgrade, or expand their agreements with us after the terms of their existing agreements have expired. In addition, many of our customer contracts permit the customer to terminate their contracts with us with notice periods of varying lengths, generally three to six months. If one or more of our customers terminate their contracts with us, whether for convenience, for default in the event of a breach by us, or for other reasons specified in our contracts, as applicable; if our customers elect not to renew their contracts with us; if our customers renew their contractual arrangements with us for shorter contract lengths or for a reduced scope; or if our customers otherwise seek to renegotiate terms of their existing agreements on terms less favorable to us, our business and results of operations could be adversely affected. This adverse impact would be even more pronounced for customers that represent a material portion of our revenue or business operations.

 

Our ability to renew or expand our customer relationships may decrease or vary as a result of a number of factors, including our customers’ satisfaction or dissatisfaction with our platforms and services, the frequency and severity of software and implementation errors, our platforms’ reliability, our pricing, the effects of general economic conditions, competitive offerings or alternatives, or reductions in our customers’ spending levels. If our customers do not renew or expand their agreements with us or if they renew their contracts for shorter lengths or on other terms less favorable to us, our revenue may grow more slowly than expected or decline, and our business could suffer. Our business, financial condition, and results of operations would also be adversely affected if we face difficulty collecting our accounts receivable from our customers or if we are required to refund customer deposits.

 

Achieving renewal or expansion of deployments may require us to increasingly engage in sophisticated and costly sales efforts that may not result in additional sales. In addition, our customers’ decisions to expand the deployment of our platforms depends on a number of factors, including general economic conditions, the functioning of our platforms, the ability of our forward-deployed engineers to assist our customers in identifying new use cases, modernizing their data architectures, and achieving success with data-driven initiatives, and our customers’ satisfaction with our services. If our efforts to expand within our existing customer base are not successful, our business may suffer.

 

 
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Seasonality may cause fluctuations in Airship AI’s results of operations and financial position.

 

Historically, the first quarter of our year generally has relatively lower sales, and sales generally increase in each subsequent quarter with substantial increases during our third and fourth quarters ending September 30 and December 31, respectively. We believe that this seasonality results from a number of factors, including:

 

 

·

the fiscal year end procurement cycle of our government customers, and in particular U.S. government customers which have a fiscal year end of September 30;

 

 

 

 

·

the fiscal year budgeting process for our commercial customers, many of which have a fiscal year end of December 31;

 

 

 

 

·

seasonal reductions in business activity during the summer months in the United States, Europe, and certain other regions; and

 

 

 

 

·

timing of projects and our customers’ evaluation of our work progress.

 

This seasonality has historically impacted and may in the future continue to impact the timing of collections and recognized revenue. Because a significant portion of our customer contracts are typically finalized near the end of the year, and we typically invoice customers shortly after entering into a contract, we may receive a portion of our customer payments near the end of the year and record such payment as an increase in deferred revenue or customer deposits (“contract liabilities”), while the revenue from our customer contracts is generally recognized over the contract term. While we have historically billed and collected payments for multiple contract years from certain customers in advance, we have and may continue to shift to collecting payments on an annual or other basis.

 

While this has been the historical seasonal pattern of our quarterly sales, we believe that our customers’ required timing for certain new government or commercial programs requiring new software may outweigh the nature or magnitude of seasonal factors that might have influenced our business to date. As a result, we may experience future growth from additional government or commercial mandates that do not follow the seasonal purchasing and evaluation decisions by our customers that we have historically observed.

 

For example, increased government spending on technology aimed at national defense, financial or policy regulation, cybersecurity, or healthcare mandates may drive customer demand at different times throughout our year, the timing of which we may not be able to anticipate and may cause fluctuations in our results of operations. The timing of our fiscal quarters and the U.S. federal government’s September 30 fiscal year end also may impact sales to governmental agencies in the third quarter of our year, offsetting, at least in part, the otherwise seasonal downturn we have historically observed in later summer months.

 

Our recent growth may obscure the extent to which seasonality trends have affected our business and may continue to affect our business. We expect that seasonality will continue to materially impact our business in the future and may become more pronounced over time. The seasonality of our business may cause continued or increased fluctuations in our results of operations and cash flows, which may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, which in turn may cause a decline in the trading price of our securities.

 

If Airship AI does not successfully develop and deploy new technologies to address the needs of its customers, its business and results of operations could suffer.

 

Airship AI’s success has been based on our ability to design software and products that enable the integration of data into a common operating environment to facilitate advanced data analysis, knowledge management, and collaboration. We spend substantial amounts of time and money researching and developing new technologies and enhanced versions of existing features to meet our customers’ and potential customers’ rapidly evolving needs. There is no assurance that our enhancements to our platforms or our new product features, capabilities, or offerings, including new product modules, will be compelling to our customers or gain market acceptance. If our research and development investments do not accurately anticipate customer demand or if we fail to develop our platforms in a manner that satisfies customer preferences in a timely and cost-effective manner, we may fail to retain our existing customers or increase demand for our platforms.

 

 
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The introduction of new products and services by competitors or the development of entirely new technologies to replace existing offerings could make our platforms obsolete or adversely affect our business, financial condition, and results of operations. We may experience difficulties with software development, design, or marketing that delay or prevent our development, introduction, or implementation of new platforms, features, or capabilities. We have in the past experienced delays in our internally planned release dates of new features and capabilities, and there can be no assurance that new platforms, features, or capabilities will be released according to schedule. Any delays could result in adverse publicity, loss of revenue or market acceptance, or claims by customers brought against us, any of which could harm our business. Moreover, the design and development of new platforms or new features and capabilities to our existing platforms may require substantial investment, and we have no assurance that such investments will be successful. If customers do not widely adopt our new platforms, experiences, features, and capabilities, we may not be able to realize a return on our investment and our business, financial condition, and results of operations may be adversely affected.

 

Our new and existing platforms and changes to our existing platforms could fail to attain sufficient market acceptance for many reasons, including:

 

 

·

our failure to predict market demand accurately in terms of product functionality and to supply offerings that meet this demand in a timely fashion;

 

 

 

 

·

product defects, errors, or failures or our inability to satisfy customer service level requirements;

 

 

 

 

·

negative publicity or negative private statements about the security, performance, or effectiveness of our platforms or product enhancements;

 

 

 

 

·

delays in releasing to the market our new offerings or enhancements to our existing offerings, including new product modules;

 

 

 

 

·

introduction or anticipated introduction of competing platforms or functionalities by our competitors;

 

 

 

 

·

inability of our platforms or product enhancements to scale and perform to meet customer demands;

 

 

 

 

·

receiving qualified or adverse opinions in connection with security or penetration testing, certifications or audits, such as those related to IT controls and security standards and frameworks or compliance;

 

 

 

 

·

poor business conditions for our customers, causing them to delay software purchases;

 

 

 

 

·

reluctance of customers to purchase proprietary software products;

 

 

 

 

·

reluctance of our customers to purchase products hosted by our vendors and/or service interruption from such providers; and

 

 

 

 

·

reluctance of customers to purchase products incorporating open source software.

 

If we are not able to continue to identify challenges faced by our customers and develop, license, or acquire new features and capabilities to our platforms in a timely and cost-effective manner, or if such enhancements do not achieve market acceptance, our business, financial condition, results of operations, and prospects may suffer and our anticipated revenue growth may not be achieved. Because we derive, and expect to continue to derive, substantially all of our revenue from customers purchasing our platforms and products, market acceptance of these platforms and products, and any enhancements or changes thereto, is critical to our success.

 

Airship AI’s ability to sell its platforms and satisfy its customers is dependent on the quality of Airship AI’s services, and its failure to offer high quality services could have a material adverse effect on its sales and results of operations.

 

Once Airship AI’s platforms are deployed and integrated with our customers’ existing information technology investments and data, our customers depend on our support and maintenance services to resolve any issues relating to our platforms. Increasingly, our platforms have been deployed in large-scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our platforms for use in such deployments. Further, our ability to provide effective ongoing services, or to provide such services in a timely, efficient, or scalable manner, may depend in part on our customers’ environments and their upgrading to the latest versions of our platforms and participating in our centralized platform management and services.

 

 
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In addition, our ability to provide effective services is largely dependent on our ability to attract, train, and retain qualified personnel with experience in supporting customers on platforms such as ours. The number of our customers has grown significantly, and that growth has and may continue to put additional pressure on our services teams. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for our support and maintenance services. We also may be unable to modify the future scope and delivery of our support and maintenance services to compete with changes in the services provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase costs and negatively affect our business and results of operations. In addition, as we continue to grow our operations and expand outside of the United States, we need to be able to provide efficient services that meet our customers’ needs globally at scale, and our services teams may face additional challenges, including those associated with operating the platforms and delivering support, training, and documentation in languages other than English and providing services across expanded time-zones. If we are unable to provide efficient support and maintenance services globally at scale, our ability to grow our operations may be harmed, and we may need to hire additional services personnel, which could negatively impact our business, financial condition, and results of operations.

 

Our customers typically need training in the proper use of and the variety of benefits that can be derived from our platforms to maximize the potential of our platforms. If we do not effectively deploy, update, or upgrade our platforms, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing services, our ability to sell additional products and services to existing customers could be adversely affected, we may face negative publicity, and our reputation with potential customers could be damaged. Many enterprise and government customers require higher levels of service than smaller customers. If we fail to meet the requirements of the larger customers, it may be more difficult to execute on our strategy to increase our penetration with larger customers. As a result, our failure to maintain high quality services may have a material adverse effect on our business, financial condition, results of operations, and growth prospects.

 

If Airship AI is not able to maintain and enhance its brand and reputation, Airship AI’s relationships with its customers, partners, and employees may be harmed, and its business and results of operations may be adversely affected.

 

We believe that maintaining and enhancing our brand identity and reputation is important to our relationships with, and to our ability to attract and retain customers, partners, investors, and employees. The successful promotion of our brand depends upon our ability to continue to offer high-quality software, maintain strong relationships with our customers, the community, and others, while successfully differentiating our platforms from those of our competitors. Unfavorable media coverage may adversely affect our brand and reputation. We anticipate that as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. If we do not successfully maintain and enhance our brand identity and reputation, we may fail to attract and retain employees, customers, investors, or partners, grow our business, or sustain pricing power, all of which could adversely impact our business, financial condition, results of operations, and growth prospects. Additionally, despite our internal safeguards and efforts to the contrary, we cannot guarantee that our customers will not ultimately use our platforms for purposes inconsistent with our company values, and such uses may harm our brand and reputation.

 

If the market for Airship AI’s platforms and services develops more slowly than Airship AI expects, its growth may slow or stall, and its business, financial condition, and results of operations could be harmed.

 

The market for Airship AI’s platforms is rapidly evolving. Our future success will depend in large part on the growth and expansion of this market, which is difficult to predict and relies on a number of factors, including customer adoption, customer demand, changing customer needs, the entry of competitive products, the success of existing competitive products, potential customers’ willingness to adopt an alternative approach to data collection, storage, and processing and their willingness to invest in new software after significant prior investments in legacy data collection, storage, and processing software. The estimates and assumptions that are used to calculate our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of the organizations covered by our market opportunity estimates will pay for our platforms and services at all or generate any particular level of revenue for us. Even if the market in which we compete meets the size estimates and growth forecasts, our business could fail to grow at the levels we expect or at all for a variety of reasons outside our control, including competition in our industry. Further, if we or other data management and analytics providers experience security breaches or incidents, loss, corruption, or unavailability of or unauthorized access to customer data, disruptions in delivery, or other problems, this market as a whole, including our platforms, may be negatively affected. If software for the challenges that we address does not achieve widespread adoption, or there is a reduction in demand caused by a lack of customer acceptance, technological challenges, weakening economic conditions (including due to the ongoing COVID-19 pandemic, the ongoing Russia-Ukraine war and related economic sanctions, rising inflation and interest rates, and monetary policy changes), security or privacy concerns, competing technologies and products, decreases in corporate spending, or otherwise, or, alternatively, if the market develops but we are unable to continue to penetrate it due to the cost, performance, and perceived value associated with our platforms, or other factors, it could result in decreased revenue and our business, financial condition, and results of operations could be adversely affected.

 

 
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Issues raised by the use of artificial intelligence (“AI”) (including machine learning) in Airship AI’s platforms may result in reputational harm or liability.

 

AI is enabled by or integrated into some of Airship AI’s technology platforms and is a significant and potentially growing element of our business. As with many developing technologies, AI presents risks and challenges that could affect its further development, adoption, and use, and therefore our business. AI algorithms may be flawed. Datasets in AI training, development, or operations may be insufficient, of poor quality, or reflect unwanted forms of bias. Inappropriate or controversial data practices by, or practices reflecting inherent biases of, data scientists, engineers, and end-users of our systems could impair the acceptance of AI solutions. If the recommendations, forecasts, or analyses that AI applications assist in producing are deficient or inaccurate, we could be subjected to competitive harm, potential legal liability, including under new proposed legislation regulating AI in jurisdictions such as the European Union and brand or reputational harm. Some AI scenarios present ethical issues. Though our technologies and business practices are designed to mitigate many of these risks, if we enable or offer AI solutions that are controversial or problematic because of their purported or real impact on human rights, privacy, employment, or other social issues, we may experience brand or reputational harm, as well as regulatory or legal scrutiny.

 

Real or perceived errors, failures, defects, or bugs in Airship AI’s platforms could adversely affect its results of operations and growth prospects.

 

Because Airship AI offers very complex technology platforms, undetected errors, defects, failures, or bugs have occurred and may in the future occur, especially when platforms or capabilities are first introduced or when new versions or other product or infrastructure updates are released. Our platforms are often installed and used in large-scale computing environments with different operating systems, software products and equipment, and data source and network configurations, which may cause errors or failures in our platforms or may expose undetected errors, failures, or bugs in our platforms. Despite testing by us, errors, failures, or bugs may not be found in new software or releases until after commencement of commercial shipments. In the past, errors have affected the performance of our platforms and can also delay the development or release of new platforms or capabilities or new versions of platforms, adversely affect our reputation and our customers’ willingness to buy platforms from us, and adversely affect market acceptance or perception of our platforms. Many of our customers use our platforms in applications that are critical to their businesses or missions and may have a lower risk tolerance to defects in our platforms than to defects in other, less critical, software products. Any errors or delays in releasing new software or new versions of platforms or allegations of unsatisfactory performance, errors, defects, or failures in released software could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the software, cause us to lose significant customers, subject us to liability for damages and divert our resources from other tasks, any one of which could materially and adversely affect our business, results of operations and financial condition. In addition, our platforms could be perceived to be ineffective for a variety of reasons outside of our control. Hackers or other malicious parties could circumvent our or our customers’ security measures, and customers may misuse our platforms resulting in a security breach or perceived product failure.

 

Real or perceived errors, failures, or bugs in our platforms and services, or dissatisfaction with our services and outcomes, could result in customer terminations and/or claims by customers for losses sustained by them. In such an event, we may be required, or we may choose, for customer relations or other reasons, to expend additional resources in order to help correct any such errors, failures, or bugs. Although we have limitation of liability provisions in our standard software licensing and service agreement terms and conditions, these provisions may not be enforceable in some circumstances, may vary in levels of protection across our agreements, or may not fully or effectively protect us from such claims and related liabilities and costs. We generally provide a warranty to our customers for our software products and services. In the event that there is a failure of warranties in such agreements, we are generally obligated to correct the product or service to conform to the warranty provision as set forth in the applicable agreement, or, if we are unable to do so, the customer is entitled to seek a refund of the purchase price of the product and service (generally prorated over the contract term). The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.

 

 
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In addition, our platforms integrate a wide variety of other elements, and our platforms must successfully interoperate with products from other vendors and our customers’ internally developed software. As a result, when problems occur for a customer using our platforms, it may be difficult to identify the sources of these problems, and we may receive blame for a security, access control, or other compliance breach that was the result of the failure of one of the other elements in a customer’s or another vendor’s IT, security, or compliance infrastructure. The occurrence of software or errors in data, whether or not caused by our platforms, could delay or reduce market acceptance of our platforms and have an adverse effect on our business and financial performance, and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems could harm our business, financial condition, and results of operations. If an actual or perceived breach of information correctness, auditability, integrity, or availability occurs in one of our customers’ systems, regardless of whether the breach is attributable to our platforms, the market perception of the effectiveness of our platforms could be harmed. Alleviating any of these problems could require additional significant expenditures of our capital and other resources and could cause interruptions, delays, or cessation of our product licensing, which could cause us to lose existing or potential customers and could adversely affect our business, financial condition, results of operations, and growth prospects.

 

Airship AI may not be able to adequately protect or enforce its intellectual property rights or prevent unauthorized parties from copying or reverse engineering its solutions. Airship AI’s efforts to protect and enforce its intellectual property rights and prevent third parties from violating its rights may be costly.

 

The success of Airship AI’s services and its business depends, in part, on Airship AI’s ability to obtain intellectual property rights and maintain adequate legal protection for its products in the United States and other international jurisdictions. Airship AI does not have any patents. Airship AI relies on a combination of copyright, service mark, and trade secret laws, as well as confidentiality procedures and contractual obligations, to establish and protect its proprietary rights, all of which provide only limited protection. Airship AI cannot be certain that the steps it has taken will prevent unauthorized use of its technology or the reverse engineering of its technology. Moreover, others may independently develop technologies that are competitive to Airship AI or infringe Airship AI’s intellectual property.

 

Protecting against the unauthorized use of Airship AI’s intellectual property, products and other proprietary rights is expensive and can be difficult, particularly with respect to international jurisdictions. Unauthorized parties may attempt to copy or reverse engineer Airship AI’s solutions or certain aspects of Airship AI’s solutions that are considered proprietary. Litigation may be necessary in the future to enforce or defend Airship AI’s intellectual property rights, to prevent unauthorized parties from copying or reverse engineering its solutions, to determine the validity and scope of the proprietary rights of others or to block the importation of infringing products into the U.S. Any such litigation, regardless of merit, could be costly, divert the attention of management and may not ultimately be resolved in Airship AI’s favor.

 

Effective trademark, service mark, copyright and trade secret protection may not be available or applied for in every country in which Airship AI’s products are available and competitors based in other countries may sell infringing products in one or more markets. An inability to adequately protect and enforce Airship AI’s intellectual property and other proprietary rights or an inability to prevent authorized parties from copying or reverse engineering its technology solutions or certain aspects of its solutions that Airship AI considers proprietary could adversely affect its business, operating results, financial condition and prospects.

 

Airship AI relies on its unpatented proprietary technology, trade secrets, processes and know-how.

 

Airship AI relies on proprietary information (such as trade secrets, know-how and confidential information) to protect intellectual property that may not be patentable or subject to copyright, trademark, trade dress or service mark protection, or that Airship AI believes is best protected by means that do not require public disclosure.

 

Airship AI generally seeks to protect this proprietary information by entering into confidentiality agreements, or consulting, services or employment agreements that contain non-disclosure and non-use provisions with its employees, consultants, contractors and third parties. However, Airship AI may fail to enter into the necessary agreements and, even if entered into, these agreements may be breached or may otherwise fail to prevent disclosure, third-party infringement or misappropriation of its proprietary information, may be limited as to their term and may not provide an adequate remedy in the event of unauthorized disclosure or use of proprietary information. Airship AI has limited control over the protection of trade secrets used by its current or future manufacturing partners and suppliers and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, Airship AI’s proprietary information may otherwise become known or be independently developed by its competitors or other third parties. To the extent that its employees, consultants, contractors, advisors and other third parties use intellectual property owned by others in their work for Airship AI, disputes may arise as to the rights in related or resulting know-how and inventions. Costly and time-consuming litigation could be necessary to enforce and determine the scope of Airship AI’s proprietary rights, and failure to obtain or maintain protection for its proprietary information could adversely affect its competitive business position. Furthermore, laws regarding trade secret rights in certain markets where Airship AI operates may afford limited or no protection for its trade secrets.

 

 
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Airship AI also relies on physical and electronic security measures to protect its proprietary information, but it cannot provide assurance that these security measures will not be breached or that these measures will provide adequate protection. There is a risk that third parties may obtain and improperly utilize Airship AI’s proprietary information to its competitive disadvantage. Airship AI may not be able to detect or prevent the unauthorized use of such information or take appropriate and timely steps to enforce its intellectual property rights.

 

Airship AI has not been profitable in the past and may not achieve or maintain profitability in the future.

 

We had a comprehensive loss of approximately $6.5 million, $498,000 and $5.1 million for the nine months ended September 30, 2023 and the years ended December 31, 2022 and 2021, respectively.

 

There can be no assurance that Airship AI will ever achieve the level of revenues needed to be profitable in the future and if profitability is achieved, that it will be sustained. Airship AI’s revenues have fluctuated and may likely continue to fluctuate significantly from quarter to quarter and from year to year. Airship AI will need to obtain additional capital and increase sales to become profitable.

 

Airship AI requires substantial additional funding, which may not be available to Airship AI on acceptable terms, or at all, and, if not so available, may require Airship AI to delay, limit, reduce or cease its operations.

 

Airship AI has limited financial resources. There can be no assurance that sufficient funding will be available to us to fund our operating expenses and to further develop our business. Unless we achieve substantial profitability, we anticipate that we will likely need to raise additional capital to fund our operations while we implement and execute our business plan. We currently do not have any contracts or commitments for additional financing. In addition, any additional equity financing may involve substantial dilution to our existing shareholders. There can be no assurance that such additional capital will be available on a timely basis or on terms that will be acceptable to us. Failure to obtain such additional financing could result in delay or indefinite postponement of operations or the further development of our business. If adequate funds are not available or are not available on acceptable terms, we may not be able to further fund our business or the expansion thereof, take advantage of strategic acquisitions or investment opportunities or respond to competitive pressures. Such inability to obtain additional financing when needed could have a material adverse effect on our business, results of operations, cash flow, financial condition and prospects.

 

There can be no assurance that Airship AI will be able to comply with the terms of its convertible note.

 

Airship AI issued senior secured convertible promissory notes on June 22, 2023 and October 3, 2023 in principal amounts totaling $2,600,000. Pursuant to the terms of a senior secured convertible promissory notes, $2,000,000 is due on June 22, 2024 and $600,000 is due on September 30, 2024. Failure to repay the principal amounts on the due date, an additional 10% and related interest or to convert these amounts into shares of Airship AI common stock in accordance with the promissory notes would result in a default. We may not have the funds to repay, or the ability to refinance, such outstanding amounts and the holder could foreclose upon critical assets. Any of these outcomes would have an adverse effect on our business and financial condition.

 

Airship AI has a limited operating history. There can be no assurance that Airship AI will be successful in growing its business.

 

We have a limited history of operations. As a result, there can be no assurance that we will be successful in our operations. Any potential for future growth will place additional demands on our executive officers, and any increased scope of our operations will present challenges due to our current limited management resources. There can be no assurance that we will be successful in our efforts. Our inability to locate additional opportunities, to hire additional management and other personnel, or to enhance our management systems, could have a material adverse effect on our results of operations. There can be no assurance that our operations will be profitable.

 

 
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Airship AI faces intense competition within its industry and is subject to the effects of technology change.

 

The industry in which we are engaged is subject to rapid and significant technological change. There can be no assurance that Airship AI’s systems can be upgraded to meet future innovations in the industry or that new technologies will not emerge, or existing technologies will not be improved, which would render Airship AI’s offerings obsolete or non-competitive. Many of the companies we compete with enjoy significant competitive advantages over us, including greater name recognition; greater financial, technical and service resources; established networks; additional product offerings; and greater resources for product development and sales and marketing. In addition, there can be no assurance that other established technology companies, any of which would likely have greater resources than Airship AI, will not enter the market. There can be no assurance that Airship AI will be able to compete successfully against any of its competitors.

 

Airship AI’s proprietary products and services and service delivery may not operate properly, which could damage its reputation, give rise to claims against Airship AI, or divert application of its resources from other purposes, any of which could harm its business and operating results.

 

We may encounter supply chain, human, or technical obstacles that prevent our products and services from operating profitably. If our offerings do not function reliably or fail to achieve customer expectations in terms of performance, customers could assert liability claims against us or cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain customers. We cannot assure you that material performance problems or defects in our products will not arise in the future. Errors may result from receipt, entry, or interpretation of customer information or from interface of our services. These defects and errors and any failure by us to identify and address them could result in loss of revenue or market share, liability to customers or others, failure to achieve market acceptance or expansion, diversion of development resources, injury to our reputation, and increased service and maintenance costs. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.

 

If critical components used in Airship AI’s products become scarce or unavailable, Airship AI may incur delays in delivering its products and providing services, which could damage its business. Airship AI relies on a sustainable supply chain. Any issues with this supply chain could adversely affect daily business operations and profitability.

 

We depend on third party providers, suppliers and licensors to supply some of the hardware, software and support necessary to provide some of our products and services. We obtain these materials from a limited number of vendors, some of which do not have a long operating history, or which may not be able to continue to supply the equipment, supplies, and services we desire. Some of our hardware, software and operational support vendors represent our primary or sole source of supply or have, either through contract or as a result of intellectual property rights, a position of some exclusivity. If demand exceeds these vendors’ capacity or if these vendors experience operating or financial difficulties or are otherwise unable to provide the equipment or services we need in a timely manner, at our specifications and at reasonable prices, our ability to provide some services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials or services might delay our ability to serve our customers. These events could materially and adversely affect our ability to retain and attract customers, and have a material negative impact on our operations, business, financial results and financial condition.

 

Unavailability of materials or higher costs could adversely affect Airship AI’s financial results.

 

We depend on certain domestic and international suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. Although we have and are implementing additional long-term agreements with strategic suppliers to mitigate the risk of supply continuity, there remains risk across our supply chain while we extend our supplier contract program, and there is no guarantee that supply will not be interrupted. Additionally, if our suppliers do not accurately forecast and effectively allocate production or if they are not willing to allocate sufficient production to us, or they decommit to us previously agreed to supply levels, it may reduce our access to components and require us to search for new suppliers. If we are unable to accurately match the timing and quantities of component purchases to our actual needs, we may incur unexpected production disruption, storage, transportation and write-off costs, which may harm our business and operating results.

 

 
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Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations and could harm our reputation.

 

A significant number of our raw materials or components are comprised of petroleum-based products or incur some form of landed cost associated with transporting the raw materials or components to our facility. Our freight and import costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce the profitability of our operations, including: higher fuel costs; potential port closures; customs clearance issues; increased government regulation or regulatory changes for imports of foreign products into the U.S.; delays created by terrorist attacks or threats, public health issues, national disasters or work stoppages; and other matters. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition. For example, there have been disruptions in the semi-conductor supply chain that could negatively impact our ability to make our products. While many of the COVID-19 driven supply chain issues have been resolved, challenges to the timely production and delivery of Taiwan based products we utilize for our edge AI platform due to geo-political factors is a concern looking forward. In the event that our suppliers are unable to provide timely delivery of those supplies it will significantly impact our ability to meet delivery schedules for existing and anticipated edge AI hardware-based solutions.

 

International or domestic geopolitical or other events, including the imposition of new or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components and other government trade policies, could adversely impact the supply and cost of these raw materials or components, and could adversely impact our revenues, profitability and financial condition. In particular, the implementation of tariffs and trade restrictions as well as changes in trade policies between the U.S. and China may have an adverse effect on our supply chain from a sourcing and cost perspective. We source certain raw materials from China, as do some of our suppliers. We may be unable to transition away from China to other jurisdictions or obtain secondary source s for raw materials which could result in a material adverse effect on our revenues, profitability and financial condition.

 

If Airship AI’s security measures are breached or fail and unauthorized access is obtained to a customer’s data, our service may be perceived as insecure, the attractiveness of its services to current or potential customers may be reduced, and Airship AI may incur significant liabilities.

 

Airship AI services involve the web-based and data storage and transmission of customers’ information. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for processing, transmission and storage of such information. Because of the sensitivity of this information and due to requirements under applicable laws and regulations, the effectiveness of our security efforts is very important. If our security measures are breached or fail as a result of third-party action, acts of terror, social unrest, employee error, malfeasance or for any other reasons, someone may be able to obtain unauthorized access to customer data. Improper activities by third-parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our security systems. Our security measures may not be effective in preventing unauthorized access to the customer data stored on our servers. If a breach of our security occurs, we could face damages for contract breach, penalties for violation of applicable laws or regulations, possible lawsuits by individuals affected by the breach and significant remediation costs and efforts to prevent future occurrences. In addition, whether there is an actual or a perceived breach of our security, the market perception of the effectiveness of our security measures could be harmed and we could lose current or potential customers.

 

The loss of one or more of Airship AI’s significant customers, or any other reduction in the amount of revenue Airship AI derives from any such customer, would adversely affect its business, financial condition, results of operations and growth prospects.

 

Airship AI sells its product to commercial and government customers under agreements that are normally paid within 30 days of contract completion. For the nine months ended September 30, 2023, two customers represented 50% and 16% of total revenue from 48 customers, although such a high level of 50% customer concentration is not typical. We are not substantially dependent on this customer or any one customer. The primary reason for the increase in reliance on a single customer for the nine months ended September 30, 2023 was due to the lag-time in delivering on a large order received in late 2022 from one division of a customer which was not fulfilled until 2023. For the year ended December 31, 2022, two customers represented 28% and 17% of total revenue from 45 customers, which is more representative of our typical customer concentration. As of December 31, 2022, four customers represent approximately 42%, 19%, 14% and 10% of outstanding account receivables. As of December 31, 2021, three customers represented 28%, 22% and 18% of the outstanding account receivables. Due to the customers and timely payments, customer concentration in account receivables is minimal.

 

 
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We expect to continue to derive a significant portion of our revenue from a limited number of customers in the future and, in some cases, the portion of our revenue attributable to individual customers may increase. The loss of one or more significant customers or a reduction in the amount of revenue we derive from any such customer could significantly and adversely affect our business, financial condition and results of operations. Customers may choose not to renew their contracts or may otherwise reduce the breadth of the offerings which they purchase for any number of reasons. We are also subject to the risk that any such customer will experience financial difficulties that prevent them from making payments to us on a timely basis or at all.

 

Airship AI depends on key information systems and third party service providers.

 

We depend on key information systems to accurately and efficiently transact our business. These systems and services are vulnerable to interruptions or other failures resulting from, among other things, pandemics, epidemics, natural disasters, terrorist attacks, software or equipment failures, processing errors, computer viruses, other security issues or supplier defaults. Security, backup and disaster recovery measures may not be adequate or implemented properly to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial errors, processing inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other business disruptions, all of which could negatively affect our business and financial performance.

 

As cybersecurity attacks continue to evolve and increase, our information systems could also be penetrated or compromised by internal and external parties’ intent on extracting confidential information, disrupting business processes or corrupting information. These risks could arise from external parties or from acts or omissions of internal or service provider personnel. Such unauthorized access could disrupt our business and could result in the loss of assets, litigation, remediation costs, damage to our reputation and failure to retain or attract customers following such an event, which could adversely affect our business.

 

Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to Airship AI’s competitive position.

 

Increased sophistication and activities of perpetrators of cyber-attacks have resulted in an increase in information security risks in recent years. Hackers develop and deploy viruses, worms, and other malicious software programs that attack products and services and gain access to networks and data centers. If we experience difficulties maintaining existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary and confidential information and may contain personal data of our customers. A security breach could result in disruptions of our internal systems and business applications, harm to our competitive position from the compromise of confidential business information, or subject us to liability under laws that protect personal data. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins.

 

Claims by others that Airship AI infringes their intellectual property could force Airship AI to incur significant costs or revise the way Airship AI conducts its business.

 

Our competitors protect their proprietary rights by means of patents, trade secrets, copyrights, trademarks and other intellectual property. We have not conducted an independent review of patents and other intellectual property issued to third-parties, who may have patents or patent applications relating to our proprietary technology. We may receive letters from third parties alleging, or inquiring about, possible infringement, misappropriation or violation of their intellectual property rights. Any party asserting that we infringe, misappropriate or violate proprietary rights may force us to defend ourselves, and potentially our customers, against the alleged claim. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and/or invalidation of our proprietary rights or interruption or cessation of our operations. Any such claims or lawsuit could:

 

 
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be time-consuming and expensive to defend, whether meritorious or not;

 

 

 

 

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require us to stop providing products or services that use the technology that allegedly infringes the other party’s intellectual property;

 

 

 

 

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divert the attention of our technical and managerial resources;

 

 

 

 

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require us to enter into royalty or licensing agreements with third-parties, which may not be available on terms that we deem acceptable;

 

 

 

 

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prevent us from operating all or a portion of our business or force us to redesign our products, services or technology platforms, which could be difficult and expensive and may make the performance or value of our product or service offerings less attractive;

 

 

 

 

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subject us to significant liability for damages or result in significant settlement payments; or

 

 

 

 

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require us to indemnify our customers.

 

Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely affect our business. Some of our competitors may be able to sustain the costs of intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, any litigation could significantly harm our relationships with current and prospective customers. Any of the foregoing could disrupt our business and have a material adverse effect on our business, operating results and financial condition.

 

Airship AI’s success depends upon the continued protection of its intellectual property rights and Airship AI may be forced to incur substantial costs to maintain, defend, protect and enforce its intellectual property rights.

 

We hold certain intellectual property rights, trade secrets and know-how relating to various aspects of its technologies, which are of material importance to Airship AI and its future prospects. Competitors may attempt to challenge our IP and IP systems, or may be able to design alternative techniques or devices that develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our intellectual property, enforcing those rights, even if successful, could be expensive, uncertain, difficult and time consuming and could require significant time and attention from our management. Furthermore, there can be no assurance that Airship AI’s products will not infringe on others. We may not have sufficient resources to enforce our intellectual property rights or to defend our IP against challenges from others.

 

Airship AI depends on its management team and other key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect its business.

 

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously and adversely affect our business, financial condition and results of operations. Although we have entered into employment or consulting agreements with our personnel, their employment is generally for no specific duration.

 

Our future performance also depends on the continued services and continuing contributions of our senior management team, which include Victor Huang, our co-Founder and Chief Executive Officer, and Derek Xu, our co-Founder and Chief Operating Officer, to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of our senior management team, particularly our Chief Executive Officer, Chief Operating Officer or Chief Technology Officer, could significantly delay or prevent the achievement of our development and strategic objectives, which could adversely affect our business, financial condition and results of operations.

 

Airship AI’s management team has limited experience managing a public company and regulatory compliance may divert their attention from the day-to-day management of Airship AI’s business.

 

Our management team has limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. These obligations typically require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business.

 

 
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Airship AI’s business depends, in part, on sales to government organizations, and significant changes in the contracting or fiscal policies of such government organizations could have an adverse effect on Airship AI’s business and operating results.

 

Our future depends, in part, on continuing sales to government organizations. Demand from government organizations is often unpredictable, subject to budgetary uncertainty and typically involves long sales cycles. We have made significant investments to address the government sector, but we cannot assure you that these investments will be successful, or that we will be able to maintain or grow our revenue from the government sector. Although we anticipate that they may increase in the future, sales to governmental organizations have not accounted for, and may never account for, a significant portion of our revenue. Sales to governmental organizations are subject to a number of challenges and risks that may adversely impact our business. Sales to such government entities include the following risks:

 

 

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selling to governmental agencies can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale;

 

 

 

 

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government certification requirements applicable to our platform may change and, in doing so, restrict our ability to sell into the governmental sector until we have attained the revised certification;

 

 

 

 

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government demand and payment for our platform may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our platform; and

 

 

 

 

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governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our platform, which would adversely impact our revenue and operating results.

 

The occurrence of any of the foregoing could cause governmental organizations to delay or refrain from purchasing our solutions in the future or otherwise have an adverse effect on our business, operating results and financial condition.

 

Acquisitions of, or investments in, other companies, products, or technologies may require significant management attention and could disrupt Airship AI’s business, dilute stockholder value, and adversely affect its operating results.

 

Our business strategy may include acquiring other complementary products, technologies or businesses. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we can make no assurance that these transactions once undertaken and announced, will close.

 

If we merge with or acquire another company following the Business Combination, it is reasonably expected that there will be increased operating expenses and costs associated with the merger that could negatively impact operating profits in the future periods immediately following the M&A event. The extent and longevity of those impacts is not possible to quantify.

 

These kinds of acquisitions or investments may result in unforeseen operating difficulties and expenditures. If we acquire businesses or technologies, we may not be able to integrate the acquired personnel, operations, and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

 

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inability to integrate or benefit from acquired technologies, products, personnel or services in a profitable manner;

 

 

 

 

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unanticipated costs or liabilities associated with the acquisition, including potential liabilities due to litigation and potential identified or unknown security vulnerabilities in acquired technologies that expose us to additional security risks or delay our ability to integrate the product into our offerings or recognize the benefits of our investment;

 

 

 

 

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differences between our values and those of an acquired company, as well as potential disruptions to our workplace culture;

 

 

 

 

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incurrence of acquisition-related costs, including costs related to integration activities;

 

 
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difficulty integrating the accounting and information systems, operations, and personnel of the acquired business;

 

 

 

 

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augmenting the acquired technologies and platforms to the levels that are consistent with our brand and reputation;

 

 

 

 

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difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

 

 

 

 

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challenges converting the acquired company’s revenue recognition policies and forecasting the related revenues, including subscription-based revenues and software license revenues;

 

 

 

 

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potential write-offs of acquired assets or investments, and potential financial and credit risks associated with acquired customers;

 

 

 

 

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difficulty converting the customers of the acquired business onto our platform and contract terms;

 

 

 

 

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diversion of management’s attention and other company resources;

 

 

 

 

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harm to our existing business relationships with business partners and customers as a result of the acquisition;

 

 

 

 

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the potential loss of key employees;

 

 

 

 

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use of resources that are needed in other parts of our business; and

 

 

 

 

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use of substantial portions of our available cash to consummate the acquisition.

 

We cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities or risks. Integrating an acquired technology, asset or business into our operations can be challenging, complex and costly and we cannot assure you that we will be successful or that the anticipated benefits of the acquisitions that we complete will be realized or outweigh their costs. If our integration and development efforts are not successful and the anticipated benefits of the acquisitions that we complete are not achieved, our business, operating results, financial condition, and prospects could be adversely affected.

 

In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures and values, and become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges. These challenges could adversely affect our business, operating results, financial condition, and prospects.

 

Material adverse developments in domestic and global economic conditions, or the occurrence of other world events, could materially adversely affect Airship AI’s revenue and results of operations.

 

Various factors contribute to the uncertain economic environment, including the ongoing Russia-Ukraine war, the increase in, and volatility of, interest rates, high inflation, an actual recession or fears of a recession, trade policies and tariffs and geopolitical tensions. Our inability to offset price inflation in our materials, components, shipping, or labor through increased prices to customers with long-term fixed contracts and formula-based or long-term fixed price contracts with suppliers could adversely affect our business, financial condition and results of operations. Global supply chain and labor market challenges could also negatively affect our performance as well as the performance of our suppliers. Interest rate increases have also created financial market volatility and could further negatively impact financial markets, lead to an economic downturn or recession or have an adverse effect on our operating results. Economic slowdowns can also negatively impact municipal and state tax collections and put pressure on law enforcement budgets which may increase the risk that our customers will be unable to appropriate funds for existing or future contracts with us. In addition, geopolitical risks could affect our customers’ budgets and policies. These and other factors may adversely affect customer demand and ability to pay, cause decrease in sales, and negatively impact the realizability of our accounts and notes receivable and contract assets.

 

 
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Catastrophic events could materially adversely affect Airship AI’s business, results of operations and/or financial condition.

 

A disruption or failure of our systems or operations in the event of a major earthquake, weather event, fire, explosion, failure to contain hazardous materials, industrial accident, utility failure, cyber-attack, terrorist attack, public health crisis, pandemic, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results as well as expose us to claims, litigation and governmental investigations and fines.

 

If our backup and mitigation plans are not sufficient to minimize business disruption, our financial results could be adversely affected. We are continuously monitoring our operations and intend to take appropriate actions to mitigate the risks arising from catastrophic events, but there can be no assurances that we will be successful in doing so.

 

If Airship AI fails to maintain effective internal control over financial reporting or identify a material weakness or significant deficiency in its internal control over financial reporting, Airship AI’s ability to report its financial condition and results of operations in a timely and accurate manner could be adversely affected, investor confidence in Airship AI company could diminish, and the value of its stock may decline.

 

Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more of these processes may result in errors that may not be detected and could result in a material misstatement or other errors of our consolidated financial statements. Such errors may be more likely to occur when implementing new systems and processes, particularly when implementing evolving and complex accounting rules. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, that as a publicly-traded company we disclose whether our internal control over financial reporting and disclosure controls and procedures are effective.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. While we continually undertake steps to improve our internal control over financial reporting as our business changes, we may not be successful in making the improvements and changes necessary to be able to identify and remediate control deficiencies or material weaknesses on a timely basis. If we are unable to successfully remediate any current or future material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected; our liquidity, access to capital markets and perceptions of our creditworthiness may be adversely affected; we may be unable to maintain compliance with securities laws, stock exchange listing requirements and debt instruments covenants regarding the timely filing of periodic reports; we may be subject to regulatory investigations and penalties; investors may lose confidence in our financial reporting; we may suffer defaults under our debt instruments; and our stock price may decline.

 

Changes in accounting principles or their application to Airship AI could result in unfavorable accounting charges or effects, which could adversely affect its results of operations and growth prospects.

 

We prepare our consolidated financial statements in accordance with GAAP. In particular, we make certain estimates and assumptions related to the adoption and interpretation of these principles including the recognition of our revenue and the accounting for our provision for income taxes. If these assumptions turn out to be incorrect, our financial results and position could materially differ from our expectations and could be materially adversely affected. A change in any of these principles or guidance, or in their interpretations or application to us, may have a significant effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results or our forecasts, which may negatively impact our financial statements.

 

If Airship AI’s judgments or estimates relating to its critical accounting policies are based on assumptions that change or prove to be incorrect, Airship AI’s results of operations could fall below expectations of securities analysts and investors, resulting in a decline in its stock price.

 

The preparation of our financial statements in conformity with GAAP requires management to make judgments, estimates, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Airship AI” the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of the combined company’s securities. Significant judgments, estimates, and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition and income taxes.

 

 
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Airship AI has limited insurance which may not cover claims by third parties against Airship AI or its officers and directors.

 

We have directors’ and officers’ liability insurance and commercial liability insurance policies. Claims, however, by third parties against us may exceed policy amounts and we may not have amounts to cover these claims. Any significant claims would have a material adverse effect on our business, financial condition and results of operations. In addition, our limited directors’ and officers’ liability insurance may affect our ability to attract and retain directors and officers.

 

Airship AI could be subject to additional tax liabilities.

 

We are subject to federal, state, and local income taxes in the United States and numerous foreign jurisdictions. Determining our provision for income taxes requires significant management judgment, and the ultimate tax outcome may be uncertain. In addition, our provision for income taxes is subject to volatility and could be adversely affected by many factors, including, among other things, changes to our operating or holding structure, changes in the amounts of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in U.S. and foreign tax laws. Moreover, we are subject to the examination of our income tax returns by tax authorities in the United States and various foreign jurisdictions, which may disagree with our calculation of research and development tax credits, cross-jurisdictional transfer pricing, or other matters and assess additional taxes, interest or penalties. While we regularly assess the likely outcomes of these examinations to determine the adequacy of our provision for income taxes and we believe that our financial statements reflect adequate reserves to cover any such contingencies, there can be no assurance that the outcomes of such examinations will not have a material impact on our results of operations and cash flows. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our financial condition or results of operations may be adversely impacted.

 

Under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any net operating loss carryforwards in the future.

 

Provisions enacted by the 2017 Tax Cuts and Jobs Act related to the capitalization for tax purposes of research and experimental (“R&E”) expenditures became effective on January 1, 2022. Beginning January 1, 2022, all U.S. and non-U.S. based R&E expenditures must be capitalized and amortized over five years and 15 years, respectively.

 

Costs incurred in the development of software programs for Airship AI’s products are charged to operations as incurred until technological feasibility of the software has been established. Generally, technological feasibility is established when the software module performs its primary functions described in its original specifications, contains features required for it to be usable in a production environment, is completely documented and the related hardware portion of the product is complete. After technological feasibility is established, any additional costs are capitalized. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use. No software development costs have been capitalized during the years ended or as of December 31, 2022 and 2021.

 

Risks Related to Our Securities

 

Currently, our Common Stock and Public Warrants are listed on Nasdaq. However, there may not be enough liquidity in such market to enable stockholders to sell their securities.

 

 
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Currently, our Common Stock and Public Warrants are listed on The Nasdaq Global Market and The Nasdaq Capital Market, respectively. If a public market for our securities does not develop, investors may not be able to re-sell their Common Stock or Warrants, rendering their securities illiquid and possibly resulting in a complete loss of their investment. We cannot predict the extent to which investor interest in us will lead to the development of an active, liquid trading market. The trading price of and demand for the Common Stock and the development and continued existence of a market and favorable price for the Common Stock will depend on a number of conditions, including the development of a market following, including by analysts and other investment professionals, the businesses, operations, results, and prospects of the Company, general market and economic conditions, governmental actions, regulatory considerations, legal proceedings, and developments or other factors. These and other factors may impair the development of a liquid market and the ability of investors to sell shares at an attractive price. These factors also could cause the market price and demand for the Common Stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares and may otherwise affect negatively the price and liquidity of the Common Stock. Many of these factors and conditions are beyond the control of the Company or the stockholders.

 

Our common stock price may be volatile.

 

If a public trading market does develop for our Common Stock, its market price is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

 

·

the concentration of the ownership of our shares by a limited number of affiliated stockholders may limit interest in our securities;

 

 

 

 

·

limited “public float” with a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for the Common Stock;

 

 

 

 

·

additions or departures of key personnel;

 

 

 

 

·

loss of a strategic relationship;

 

 

 

 

·

variations in operating results from the expectations of securities analysts or investors;

 

 

 

 

·

announcements of new products or services by us or our competitors;

 

 

 

 

·

reductions in the market share of our products;

 

 

 

 

·

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

 

 

 

·

investor perception of our industry or prospects;

 

 

 

 

·

insider selling or buying;

 

 

 

 

·

investors entering into short sale contracts;

 

 

 

 

·

regulatory developments affecting our industry;

 

 

 

 

·

changes in our industry;

 

 

 

 

·

competitive pricing pressures;

 

 

 

 

·

our ability to obtain working capital financing;

 

 

 

 

·

our ability to execute our business plan;

 

 

 

 

·

operating results that fall below expectations;

 

 

 

 

·

revisions in securities analysts’ estimates or reductions in security analysts’ coverage; and

 

 

 

 

·

economic and other external factors.

 

Many of these factors are beyond our control and may decrease the market price of the Common Stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for the Common Stock will be at any time, including as to whether the Common Stock will sustain current market prices, or as to what effect that the sale of shares or the availability of the Common Stock for sale at any time will have on the prevailing market price.

 

In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the Common Stock.

 

 
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Our executive officers and directors exercise significant control over us, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.

 

Victor Huang, Airship AI’s co-Founder and our Chief Executive Officer, and Derek Xu, Airship AI’s co-Founder and our Chief Operating Officer, beneficially own (including shares underlying Converted Warrants, Converted Stock Options and Converted SARs) approximately 62.3% of the combined voting power for the election of directors to the Board. As a result, these stockholders will be able to influence our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets.

 

These stockholders may have interests, with respect to their Common Stock, which are different from those of the public investors and the concentration of voting power among one or more of these stockholders may have an adverse effect on the price of the Common Stock.

 

In addition, this concentration of ownership might adversely affect the market price of the Common Stock by: (1) delaying, deferring or preventing a change of control; (2) impeding a merger, consolidation, takeover or other business combination involving us; or (3) discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

The requirements of being a public company may strain the Company’s resources and distract management and we will incur substantial costs as a result of being a public company.

 

Following the consummation of the Business Combination, the Company is subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the Securities Act. These rules, regulations and requirements are extensive. We will incur significant costs associated with our public company corporate governance and reporting requirements. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more corporate employees to comply with these requirements or engage outside consultants, which would increase our costs and expenses. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. These applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on the Board or as executive officers.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

 

As a result of disclosure of information in this prospectus and in the filings that we are required to make as a public company, our business, operating results and financial condition have become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If any such claims are successful, our business, operating results and financial condition could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, operating results and financial condition.

 

 
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Sales of a substantial amount of Common Stock in the public market, particularly sales by our executive officers, directors and significant stockholders, or the perception that these sales could occur, could cause the market price of Common Stock to decline.

 

Sales of a substantial number of shares of Common Stock in the public market, particularly sales by our executive officers, directors and principal stockholders, or the perception that these sales might occur, could cause the market price of Common Stock to decline. Some of our executive officers, directors and the holders of a substantial number of shares of Common Stock are subject to lock-up provisions in our Bylaws in that, for a period of at least six months from the date of closing of the Business Combination, subject to certain exceptions, prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of any shares of Common Stock and of any securities convertible into or exercisable for Common Stock, unless waived, amended, or repealed by the Board.

 

When the applicable lock-up periods expire, our security holders subject to lock-up provisions will be able to sell shares of Common Stock in the public market. In addition, the Board may, in its discretion, permit our security holders to sell shares prior to the expiration of the restrictive provisions contained in the Bylaws. Sales of a substantial number of such shares upon expiration of the lock-up provisions, the perception that such sales may occur or early release of these provisions could cause our market price to fall or make it more difficult for you to sell your shares of Common Stock at a time and price that you deem appropriate.

 

In addition, we may file a registration statement to register shares reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable vesting requirements and expiration of the lock-up provisions referred to above, the shares issued upon exercise of outstanding stock options would be available for immediate resale in the open market.

 

A decline in the price of Common Stock could affect our ability to raise working capital and adversely impact our ability to continue operations.

 

A prolonged decline in the price of Common Stock could result in a reduction in the liquidity of the Common Stock and a reduction in our ability to raise capital. A decline in the price of Common Stock could be especially detrimental to our liquidity, operations and strategic plans. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new products and services and continue current operations. If our Common Stock’s price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us or our business, our Common Stock price and trading volume could decline.

 

The trading market for our Common Stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the trading price for our Common Stock would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our securities or publish inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us, demand for our Common Stock could decrease, which might cause the share price and trading volume to decline.

 

We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock.

 

We have not paid any cash dividends on Common Stock and do not intend to pay cash dividends on Common Stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the Board decides is relevant. Therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock.

 

 
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The market price of our equity securities may be volatile, and you could lose a significant part of your investment.

 

The market price of Common Stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this prospectus, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as the ongoing Russia-Ukraine war, recessions, inflation, interest rate changes or international currency fluctuations, may negatively affect the market price of our Common Stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If our common stock is no longer listed on a national securities exchange such as Nasdaq and if the price of our common stock is less than $5.00, our common stock may be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive: (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.

 

We are a “smaller reporting company” and “emerging growth company” under the U.S. federal securities laws, and the reduced reporting requirements applicable to smaller reporting companies and emerging growth companies could make our common stock less attractive to investors.

 

We are a “smaller reporting company” and an “emerging growth company” under U.S. federal securities laws. For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Furthermore, as an emerging growth company, we may take advantage of exemptions from certain reporting requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and exemptions from the requirements of holding a non-binding advisory vote on executive compensation. Investors may not find our common stock attractive because we may rely on these exemptions and reduced disclosures. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common stock held by non-affiliates exceeds $250 million as of the prior June 30, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30.

 

We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of BYTS’ IPO, (b) in which we have total annual gross revenue of at least $1.23 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which we have issued more than $1.00 billion in non-convertible debt securities during the prior three-year period. 

 

 
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Anti-takeover provisions contained in our certificate of incorporation and bylaws could impair a takeover attempt.

 

Our Charter and bylaws afford certain rights and powers to our board of directors that could contribute to the delay or prevention of an acquisition that it deems undesirable, including:

 

 

·

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

 

 

 

·

the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which may prevent stockholders from being able to fill vacancies on our board of directors;

 

 

 

 

·

the requirement that a special meeting of stockholders may be called only by our board of directors or the chairman of the board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

We are also subject other provisions of Delaware law that limit the ability of stockholders in certain situations to effect certain business combinations. Any of the foregoing provisions and terms that has the effect of delaying or deterring a change in control could limit the opportunity for stockholders to receive a premium for their shares of Common Stock, and could also affect the price that some investors are willing to pay for the Common Stock.

 

Our certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

 

Our Charter requires, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought in the Court of Chancery in the State of Delaware or, if that court lacks subject matter jurisdiction, another federal or state court situated in the State of Delaware. These provisions will not apply to suits brought to enforce any liability or duty created by the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in the Charter. In addition, the our Charter and bylaws provide that, to the fullest extent permitted by law, claims made under the Securities Act must be brought in federal district court.

 

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims and result in increased costs for investors to bring a claim. Alternatively, if a court were to find the choice of forum provision contained in the Charter to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

 

 
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USE OF PROCEEDS

 

All of the shares of Common Stock offered by the Selling Securityholders pursuant to this prospectus will be sold by the Selling Securityholders for their respective accounts. We will not receive any of the proceeds from these sales.

 

We may receive up to an aggregate of approximately $186,123,038 from the exercise of the outstanding Public Warrants (each of which is generally exercisable for $11.50 per share), approximately $4,761,127 from the exercise of the outstanding Converted Warrants (each of which is generally exercisable for $1.77 per share) and approximately $700,536 from the exercise of the outstanding Platinum Warrant (which is generally exercisable for $3.69717 per share), assuming the exercise in full of all such warrants for cash. There is no assurance that the holders of such warrants will elect to exercise any or all of their warrants. To the extent that Public Warrants or Platinum Warrant are exercised on a “cashless basis,” the amount of cash we would receive from the exercise of the Public Warrants will decrease, potentially to zero. On February 2, 2024, the last reported sales price of our Common Stock was $1.50.  The exercise price per share of the Public Warrants is $11.50, the exercise price per share of the Converted Warrants is $1.77 and the exercise price per share of the Platinum Warrant is $3.69717. The exercise price of the Public Warrants is significantly higher than the current market price of our Common Stock and accordingly, it is highly unlikely that holders of the Public Warrants will exercise their Public Warrants in the foreseeable future. Cash proceeds associated with the exercises of the Public Warrants, the Converted Warrants and the Platinum Warrant are dependent on our stock price and given the recent price volatility of our Common Stock and relative lack of liquidity in our stock, we may not receive any cash proceeds in relation to such outstanding warrants.

 

We expect to use the net proceeds received from the exercise of such warrants, if any, for working capital and general corporate purposes. Our management will have broad discretion over the use of proceeds from the exercise of such warrants. See “Plan of Distribution.”

 

 
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MARKET INFORMATION OF OUR SECURITIES

 

Market Information

 

Our Common Stock and Public Warrants are listed on The Nasdaq Global Market and The Nasdaq Capital Market, respectively, and began trading on Nasdaq under the symbols “AISP” and “AISPW,” respectively, on December 22, 2023. On February 2, 2024, the last reported sales price of our Common Stock was $1.50 per share and the last reported sales price of our Public Warrants was approximately $0.06 per warrant. As of February 2, 2024, there were approximately 447 holders of record of our Common Stock, 13 holders of record of the Public Warrants, two holders of the Converted Warrants and one holder of the Platinum Warrant. Such numbers do not include beneficial owners holding our securities through nominee names.

 

Dividend Policy

 

We have not paid any cash dividends on our Common Stock to date. The payment of cash dividends by us in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors.

 

 
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed combined financial information presents the combination of financial information of BYTS and Airship AI, adjusted to give effect to the Business Combination and related transactions. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.”

 

The unaudited pro forma condensed combined financial information filed as Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on December 28, 2023 has been corrected in this prospectus to classify a portion of the Earnout Shares as a liability.

 

On June 27, 2023, BYTS entered into the Merger Agreement, by and among BYTS, Merger Sub, and Airship AI. The Merger Agreement was amended on September 22, 2023.

 

The unaudited pro forma condensed combined balance sheet as of September 30, 2023, combines the unaudited historical condensed balance sheet of BYTS as of September 30, 2023, with the unaudited historical condensed consolidated balance sheet of Airship AI as of September 30, 2023, giving effect to the Business Combination, as if it had been consummated as of that date.

 

The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 combines the unaudited historical condensed statement of operations of BYTS for the nine months ended September 30, 2023 with the unaudited historical condensed consolidated statement of operations of Airship AI for the nine months ended September 30, 2023, giving effect to the Business Combination, as if it had been consummated as of January 1, 2022, the earliest period presented.

 

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2022 combines the audited historical statement of operations of BYTS for the year ended December 31, 2022 with the audited historical statement of operations of Airship AI for the year ended December 31, 2022, giving effect to the Business Combination, as if it had been consummated as of January 1, 2022, the earliest period presented.

 

The historical financial information has been adjusted to give pro forma effect to events that relate to material financing transactions consummated after September 30, 2023, and pro forma adjustments that are directly attributable to the Business Combination. The adjustments presented on the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Business Combination.

 

The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience. BYTS and Airship AI have not had any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies. This information should be read together with the following:

 

 

·

the historical unaudited condensed financial statements of BYTS as of and for the three and nine months ended September 30, 2023 and 2022;

 

 

 

 

·

the historical unaudited condensed consolidated financial statements of Airship AI as of and for the nine months ended September 30, 2023 and 2022;

 

 

 

 

·

the historical audited financial statements of BYTS as of December 31, 2022 and 2021, for the year ended December 31, 2022 and the period from January 8, 2021 (inception) through December 31, 2021;

 

 

 

 

·

the historical audited consolidated financial statements of Airship AI as of and for the years ended December 31, 2022 and 2021;

 
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·

the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of BYTS,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Airship AI” and other financial information included in the prospectus filed on December 5, 2023 and supplemented on December 15, 2023; and

 

 

 

 

·

other information relating to BYTS and Airship AI included in this proxy statement/prospectus filed on December 5, 2023 and supplemented on December 15, 2023, including the Merger Agreement and the description of certain terms thereof set forth under the section entitled “The Business Combination.”

 

Description of the Business Combination

 

The Merger

 

Effective as of December 21, 2023, subject to the conditions of the Merger Agreement, following the Domestication, Merger Sub merged with and into Airship AI, after which Airship AI became the Surviving Corporation and a wholly-owned subsidiary of BYTS. In connection with the Business Combination, BYTS was renamed “Airship AI Holdings, Inc.”

 

The Domestication

 

On December 20, 2023, subject to the conditions of the Merger Agreement, BYTS de-registered from the Register of Companies in the Cayman Islands by way of continuation out of the Cayman Islands and into the State of Delaware so as to migrate to and domesticate as a Delaware corporation in accordance with Section 388 of the Delaware General Corporation Law, as amended, and Part XII of the Companies Act (Revised) of the Cayman Islands.

 

In connection with the Domestication, (x) prior to the Domestication, Sponsor surrendered to BYTS for no consideration the sole issued and outstanding BYTS Class B Ordinary Share and (y) at the effective time of the Domestication, (i) each then issued and outstanding BYTS Class A Ordinary Share, converted automatically, on a one-for-one basis, into one share of Airship Pubco Common Stock, (ii) each then issued and outstanding BYTS Warrant became one Airship Pubco Warrant exercisable for one share of Airship Pubco Common Stock pursuant to the Warrant Agreement, dated as of March 18, 2021, by and between BYTS and Continental Stock Transfer & Trust Company, as warrant agent, and (iii) each then issued and outstanding BYTS Unit separated and converted automatically into one share of Airship Pubco Common Stock and one-half of one Airship Pubco Warrant.

 

On December 13, 2023, BYTS formed a wholly-owned subsidiary in Nevada, BYTS NV Merger Sub, Inc. (“NV Merger Sub”), for the purpose of acquiring SILLC (E) Acquisition Corp., a Nevada corporation (“SILLC”), an entity subject to a bankruptcy proceeding that has no assets, no equity owners and no liabilities, except for claims of approximately 400 holders of allowed unsecured claims and a holder of allowed administrative expenses (collectively, the “Claim Holders”). On December 15, 2023, BYTS entered into an Agreement and Plan of Merger (the “SILLC Merger Agreement”) by and among BYTS, NV Merger Sub, SILLC, and the other parties thereto, pursuant to which, immediately following the consummation of the Domestication and prior to the consummation of the Business Combination, NV Merger Sub merged with and into SILLC (the “SILLC Merger”), with SILLC surviving the SILLC Merger as a wholly-owned subsidiary of BYTS. SILLC became the successor and “Post Confirmation Debtor” pursuant to the bankruptcy plan. As a result of the SILLC Merger, and in accordance with the bankruptcy plan, Airship Pubco issued an aggregate of 150,000 shares of Airship Pubco Common Stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfaction of their respective claims, pursuant to Section 1145 of the U.S. Bankruptcy Code. The Sponsor forfeited an equal number of Sponsor Shares.

 

Consideration and Structure

 

Under the Merger Agreement, the Airship AI equityholders that held shares of Airship Common Stock, Airship Options, Airship Earnout Warrants or Airship SARs received an aggregate of 22.5 million shares of Airship Pubco Common Stock in exchange for all of Airship AI’s outstanding equity interests.

 

The Merger Agreement also provides, among other things, that the Airship Earnout Holders have the contingent right to receive up to 5.0 million Earnout Shares assuming the Airship Earnout Holders comply with various terms and conditions of the agreement, and the following performance and market based contingencies are achieved:

 

 
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(A)

25% of the Earnout Shares if, for the period starting on the Closing Date and ending on the last day of the full calendar quarter immediately following the first anniversary of the Closing Date, (1) Company Revenue is at least $39 million, or (2) the aggregate value of new contract awards (including awards obtained through purchase orders) with federal law enforcement agencies (whether such awards are obtained directly or through intermediaries) has grown by at least 100% as compared to the year-over-year amount for the twelve-month period ending on the date of the Merger Agreement;

 

 

 

 

(B)

75% of the Earnout Shares if, for the period starting on the Closing Date and ending on the last day of the full calendar quarter immediately following the third anniversary of the Closing Date, Company Revenue is at least $100 million;

 

 

 

 

(C)

50% of the Earnout Shares if, at any time during the period starting on the Closing Date and ending on the fifth anniversary of the Closing Date, over any twenty (20) trading days within any thirty (30) trading day period the VWAP of the Airship Pubco Common Stock is greater than or equal to $12.50 per share; and

 

 

 

 

(D)

50% of the Earnout Shares if, at any time during the period starting on the Closing Date and ending on the fifth anniversary of the Closing Date, over any twenty (20) trading days within any thirty (30) trading day period the VWAP of the Airship Pubco Common Stock is greater than or equal to $15.00 per share.

 

For the avoidance of doubt, the Company Earnout Holders shall be entitled to earn Earnout Shares upon the occurrence of each Earnout Milestone (or a Change of Control) during the Applicable Earnout Period; provided, however, that each Earnout Milestone (or a Change of Control if applicable) shall only occur once, if at all, and in no event shall the Company Earnout Holders be entitled to earn more than 5,000,000 Earnout Shares in the aggregate (subject to adjustment as set forth in the Merger Agreement).

 

Notwithstanding anything in the Merger Agreement to the contrary, any Earnout Shares issuable under the Merger Agreement to a Company Earnout Holder in respect of each Company Option or Company SAR held by such Company Earnout Holder as of immediately prior to the Effective Time shall be earned by such Company Earnout Holder on the later of (i) the occurrence of the applicable Earnout Milestone, and (ii) the date on which the Converted Stock Option in respect of such Company Option or Converted SAR in respect of such Company SAR becomes vested pursuant to its applicable vesting schedule, but only if such Company Earnout Holder continues to provide services (whether as an employee, director or individual independent contractor) to Parent or one of its Subsidiaries through such date. Notwithstanding the foregoing,

any Earnout Shares that are not earned by a Company Earnout Holder in respect of its Company Options or Company SARs on or before the fifth anniversary of the Closing Date shall be forfeited without any consideration. Any Earnout Shares that are forfeited pursuant to the Merger Agreement shall be reallocated to the other Company Earnout Holders who remain entitled to receive Earnout Shares in accordance with their respective Earnout Pro Rata Shares.

 

Pursuant to the Merger Agreement, at the Effective Time, each Airship Option that was outstanding as of immediately prior to the Effective Time (whether vested or unvested) converted into (i) a Converted Stock Option, and (ii) the right to receive a number of Earnout Shares in accordance with, and subject to, the contingencies set forth in the Merger Agreement. At the Effective Time, Airship Pubco assumed all obligations of Airship with respect to each Converted Stock Option.

 

Pursuant to the Merger Agreement, at the Effective Time, each Airship SAR that was outstanding immediately before the Effective Time (whether vested or unvested) was assumed by Airship Pubco and converted into a Converted SAR. Each Converted SAR continued to have and be subject to substantially the same terms and conditions as were applicable to such Airship SAR immediately before the Effective Time (including expiration date, vesting conditions, and exercise provisions), except that (i) each Converted SAR covered that number of shares of Airship Pubco Common Stock equal to (A) the product (rounded down to the nearest whole number) of (1) the number of shares of Airship Common Stock subject to the Airship SAR immediately before the Effective Time and (2) the Conversion Ratio and (B) a number of Earnout Shares in accordance with, and subject to, the contingencies set forth in the Merger Agreement, and (ii) the per share base value for each share of Airship Pubco Common Stock covered by the Converted SAR equaled to the quotient (rounded up to the nearest whole cent) obtained by dividing (A) the base value per share of Airship Common Stock of such Airship SAR immediately prior to the Effective Time by (B) the Conversion Ratio. At the Effective Time, Airship Pubco assumed all obligations of Airship AI with respect to each Converted SARs.

 

Pursuant to the Merger Agreement, at the Effective Time, all of the Airship Warrants converted into (i) a Converted Warrant and (ii) with respect to each Airship Earnout Warrant, the right to receive a number of Earnout Shares in accordance with, and subject to, the contingencies set forth in the Merger Agreement. At the Effective Time, Airship Pubco assumed all obligations of Airship AI with respect to any Converted Warrants.

 

 
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The Proposed Bylaws provide that the shares of Airship Pubco Common Stock issued to all holders of Airship Common Stock, Airship Options, Airship Earnout Warrants and Airship SARs as the Aggregate Merger Consideration will be subject to a lock-up for a period of 180 days following the Closing, and that the shares of Airship Pubco Common Stock issued to such holders upon satisfaction of the First Operating Performance Milestone (if any) will be subject to a 12-month lock-up period beginning on the date such shares are issued, unless waived, amended or repealed by the unanimous approval of the Airship Pubco Board; provided, further, that the lockup obligations set forth in Airship Pubco’s bylaws will not apply to the lock-up shares of any lock-up holder that have been released from the lock-up obligations set forth therein in writing by the Company prior to the Closing Date.

 

Parent Support Agreement

 

In connection with the execution of the Merger Agreement, BYTS entered into the Parent Support Agreement with the Sponsor and Airship AI, pursuant to which the Sponsor agreed to, among other things, (a) to forfeit 1,000,000 BYTS Class A Ordinary Shares owned by the Sponsor on the Closing Date and (b) to make the Share Contribution of 2,600,000 BYTS Class A Ordinary Shares to secure non-redemption agreements and/or PIPE Financing. The Parent Support Agreement also provides that the Sponsor Shares will be subject to a lock-up for a period of 180 days following the Closing.

 

 Non-Redemption Agreements

 

On August 1, 2023, BYTS entered into a Non-Redemption Agreement with the Sponsor pursuant to which the Sponsor agreed to acquire from shareholders of BYTS $6 million in aggregate value of Public Shares, either in the open market or through privately negotiated transactions, at a price no higher than the redemption price per share payable to Public Shareholders who exercise Redemption Rights with respect to their Public Shares, prior to the closing date of the Business Combination, to waive its Redemption Rights and hold the Public Shares through the closing date of the Business Combination, and to abstain from voting and not vote the Public Shares in favor of or against the Business Combination. As consideration for the Non-Redemption Agreement, BYTS agreed to pay the Sponsor $0.033 per Public Share per month, which will begin accruing on the date that is three days after the date of the Non-Redemption Agreement and terminate on the earlier of the closing date of the Business Combination, the termination of the Merger Agreement, or the Outside Closing Date (as defined in the Merger Agreement). Additionally, on August 1, 2023, BYTS entered into a Non-Redemption Agreement with the Non-Redeeming Shareholder holding Public Shares, pursuant to which the Non-Redeeming Shareholder agreed not to redeem $1 million in aggregate value of Public Shares held by it on the date of the Non-Redemption Agreement in connection with the Business Combination. The Non-Redeeming Shareholder is an investor in our Sponsor and, other than indirectly through its interest in our Sponsor, the Non-Redeeming Shareholder did not receive any separate consideration for such waiver.

 

Earnout Escrow Agreement

 

On December 21, 2023, the Company and Continental Stock Transfer & Trust Company entered in to an earnout escrow agreement (the “Earnout Escrow Agreement”), effective as of the Closing. The Earnout Escrow Agreement provides, among other things, that the Earnout Shares will be placed in escrow and will not be released from escrow until they are earned as a result of the occurrence of, as applicable, the First Operating Performance Milestone, the Second Operating Performance Milestone, the First Share Price Performance Milestone, and/or the Second Share Price Performance Milestone.

 

Anticipated Accounting Treatment

 

The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, BYTS, who was the legal acquirer, was treated as the “acquired” company for accounting purposes and Airship AI was treated as the accounting acquirer. Accordingly, the Business Combination was treated as the equivalent of Airship AI issuing shares at the closing of the Business Combination for the net assets of BYTS as of the closing date, accompanied by a recapitalization. The net assets of BYTS was stated at historical cost, with no goodwill or other intangible assets recorded.

 

Airship AI was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:

 

 
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·

Airship AI’s stockholders have the majority voting interest in the combined company;

 

 

 

 

·

The Airship Pubco Board is composed of one (1) director designated by BYTS and four (4) directors designated by Airship AI;

 

 

 

 

·

Airship AI’s senior management is the senior management of Airship Pubco;

 

 

 

 

·

The business of Airship AI comprises the ongoing operations of Airship Pubco; and

 

 

 

 

·

Airship AI is the larger entity, in terms of substantive assets.

 

Basis of Pro Forma Presentation

 

The unaudited pro forma condensed combined financial information has been prepared reflecting the actual redemptions as follows:

 

 

·

Actual Redemptions: This scenario reflects that 1,068,187 Public Shares were redeemed for their pro rata share of the cash in the Trust Account. This resulted in a payment of approximately $11.55 million upon consummation of the Business Combination at a redemption price of approximately $10.81 per share.

 

The following summarizes the purchase consideration reflecting the actual redemptions:

 

Total shares transferred(1)

 

 

13,387,384

 

Value per share(2)

 

$10.00

 

Total share consideration

 

$133,873,839

 

Options exchanged(3)

 

 

46,646,100

 

SARs exchanged(4)

 

 

17,581,052

 

Warrants exchanged(5)

 

 

26,899,009

 

Total equity value(6)

 

$225,000,000

 

____________

(1)

Total shares transferred do not include Airship AI options, SARs or Warrants. See notes (3), (4) and (5) directly below for further information on these instruments.

(2)

Value per share is calculated using a $10.00 per-share reference price. As the Business Combination will be accounted for as a reverse recapitalization, the value per share is disclosed for informational purposes only in order to indicate the fair value of shares transferred.

(3)

Options exchanged represents the conversion of Airship AI options and SARs into Airship Pubco options and SARs in accordance with the Merger Agreement. These options are not assumed to be exercised for the purposes of the unaudited pro forma condensed combined financial information and, therefore, have not been included in Total share consideration. The value of the options represents the number of shares that would be issued under the option agreements assuming full cash exercise. Those shares are valued at the $10.00 per-share reference price.

(4)

SARs exchanged represents the conversion of Airship AI SARs into Airship Pubco SARs in accordance with the Merger Agreement. These SARs are not assumed to be exercised for the purposes of the unaudited pro forma condensed combined financial information and, therefore, have not been included in Total share consideration. The value of the SARs represents the number of shares that would be issued under the SARs agreements assuming full cash exercise. Those shares are valued at the $10.00 per-share reference price.

(5)

Warrants exchanged represents the conversion of Airship AI warrants into Airship Pubco Warrants in accordance with the Merger Agreement. These warrants are not assumed to be exercised for the purposes of the unaudited pro forma condensed combined financial information and, therefore, have not been included in Total share consideration. The value of the warrants represents the number of shares that would be issued under the warrant agreements assuming full cash exercise. Those shares are valued at the $10.00 per-share reference price.

(6)

Total equity value includes the value of the exchanged options and warrants assuming full cash exercise of all such instruments. The total equity value is equal to the Equity Value of $225.0 million outlined in the Merger Agreement.

 

 
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The following summarizes the pro forma shares of Airship Pubco Common Stock outstanding reflecting the actual redemptions:

 

 

 

Actual

Redemptions

(Shares)

 

 

%

 

BYTS Public Shareholders(1)

 

 

106,330

 

 

 

0.5%

Non-Redemption Agreement Holders(2)

 

 

3,263,076

 

 

 

14.6%

BYTE NV Shareholders(4)

 

 

150,000

 

 

 

0.7%

Sponsor(3)

 

 

5,372,312

 

 

 

24.1%

Total BYTS Shares

 

 

8,891,718

 

 

 

39.9%

Existing Airship AI Shareholders

 

 

13,387,384

 

 

 

60.1%

Pro Forma Airship Pubco Common Stock at September 30, 2023(5)

 

 

22,279,102

 

 

 

100.0%

___________ 

(1)

Excludes (i) 570,555 Public Shares acquired by the Sponsor from the Public Shareholders in order to comply with the Non-Redemption Agreement to purchase $6 million worth of shares from either the open market or a private arrangement and (ii) approximately 92,521 Public Shares held by the Non-Redeeming Shareholder at an assumed price of $10.81 pursuant to the Non-Redeeming Shareholder’s agreement not to redeem $1 million in aggregate value of Public Shares held by it.

(2)

Reflects 570,555 Public Shares purchased by the Sponsor pursuant to the Non-Redemption Agreement and approximately 92,521 Public Shares held by the Non-Redeeming Shareholder at an assumed price of $10.81 pursuant to the Non-Redeeming Shareholder’s agreement not to redeem $1 million in aggregate value of Public Shares held by it and 2,600,000 shares transferred from Sponsor to Non-Redeeming Shareholders as compensation to enter into Non-Redemption Agreements.

(3)

Excludes 1,000,000 shares held by the Sponsor. The Sponsor agreed (a) to forfeit 1,000,000 BYTS Class A Ordinary Shares owned by the Sponsor on the Closing Date and (b) to make the Share Contribution of 2,600,000 BYTS Class A Ordinary Shares to secure non-redemption agreements and/or PIPE Financing. Also excludes 570,555 Public Shares acquired by the Sponsor from the Public Shareholders in order to comply with the Non-Redemption Agreement to purchase $6 million worth of shares from either the open market or a private arrangement.

(4)

Includes 150,000 shares transferred from Sponsor to the claim holders of BYTE NV in full settlement of any claims.

(5)

Excludes all Airship AI options (including vested Airship AI options), Airship AI SARs, Airship AI shares issuable under convertible notes, and Airship AI warrants as they were not outstanding common stock at the time of Closing. Also excludes the 16,699,626 warrants outstanding to acquire BYTS Class A Ordinary Shares. These warrants converted into warrants to acquire Airship Pubco Common Stock at Closing.

 

 
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2023 

 

 

 

Airship AI

(Historical)(A)

 

 

Byte

(Historical)(B)

 

 

Transaction Accounting Adjustments

(Actual

Redemptions)

 

 

 

 

Pro Forma

Combined

(Actual

Redemptions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$482,373

 

 

$18,752

 

 

$8,121,895

 

 

 

(1)

 

$3,456,397

 

 

 

 

 

 

 

 

 

 

 

 

(4,685,225 )

 

 

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(340,838 )

 

 

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(140,560 )

 

 

(8)

 

 

 

 

Accounts receivable, net of provision for credit losses of $0

 

 

600,938

 

 

 

 

 

 

 

 

 

 

 

 

 

600,938

 

Prepaid expenses and other

 

 

16,334

 

 

 

20,190

 

 

 

894,662

 

 

 

(4)

 

 

931,186

 

Payroll and income tax receivable

 

 

7,230

 

 

 

 

 

 

 

 

 

 

 

 

 

7,230

 

Total Current Assets

 

 

1,106,875

 

 

 

38,942

 

 

 

3,849,934

 

 

 

 

 

 

 

4,995,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

5,580

 

 

 

 

 

 

 

 

 

 

 

 

 

5,580

 

Operating lease right of use asset

 

 

25,974

 

 

 

 

 

 

 

 

 

 

 

 

 

25,974

 

Other assets

 

 

255,431

 

 

 

 

 

 

 

 

 

 

 

 

 

255,431

 

Investments held in Trust Account

 

 

 

 

 

25,254,705

 

 

 

(13,709,278 )

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,545,427 )

 

 

(2)

 

 

 

 

Total Assets

 

$1,393,860

 

 

$25,293,647

 

 

$(21,404,771 )

 

 

 

 

 

$5,282,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable – trade

 

$592,199

 

 

$184,322

 

 

$(275,000 )

 

 

(4)

 

$501,521

 

Advances from founders

 

 

1,750,000

 

 

 

 

 

 

 

 

 

 

 

 

 

1,750,000

 

Accrued expenses

 

 

112,700

 

 

 

 

 

 

3,375,000

 

 

 

(4)

 

 

3,487,700

 

Current portion of Senior Secured Convertible Promissory Note

 

 

2,385,503

 

 

 

 

 

 

 

 

 

 

 

 

 

2,385,503

 

Current Portion of operating lease liability

 

 

26,844

 

 

 

 

 

 

 

 

 

 

 

 

 

26,844

 

Deferred revenue – current portion

 

 

4,059,406

 

 

 

 

 

 

 

 

 

 

 

 

 

4,059,406

 

Advances from related party

 

 

 

 

 

140,560

 

 

 

(140,560 )

 

 

(8)

 

 

 

Non-redemption agreement liability

 

 

 

 

 

250,243

 

 

 

(250,243 )

 

 

(6)

 

 

 

Non-redemption agreement liability – related party

 

 

 

 

 

37,657

 

 

 

(37,657 )

 

 

(6)

 

 

 

Accrued expenses

 

 

 

 

 

2,454,277

 

 

 

(2,019,438 )

 

 

(4)

 

 

434,839

 

Total current liabilities

 

 

8,926,652

 

 

 

3,067,059

 

 

 

652,102

 

 

 

 

 

 

 

12,645,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue – non-current

 

 

4,693,897

 

 

 

 

 

 

 

 

 

 

 

 

 

4,693,897

 

Redemption payable

 

 

 

 

 

5,587,383

 

 

 

(5,587,383 )

 

 

(1)

 

 

 

Derivative warrant liability

 

 

 

 

 

3,840,914

 

 

 

 

 

 

 

 

 

 

3,840,914

 

Earnout liability

 

 

 

 

 

 

 

 

46,243,636

 

 

 

(11)

 

 

46,243,636

 

Deferred underwriting fee payable

 

 

 

 

 

11,329,238

 

 

 

(11,329,238 )

 

 

(7)

 

 

 

Total Liabilities

 

 

13,620,549

 

 

 

23,824,594

 

 

 

29,979,117

 

 

 

 

 

 

 

67,424,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock subject to possible redemption

 

 

 

 

 

19,567,322

 

 

 

(8,021,895 )

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,545,427 )

 

 

(2)

 

 

 

 

 

 

 

 

 

 

19,567,322

 

 

 

(19,567,322 )

 

 

 

 

 

 

 

 

 
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET — (Continued) 

AS OF SEPTEMBER 30, 2023

 

 

 

Airship AI

(Historical)(A)

 

 

Byte

(Historical)(B)

 

 

Transaction

Accounting

Adjustments

(Actual

Redemptions)

 

 

 

 

 

Pro Forma

Combined

(Actual

Redemptions)

 

Stockholders’ Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common stock

 

 

 

 

 

912

 

 

 

(912 )

 

 

(5)

 

 

 

Common stock

 

 

44,666

 

 

 

 

 

 

77

 

 

 

(3)

 

 

2,228

 

 

 

 

 

 

 

 

 

 

 

 

(44,666 )

 

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,876

 

 

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

260

 

 

 

(10)

 

 

 

 

Additional paid-in capital

 

 

4,537,370

 

 

 

 

 

 

8,021,818

 

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,872,953 )

 

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15 )

 

 

(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(260)

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,685,960)

 

 

 

(11)

 

 

 

 

 

Accumulated deficit

 

 

(16,796,375 )

 

 

(18,099,181 )

 

 

(4,871,125 )

 

 

(4)

 

 

(62,131,402 )

 

 

 

 

 

 

 

 

 

 

 

10,916,655

 

 

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,938 )

 

 

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,329,238

 

 

 

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,557,676)

 

 

(11)

 

 

 

 

Accumulated other comprehensive loss

 

 

(12,350 )

 

 

 

 

 

 

 

 

 

 

 

 

(12,350 )

Total Stockholders’ Deficit

 

 

(12,226,689 )

 

 

(18,098,269 )

 

 

(31,816,566)

 

 

 

 

 

 

(62,141,524 )

Total Liabilities and Stockholders’ Deficit

 

$1,393,860

 

 

$25,293,647

 

 

$(21,404,771 )

 

 

 

 

 

$5,282,736

 

____________

(A) Derived from the unaudited consolidated balance sheet of Airship AI.

(B) Derived from the unaudited balance sheet of Byte.

 

See accompanying notes to the unaudited pro forma condensed combined financial information.

 

 
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2023

 

 

 

(A)

Airship AI

(Historical)

 

 

(B)

Byte

(Historical)

 

 

Transaction

Accounting

Adjustments

(Actual

Redemptions)

 

 

 

 

Pro Forma

Combined

(Actual

Redemptions)

 

Net revenue

 

$8,092,971

 

 

$

 

 

$

 

 

 

 

 

$8,092,971

 

Cost of net revenue

 

 

4,013,433

 

 

 

 

 

 

 

 

 

 

 

 

4,013,433

 

Gross profit

 

 

4,079,538

 

 

 

 

 

 

 

 

 

 

 

 

4,079,538

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

2,028,081

 

 

 

 

 

 

 

 

 

 

 

 

2,028,081

 

Selling, general and administrative expenses

 

 

8,067,343

 

 

 

 

 

 

 

 

 

 

 

 

8,067,343

 

General and administrative – related party

 

 

 

 

 

90,000

 

 

 

 

 

 

 

 

 

90,000

 

General and administrative

 

 

 

 

 

3,289,510

 

 

 

378,812

 

 

 

(3)

 

 

3,668,322

 

Total operating loss

 

 

(10,095,424 )

 

 

(3,379,510 )

 

 

(378,812 )

 

 

 

 

 

 

(13,853,746 )

Loss from operations

 

 

(6,015,886 )

 

 

(3,379,510 )

 

 

(378,812 )

 

 

 

 

 

 

(9,774,208 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (loss)

 

 

(408,346 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(408,346 )

Change in fair value of warrant liabilities

 

 

 

 

 

(2,504,864 )

 

 

 

 

 

 

 

 

 

(2,504,864 )

Interest earned in Trust Account

 

 

 

 

 

3,720,218

 

 

 

(3,720,218 )

 

 

(1)

 

 

 

Interest and dividend expense

 

 

(57,830 )

 

 

17,445

 

 

 

 

 

 

 

 

 

 

 

(40,385 )

(Loss) income before taxes

 

 

(6,482,062 )

 

 

(2,146,711 )

 

 

(4,099,030 )

 

 

 

 

 

 

(12,727,803 )

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$(6,482,062 )

 

$(2,146,711 )

 

$(4,099,030 )

 

 

 

 

 

$(12,727,803 )

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(2,244 )

 

 

 

 

 

 

 

 

 

 

 

 

(2,244 )

Total comprehensive loss

 

$(6,484,306 )

 

$(2,146,711 )

 

$(4,099,030 )

 

 

 

 

 

$(12,730,047 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted

 

 

7,614,666

 

 

 

19,713,543

 

 

 

2,565,559

 

 

 

 

 

 

 

22,279,102

 

Basic and diluted net income (loss) per share

 

$(0.85 )

 

$(0.11 )

 

 

 

 

 

 

 

 

 

$(0.57 )

Weighted average shares outstanding, diluted

 

 

7,614,666

 

 

 

19,713,543

 

 

 

2,565,559

 

 

 

 

 

 

 

22,279,102

 

Diluted net (loss) income per share

 

$(0.85 )

 

$(0.11 )

 

 

 

 

 

 

 

 

 

$(0.57 )

____________

(A) Derived from the unaudited statement of operation and comprehensive loss of Airship AI for the nine months period ended September 30, 2023.

(B) Derived from the income statement of BYTS for the nine month period ended September 30, 2023.

 

See accompanying notes to the unaudited pro forma condensed combined financial information.

 

 
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2022

 

 

 

(C) 

Airship AI

(Historical)

 

 

(D) 

Byte

(Historical)

 

 

Transaction

Accounting

Adjustments

(Actual

Redemptions)

 

 

 

 

Pro Forma

Combined

(Actual

Redemptions)

 

Net revenue

 

$14,549,141

 

 

$

 

 

$

 

 

 

 

 

$14,549,141

 

Cost of net revenue

 

 

6,128,128

 

 

 

 

 

 

 

 

 

 

 

 

6,128,128

 

Gross profit

 

 

8,421,013

 

 

 

 

 

 

 

 

 

 

 

 

8,421,013

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

3,614,814

 

 

 

 

 

 

 

 

 

 

 

 

3,614,814

 

Selling, general and administrative expenses

 

 

7,630,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,630,012

 

General and administrative – related party

 

 

 

 

 

 

120,000

 

 

 

 

 

 

 

 

 

 

120,000

 

General and administrative

 

 

 

 

 

 

1,277,009

 

 

 

4,374,413

 

 

 

(2)

 

 

6,156,505

 

 

 

 

 

 

 

 

 

 

 

 

505,083

 

 

 

(3)

 

 

 

 

Total Operating expenses

 

 

(11,244,826 )

 

 

(1,397,009 )

 

 

(4,879,496 )

 

 

 

 

 

 

(17,521,331 )

Loss from operations

 

 

(2,823,813 )

 

 

(1,397,009 )

 

 

(4,879,496 )

 

 

 

 

 

 

(9,100,318 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

42,565

 

 

 

 

 

 

 

 

 

 

 

 

 

42,565

 

Interest expense

 

 

(75,256 )

 

 

 

 

 

 

 

 

 

 

 

 

(75,256 )

Other income – PPP loan forgiveness

 

 

1,146,235

 

 

 

 

 

 

 

 

 

 

 

 

 

1,146,235

 

Other income – employee retention tax credit

 

 

1,232,776

 

 

 

 

 

 

 

 

 

 

 

 

 

1,232,776

 

Change in fair value of warrant liabilities

 

 

 

 

 

7,518,520

 

 

 

 

 

 

 

 

 

 

7,518,520

 

Interest income – bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earned in Trust Account

 

 

 

 

 

4,509,453

 

 

 

(4,509,453 )

 

 

(1)

 

 

 

(Loss) income before taxes

 

 

(477,493 )

 

 

10,630,964

 

 

 

(9,388,949 )

 

 

 

 

 

 

764,522

 

Income tax expense

 

 

(10,000 )

 

 

 

 

 

 

 

 

 

 

 

 

(10,000 )

Net (loss) income

 

$(487,493 )

 

$10,630,964

 

 

$(9,388,949 )

 

 

 

 

 

$754,522

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(10,106 )

 

 

 

 

 

 

 

 

 

 

 

 

(10,106 )

Total comprehensive (loss) income

 

$(497,599 )

 

$10,630,964

 

 

$(9,388,949 )

 

 

 

 

 

$744,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted

 

 

7,614,666

 

 

 

41,491,564

 

 

 

(19,212,462 )

 

 

 

 

 

 

22,279,102

 

Basic and diluted net income (loss) per share

 

$(0.06 )

 

$0.26

 

 

 

 

 

 

 

 

 

 

$0.03

 

Weighted average shares outstanding, diluted

 

 

7,614,666

 

 

 

41,491,564

 

 

 

(19,212,462 )

 

 

 

 

 

 

22,279,102

 

Diluted net (loss) income per share

 

$(0.06 )

 

$0.26

 

 

 

 

 

 

 

 

 

 

$0.03

 

____________

(C) Derived from the audited statements of operation and comprehensive loss of Airship for the year ended December 31, 2022.

(D) Derived from the audited income statement of BYTS for the year ended December 31, 2022.

 

See accompanying notes to the unaudited pro forma condensed combined financial information.

 

 
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

1. Basis of Presentation

 

The unaudited pro forma condensed combined financial information has been adjusted to give effect to transaction accounting adjustments related to the Business Combination linking the effects of the Business Combination to the historical financial information.

 

The Business Combination was accounted for as a reverse recapitalization in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations. Airship AI was determined to be the accounting acquirer. Under the reverse recapitalization model, the Business Combination was treated as Airship AI issuing equity for the net assets of BYTS, with no goodwill or intangible assets recorded.

 

The pro forma adjustments have been prepared as if the Business Combination had been consummated on September 30, 2023, in the case of the unaudited pro forma condensed combined balance sheet, and on January 1, 2022, the beginning of the earliest period presented, in the case of the unaudited pro forma condensed combined statements of operations.

 

The pro forma condensed combined balance sheet as of September 30, 2023, has been prepared using the following:

 

 

·

Airship AI’s historical unaudited condensed consolidated balance sheet as of September 30, 2023, as included elsewhere in this proxy statement/prospectus.

 

 

 

 

·

BYTS’s historical unaudited condensed balance sheet as of September 30, 2023, as included elsewhere in this proxy statement/prospectus.

 

The pro forma condensed combined statement of operations for the nine months ended September 30, 2023, has been prepared using the following:

 

 

·

Airship AI’s historical unaudited condensed consolidated statement of operations for the nine months ended September 30, 2023, as included in proxy statement/prospectus as filed on December 5, 2023 and supplemented on December 15, 2023.

 

 

 

 

·

BYTS’s historical unaudited condensed statement of operations for the nine months ended September 30, 2023, as included in proxy statement/prospectus as filed on December 5, 2023 and supplemented on December 15, 2023.

 

 
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Table of Contents

 

The pro forma combined statement of operations for the year ended December 31, 2022, has been prepared using the following:

 

 

·

Airship AI’s historical consolidated statement of operations for the period year ended December 31, 2022, as included in proxy statement/prospectus as filed on December 5, 2023 and supplemented on December 15, 2023.

 

 

 

 

·

BYTS’s historical condensed statement of operations for the year ended December 31, 2022, as included in proxy statement/prospectus as filed on December 5, 2023 and supplemented on December 15, 2023.

 

The adjustments presented in the unaudited pro forma condensed combined financial information have been identified and presented to provide relevant information necessary for an accurate understanding of Airship Pubco after giving effect to the Business Combination. Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.

 

The Public Warrants issued in connection with BYTS Initial Public Offering (including sale of the Over-Allotment Units) and the Private Placement Warrants have been historically recognized as derivative liabilities in accordance with ASC 815. The terms of the warrants were reviewed in connection with the preparation of the pro forma and concluded that there were no elements that would cause a different accounting treatment. Accordingly, the warrant instruments will remain as liabilities at fair value and adjusts the instruments to fair value at each reporting period subsequent to the Business Combination.

 

The pro forma adjustments reflecting the consummation of the Business Combination are based on certain currently available information and certain assumptions and methodologies that management believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Management believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at this time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.

 

The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the post-combination company. They should be read in conjunction with the historical financial statements and notes thereto of Airship AI and BYTS.

 

2. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2023

 

The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). BYTS has elected not to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information.

 

The Transaction Accounting Adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2023 are as follows:

 

 

(1)

To reflect the release of cash from investments held in the Trust Account and the payoff of the redemptions of $5.59 million in connection with the Second Extension Meeting held on September 22, 2023 for 525,624 BYTS Class A Ordinary Shares exercised their right to redeem their shares for approximately $10.63 per shares.

 

 

 

 

(2)

To reflect the redemptions in connection with vote to approve the Business Combination, shareholders holding an aggregate of 1,068,187 BYTS Class A Ordinary Shares exercised their right to redeem their shares for approximately $10.81 per share of the funds held in the Trust Account for approximately $11.55 million.

 

 

 

 

(3)

To reflect the transfer of share that did not redeem into permanent equity for the 769,406 Class A ordinary shares that remain.

 

 

 

 

(4)

To record an aggregate of $4.87 million of estimated transaction cost consisting of legal, financial advisory and other professional fees related to the Business Combination and a prepaid D&O policy of $0.89 million. Out of the $4.87 million estimated transaction costs, $3.38 million remain payable to bankers currently represents 1.5% of the consideration paid of $225 million which is being negotiated, as such this resulted in $4.69 million paid with cash. The total amount expensed is $4.87 million ($8.06 million of estimated transaction costs, less $2.02 million already accrued by BYTS and $0.28 million already accrued by Airship, less $0.89 million capitalized as prepaid expense).

 

 
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Table of Contents

 

 

(5)

To reflect the recapitalization of Airship AI through (a) the contribution of all the share capital in Airship AI to Airship Pubco Common Stock (b) the issuance of 13,387,384 Airship Pubco shares (c) the forfeiture of 1,000,000 shares in connection with the Sponsor Support Agreement at Closing (d) the surrender of the Class B Ordinary Share of BYTS and (e) the elimination of the historical accumulated deficit of BYTS of $10.92 million, the legal acquiree consisting of $18.10 million historical accumulated deficit as of September 30, 2023 plus the waived underwriting fee of $11.33 million discussed in adjustment 7 below and the transaction cost totaling $0.77 million.

 

 

Class A ordinary shares reconciliation:

 

 

 

Class B converted to Class A at par

 

$

912

 

Issuance of 13,387,384 shares at par

 

 

1,339

 

Forfeiture of Sponsor Class A share at par

 

 

(375

)

Total Class A ordinary shares adjustment at par

 

$

1,876

 

 

 

 

 

 

BYTS historical accumulated deficit elimination reconciliation in millions:

 

 

 

 

Historical accumulated deficit

 

$

18.10

 

BYTS waived underwriting fee

 

 

(11.33

)

BYTS transaction cost settled in cash

 

 

2.79

 

BYTS transaction cost settled included in accrued expenses

 

 

3.38

 

Accrued transaction cost included in balance sheet

 

 

(2.02

)

Total eliminated historical accumulated deficit

 

$

10.92

 

Less historical Airship capital to be recapitalized

 

$

(0.04

)

Net impact to additional paid in capital

 

$

10.88

 

 

 

(6)

To record the payment pursuant to the two non-redemption agreements, pursuant to which each of the non-redeeming shareholders agreed to (a) not redeem 1,000,000 Public Shares held by each party on the date of the non-redemption agreements in connection with the vote to amend BYTS’ Amended and Restated Memorandum and Articles of Association to extend the date by which BYTS has to consummate an initial Business Combination from March 23, 2023 to September 25, 2023 (the “First Extension” and such extended date, the “Extended Date”) and (b) vote their Public Shares in favor of the Extension presented by BYTS for approval by its shareholders. In connection with the foregoing, BYTS agreed to pay to each non-redeeming shareholder $0.033 per Share in cash, total amount paid at closing in connection with the Non-Redemption Agreements was $340,838.

 

 

 

 

 

Additional Non-Redemption Agreements

 

On August 1, 2023, BYTS entered into a Non-Redemption Agreement with the Sponsor pursuant to which the Sponsor agreed to acquire from shareholders of BYTS $6 million in aggregate value of Public Shares, either in the open market or through privately negotiated transactions, at a price no higher than the redemption price per share payable to Public Shareholders who exercise Redemption Rights with respect to their Public Shares, prior to the Closing Date of the Business Combination, to waive its Redemption Rights and hold the Public Shares through the closing date of the Business Combination, and to abstain from voting and not vote the Public Shares in favor of or against the Business Combination. As consideration for the Non-Redemption Agreement, BYTS agreed to pay the Sponsor $0.033 per Public Share per month, which will begin accruing on the date that is three days after the date of the Non-Redemption Agreement and terminate on the earlier of the closing date of the Business Combination, the termination of the Merger Agreement, or the Outside Closing Date (as defined in the Merger Agreement). Additionally, on August 1, 2023, BYTS entered into a Non-Redemption Agreement with the Non-Redeeming Shareholder holding Public Shares, pursuant to which the Non-Redeeming Shareholder agreed not to redeem $1 million in aggregate value of Public Shares held by it on the date of the Non-Redemption Agreement in connection with the Business Combination. The Non-Redeeming Shareholder is an investor in our Sponsor and, other than indirectly through its interest in our Sponsor, the Non-Redeeming Shareholder did not receive any separate consideration for such waiver.

 

 
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Amendment to Non-Redemption Agreement

 

In connection with the Second Extension, on September 14, 2023, BYTS entered into an amendment to the March 8, 2023 non-redemption agreement with one shareholder holding 1,000,000 Public Shares. In exchange for the shareholder’s agreement not to redeem its Public Shares in connection with the Second Extension and to vote in favor of the Second Extension, BYTS agreed to extend its obligation to pay such shareholder $0.033 per share in cash per month through March 25, 2024.

 

 

 

 

(7)

To record the effect of the underwriters agreement to waive the deferred underwriting commissions of $11.3 million, that was to be paid under the terms of the underwriting agreement, in the event of closing of a business combination with Airship AI Holdings, Inc.

 

 

 

 

(8)

To record the repayment of advances from related party at closing for the amount due as of September 30, 2023 and an additional $0.34 million of proceeds received subsequent to September 30, 2023 for total payment at closing for $0.48 million, net impact of cash for the pro forma of $0.14 million.

 

 

 

 

(9)

To record the transfer of 150,000 Sponsor share to the claim holders of BYTE NV. On December 13, 2023, BYTS formed a wholly-owned subsidiary in Nevada, BYTS NV Merger Sub, Inc. (“NV Merger Sub”), for the purpose of acquiring SILLC (E) Acquisition Corp., a Nevada corporation (“SILLC”), an entity subject to a bankruptcy proceeding that has no assets, no equity owners and no liabilities, except for claims of approximately 400 holders of allowed unsecured claims and a holder of allowed administrative expenses (collectively, the “Claim Holders”). On December 15, 2023, BYTS entered into an Agreement and Plan of Merger (the “SILLC Merger Agreement”) by and among BYTS, NV Merger Sub, SILLC, and the other parties thereto, pursuant to which, immediately following the consummation of the Domestication and prior to the consummation of the Business Combination, NV Merger Sub merged with and into SILLC (the “SILLC Merger”), with SILLC surviving the SILLC Merger as a wholly-owned subsidiary of BYTS. SILLC became the successor and “Post Confirmation Debtor” pursuant to the bankruptcy plan. As a result of the SILLC Merger, and in accordance with the bankruptcy plan, Airship Pubco issued an aggregate of 150,000 shares of Airship Pubco Common Stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfaction of their respective claims, pursuant to Section 1145 of the U.S. Bankruptcy Code. The Sponsor forfeited an equal number of Sponsor Shares.

 

 

 

 

(10)

To record the transfer of 2,600,000 Sponsor shares to make the Share Contribution to secure non-redemption agreements and/or PIPE Financing.

 

 

 

 

(11)

Represents the Earnout Shares liability. These earnout shares have been categorized into two components: (i) the “Vested Shares” - those associated with Earnout Holders with vested equity at the closing of the Merger that will be earned upon achievement of the Earnout Milestones and (ii) the “Unvested Shares” - those associated with Earnout Holders with unvested equity at the closing of the Merger that will be earned over the remaining service period with the Company on their unvested equity shares and upon achievement of the Earnout Milestones. The Vested Shares, which represent 95% of the total Earnout Shares are classified as liabilities in the consolidated balance sheet at fair value with changes in fair value recognized in the consolidated statements of operations due to the variability in the number of Earnout Shares at settlement which could change upon a change of control event.  The Earnout arrangement contains a settlement provision that violates the indexation guidance under ASC 815-40.  The Unvested Shares are equity-classified share-based compensation to be recognized over time under ASC 718 due to the service component. The value of the earnout was determined using a Monte Carlo Model. The following assumptions were used in the simulation: Five-year term, quoted prices as of September 30, 2023 of $10.67, volatility of 40.3%, discount rate of 4.60%, probability of meeting the federal law enforcement agency growth at 100%.

 

 

 
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Earnout shares

 

 

5,000,000

 

Per share fair value

 

 

9.754

 

Total estimated grant date fair value

 

$48,769,051

 

5% allocated to Services

 

 

2,525,415

 

95% allocated to Earnout liability

 

$46,243,636

 

 

3. Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the Nine Months Ended September 30, 2023 and the Twelve Months Ended December 31, 2022

 

The transaction accounting adjustments included in the unaudited pro forma condensed combined statements of operations are as follows:

 

 

(A)

Derived from the unaudited condensed statement of operations of Airship AI for the nine months ended September 30, 2023.

 

 

 

 

(B)

Derived from the unaudited condensed statement of operations of BYTS for the nine months ended September 30, 2023.

 

 

 

 

(C)

Derived from the audited consolidated statement of operations of Airship AI for the year ended December 31, 2022.

 

 

 

 

(D)

Derived from the audited statement of operations of BYTS for the year ended December 31, 2022.

 

 

 

 

(1)

Represents an adjustment to eliminate interest income on investments held in the trust account as of the beginning of the period.

 

 

 

 

(2)

Represents an adjustment to recognize the effect of the pro forma balance sheet adjustment presented in Accounting Entry Adjustment #(4) above in the aggregate amount of $4.37 million for the direct, incremental costs of the Business Combination attributed to $0.99 million of legal and profession fees associated to Airship AI and $3.38 million in advisory fees included in accrued expenses, assuming those adjustments were made as of the beginning of the fiscal year presented. As these costs are directly related to the Business Combination, they are not expected to recur in the income of the combined company beyond 12 months after the Business Combination.

 

 

(3)

Represents the stock-based compensation associated to the Earnout Shares. The Earnout Shares are being issued to employees or service providers of Airship AI, as such consideration was given to whether it should be viewed as a compensation arrangement under ASC 718, Stock compensation. The Earnout Shares have a service requirement and as such the shares were determined to fall under ASC 718. The milestones are anticipated to be achieved as such the value of the earn-out assumed to be recognized evenly over the requisite service period of five years. The value of the earnout was determined using a Monte Carlo Model. The following assumptions were used in the simulation: Five-year term, quoted prices as of September 30, 2023 of $10.67, volatility of 40.3%, discount rate of 4.60%, probability of meeting the federal law enforcement agency growth at 100%. Adjustment represents the annual compensation expense for the year ended December 31, 2022 and the nine-month expense for the nine-month period ended September 30, 2023.

 

Earnout shares

 

 

5,000,000

 

Per share fair value

 

 

9.754

 

Total estimated grant date fair value

 

$48,769,051

 

95% allocated to Earnout liability

 

 

46,243,636

 

5% allocated to Service

 

$2,525,415

 

 

 

 

 

 

Earnout period

 

5 years

 

Annual expense

 

 

505,083

 

Nine-month expense

 

 

378,812

 

 

 
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4. Net Loss per Share

 

Represents the net loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination and related transactions, assuming the shares were outstanding since January 1, 2022. As the Business Combination and related transactions are being reflected as if they had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issued in connection with the Business Combination have been outstanding for the entire period presented.

 

The unaudited pro forma condensed combined financial information has been prepared reflecting the actual redemptions:

 

 

 

Pro Forma

Combined

Reflecting

Actual

Redemptions

into Cash

 

Nine Months Ended September 30, 2023

 

 

 

Net loss

 

$(12,727,803 )

Weighted average shares outstanding – basic and diluted

 

 

22,279,102

 

Basic and diluted net loss per share

 

$(0.57 )

 

 

 

 

 

Year Ended December 31, 2022

 

 

 

 

Net income

 

$744,416

 

Weighted average shares outstanding – basic and diluted(1)

 

 

22,279,102

 

Basic and diluted net income per share

 

$0.03

 

 

Weighted average shares calculations, basic and diluted

 

Pro Forma

Combined

Reflecting

Actual

Redemptions

into Cash

 

BYTS Public Shareholders

 

 

106,330

 

Non-Redemption Agreement Holders

 

 

3,263,076

 

BYTS NV Shareholders

 

 

150,000

 

Sponsor

 

 

5,372,312

 

Existing Airship AI Shareholders

 

 

13,387,384

 

Weighted average shares outstanding – basic and diluted

 

 

22,279,102

 

____________

(1)

As Airship Pubco had a net loss on a pro forma combined basis, the outstanding Airship Pubco options of 4,664,610, Airship SARs of 1,758,105, Airship Warrants of 2,689,901, Airship convertible notes of 367,000 and the 5,000,000 in Earnout Shares as well as the BYTS outstanding Public Warrants of 16,184,626 to Public Shareholders and 515,000 BYTS Warrants held by the Sponsor have no impact to diluted net loss per share as they are considered anti-dilutive.

 

 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AIRSHIP AI

 

The following discussion and analysis provides information that Airship AI’s management believes is relevant to an assessment and understanding of Airship AI’s consolidated results of operations and financial condition. The discussion should be read together with Airship AI’s historical audited annual consolidated financial statements as of and for the years ended December 31, 2022 and 2021 and Airship AI’s unaudited interim condensed consolidated financial statements as of September 30, 2023 and the nine-month periods ended September 30, 2023 and 2022, and the respective notes thereto, included elsewhere in this prospectus.

 

The discussion and analysis should also be read together with the Company’s unaudited pro forma condensed combined financial information for the year ended December 31, 2022 and as of and for the nine months ended September 30, 2023. See “Unaudited Pro Forma Condensed Combined Financial Information.” This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Airship AI’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Airship AI” to “we”, “our” and “the Company” refer to the business and operations of Airship AI Holdings, Inc. (now known as Airship AI, Inc.) and its consolidated subsidiaries prior to the Business Combination and to Airship AI Holdings, Inc. and its consolidated subsidiaries following the consummation of the Business Combination.

 

Company Overview

 

We are a robust AI-driven data management platform that solves complex data challenges for large institutions operating in dynamic and mission-critical environments with rapidly increasing volumes of data being ingested from a similarly rapidly growing number of data sources.

 

We solve these challenges by structuring “dark” or unstructured data at the edge and leveraging purpose-built AI models. Combining these capabilities with a tailored approach to customer workflow enables real-time decision making and data-driven operational efficiency.

 

We specialize in ingesting data from edge-based sensors used by government and law enforcement agencies around the world, including surveillance cameras (video), audio, telemetry, acoustic, seismic, and autonomous devices, along with large commercial corporations with fundamentally similar capabilities and requirements.

 

Our primary offerings include Outpost AI, Acropolis, and Airship Command. Our offerings allow customers to manage their data across the full data lifecycle, when and where they need it, using a highly secure permissioned based architecture.

 

We apply AI across the entire offering suite, ensuring that we are extracting as much value from our customers’ existing and emerging data as possible. Whether it is using machine learning to train new models for deployment at the edge, or using a rules-based approach to detect anomalies based on data generated by machine learning models, we are constantly expanding and evolving our AI capabilities.

 

Our offerings are used by some of the largest government agencies and commercial organizations in the world. While we are heavily focused on continuing to grow market share in the United States, our offerings are currently deployed around the world, with significant room to grow in both the governmental and commercial markets.

 

Business Combination and Public Company Costs

 

On December 21, 2023, Airship AI completed the Business Combination contemplated by the Merger Agreement with BYTS and Merger Sub, pursuant to which, among other things, following the Domestication, Merger Sub merged with and into Airship AI, the separate corporate existence of Merger Sub ceased, and Airship AI was the surviving entity as a wholly-owned subsidiary of BYTS and changed its name to “Airship AI, Inc.” and BYTS was renamed “Airship AI Holdings, Inc.” (collectively, the “Business Combination”). The Business Combination was accounted for as a reverse recapitalization. Airship AI was deemed the accounting predecessor and the combined entity became the successor SEC registrant, meaning that Airship AI’s financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC. Under this method of accounting, BYTS will be treated as the acquired company for financial statement reporting purposes. Total transaction costs were approximately $8.8 million.

 

 
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As a result of the Business Combination, Airship AI became the successor to an SEC-registered and Nasdaq-listed company, which will require Airship AI to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. Airship AI expects to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit, and other professional service fees.

 

Key Factors and Trends Affecting Results of Operations

 

We believe the following factors and trends may cause previously reported financial information not to be necessarily indicative of future operating results or future financial conditions:

 

 

·

Increase in the sales of lower margin solutions as we expand our operational footprint. While our current focus remains on expanding our AI driven software application portfolio, opportunities will continue to present themselves to provide those software-based solutions as part of a larger hardware-based turn-key solutions where Airship AI can provide a unique value-add to the customer. While these solutions will positively affect revenue we anticipate our operating profits in future periods may be adversely affected as compared to previous years due to the lower operating margin for hardware versus software applications.

 

 

 

 

·

Challenges due to geo-political driven supply-chain constraints. While many of the COVID-19 driven supply chain issues have been resolved, challenges to the timely production and delivery of Taiwan based products we utilize for our edge AI platform due to geo-political factors is a concern looking forward. In the event that our suppliers are unable to provide timely delivery of those supplies it will significantly impact our ability to meet delivery schedules for existing and anticipated edge AI hardware-based solutions.

 

 

 

 

·

Near-term impacts due to merger and acquisition activity. If Airship AI merges with or acquires another company following the Business Combination, it is reasonably expected that there will be increased operating expenses and costs associated with the merger that could negatively impact operating profits in the future periods immediately following the M&A event. The extent and longevity of those impacts is not possible to quantify.

 

Key Performance Indicators

 

Historically, a majority of our product revenue has consisted primarily of a bundled hardware and software product and to date we have sold or licensed a minimal amount of standalone software. In the future, we expect to see more delivery of our products using a cloud based software solution which will allow us to create additional subscription revenue.

 

We have historically evaluated our business solely based on revenue generated from customers and we have not tracked any other customer-related metrics. As we grow and increase our product offerings and customer base, we intend to modify and develop more advanced performance indicators. We believe the following key performance indicators apply to us in the future:

 

 

·

Growth within existing government customers. While we currently have a strong footprint across multiple large U.S. government agencies, growing our business within these agencies outside of the investigation focused departments is a fundamental area of our projected growth. Our ability to expand our footprint by implementing AI based solutions that leverage our core existing competencies within the agencies will be a critical indicator of the success of this strategy. We will measure progress against this objective through the disclosure of awards for new business within these agencies during the affected timeframe, providing tangible evidence of the success of our strategy to both management and investors alike.

 

 

 

 

·

Greater penetration into the commercial marketplace. While we have several existing customers in the commercial marketplace, our ability to build on the solutions we provide those customers and expand that base will be critical to our projected growth objectives. We will measure progress against this objective through the disclosure of the number of new commercial customers added during the affected timeframe, providing tangible evidence of the success of our strategy to both management and investors alike.

 
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·

Expansion of our edge AI based solutions. We began to sell AI based solutions in late 2022. Our current strategy is highly focused on the transition of data management and analysis workloads to the edge, driving efficiency and cost savings for our customers. This strategy also includes new models being trained to extract data at the edge which enables real-time intelligent decision making for our customers. We will measure progress against this objective through the disclosure of the numbers of edge AI hardware devices we are selling as well as the growth of our edge AI analytic capabilities, providing tangible evidence of the success of our strategy to both management and investors alike.

 

Non-GAAP Financial Measures

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We report certain key financial measures that are not required by, or presented in accordance with GAAP, and these non-GAAP financial measures should not be considered as an alternative to the information prepared in accordance with GAAP. In addition, our management reviews our performance by focusing on several key performance indicators not prepared in conformity with GAAP. We believe these non-GAAP financial measures provide a useful measure of our operating results, a meaningful comparison with historical results and with the results of other companies, and insight into our ongoing operating performance. Further, we utilize these measures, in addition to GAAP measures, when evaluating and comparing our operating performance against internal financial forecasts and budgets.

 

However, there are several limitations related to the use of non-GAAP financial measures because it excludes significant expenses or credits that are required by GAAP to be included in our financial statements. In addition, other companies may calculate non-GAAP measures differently or may use other measures to calculate their financial performance. Therefore, non-GAAP measures may not be directly comparable to similarly titled measures of other companies.

 

The Company defines adjusted EBITDA as net earnings (loss) before interest expense, income tax expense (benefit), depreciation and amortization, as adjusted to exclude stock based compensation.

 

Non-GAAP Reconciliations

 

We use the non-GAAP measures EBITDA and adjusted EBITDA to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. Also, we exclude depreciation and stock-based compensation, which are non-cash expenses, from these non-GAAP financial measures because we believe that excluding these items provides meaningful supplemental information regarding operational performance and provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team.

 

Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Further, these metrics have certain limitations, as they do not include the impact of certain expenses that are reflected in our consolidated statement of operations. Thus, our non-GAAP EBITDA and adjusted EBITDA should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

 

We compensate for these limitations by providing reconciliations of these non-GAAP measures to the most comparable GAAP measures. We encourage investors and others to review our business, results of operations, and financial information in its entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measures.

 

The reconciliation of our net loss to EBITDA and Adjusted EBITDA for the years ended December 31, 2022 and 2021 is as follows:

 

 

 

Year Ended December 31,

 

($ Millions)

 

2022

 

 

2021

 

Net loss

 

$(0.5 )

 

$(5.1 )

+ Interest expense

 

 

0.0

 

 

 

0.0

 

+ Depreciation and amortization

 

 

0.01

 

 

 

0.05

 

EBITDA

 

$(5.0 )

 

$(0.4 )

Stock-based compensation

 

 

0.5

 

 

 

0.8

 

Adjusted EBITDA

 

$(4.2 )

 

$0.1

 

  

 
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Results of Operations

 

The period to period comparisons of our results of operations have been prepared using the historical periods included in our consolidated financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. We have derived this data from our interim and annual consolidated financial statements included elsewhere in this prospectus.

 

Results of Operations

 

The period to period comparisons of our results of operations have been prepared using the historical periods included in our consolidated financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. We have derived this data from our interim and annual consolidated financial statements included elsewhere in this prospectus.

 

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

 

(dollars in thousands)

 

 

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

$ Variance

 

 

% Variance

 

Net revenue

 

$8,093

 

 

$12,962

 

 

$(4,869 )

 

 

(37.6 )%

Cost of net revenue

 

 

4,013

 

 

 

5,134

 

 

 

1,121

 

 

 

21.8%

Gross profit

 

 

4,080

 

 

 

7,828

 

 

 

(3,748 )

 

 

(47.9 )%

Research and development expenses

 

 

2,028

 

 

 

2,732

 

 

 

704

 

 

 

25.8%

Selling, general and administrative expenses

 

 

8,068

 

 

 

6,107

 

 

 

(1,961 )

 

 

(32.1 )%

Total operating expenses

 

 

10,096

 

 

 

8,839

 

 

 

(1,257 )

 

 

(14.2 )%

Operating loss

 

 

(6,016 )

 

 

(1,011 )

 

 

(5,005 )

 

 

(495.1 )%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

13

 

 

 

(13 )

 

 

(100.0 )%

Interest expense

 

 

(58 )

 

 

(4 )

 

 

(54 )

 

 

(1350.0 )%

Other income (expense)

 

 

(408 )

 

 

1,146

 

 

 

(1,554 )

 

 

(135.6 )%

Total other (expense) income, net

 

 

(466 )

 

 

1,155

 

 

 

(1,621 )

 

 

(140.3 )%

(Loss) income before income taxes

 

 

(6,482 )

 

 

144

 

 

 

(6,626 )

 

 

(4601.4 )%

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

0.0%

Net (loss) income

 

$(6,482 )

 

$144

 

 

$(6,626 )

 

 

(4601.4 )%

  

Net Revenue — Revenue for the nine months ended September 30, 2023 decreased $4,869,000 to $8,093,000 as compared to $12,962,000 for the nine months ended September 30, 2022, as a result of lower product sales. As a result of supply chain issues that existed at December 31, 2021, we were unable to fulfill many orders and had a backlog of new orders of $6.8 million that shipped during the nine months ended September 30, 2022.

 

Cost of Net Revenue — Cost of net revenue primarily consists of product costs and post customer support. For the nine months ended September 30, 2023, cost of sales decreased $1,121,000 to $4,013,000 as compared to $5,134,000 for the nine months ended September 30, 2022. The decrease was due to lower product sales. The cost of our products during the nine months ended September 30, 2022 were much higher as a percentage of product sales than the nine months ended September 30, 2023 as a result of higher costs from the supply chain issues that existed early on in the COVID-19 pandemic.

 

 
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Research and Development Expenses — Research and development expenses for the nine months ended September 30, 2023 decreased $704,000 to $2,028,000 as compared to $2,732,000 for the nine months ended September 30, 2022. The decrease was due to reduced personnel (18 personnel as compared to 20 personnel) and reduced funding of $550,000 of the AI expenses in Taiwan.

 

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the nine months ended September 30, 2023 increased $1,961,000 to $8,068,000 as compared to $6,107,000 for the nine months ended September 30, 2022. The increase was due to (i) increased stock based compensation of $2,616,000; and partially offset by (ii) decreased payroll of $293,000 (reduced personnel over the nine months); and (iii) reduced other expenses of $362,000. The stock based compensation increase includes approximately $2.1 million for warrants to purchase 765,000 shares of common stock issued to each of Victor Huang and Derek Xu.

 

Other Income — Other expense for the nine months ended September 30, 2023 was $408,000 as compared to other income of $1,155,000 for the nine months ended September 30, 2022. The expense for the nine months ended September 30, 2023 related to the increase in fair value of the convertible promissory note. On January 25, 2021, the Company received $1,146,235 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). In May 2022, the entire unpaid balance was forgiven and approximately $1,146,000 was recognized as other income.

 

Net Loss — Net loss for the nine months ended September 30, 2023 was $6,482,000 as compared to net income of $144,000 for the nine months ended September 30, 2022. The change was the result of $3.1 million lower gross profit in 2023 from decreased revenue, higher operating expenses in 2023 of $1.2 million due mostly to increased stock based compensation and $1.6 million change in other income resulting from the approximately $400,000 expense in 2023 for the fair value adjustment of convertible promissory note and the $1.1 million gain on the PPP loan in 2022. The net loss for the nine months ended September 30, 2023 included noncash expenses of $3,462,000. Net income for the nine months ended September 30, 2022 included net noncash income of $269,000.

 

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

 

(dollars in thousands)

 

 

 

Year Ended December 31,

 

 

 

2022

 

 

2021

 

 

$ Variance

 

 

% Variance

 

Net revenue

 

$14,549

 

 

$13,039

 

 

$1,510

 

 

 

11.6%

Cost of net revenue

 

 

6,128

 

 

 

6,052

 

 

 

(76 )

 

 

(1.3 )%

Gross profit

 

 

8,421

 

 

 

6,987

 

 

 

1,434

 

 

 

20.5%

Research and development expenses

 

 

3,615

 

 

 

4,215

 

 

 

600

 

 

 

14.2%

Selling, general and administrative expenses

 

 

7,630

 

 

 

8,895

 

 

 

1,265

 

 

 

14.2%

Total operating expenses

 

 

11,245

 

 

 

13,110

 

 

 

1,865

 

 

 

14.2%

Operating loss (income)

 

 

(2,824 )

 

 

(6,123 )

 

 

3,299

 

 

 

53.9%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

43

 

 

 

24

 

 

 

19

 

 

 

79.2%

Interest expense

 

 

(75 )

 

 

(21 )

 

 

(54 )

 

 

(257.1 )%

Other income – PPP loan forgiveness

 

 

1,146

 

 

 

996

 

 

 

150

 

 

 

15.1%

Other income – Employee retention tax credit

 

 

1,233

 

 

 

 

 

 

1,233

 

 

 

100.0%

Total other income, net

 

 

2,347

 

 

 

999

 

 

 

1,348

 

 

 

134.9%

(Loss) income before income taxes

 

 

(477 )

 

 

(5,124 )

 

 

4,647

 

 

 

90.7%

Income tax benefit (expense)

 

 

(10 )

 

 

 

 

 

(10 )

 

 

0.0%

Net (loss) income

 

$(487 )

 

$(5,124 )

 

$4,637

 

 

 

90.5%

  

 
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Net Revenue — Revenue for the year ended December 31, 2022 increased $1,510,000 to $14,549,000 as compared to $13,039,000 for the year ended December 31, 2021, as a result of supply chain issues as of December 31, 2021. As of December 31, 2021, we had a backlog of new orders of $6.8 million that shipped during the year ended December 31, 2022.

 

Cost of Net Revenue — Cost of net revenue consists of product support and raw material component expenses. Cost of sales for the year ended December 31, 2022 increased $76,000 to $6,128,000 as compared to $6,052,000 for the year ended December 31, 2021. The increase is related to increased sales.

 

Research and Development Expenses — Research and development expenses for the year ended December 31, 2022 decreased $600,000 to $3,615,000 as compared to $4,215,000 for the year ended December 31, 2021. The decrease was due to (i) reduced payroll expenses of $122,000 (20 personnel as compared to 24 personnel) in the United States; and (ii) reduced consulting expenses of $815,000; offset by (iii) increased funding of the AI project expenses in Taiwan of $377,000.

 

Selling, General and Administrative Expense — Selling, general and administrative expenses for the year ended December 31, 2022 decreased $1,265,000 to $7,630,000 as compared to $8,895,000 for the year ended December 31, 2021. The decrease primarily was due to (i) reduced payroll of $971,000 (28 personnel as compared to 38 personnel); (ii) reduced stock based compensation of $353,000; and offset by other increases of $59,000.

 

Other Income — Other income for the year ended December 31, 2022 was $2,347,000. On January 25, 2021, the Company received $1,131,878 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). The note payable bears interest at 1% and was due January 23, 2026. The Company accrued interest of $9,845 as of December 31, 2021. The Company had used the funds in accordance with the legal requirements. In May 2022, the entire unpaid balance was forgiven and approximately $1,146,000 was recognized as other income.

 

On April 29, 2020, the Company received $984,485 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020). The note payable included interest of $11,349 and was due April 17, 2022. The loan and interest were forgiven on June 14, 2021. The loan and interest forgiveness totaling approximately $996,000 were recognized as other income during the year ended December 31, 2021.

 

The CARES Act allowed eligible employers to claim employee retention tax credits (“ERTC”) for qualified wages paid after March 12, 2020 and before January 1, 2021. The ERTC was extended to June 30, 2021 under the passage of the Taxpayer Certainty and Disaster Relief Act of 2020 (“ACT”) which was signed into law on December 27, 2020. We qualified for credits under the provisions of the CARES Act for the entire period subsequent to March 12, 2020 through January 1, 2021 and for the entire period subsequent to January 1, 2021 through June 30, 2021.

 

On September 8, 2021, the Company applied for ERTC credits for qualifying 2020 wages. The Company filed amended payroll tax returns to claim the credit it believed it was entitled to, $99,132 and $190,983, respectively. On April 4, 2022, the Company received $99,826 and $192,793, including interest.

 

The Company accounted for this in the year it believed collectability was assured. Considering the length of time after year-end and the lack of certainty over the government’s handling of ERTC claims, the Company deemed it appropriate and conservative to not record this transaction in the year ended December 31, 2021 but rather in 2022 when the cash received.

 

On May 25, 2022, the Company applied for ERTC credits for qualifying 2021 wages. The Company filed amended payroll tax returns to claim the credit it believed it was entitled to, $461,043 and $459,614, respectively. The Company received two refunds in January 2023 for $468,880 and $470,970, including interest. The Company recorded the amounts in payroll tax receivable as of December 31, 2022.

 

Net Loss — Net loss for the year ended December 31, 2022 was $487,000 as compared to net loss of $5,124,000 for the year ended December 31, 2021. The net loss for the year ended December 31, 2022 is discussed above.

 

 
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Liquidity and Capital Resources as of September 30, 2023 and 2022

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. We formally evaluated our liquidity and cash position most recently in November 2023 when preparing our September 30, 2023 interim financial statements. During this process we concluded, based upon existing assets and liabilities, our order backlog and projections, plus the ability to borrow up to $2.5 million in short term loans from our founder, that we would be able to operate at least for the next twelve months. Subsequent to the completion of our September 30, 2023 interim financial statements, we entered into a short term loan agreement providing $600,000 in cash. We have also recently received purchase orders from various government agency customers totaling over $13 million from which we expect to start receiving cash in the first quarter of 2024.

 

As of September 30, 2023, we had cash of approximately $482,000 and a net working capital deficit of approximately $7,820,000 and a working capital deficit of approximately $3,760,000 excluding current portion of deferred revenue of $4,059,000 as of September 30, 2023. As of September 30, 2023, we had an accumulated deficit of $16,796,000 and a net loss of $6,482,000 for the nine months ended September 30, 2023. We had noncash expenses of $3,462,000 during the nine months ended September 30, 2023. On May 8, 2023, we issued warrants to purchase 765,000 shares of common stock to each of Victor Huang and Derek Xu. The warrants were valued at $2,136,115 and were recorded as stock based compensation.

 

Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2023 was $2,524,000. This amount was primarily related to (i) a net loss of $6,482,000; offset by (ii) depreciation of $11,000; (iii) stock based compensation of $2,616,000; (iv) net amortization of operating lease right of use asset of $513,000; (v) unrealized loss for increase in fair value of convertible promissory note of $401,000; and (vi) working capital changes of $496,000. On May 8, 2023, we issued warrants to purchase 765,000 shares of common stock to each of Victor Huang and Derek Xu. The warrants were valued at $2,136,115 and were recorded as stock based compensation.

 

Net cash used in operating activities for the nine months ended September 30, 2022 was $685,000. This amount was primarily related to (i) a net income of $144,000; (ii) depreciation of $11,000; (iii) stock based compensation of $448,000; (iv) amortization of operating lease right of use asset of $426,000; (v) working capital changes of $559,000; and offset by (vi) gain on PPP loan forgiveness of $1,142,000; and (vii) other expense of $13,000.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2023 was $2,710,000 and consisted of (i) issuance of a senior secured convertible promissory note of $1,985,000; net advances provided by the founders of $1,150,000; and (ii) the payoff of small business loan and line of credit of $425,000.

 

Net cash provided by financing activities for the nine months ended September 30, 2022 was $465,000 and consisted of net advances provided by the founders of $500,000; offset by repayment of small business loan and line of credit of $35,000.

 

Our contractual cash obligations as of September 30, 2023 are summarized in the table below:

 

Contractual Cash Obligations

 

Total

 

 

Less Than

1 Year

 

Operating lease cash payments

 

$26,844

 

 

$26,844

 

 

On May 1, 2019, we leased 31,765 square feet for our executive offices in Redmond, Washington. Our net monthly payment was $44,440. The monthly payment increased approximately 3% each year and the lease was set to expire on April 30, 2024. We had two five-year renewal options. In April 2023, we and the landlord entered into an agreement whereby our office lease was terminated on September 30, 2023.

 

We entered into a new lease in Redmond, Washington for 15,567 square feet of office and warehouse space which started October 1, 2023. The monthly payment is $25,000 per month. The lease expires October 31, 2027 and the monthly payment increases 3% on July 31, 2024 and each year thereafter. There is a three year option to extend based on the fair market rate on October 31, 2027.

 

Debt Financing Arrangements

 

On June 22, 2023, we entered into a Senior Secured Convertible Promissory Note with Platinum Capital Partners Inc. and received $2,000,000. As a condition of funding, we paid off three small notes and accounts payable totaling $374,000. In the event the BYTS merger has not closed by December 22, 2023, then on not less than thirty days written notice to the Company by the holder thereafter, the holder may put this note to the Company and the Company will pay the holder 110% of the unpaid principal amount of the note together with any unpaid accrued interest and any other amount payable.

 

 
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On November 2, 2023, we issued senior secured convertible promissory notes for $600,000 to two private investors. At the option of the holders, the notes are convertible into cash, common stock or a combination of cash and stock.

 

Mr. Huang has committed to providing $2.5 million in additional temporary funding if it is necessary.

 

We believe that our cash on hand, funding from the completion of the business combination, results of operations and financing transactions will be sufficient to fund our operations for the next twelve months.

 

Equity financing, if obtained, could result in dilution to our then-existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, we may be required to delay, scale back, or eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected.

 

Liquidity and Capital Resources as of December 31, 2022 and 2021

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

As of December 31, 2022, we had cash of approximately $299,000 and net working capital deficit of approximately $4,039,000 and a working capital of approximately $129,000 excluding current portion of deferred revenue of $4,168,000 as of December 31, 2022. As of December 31, 2022, we had an accumulated deficit of $10,314,000 and a net loss of $487,000 for the year ended December 31, 2022. During the year ended December 31, 2022, we received (i) the founders advances of $1,900,000 and we repaid advances to the founders of $1,300,000; (ii) we received $940,000 from the CARES Act which allowed eligible employers to claim employee retention tax credits (“ERTC”) for qualified wages paid after March 12, 2020 and before January 1, 2021; (iii) we received $565,000 from a small business loan and a line of credit; and (iv) proceeds from notes receivable — related parties of $842,000.

 

Operating Activities

 

Net cash used in operating activities for the year ended December 31, 2022 was $2,903,000. This amount was primarily related to (i) a net loss of $487,000; (ii) working capital changes of $2,365,000; (iii) gain on forgiveness of note payable — PPP of $1,146,000; offset by (iv) depreciation of $15,000; (v) stock based compensation of $546,000; (vi) amortization of operating lease right of use asset of $517,000; and (vii) other of $17,000.

 

Net cash used in operating activities for the year ended December 31, 2021 was $5,133,000. This amount was primarily related to (i) a net loss of $5,124,000; offset by (ii) depreciation of $53,000; (iii) stock based compensation of $899,000; (iv) other of $37,000; and (v) offset by gain on forgiveness of note payable — PPP of $996,000.

 

Financing Activities

 

Net cash provided by financing activities for the year ended December 31, 2022 was $1,866,000 and consisted of (i) $565,000 from a small business loan and a line of credit; (ii) proceeds from notes receivable — related parties of $842,000; (iii) the founders advances of $1,900,000 and repayment of advances to the founders of $1,300,000; and (iv) repayment of small business loan and line of credit of $140,000.

 

Net cash provided by financing activities for the year ended December 31, 2021 was $3,637,000 and consisted of (i) the founders repaid advances of $2,490,000; (ii) we received $1,132,000 under the Paycheck Protection Program of the U.S. Small Business Administration’s (SBA) 7(a) Loan Program pursuant to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), Pub. Law 116-136, 134 Stat. 281 (2020); and (iii) other of $15,000.

 

Our contractual cash obligations as of December 31, 2022 are summarized in the table below:

 

Contractual Cash Obligations

 

Total

 

 

Less Than

1 Year

 

 

1 – 3 Years

 

Operating lease cash payments

 

$868,435

 

 

$657,502

 

 

$210,933

 

 

 
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Contractual Obligations and Commitments

 

On May 1, 2019, we leased 31,765 square feet for our executive offices in Redmond, Washington. Our net monthly payment was $44,440. The monthly payment increases approximately 3% each year and the lease expires on April 30, 2024. We had two five-year renewal options. In April 2023, we entered into an agreement whereby our office lease would be terminated on September 30, 2023. On July 13, 2023, we entered into a new lease in Redmond, Washington for office and warehouse space.

 

On January 1, 2021, we leased offices located in Moorestown, North Carolina. We leased 3,621 square feet and the net monthly payment is $4,828. The monthly payment increases approximately 3% – 6% annually thereafter. The lease expires on February 28, 2024 and can be extended for one three-year term.

 

Recent Developments

 

In April 2023, we entered into an agreement whereby our office lease in Redmond, Washington will be terminated on September 30, 2023. On July 13, 2023, we entered into a new lease in Redmond, Washington for office and warehouse space at an annual savings of approximately $350,000 per year.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the current economic environment. To the extent that there are material differences between these estimates and our actual results, our future consolidated financial statements will be affected.

 

We believe that the significant accounting policies described in “Note 2, Summary of Significant Accounting Policies” to our audited consolidated financial statements are accurate and complete. The critical accounting estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.

 

Revenue Recognition

 

The majority of our contracts with our customers include various combinations of our products and post contract support (“PCS”) services. Our products and PCS offerings have significant standalone functionalities and capabilities. Accordingly, the products are distinct from our PCS services as customers can benefit from the products without the PCS services and such PCS services are separately identifiable within the contracts. We account for multiple agreements with a single customer as a single contract if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. The amount of consideration we expect to receive in exchange for delivering on the contract is allocated to each performance obligation based on its relative standalone selling price.

 

We establish the standalone selling price using the prices charged for a deliverable when sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price based on our pricing model and offering type (products or PCS services). As our business offerings evolve over time, we may be required to modify our estimated standalone selling prices, and as a result the timing and classification of our revenue could be affected.

 

Income Taxes

 

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In addition, deferred tax assets are recorded for all future benefits including, but not limited to, net operating losses, research and development credit carryforwards, and basis differences with certain assets and liabilities.

 

 
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Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision or benefit for income taxes in the period in which such determination is made.

 

We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more likely than not to be realized upon ultimate settlement. We do not believe that we currently have any material uncertain tax positions and no reserves are currently required given our deferred tax asset has a 100% valuation allowance.

 

Stock Based Compensation

 

The Company records stock-based compensation expense associated with stock options, warrants, SARs and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of such equity instruments. The fair value of such equity instruments is determined at the date of grant and such value is recognized as an expense over the service period of the recipient. The Black Scholes pricing model uses various inputs and assumptions, including the estimated fair value of the common stock, stock volatility, risk free interest rate over the expected term of the instrument, estimated life of the award, and forfeiture rates of such awards. All of these estimates impact stock based compensation which is a non cash expense. Changes in the assumptions used in the calculation would impact the recorded stock based compensation. The fair value of the equity instrument is usually calculated at issuance and not required to be remeasured in the future. Management uses third party experts to assist with certain elements of the fair value calculation and it constantly adjusts the variables used in estimating the fair value of equity instruments issued as compensation.

 

Recent Accounting Pronouncements

 

For further information on recent accounting pronouncements, see “Note 2, Summary of Significant Accounting Policies” to our audited consolidated financial statements included herein.

 

Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in the value of our investments, interest rates, foreign exchange, and inflation.

 

Market Risk

 

As of September 30, 2023, we had no outstanding investments in marketable securities.

 

Interest Rate Risk

 

Our cash, cash equivalents, and restricted cash consist of cash, certificates of deposit, and money market funds. Our primary investment policy and strategies are focused on the preservation of capital and supporting our liquidity requirements; however, to a lesser extent we have made and may continue to make investments in early- and growth-stage companies as disclosed in Note 4. Investments and Fair Value Measurements in our consolidated financial statements included elsewhere in our financial statements. We do not currently anticipate entering into new Investment Agreements to purchase, or commit to purchase, securities of special purpose acquisition companies. Due to the short-term nature of the financial instruments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.

 

Foreign Currency Exchange Risk

 

Our contracts with customers are denominated in U.S. dollars. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, and Taiwan. Our results of current and future operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the U.S. dollar and the New Taiwan dollar. We have experienced, and may continue to experience, fluctuations in net loss as a result of transaction gains or losses related to remeasuring certain assets and liability balances that are denominated in foreign currencies. These exposures may change over time as business practices evolve and economic conditions change. To date, foreign currency transaction gains and losses have not been material to our consolidated financial statements, and we have not engaged in any foreign currency hedging transactions.

 

Inflation Risk

 

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, or results of operations.

 

 
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DESCRIPTION OF AIRSHIP AI’S BUSINESS

 

Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” or “our” refer to the business and operations of Airship AI and its subsidiaries prior to the consummation of the Business Combination and to Airship Pubco and its consolidated subsidiaries following the consummation of the Business Combination.

 

Overview

 

We are a robust AI-driven data management platform that solves complex data challenges for large institutions operating in dynamic and mission-critical environments with rapidly increasing volumes of data being ingested from a similarly rapidly growing number of data sources.

 

We solve these challenges by structuring “dark” or unstructured data at the edge, the location at which the data is generated and collected, and leveraging purpose-built AI models. Unstructured, or “dark” data, which is typically categorized as qualitative data, cannot be processed and analyzed via conventional data tools and methods. Conversely, structured data, typically categorized as quantitative data, is highly organized and easily decipherable by machine learning algorithms.

 

Structuring and then analyzing data using AI models at the edge, versus transmitting the data from the edge back to a central processing location for structuring and analysis, enables real-time decision making and data-driven operational efficiency.

 

We specialize in ingesting all available metadata from edge-based sensors used by government and law enforcement agencies around the world, including surveillance cameras (video), audio, telemetry, acoustic, seismic, and autonomous devices, along with large commercial corporations with fundamentally similar capabilities and requirements.

 

Data generated by these edge-based sensors, including video, can then be run through our trained AI models to detect objects present within the video frame. Once an object is detected, for example an automobile, additional identifying characteristics of the object can be extracted from the image including the license plate characters and the make, model, and color of the automobile. This process of analyzing, logging and categorizing ingested data is referred to as “structuring” the data.

 

Airship AI’s software allows customers to view structured data both in real-time as well as to conduct searches on the structured data at a later point in time. Real-time structured data use includes, for example, alarms on a specific license plate or a specific make, model or color of automobile. Non-real-time structured data use includes, for example, searching a database of video data that has been previously ingested and stored to find instances of a particular license plate being visible, along with other logged vehicle characteristics such as make, model and color of an automobile.

 

Additional edge deployed AI models enable similar object detection and recognition of common and custom trained objects, such as an aircraft, boat, person, animal, bag, or weapon. Airship AI’s models provide similar data points for these object types allowing analysts the ability to be notified in real-time of the detection of a specified object and similarly search for historically detected objects. Examples include detecting aircrafts and boats along with their respective tail numbers and hull registration numbers.

 

Our AI modelling process starts with pre-trained AI models from our technology ecosystem partners which we then customize using proprietary datasets tailored towards our customers unique workflow requirements. Where customers have pre-existing AI models or engines, we integrate those models or engines into our edge platform allowing customers to leverage proprietary models within the Airship AI software ecosystem.

 

Our primary offerings include Outpost AI, Acropolis, and Airship Command. Our offerings allow customers to manage their data across the full data lifecycle, when and where they need it, using a highly secure permissioned based architecture.

 

Outpost AI is our edge hardware and software offering that is purpose built to structure and analyze data efficiently and effectively at the source using Airship AI trained models. Once structured, Outpost AI securely encodes the data and streams it to Acropolis for further processing. In the automobile example, Outpost AI will process the unstructured and unlabeled video data into structured data including images of vehicles, images of plates, make, model, color, locations and plate numbers, as well as confidence levels on the structured results.

 

Acropolis is our enterprise management software suite which serves as the backbone of our software ecosystem. Acropolis allows customers with a handful of devices or hundreds of thousands of devices to manage their user and install base efficiently and securely from a single graphical user interface. Acropolis can be installed and managed locally (on-premises) as well as in cloud/multi-cloud-based system architectures. Acropolis can work with structured and unstructured data. In the scenario where Outpost AI processes the unstructured video of vehicles into images, plate numbers and other structured data, Acropolis will compare the structured data against customer repositories of structured data in order to add labels to results for user attention. Here, Acropolis leaves the initial processing of unstructured data to the edge device (Outpost AI) and handles additional labeling which requires bigger centralized datasets. Where Acropolis is receiving unstructured data as input from devices, it will do the initial processing of unstructured to structured data similar to what Outpost AI does at the edge before any additional labelling. This holistic approach allows customers to leverage the benefits of both edge and back-end data structuring and analysis in a “single-pane-of-glass” approach.

 

 
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Airship Command then allows the customer to view the final labelled data which can be presented in real-time or as search results, as alerts, in automatically updating lists or on maps. In the vehicle example, Airship Command can present alarms on specific filters such as specific plates, intelligent partial matches, make, model, color and any combination thereof, as well as searches using the same filters against character recognition and vehicle characteristics results.

 

Airship Command is our suite of visualization tools that allow customers to interact with their data and devices securely and efficiently. Customer data interaction may include receiving and viewing an alarm triggered by an AI detected event at the edge on a mobile phone, or receiving and viewing events from thousands of edge devices spread across multiple different locations on a large video wall in a Security Operations Center (“SOC”). Our visualization tools span applications for workstations, web-based browsers, and applications for mobile handheld devices ensuring our customers data is never out of their immediate reach.

 

We apply AI across the entire offering suite, ensuring that we are extracting as much value from our customers’ existing and emerging data as possible. Whether it is using machine learning to train new models for deployment at the edge, or using a rules-based approach to detect anomalies based on data generated by machine learning models, we are constantly expanding and evolving our AI capabilities.

 

Our offerings are used by some of the largest government agencies and commercial organizations in the world. While we are heavily focused on continuing to grow market share in the United States, our offerings are currently deployed around the world, with significant room to grow in both the governmental and commercial markets.

 

Our typical customer engagement is a multi-year contractual agreement, an agreement which includes our core offerings as well as professional services, technical support, and software maintenance, which we expect will result in predictable, long-term recurring revenue. Our history shows that organizations that have chosen to partner with Airship AI stick with Airship AI.

 

Since our inception, we have operated as a 100% employee-owned bootstrapped company with no outside investment, operating in a fiscally conservative model. As a U.S. based company, we operate in high growth areas, namely the intersection of public safety and AI, with a combined $7 billion edge AI hardware and software addressable market.

 

In 2022, we generated $14.5 million of revenue with 58% gross margin with positive EBITDA. We entered 2023 with $5.5 million of bookings and billings and $162.9 million in our pipeline, consisting predominantly of large U.S. government contracts, with further room to grow, especially in the commercial sector.

 

Our customers trust us to collect and analyze vast amounts of data in real-time as well as make it available to their users when they need it, where they need it, as securely as possible. We believe our offerings are purpose built from the ground up to help ensure we continue to meet or exceed these expectations.

 

Our Industry

 

We believe a robust digital transformation strategy is imperative today for companies to discover new revenue opportunities, gain competitive advantages, and create efficient business operations. Whether companies are established brick and mortar operations with large disparate operational footprints and user bases or newer entrants to the marketplace with centralized operations, the need to ingest and process data efficiently and effectively is critical.

 

Nowhere across the digital data lifecycle is transformation occurring at a greater rate and pace than at the edge. While the advantages of operating at the edge are clearly recognized, it is only recently that physical technology has caught up with the virtual capabilities software has to offer. These advancements include the shrinking size of processors capable of performing advanced analytics at the edge and networking advancements such as 5G that can efficiently move the data processed at the edge (in real-time).

 

 
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With these advancements, the ability to move data processing workloads to the edge and achieve true digital transformation has started to become reality. To achieve the full value of this transformation, we must be able to do the following key technical attributes at the edge:

 

 

·

Structure data and analyze it in real-time,

 

 

 

 

·

Extract value from the analyzed data in real-time,

 

 

 

 

·

Securely transmit the usable data to the consumers who need it in real-time, and

 

 

 

 

·

Securely retain all data at the edge for regulatory/evidentiary purposes.

 

Achieving these end-states at the edge should allow companies to substantially reduce the time needed to make decisions that affect operations across their environment, in some cases in a predictive manner. This ability to make real-time decisions using data analyzed at the edge can transform operations across industry and government by improving public safety, tailoring predictive maintenance, improving quality control, mitigating organized retail crime, and providing more efficient operations, which drive better customer experiences and operational outcomes.

 

In addition to the benefits achieved by increasing the speed and efficiency at which decisions can be made by offloading workflow and AI capabilities to the edge, significant cost benefits such as reduced operational costs associated with moving data across networks, processing and analyzing data using traditional massive backend servers and processors, and storage costs for extraneous data that is not valuable. Data security is also greatly enhanced, as are regulatory and compliance requirements for data, when compared to legacy data center approaches to data management.

 

Similarly, transformative changes are happening between edge and the cloud, leveraging applications that allow you to interact with your data wherever it resides, at the edge, on-premises, and/or in the cloud. True digital transformation can then be fully achieved when you have the “single pane of glass” interface that brings all your data together, securely, and efficiently, structured and analyzed, when and where the data consumer needs it.

 

Our Solution

 

Airship AI’s platform today is used across multiple verticals and markets, including commercial and government, and small and enterprise. Our products are purpose-built to be scalable and flexible, operating in the environments our customers are in today as well as where they want to be tomorrow. Our software can be installed in air-gapped stand-alone environments as well as enterprise-wide federated environments with countless devices, users, and end-points where data is aggregated and consumed. Our software is installed on bare-metal servers on-premises, in data centers, and in the cloud, as well as in physical and virtualized environments.

 

Our software is also designed to replace existing capabilities as well as augment and/or enhance existing capabilities, from sensors to IT infrastructure to analytics. In many cases, our customers are able to achieve greater functionality out of existing capabilities through our unique approach to sensor integration and fusion than they could through the OEM manufacturers offerings, further improving ROI on existing infrastructure and cost-savings on planned future technology.

 

Our primary product offering is our software operating system, Airship Acropolis, supported by our edge (Airship Outpost AI) and end point visualization (Airship Command) offerings. Within Airship Acropolis, we have two variations, our commercial offering (Acropolis Commercial) and our government offering (Acropolis Law). While both variations are derived from the same code base, each is tailored towards specific workflow and operational requirements for their respective customer environments.

 

 

·

Acropolis Commercial. We built this platform first, supporting a variety of small and medium businesses across various commercial verticals, including schools, hospitals, casinos, logistics, and retail establishments. Our growth led us to larger commercial entities where we branched out from a standalone platform managing small numbers of cameras to an enterprise platform capable of managing hundreds of thousands of cameras and users from a single graphical user interface. Acropolis Commercial continues to support our commercial customers’ requirements today.

 

 

 

 

·

Acropolis Law. We built this platform based on the success of our commercial offering and we have grown our customer base to include agencies across the law enforcement, defense, and intelligence sectors, with dozens of custom sensor integrations and unique workflows allowing agencies to break down data sharing silos when operating standalone or in joint interagency environments.

 

Our edge platform, Airship Outpost AI, can be used in a standalone environment as well as pointed back to Airship Acropolis. Outpost AI primarily ingests either single or multiple feeds and using edge inference AI analyzes each feed for specific defined data parameters to alert on. All data is then encoded and streamed back to Acropolis securely for downstream visualization as well as further processing and/or analysis.

 

Our end point visualization platforms, Airship Command, consists of a thick client application, a web-based thin client, and our iOS and Android applications. Each of these visualization applications provides users the opportunity to securely view and interact with data being managed by Acropolis and control sensors/devices at the edge. Airship Command is the “single pane of glass” solution customers need.

 

 
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Our professional services include custom model training for customers using their proprietary and sensitive data, on-site and/or remote engineering services supporting customer deployments and operations, as well as custom integrations and workflow enhancements aimed at creating additional operational efficiencies in their environments.

 

Our support and software maintenance agreements (“SMA”) create recurring revenue opportunities for the life of the contract and include options for general support as well as dedicated support through cleared individuals (up to the Top Secret clearance level). Our SMA provides customers access to new releases, patches, and other software updates as they are made public.

 

Our Customer Base

 

Our market-entry strategy has been to build enduring partnerships with large early adopters, or lighthouse customers, primarily in the United States. We believe these lighthouse customers serve as validation of our capabilities to other potential customers in similar and adjacent verticals by demonstrating the value and operational efficiencies our platform provides. From our first lighthouse customer in the commercial space, we have successfully expanded our footprint to include additional enterprise customers in the commercial market, as well as numerous federal, military, and intelligence agencies across the U.S. government.

 

After our initial contract is established, our customers tend to expand their use of our products and services, as they realize the efficiency and value provided. We also tend to see rapid expansion into adjacent buying entities within the customer, allowing them to break down data silos between functional areas that have historically existed, through the sharing of data securely and efficiently across network and operational domains.

 

We believe there are substantial opportunities to leverage work done for our existing lighthouse customers in the commercial and government sectors, where we continue to see growing parallels around operational needs and the technology capabilities we provide that can solve them.

 

Revenue Mix

 

Historically, a majority of our product revenue has consisted primarily of a bundled hardware and software product and to date we have sold or licensed a minimal amount of standalone software. In the future, we expect to see more delivery of our products using a cloud based software solution which will allow us to create additional subscription revenue.

 

We expect to capitalize on the significant investments made over the last several years by refining our enterprise software platform for federated users in our defined customer verticals and completing the development of our AI driven edge hardware platform running our proprietary edge software and analytic platform.

 

These investments have positioned us to not only significantly grow market share at higher margins in these existing verticals but to also find and/or create opportunities in greenfield spaces where the benefits of AI are just starting to emerge.

 

Competitive Strengths

 

We believe that our approach to providing a holistic data management solution that leverages AI is the key to our future success, as much as the foresight to build a scalable and federated data management backend was when we first started our company. Our software and capabilities are more than just tools in a customer’s toolbox, they are integral parts of their day-to-day operational workflow and equally ingrained into their operational processes.

 

 

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Single Pane of Glass Platform: Our platform brings together disparate edge generated data into one place, structured and unstructured, allowing our customers the ability to visualize multiple analyzed data forms in a true “single pane of glass.” This approach substantially reduces the infrastructure, human and physical, that has been historically needed to view and extract operational value from the customers’ data.

 

 

 

 

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Superior Customer Experience: Our direct approach to customer engagements enables our team to manage the entire customer experience, starting with the first platform demonstration and continuing through installation and long-term employment. This is key to our goal to build partnerships with our customers, which we equate to potential long-term recurring revenue engagements with strong opportunities for expansion within the organization.

 

 
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Ease of Use and Adoption: Our solution is architected such that it can be installed in as little as one hour with minimal direct engagement or support needed, yet ready to support operational engagements of a handful of users and devices to thousands of users and tens of thousands of attached devices. Everything within the architecture is purpose built to be intuitive and straightforward, allowing users to become operationally proficient in short order with limited training.

 

 

 

 

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Hardened and Secure Platform: As a U.S. owned and operated company, our offerings are compliant with the National Defense Authorization Act (“NDAA”), the Commercial Software and the Trade Agreements Act (“TAA”), and the Buy American Act. Thus, cybersecurity and safeguarding data at rest and in transit is factored into everything we do, resulting in our platform having been accredited with numerous Authorities to Operate (“ATO”) for U.S. government agencies for on-premise deployments as well at the Fed Ramp high impact level in the secure cloud. This allows us to bring government-grade security to the larger commercial sector.

 

 

 

 

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Significant Cost Savings: Our edge solution enables customers to add AI capabilities to their existing IT infrastructure, allowing them to immediately recognize the operational benefits of our AI platform without having to add expensive backend servers. Additionally, our open approach to edge sensors and devices allows customers to extract the full value out of their existing devices compared to the more common industry standard rip and replace approach.

 

Market Opportunity

 

Airship AI serves a large and rapidly growing addressable market. We determined the total addressable market (“TAM”) based upon publicly-available third-party industry reports on the current and projected markets for edge AI hardware and software offerings as well as federal, state, and local grants and set-aside funding for law enforcement, public safety, and community violence intervention efforts.

 

In addition to the $7 billion combined edge AI hardware and software addressable market by 2029, growing at a blended compounded average growth rate (“CAGR”) of 21.8%, for 2023 alone the U.S. government has set aside $3.2 billion in discretionary resources for state and local grants and $30 billion in mandatory resources to support law enforcement, crime prevention, and violence intervention, based on The President’s Budget for Fiscal Year 2023.

 

We believe our existing product market fit in the law enforcement vertical supported by our rapidly growing edge AI hardware and software offerings positions us well in this market. We plan to take advantage of this nexus market opportunity by targeting the larger state and local public safety marketplaces as well as commercial customers where our edge AI platform can allow them to participate in joint public-private ventures to improve public safety for their larger communities.

 

We expect that our market opportunity will continue to grow as we expand our edge AI hardware and software capabilities allowing us to serve our customers more broadly across their operations.

 

Growth Strategy

 

For FY 2023, we started with a pipeline of $162 million, consisting largely of U.S. government agency contracts. The opportunities that make up this pipeline include opportunities for expansion within existing agencies as well as new opportunities within the agency and/or new agencies themselves. While many of these opportunities are multi-year engagements which are expected to be highly competitive, they represent years of work of developing the opportunity around our unique value proposition and differentiators in support of a sole source award or to position Airship AI as the company to beat.

 

While this pipeline represents the path for substantial growth over the next 12-18 months, we are executing a number of strategies which we believe will bring our value proposition to a broader audience in the United States and abroad.

 

 

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Embrace Existing Direct Routes to Market While Building A Channel Program: Our focus in the near term is to con