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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

(Mark One)

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File No.

()  

(Registrant’s telephone number, including area code) 

 _________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report) 

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

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 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No ☒

As of May 15, 2024, there were a total of shares of the registrant’s common stock issued and outstanding.

Airship AI Holdings, Inc.

Quarterly Report on Form 10-Q

Quarterly Period Ended March 31, 2024

TABLE OF CONTENTS

PART I

ITEM 1. FINANCIAL STATEMENTS.

AIRSHIP AI HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

As of March 31, 2024 and December 31, 2023

(1) Derived from the audited consolidated balance sheet.

The accompanying notes are an integral part of these consolidated financial statements.

AIRSHIP AI HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)

For the three months ended March 31, 2024 and 2023

The accompanying notes are an integral part of these consolidated financial statements.

AIRSHIP AI HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the three months ended March 31, 2024 and 2023

(1) The shares of the Company’s common stock, prior to the Merger, have been retroactively restated as shares reflecting the exchange ratio of approximately 1.7581 established in the Merger described in Note 1.

The accompanying notes are an integral part of these consolidated financial statements.

AIRSHIP AI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2024 and 2023

The accompanying notes are an integral part of these consolidated financial statements.

AIRSHIP AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Senior Secured Convertible Promissory Notes

Warrant liability (Public Warrants)- exerciseable at $11.50 per share

Warrant liability (Private Warrants)- exerciseable at $11.50 per share

Total liabilities measured at fair value

Other expense related to instruments recorded at fair value during the three months ended March 31, 2024

Private Placement and Public Warrants

At the merger closing, the Company assumed private placement warrants and public warrants. As of March 31, 2024, there were private placement warrants and public warrants outstanding. The warrants are exerciseable at $ per share. See Note 12– Private Placement and Public Warrants for more information.

Business

The Company is 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.

The Company solves 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.

The Company has received purchase orders from various federal government agency customers totaling over $13 million from which it shipped and started receiving cash in the first quarter of 2024.

Mr. Huang, the Company’s CEO, has committed to providing additional temporary funding if it is necessary.

Based on the Company’s actions undertaken during 2023 and 2024 to close customer deals, build sales pipeline, manage operating expenses and opportunities to raise additional capital after the merger, management believes that the Company’s current cash and cash equivalents will be sufficient to fund its operations for at least the next 12 months from the issuance of these consolidated financial statements.

The Company’s assessment of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement and involves risks and uncertainties. The Company’s actual results could vary as a result of its near and long-term future capital requirements that will depend on many factors.

Functional Currency

Cash and Cash Equivalents

Revenue Recognition and Deferred Revenue

Product Revenue

Post Contract Support Revenue

Contracts with Multiple Performance Obligations

Accounts Receivable and Provision for Credit Losses

Inventory

Long-Lived Assets

Research and Development Expenses

Software Development Costs

Cost of Net Revenues

Shipping and Handling of Products

Fair Value Measurements

Accounting for Senior Secured Convertible Promissory Notes at Fair Value

Derivative Liabilities and Earnout Liabilities

Upon consummation of the merger, the Company evaluated the warrants and concluded that they did not meet the criteria to be classified within the stockholders’ deficit. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The initial estimated fair value of the warrants was measured using a Monte Carlo simulation. The subsequent estimated fair value of the public warrants is based on the listed price in an active market for such warrants while the fair value of the private placement warrants continues to be measured using a Monte Carlo simulation with the key inputs being directly or indirectly observable public warrants listed price. Since the public and private warrants meet the definition of a derivative, the Company recorded the public and private warrants as liabilities on the consolidated balance sheet at fair value upon the merger closing, with subsequent changes in the fair value recognized in the consolidated statements of operations at each reporting date.

At the closing of the merger, the Airship AI securityholders that hold shares of common stock of Airship AI, Airship AI options, Airship AI earnout warrants or Airship AI SARs have the contingent right to receive up to .0 million additional shares of common stock, subject to certain contingencies. These earnout shares have been categorized into two components: (i) the vested shares that are associated with stockholders with vested equity at the closing of the merger that will be earned upon achievement of the earnout milestones and (ii) the unvested shares associated with stockholders 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 earnout shares associated with vested shares are recognized as derivative liabilities in accordance with ASC 815-40, as the events that determine the number of earnout shares required to be released or issued, as the case may be, include events that were not solely indexed to the fair value of common stock of the Company. The earnout shares were measured at the merger closing and subsequently measured at each reporting date until settled or when they met the criteria for equity classification. Accordingly, the Company recognizes the earnout shares as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The earnout shares were valued using a Monte Carlo analysis.

At the closing of the merger, the unvested earnout shares were considered to be equity instruments and valued at approximately $. This amount will be recognized as stock-based compensation going forward over the five-year vesting period.

Derivative warrant and earnout shares liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of significant current assets or require the creation of current liabilities.

Stock-Based Compensation

Income Taxes

Comprehensive Gain (Loss)

Use of Estimates

As of March 31, 2023, the Company had shares of common stock issued and outstanding. As of March 31, 2023, there were . All of the foregoing shares could potentially dilute future earnings per share but are excluded from the March 31, 2023, calculation of net loss per share because the impact is antidilutive.

Reportable Segments

Recent Accounting Pronouncements

Contract Balances

A receivable is recognized in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. The Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset. Receivables are generally paid within thirty days and there is no financing element to the customer contracts. As of March 31, 2024 and December 31, 2023, there are no unbilled receivable balances.

The Company’s short-term and long-term deferred revenue balances totaled $ and $ as of March 31, 2024. The Company’s short-term and long-term deferred revenue balances totaled $ and $ as of December 31, 2023. Of the deferred revenue balance of $ as of January 1, 2024, the Company recognized approximately $ during the three months ended March 31, 2024.

Remaining Performance Obligations

As of March 31, 2024, the Company had approximately $ million of remaining performance obligations, which were comprised of deferred service contracts not yet delivered. The Company expects to recognize approximately % of its remaining performance obligations as revenue in fiscal 2024 and the remaining % in fiscal 2025 and years thereafter.

Costs to Obtain or Fulfill a Contract

The Company does not pay any material variable compensation to obtain a customer contract. Additionally, the majority of the Company’s cost of fulfillment as a seller of products is classified as inventory and then cost of revenue when the product is sold. Other costs of contract fulfillment such as software maintenance are expensed in the period incurred and align with when the revenue is amortized.

On February 2, 2024, the Company issued in a private placement an amended and restated senior secured convertible promissory note to Platinum in the principal amount of $. The Platinum convertible note amends and restates in its entirety the senior secured convertible promissory note issued to Platinum in the principal amount of $ on June 22, 2023. The repayment amount of the Platinum convertible note is % of the principal amount ($) and matures in full on . Interest accrues on the Platinum convertible note at the rate of % 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 $518, 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.

On October 3, 2023, the Company issued senior secured convertible promissory notes for $ 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. The repayment amount of the notes is % ($) and mature on September 30, 2024. Interest on the notes is % per annum calculated on 360 days. On March 5, 2024, the two private investors converted senior secured convertible promissory notes with a face value of $ and interest into shares of the Company’s common stock valued at $. The Company recognized a loss on debt conversion of $ during the three months ended March 31, 2024.

The Company accounts for the notes under the fair value method of accounting and as of March 31, 2024 and December 31, 2023, the notes were recorded at $ and $. During the three months ended March 31, 2024, the Company recorded an increase in the fair value of the convertible notes payable totaling $ which was recorded as loss from change in fair value of convertible debt on the statement of operations and comprehensive loss. See Note 13 – Fair Value Measurements for more information.

Details on the common stock, preferred stock and equity incentive plans were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and filed with the SEC on April 1, 2024.

Common Stock

As of March 31, 2024, there were shares of common stock outstanding.

Three Months Ended March 31, 2024

During the three months ended March 31, 2024, the Company had the following sales of unregistered sales of equity securities:

On March 5, 2024, a private investor converted a senior secured convertible promissory note for $ and interest into shares of the Company’s common stock.

On March 5, 2024, a private investor converted a senior secured convertible promissory note for $ and interest into shares of the Company’s common stock.

On March 21, 2024, the Company issued shares of common stock for services performed as of December 31, 2023 to MZHCI, LLC related to an investor relations consulting agreement.

2023 Equity Incentive Plan

The Company has adopted the 2023 Equity Incentive Plan, which plan was approved by stockholders at the extraordinary general meeting held in December 2023. Details on the equity incentive plan were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and filed with the SEC on April 1, 2024.

The aggregate number of shares of common stock initially reserved and available for grant and issuance under the equity incentive plan is as of March 31, 2024. Such aggregate number of shares of stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2024 and ending on January 1, 2033, in an amount equal to 2.0% of the total number of shares of common stock outstanding on December 31 of the preceding year.

The Company had the following stock option activity during the three months ended March 31, 2024:

On March 5, 2024, the Company granted stock options to purchase an aggregate of shares of common stock with an exercise price of $, and which vest over four years and expire on .

Stock option activity for the three months ended March 31, 2024 was as follows:

Granted

Outstanding as of March 31, 2024

The following table summarizes information about stock options outstanding and exercisable as of March 31, 2024:

0.57

 1.49-1.65

1.90

6.59

There are options to purchase common stock at an average exercise price of $ per share outstanding as of March 31, 2024 under the 2023 Equity Incentive Plan. The Company recorded $ and $ of compensation expense, net of related tax effects, relative to stock options for the three months ended March 31, 2024 and 2023, respectively, in accordance with ASC 718. As of March 31, 2024, there is $ of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately years.

The significant weighted-average assumptions relating to the valuation of the Company’s stock option grants for the three months ended March 31, 2024 were as follows:

Exercise price

 $-$

Dividend yield

%

Expected life

- years

Expected volatility

%

Risk free interest rate

%

There were stock incentive plan awards outstanding at March 31, 2024 totaling shares with an aggregate intrinsic value of $.

As of March 31, 2024 and December 31, 2023 there were SARs outstanding. There were no SAR grants in the three months ended March 31, 2024 or the year ended December 31, 2023.

Warrants to Purchase Common Stock

See Note 12 for public and private placement warrants assumed after the merger.

The Company had the following warrant activity during the three months ended March 31, 2024:

In connection with the issuance of the Platinum convertible note, the Company also issued to Platinum an amended and restated common stock purchase warrant dated February 2, 2024 to purchase shares of common stock at an exercise price per share of $. The term of the Platinum warrant expires on June 22, 2028. The Platinum convertible note may not be 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 % of the common stock outstanding immediately after giving effect to such conversion and/or exercise. On March 18, 2024, Platinum exercised the Platinum warrant and received shares of common stock. Platinum forfeited shares.

Issued

Exercised

Forfeited

Expired

Outstanding at March 31, 2024

Exercisable at March 31, 2024

The following table summarizes information about warrants outstanding and exercisable as of March 31, 2024:

The significant weighted average assumptions relating to the valuation of the Company’s warrants issued for the three months ended March 31, 2024 were as follows:

- years

%

%

There were vested warrants of with an aggregate intrinsic value of $.

Earnout Liability

See Note 13 for common stock shares related to earnout liability.

In addition, a portion of the earnout shares may be issued to individuals with unvested equity awards. While the payout of these shares requires the achievement of the earnout milestones, the individuals must complete the remaining service period associated with these unvested equity awards to be eligible to receive the earnout shares. As a result, these unvested earn-out shares are equity-classified awards and have an aggregated grant date fair value of $ (or $ per share). During the three months ended March 31, 2024, the Company stock-based compensation expense for the vesting of earnout shares was $. As of March 31, 2024, unrecognized compensation cost related to unvested earnout shares totaled $. The weighted average period over which this remaining compensation cost is expected to be recognized is years.

On July 13, 2023, the Company entered into a new lease in Redmond, WA for square feet of office and warehouse space which starts October 1, 2023. The monthly payment is $ per month. The lease expires October 31, 2027 and the monthly payment increases % on July 31, 2024 and each year thereafter. There is a one three year option to extend based on the fair market rate on .

On January 1, 2021, the Company leased offices located in Moorestown, North Carolina. The Company leases square feet and the net monthly payment was $. The monthly payment increases approximately %-% annually thereafter. The lease expired on . On February 29, 2024, the Company extended the lease and the net monthly payment is $. The lease expires on .

The Company has entered into operating leases for office and development facilities for four years and include options to renew. The Company determines whether an arrangement is or contains a lease based upon the unique facts and circumstances at the inception of the lease. Operating lease liabilities and their corresponding right-of-use assets are recorded based upon the present value of the lease payments over the expected lease term. As of March 31, 2024 and December 31, 2023, total operating lease liabilities was approximately $ and $, respectively. Right of use assets totaled approximately $ and $ at March 31, 2024 and December 31, 2023, respectively. Current lease liabilities were $ and $ at March 31, 2024 and December 31, 2023, respectively. In the three months ended March 31, 2024 and 2023, the Company recognized $ and $ in total lease costs for the leases, respectively. Because the rate implicit in each lease is not readily determinable, the Company uses its estimated incremental borrowing rate to determine the present value of the lease payments.

The weighted average remaining lease term for the operating leases was forty three months at March 31, 2024 and the weighted average discount rate was %.

2026

2027

2028

Total remaining payments

Less Imputed Interest

Total lease liability

Employment Agreement

On March 1, 2024, the Company entered into an employment agreement with Mark E. Scott, the Company’s Chief Financial Officer, which provides for a base salary of $ annually. Mr. Scott is also eligible to participate in annual performance-based bonus programs established by the board or compensation committee, subject to the achievement of applicable performance criteria established by the board or compensation committee, which shall be determined in good faith by the board or compensation committee. Mr. Scott was also granted options to purchase up to twenty five thousand () shares of common stock with an exercise price equal to $, which options vested in full on the date of issuance.

The Company’s effective tax rate was % for the three months ended March 31, 2024 and 2023. The difference between the effective tax rate and the federal statutory tax rate for the three months ended March 31, 2024 and 2023 primarily relates to the valuation allowance on the Company’s deferred tax assets.

For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

As of March 31, 2024 and December 31, 2023, the Company retains a full valuation allowance on its deferred tax assets. The realization of the Company’s deferred tax assets depends primarily on its ability to generate taxable income in future periods. The amount of deferred tax assets considered realizable in future periods may change as management continues to reassess the underlying factors it uses in estimating future taxable income.

The merger 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 merger was treated as the equivalent of Airship AI issuing shares at the closing of the merger 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:

Transaction expenses (1)

Earnout liability

Warrants liability

Reverse capitalization on December 21, 2023 (1)

(1) Adjusted for correction of transaction expense discussed below.

Immaterial Revision of Prior Period Financial Information

In connection with the preparation of its consolidated financial statements, the Company identified an immaterial error related to the classification of prepaid expenses and transaction expenses (classified in accumulated deficit as reverse recapitalization). In accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements,” the Company evaluated the error and determined that the impact was not material to its financial statements for the prior annual and current interim period, accordingly the Company revised the prior period financial information for comparative purposes. The revision does not impact the consolidated statements of operations and comprehensive loss. A summary of the revision to the Company’s previously reported consolidated balance sheets is included below for comparative purposes:

Total current assets

Total assets

Accumulated deficit

Total stockholders' deficit

The revision had no impact to cash provided by operating activities in such period.

Details on the warrants were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and filed with the SEC on April 1, 2024. The public warrants will expire on December 21, 2028.

The following table is a summary of the number of shares of the Company’s common stock issuable upon exercise of the public and private warrants outstanding as of March 31, 2024:

Private Warrants

Further, the earnout milestones are also considered to be met if the Company undergoes a change of control. A change of control is defined as (i) any transaction or series of related transactions that results in any Person or “group” (within the meaning of Section 13(d)(3) of the Exchange Act) acquiring equity interests that represent more than 50% of the total voting power of the Company or (ii) a sale or disposition of all or substantially all of the assets of the Company and its subsidiaries on a consolidated basis.

Notwithstanding anything in the Merger Agreement to the contrary, any earnout shares issuable under the Merger Agreement to a Airship AI securityholder in respect of each Airship AI option or Airship AI SAR held by such holder as of immediately prior to the effective time of the merger shall be earned by such holder on the later of (i) the occurrence of the applicable earnout milestone, and (ii) the date on which the option in respect of such Airship AI option or SAR in respect of such Airship AI SAR, as applicable, becomes vested pursuant to its applicable vesting schedule, but only if such holder continues to provide services (whether as an employee, director or individual independent contractor) to the Company or one of its subsidiaries through such date. Notwithstanding the foregoing, any earnout shares that are not earned by a Airship AI securityholder in respect of its options or SARs on or before the fifth anniversary of the closing date of the merger shall be forfeited without any consideration. Any earnout shares that are forfeited pursuant to the Merger Agreement shall be reallocated to the other Airship AI securityholders who remain entitled to receive earnout shares in accordance with their respective earnout pro rata shares.

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.

At the closing of the merger on December 21, 2023, the earnout liability had an initial fair value of $, which was recorded as a long-term liability and a reduction to additional paid in capital in the consolidated balance sheet. As of December 31, 2023, the earnout liability had decreased to $ as a result of the decline in the Company’s share price since the closing of the merger. As of March 31, 2024, the estimated fair value of the earnout liability increased to $ primarily due to the increase in the Company’s share price, which resulted in a loss due to the change in fair value of the earnout liability of $ and is recorded on the consolidated statements of operations and comprehensive loss. See Note 14– Fair Value Measurements for more information.

As of March 31, 2024, the earnout shares were not earned as none of the earnout milestones have been met.

Senior Secured Convertible Promissory Notes

Warrant liability (Public Warrants)

Warrant liability (Private Warrants)

Total liabilities measured at fair value

The following table sets forth by level within the ASC 820, Fair Value Measurement, fair value hierarchy of the Company’s liabilities that are measured at fair value on a recurring basis as of December 31, 2023:

Senior Secured Convertible Promissory Notes

Warrant liability (Public Warrants)

Warrant liability (Private Warrants)

Total liabilities measured at fair value

The estimated fair value of the earnout liability was determined using a Monte Carlo Model. The assumptions utilized in the calculation are based on the achievement of certain stock price milestones including projected stock price, volatility, probability of meeting the federal law enforcement agency growth and risk-free rate. The following assumptions were used in the simulation at each valuation date:

Risk-free interest rate

Expected term (in years)

Expected volatility

Dividend yield

The assumptions also included the probability of meeting the federal law enforcement agency growth milestone at 100%.

The initial estimated fair value of the private warrants was measured using a Monte Carlo simulation. The estimated fair value of the public warrants is based on the listed price in an active market for such warrants and the fair value of the private placement warrants continues to be measured based on the public warrants listed price.

The estimated fair value of the senior secured convertible promissory notes was measured using a Monte Carlo simulation pricing model that factors in potential outcomes being consummated, such as the convertible notes being repaid in cash and the convertible notes being converted to common stock. All of these scenarios take into consideration the terms and conditions of the underlying convertible notes plus potential changes in the underlying value of the common stock. The following assumptions were used in the simulation:

Effective discount rate

Expected term (in years)

to

Expected volatility

Dividend yield

There were no transfers of financial instruments between valuation levels during the three months ended March 31, 2024 and the year ended December 31, 2023.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

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.

Recent Developments

On June 27, 2023, BYTS entered into the Merger Agreement with Merger Sub and Airship AI. The Merger Agreement was amended on September 22, 2023. On December 21, 2023, the merger with BYTS closed. Airship AI Holdings, Inc. became the accounting acquiror and the combined entity became the successor SEC registrant under the ticker symbol “AISP”.

Fair Value Transactions

As a result of the merger, the Company entered into the following transactions that were measured at fair value and vary quarterly with the share price and other items. Any change is non-cash and is recorded as a gain or loss in other income (expense). See Note 14– Fair Value Measurements for more information.

Private Placement and Public Warrants

At the merger closing, the Company assumed 515,000 private placement warrants and 16,184,612 public warrants. As of March 31, 2024, there were 515,000 private placement warrants and 16,159,112 public warrants outstanding. The warrants are exerciseable at $11.50 per share. See Note 12– Private Placement and Public Warrants for more information.

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:

Principal Factors Affecting Our Financial Performance

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:

Segment Reporting

The Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Management monitors the revenue and expense components of the various products and services the Company offers, but operations are managed and financial performance is evaluated on a corporation-wide basis in comparison to a business plan which is developed each year. Accordingly, all operations are considered by management to be one operating segment and one reportable segment as contained in the Consolidated Statements of Operations and Comprehensive Loss to the consolidated financial statements.

Results of Operations

The following table sets forth key components of our results of operations during the three months ended March 31, 2024 and 2023.

(dollars in thousands)

Net Revenues — Revenues for the three months ended March 31, 2024 increased $7,636,000 to $10,575,000 as compared to $2,939,000 for the three months ended March 31, 2023, as a result of increased product sales. We received purchase orders from various federal government agency customers totaling over $13 million from which we shipped and started receiving cash in the first quarter of 2024.

Cost of Net Revenues — Cost of net revenues primarily consists of product costs and post customer support. For the three months ended March 31, 2024, cost of sales increased $5,812,000 to $7,947,000 as compared to $2,135,000 for the three months ended March 31, 2023. The increase was due to higher product sales and product mix with high equipment purchases during the three months ended March 31, 2024.

Research and Development Expenses — Research and development expenses for the three months ended March 31, 2024 increased $21,000 to $695,000 as compared to $674,000 for the three months ended March 31, 2023.

Selling, General and Administrative Expenses — Selling, general and administrative expenses for the three months ended March 31, 2024 increased $1,503,000 to $3,335,000 as compared to $1,832,000 for the three months ended March 31, 2023. The increase was due to (i) increased insurance costs of $291,000; (ii) increased professional fees of $582,000, primarily related to the merger and the Nasdaq listing; and (iii) increased other operating --expenses of $630,000.

Other Expense — Other expense for the three months ended March 31, 2024 was $30,562,000 as compared to other expense of $10,000 for the three months ended March 31, 2023. Other expense for the three months ended March 31, 2024 consisted of (i) loss from change in fair value of warrant liability of $6,847,000; (ii) loss from change in fair value of earnout liability of $21,485,000; (iii) loss from change in fair value of convertible debt of $2,039,000; (iv) loss on note conversion of $159,000; and (iv) noncash interest of $32,000.

Other expense for the three months ended March 31, 2023 related primarily to interest and other expense of $10,000.

Net Loss — Net loss for the three months ended March 31, 2024 was $31,964,000 as compared to net loss of $1,712,000 for the three months ended March 31, 2023. The net loss primarily related to noncash charges of $30,881,000. Noncash charges include (i) depreciation of $2,000; (ii) stock based compensation of $269,000; (iii) net amortization of operating lease right of use asset of $81,000; (iv) loss from change in warrant liability of $6,847,000; (v) loss from change in earnout liability of $21,485,000; (vi) loss from change in fair value of convertible note of $2,039,000; and (vii) loss on note conversions of $159,000.

Liquidity and Capital Resources as of March 31, 2024 and December 31, 2023

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 May 2024 when preparing our March 31, 2024 unaudited financial statements. During this process we concluded, based upon existing assets and liabilities, our order backlog and projections, plus the ability to borrow in short term loans from our founder, that we would be able to operate at least for the next twelve months. We have received purchase orders from various federal government agency customers totaling over $13 million from which we shipped and started receiving cash in the first quarter of 2024.

As of March 31, 2024, we had cash of approximately $1,726,000. We have incurred losses from operations the past few years and had an accumulated deficit of $49,441,000 as of March 31, 2024. The accumulated deficit includes noncash charges of $30,881,253 and $19,626,884 for the three months ended March 31, 2024 and the year ended December 31, 2023. We also had at March 31, 2024 an adjusted working capital deficit of approximately $2,000,000. The adjusted net working capital deficit excludes current deferred revenue totaling $3,742,000 and convertible debt totaling $4,205,000 (which we expect to be converted to equity). We have primarily funded its operations from operating cash, proceeds from debt borrowings, advances from founders, and proceeds from the merger.

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 was $1,695,000. This amount was primarily related to (i) net loss of $31,964,000; and (ii) net working capital reductions of $611,000; offset by (iii) noncash charges of $30,881,000. Noncash charges include (iv) depreciation of $2,000; (v) stock based compensation of $269,000; (vi) net amortization of operating lease right of use asset of $81,000; (vii) loss from change in warrant liability of $6,847,000; (viii) loss from change in earnout liability of $21,485,000; (ix) loss from change in fair value of convertible note of $2,039,000; (x) loss on note conversions of $159,000.

Net cash used in operating activities for the three months ended March 31, 2023 was $990,000. This amount was primarily related to (i) a net loss of $1,712,000; offset by (ii) net working capital increases of $376,000; and (iii) noncash charges of $346,000. Noncash charges include (iii) depreciation of $3,000; (iv) stock based compensation of $137,000; and (v) net amortization of operating lease right of use asset of $206,000.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2024 was $293,000 and consisted proceeds from warrant exercise.

Net cash provided by financing activities for the three months ended March 31, 2023 was $865,000 and consisted of founders advances of $950,000 and repayment of small business loan and line of credit of $84,000.

Our contractual cash obligations as of March 31, 2024 (excluding debt financing arrangements below) are summarized in the table below:

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. At the option of the holder, the note is convertible into cash, common stock or a combination of cash and stock. We expect the convertible debt to be converted to equity.

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. On March 5, 2024, the two private investors converted the debt to equity.

Mr. Huang has committed to providing 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.

Contractual Obligations and Commitments

On July 13, 2023, we entered into a lease in Redmond, WA 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 one three year option to extend based on the fair market rate on October 31, 2027.

On February 29, 2024, we extended a lease in Moorestown, North Carolina. The Company leases 3,621 square feet and the net monthly payment is $6,488. The lease expires on July 29, 2024.

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 and policies during the three months ended March 31, 2024 have not materially changed to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES.

a) Evaluation of Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2024, our disclosure controls and procedures are effective at the reasonable assurance level

b) Inherent Limitations on Internal controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.

c) Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2024, there were no other changes in our internal controls over financial reporting, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a material effect on our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in actions, claims, litigation, and other legal proceedings occurring in the ordinary course of its business from time to time, including assertions by third parties relating to intellectual property infringement, contract or warranty breaches, or employment-related matters. We are not currently a party to any actions, claims, suits, or other legal procedures whose conclusion, if not determined in our favor, would have a major adverse effect on our business, financial condition, or results of operations, either individually or in the aggregate.

ITEM 1A. RISK FACTORS.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. Our market risks are similar to those disclosed under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, and our other filings with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the three months ended March 31, 2024, we had the following sales of unregistered sales of equity securities:

On March 5, 2024, we issued 70,502 shares of common stock upon the conversion of a convertible promissory note issued by us to Geng Cui in a private placement on October 3, 2023 in the principal amount of $250,000 (and accrued interest) at a conversion price per share of $4.00. This issuance was made pursuant to the exemption from registration under the Securities Act in reliance on Section 4(a)(2).

On March 5, 2024, we issued 98,702 shares of common stock upon the conversion of a convertible promissory note issued by us to Kelly and Finley White in a private placement on October 3, 2023 in the principal amount of $350,000 (and accrued interest) at a conversion price per share of $4.00. This issuance was made pursuant to the exemption from registration under the Securities Act in reliance on Section 4(a)(2).

On March 21, 2024, we issued 15,000 shares of common stock valued at $25,500 as of December 31, 2023 to MZHCI, LLC related to an investor relations consulting agreement. This issuance was made pursuant to the exemption from registration under the Securities Act in reliance on Section 4(a)(2).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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